157. Memorandum From the Director of the Office of International Financial and Development Affairs (Adair) to the Assistant Secretary of State for Economic Affairs (Mann)1
SUBJECT
- Secretary Anderson’s Sept. 25 Meeting re Argentina2
Assistant Secretary Coughran has called this meeting because of Secretary Anderson’s earlier expression of a desire to have views on the Argentine problem before he leaves for the IMF and IBRD meetings in New Delhi.3 As you know, Secretary Anderson has expressed interest in helping the Frondizi administration.
The Argentine financial situation is serious. Argentina has undergone extensive decapitalization since World War II, largely because of the policies of the Peron period. Gold and foreign exchange reserves have declined from $1.7 billion at the end of 1946 to less than $200 million now and probably will be virtually exhausted by the end of [Page 511] this year. The transportation system is seriously run down, industry badly needs re-equipment, agriculture needs equipment and technological improvements, and the country urgently needs more electric power capacity. Inflation has been serious and is accelerating. The exchange system is extremely complex and over-values the peso to the detriment of the balance of payments.
Certain constructive steps have been taken since the overthrow of Peron. Notable among them are the recent arrangements made by the Frondizi administration for foreign private capital participation in petroleum development. Fuel imports cost Argentina more than $300 million in 1957.
The approach thus far, however, has been piecemeal. The large overall problems outlined above have not been faced with a comprehensive program. Moreover, the IMF mission which visited Argentina in July found Argentine authorities unprepared, for political and other reasons, to take appropriate steps for restoration of internal and external balance. These steps include reform of the exchange system, budget balance, and wage and credit restraint.
Questions concerning external assistance for Argentina do not center so much on whether there is a legitimate need for assistance as on when, how much, for what purposes, from what sources, and under what conditions assistance should be provided. An NAC working group has been formed to study these questions. Conclusions have not yet been reached.
Secretary Anderson probably will be particularly interested at this meeting in State’s views on the political stability of the Frondizi administration. Mr. Rubottom, who will also attend the meeting, presumably will be prepared to comment on political prospects. In response to a query from the Department, Embassy Buenos Aires stated in a telegram of Sept. 94 that the political situation appeared to have quieted, Frondizi’s position seemed to have strengthened, and Frondizi probably had a better than even chance of remaining in office.
The United States has followed the practice recently of making balance-of-payments and stabilization assistance dependent on adequate financial programs worked out with the International Monetary Fund. It would seem desirable, from an economic point of view, to continue this practice in the case of Argentina. Balance-of-payments assistance without a comprehensive stabilization program would be of little value in solving Argentina’s fundamental problems. Some may argue, however, for a certain amount of balance-of-payments assistance to provide Frondizi political support, regardless of economic policies. It might be argued equally well, on the other hand, that Frondizi’s [Page 512] internal political position would be bolstered more by adoption of a sound and strong economic and financial program than by external support in the absence of such a program. Moreover, to provide balance-of-payments support without adequate stabilization measures would be to depart from our recent practice in other cases (e.g., Brazil, Chile, Colombia, France, Peru, Bolivia and Turkey).
This does not necessarily mean that further development credits should be dependent upon an adequate stabilization program. On the contrary, further development credits may be desirable whether or not a stabilization program is undertaken. However, Argentina’s capacity to service dollar loans is limited by the facts that it exports primarily to Europe, tends to run payments deficits primarily with the dollar area, and is faced with difficulties in converting balances which may be earned with European countries to dollars. Argentina’s limited capacity to service dollar loans points to the possible desirability of encouraging the IBRD, which can make nondollar loans, to enter the Argentine picture (the IBRD thus far has made no loans to Argentina, which became a member in 1956).
The problem of difficulties in converting European currencies to dollars raises the question of whether Argentina should not attempt to persuade European countries to adopt a more liberal attitude toward convertibility of possible future balances earned by Argentina under the Paris Club arrangements and whether the United States should not be prepared to support Argentina in this effort. Argentina does not now have substantial balances in European currencies and has run deficits with both Europe and the dollar area in 1957 and thus far in 1958. Its deficits are smaller with Europe than with the dollar area, however, and when its payments position improves, it will come into surplus more readily with Europe than with the dollar area. At that time reduced restrictions on convertibility of balances in European currencies would be useful in meeting Argentina’s dollar problem.
- Source: Department of State, Central Files, 835.10/9–2458. Secret. Drafted by Eaton.↩
- No memorandum or account of this meeting has been found in Department of State files.↩
- Reference is to the Annual Meeting of the Boards of Governors of the International Monetary Fund, International Bank for Reconstruction and Development, and the International Finance Corporation, October 6–10, 1958. For texts of statements made at the meeting by Secretary Anderson and Douglas Dillon, see Department of State Bulletin, November 17, 1958, pp. 793–798.↩
- Document 156.↩