20. Memorandum Prepared by the Special Assistant for Inter-American Military Affairs, Office of Regional American Affairs (Spencer)2
Several Latin American countries have requested, or are planning to request, rather substantial amounts of U.S. military equipment for purchase on credit. Requests which have been approved and those now pending are itemized in the attached list. Some of the problems raised by these requests are discussed below.
Credit Over a Three-Year Period
The Mutual Security Act of 19543 authorizes the sale of military equipment to foreign countries on credit terms over a three-year period. In making military equipment available for sale to foreign governments under this authority, each Service Department uses funds obtained from the Congress for the procurement of military equipment needed by that Service to meet its own requirements for equipment. Since these procurement funds are relatively large, and the probable amount of credit requested by Latin American countries during any one year will be relatively small, it is possible that the Pentagon will be able to underwrite the sale on credit of a considerable amount of military equipment to Latin American countries. Nevertheless, if we are to avoid the risk of the Pentagon one day informing us that it has reached the limit of funds it is prepared to use in supporting Latin American credit sales—a decision which might place us in the position of being unable to sell equipment to [Page 214] certain Latin American countries on the same terms previously offered to other Latin American countries—we must have a firm figure from the Pentagon indicating the total amount of money it is prepared to spend each year on Latin America as a whole, plus some indication as to how the Pentagon plans to apportion the money among individual countries.
In addition to the problem posed by a possible limitation of funds available for underwriting credit sales, we are confronted with the fact that only a very few Latin American countries are capable of assuming obligations for the purchase of military equipment without jeopardizing, proportionately, their financial ability: (1) to meet outstanding loan obligations and redress unfavorable dollar balances; and (2) to undertake worthwhile economic projects for the improvement of their political and economic stability. In many Latin American countries, economic stability would appear to be a prime U.S. security objective, as important to the security of the U.S. as the provision of military equipment. The Pentagon is of the opinion, however, that Latin American countries are determined to buy military equipment, irrespective of their economic situation—if not from us, then from European sources—and that it therefore behooves the U.S. to make equipment available on easy terms in the interest of standardization. The Pentagon argues that Latin American procurement of non-standard equipment jeopardizes U.S. military interests on several counts: (1) non-standard equipment probably would be useless in time of war because it could not be maintained with spare parts produced in the U.S.; (2) as Latin American countries procure significant quantities of non-standard equipment, they have less need for U.S. military training missions and are tempted to replace them with missions from countries from which they buy equipment; (3) our failure to offer U.S. equipment on terms competitive with European suppliers creates Latin American ill-will, provoking the charge of U.S. neglect, particularly since U.S. military training missions, U.S. military representatives on the Inter-American Defense Board and U.S. military officials visiting Latin America have for years promoted the doctrine that standardization is important to the security of the hemisphere, to the security of Latin American countries, and to the security of the United States.
Long-Term Credit
The Congress has specified in the Mutual Security Act of 1954 that at least $200 million of the total MDAP funds appropriated for worldwide grant economic and military assistance be expended in the form of foreign loans, rather than as straight grant assistance. In view of the relatively small size of the Latin American grant assistance program (approximately $100 million has been appropriated for [Page 215] the program over a three-year period for apportionment among ten countries), it would be politically unfeasible to request Latin American countries to pay for any part of the small amount of grant assistance we have promised to provide them to date. Consideration might be given, however, to expanding the Latin American program by means of loan assistance. The Pentagon has in fact indicated its interest in an eight or ten year loan to Peru for the construction of two submarines having a total value of about $15 million.
In applying the long-term credit authority, we encounter difficulties similar to those implicit in the three-year credit authority. First, in order to obtain $15 million in MDAP funds for the Peruvian loan, the Pentagon would be willing to subtract the necessary funds from the amount of money now set aside for grant assistance programs in areas outside Latin America, but would be unwilling to subtract additional funds necessary to offer vessels on the same terms to Ecuador, Chile, Brazil and other countries. Secondly, the law requires that long-term loans be limited to those countries for whom grant assistance has been approved. Since we do not have bilateral military assistance agreements with three of the larger countries in Latin America—Venezuela, Argentina and Mexico—long-term loans to those countries would be illegal unless we found it desirable and possible to conclude bilateral agreements with them.
Alternatives
After we have ascertained the ceiling amount of Pentagon funds available for use in underwriting three-year credit sales, we have a choice of the following alternatives:
- a.
- Approve credit only when we consider the other country to be a good credit risk for the amount requested, taking into account the country’s outstanding loans, its dollar position and other economic indicators of its ability to pay. In rejecting a request, we would frankly inform the other government of the economic reasons underlying our negative decision. The disadvantage of this alternative is that Brazil, Ecuador, Chile and other countries would not qualify for credit to the same degree as Venezuela and Peru, yet the military objectives we seek in Brazil (base facilities) are presumably more important than military objectives we are seeking elsewhere in Latin America. Moreover, it would be politically difficult to maintain good relations with Ecuador if we should approve substantial amounts of credit to Peru but refuse substantial credit to the former country.
- b.
- Approve loans to most Latin American countries on the ground that the U.S. military objective of standardization in Latin America should override economic considerations, such as ability to pay. I understand that FOA is providing substantial amounts of economic assistance, on a loan basis, to a number of countries outside Latin America, even though there is only a slight expectation that they will meet these obligations.
- c.
- We could use the loan technique for expanding the present grant military assistance program. Since the U.S. military interests we are promoting in the program are more specific than standardization (equipment must be committed for hemisphere defense tasks developed unilaterally by our Joint Chiefs of Staff), we might find it justifiable to approve loans even to poorer countries, provided that the amounts and types of equipment in each case meet the strict program criteria established by the Joint Chiefs, that is, a determination that it is required for a specific hemisphere defense purpose. The procedure would be as follows: (1) using very liberal economic criteria, we would determine for the Pentagon the maximum credit obligation we believe each Latin American country should assume in the promotion of U.S. hemisphere defense objectives; (2) we would ask the Pentagon to use our financial yardstick as a guide in determining types and quantities of military equipment determined by the Joint Chiefs of Staff to be required by individual Latin American countries for the carrying out of specific hemisphere defense missions; (3) the equipment would be offered to the other countries on a loan basis provided they agreed to use it in preparing military units for such missions under a bilateral military assistance agreement.
Until the Pentagon is prepared to offer long-term credit to more than one Latin American country, it would appear undesirable for us to approve submarines for Peru on long-term credit at the present time. In this connection, it may be desirable to consider the advisability of obtaining funds and authority from the Congress for the provision of long-term credit to Latin American countries. The Pentagon is exploring the possibility of selling military equipment to Latin American countries for payment in local currency, and it may also be desirable for us to explore this possibility with a view to obtaining authorization from the Congress, if such authorization would be required.
Recommendation:
Mr. Nolting (S/MSA) is the Departmental authority on the subject of foreign military assistance. He is familiar with the legal techniques available for use in making assistance available to foreign countries and with the status of funds available for implementing such techniques. I recommend that he be invited to attend a meeting in Mr. Sparks’s office this week for a discussion of the rather complicated problems set forth in this paper. The meeting would have the purpose of developing additional information and ideas which we require in order to prepare recommendations for Mr. Holland on this subject. I recommend that OSA, MID and AR be represented at such a meeting.
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