Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics

CH–17. Memorandum from the Assistant Secretary of State for Inter-American Affairs (Rubottom) and the Assistant Secretary of State for Economic Affairs (Mann) to the Under Secretary of State for Economic Affairs (Dillon)¹

Washington, February 13, 1959

SUBJECT

• Anticipated Chilean Request for Financial Assistance.²

Problem:

The Alessandri Government, inaugurated in November 1958, claims that the restoration of economic and financial stability based on the private enterprise is its prime objective. However, the economic program it has devised does not give promise of achieving this end. Moreover, the Administration has dragged its feet on working out a satisfactory stabilization arrangement with the IMF, and the Government has announced that about $100 million of foreign loans will be required for budgetary and balance of payments support. Mr. Figueroa, Special Assistant to the Minister of Finance arrives in Washington February 16 to open discussions on external assistance.

Recommendation:

While it is in our interests politically to support the Alessandri Government, and while its application of a sound economic program will entail certain political risks, we believe that financial support in the absence of an effective stabilization program will serve neither Chilean nor U.S. interests in the long run. Further, it is our tentative view that Chile could go through 1959 without new balance of payments loans from U.S. official sources if a serious effort is made to adhere to an adequate stabilization program. The budgetary deficit is an internal problem not appropriate for external financing. This and other stabilization problems should be worked out in operation with the IMF.

Therefore, it is recommended that the U.S. Government take the initial position that the Chilean Government should first reach agreement with the IMF on a stabilization program. We should further indicate our belief that if an adequate stabilization progress is implemented, it should be unnecessary for Chile to add to its heavy foreign debt burden.³ We should add that we are confident that if there is an adequate stabilization program, development credits for Chile will be forthcoming from appropriate financial institutions. To demonstrate our support for the Alessandri Government, we should be prepared to indicate to the Chileans at an appropriate point in the discussions that the Export–Import Bank would be willing to open credit lines⁴ to cover acceptable economic development projects on the condition that Chile reach prior agreement with the IMF on the renewal of the standby expiring next month and show satisfactory performance under its terms. In this connection, we should also be prepared to point out the possibility of DLF loans.

Discussion:

The Alessandri Administration came into office in November 1958 after a campaign in which it advocated a program aimed at correcting the financial disorder—chronic inflation and balance of payments disequilibrium—of the Ibánez Government. Under the latter, the cost of living had risen by 83 per cent in 1955, 38 per cent in 1956, and 17 per cent in 1957, and then 32 per cent in 1958. Since early 1957 money supply increased by about 70 per cent despite the use of almost $120 million of balance of payments loans from the IMF, Eximbank, ICA, and private U.S. banks. During part of this period, the Chilean financial problem was aggravated by declining copper prices as the average price fell from 40 cents in 1956, to 27 cents in 1957, and 25 cents in 1958. However, the basic causes of the inflation were the chronic fiscal deficits and the extraordinary expansion of credit. The resultant internal monetary expansion fostered a heavy demand for imports, which despite the sharp decline in export income, rose to historic highs in 1956 and 1957.

During the election campaign, Alessandri attacked the large fiscal deficits, the use of credit for speculation, and reliance on balance of payments loans. He came out for a businessman’s Government which would restore the financial health of the country. After taking office, he showed some vacillation in pursuing a coherent economic program and soon appeared to have lost the initiative required to put forth a full stabilization effort. For example, one of the major complaints of the IMF with the Ibánez Government had been that the latter had maintained the peso at an excessively appreciated rate of exchange thereby draining foreign exchange reserves. The new Minister of Finance initially took a strong position for a sizeable devaluation of the peso but he agreed to accept only about half of the depreciation he had requested when the opposition took advantage of the Government’s indecisiveness. Since then, the Government has unified the dual exchange market in accordance with IMF recommendations but it is now too early to assess the impact of this measure on the reserve position since there is no assurance that the rate of exchange will be permitted to move with the market.

In a series of radio speeches and in its submission to Congress, the Alessandri Government indicated that it expected to request budgetary and balance of payments loans from abroad and showed little liking for fiscal and credit restraint. The budget now before Congress envisages a global deficit of about 210 billion pesos ($210 million) of which 60 billion pesos is requested to cover unpaid bills from the previous Administration, 75 billion for public works including housing, and 70 billion for wage increases. The Government expects to finance 100 billion pesos of this total by increased tax revenues and has indicated that it wishes to obtain the remainder through foreign loans. President Alessandri has written a letter to President Eisenhower requesting him to use his influence with U.S. institutions in regard to prospective Chilean loan applications. On February 16, Special Assistant to the Minister of Finance, Figueroa, is expected in Washington to hold discussions with the IMF and with the U. S. Government agencies on these loan possibilities.

The IMF discussions will be necessary since Chile is not now eligible to draw the $6 million for the first quarter of 1959 remaining in the standby arrangements largely because no agreement was reached on a satisfactory rate of foreign exchange sales by the Central Bank. It is now hoped that a revised one-year extension of the standby agreement expiring in March, can be worked out between Chile and the IMF which would require Chile to maintain budgetary, monetary, and foreign exchange policies aimed at achieving financial stability.

During 1958 the Ibánez Administration used about $40 million of balance of payments loans from abroad. For 1959 it is anticipated that the average price of copper will be about 30 cents compared with 25 cents for 1958, which would give Chile an increase of about $30 million in dollar earnings. In addition, there remains the $6 million undrawn under the standby for the first quarter of 1959. Then further resources of $12.5 million may be available from the IMF and the private U.S. banks, if the Chileans reach agreement with the IMF on renewal of the standby. Therefore, Chile will have available in 1959 in additional foreign finances about the equivalent of the balance of payments loans made to the previous Government in 1958. Foreign debt amortizations, however, will probably require unusually heavy payments this year, perhaps about $20 million more than last year. About $25 million of the total payments due are owed to private U.S. banks. The Chilean Government has indicated that it may be able to secure private U.S. bank loans to cover the latter amount especially since the U.S. copper companies have expressed a willingness to assist in obtaining such loans by granting any windfall profits from the recent devaluation of the peso for the service of these loans. In summary, it appears that the Chilean Government will have adequate resources to meet its balance of payments requirements during 1959 and that with a serious effort at stabilization imports can be reduced from their present high levels so that there may actually be no need to borrow from the private U.S. banks on balance of payments grounds. The budgetary deficit is a problem for Chile to resolve in cooperation with the IMF and it certainly cannot be financed by U.S. funds.

Therefore, we take the initial position that no additional balance of payments loans should be made to Chile from U.S. official sources during 1959. It is clearly recognized that the new Administration requires same evidence of support from this Government especially since Alessandri has based his political future on close economic cooperation with the United States. Alessandri is a political independent who commands no real party allegiance and has shaky and heterogeneous congressional support. He was elected over a strong, leftist communist supported candidate by a very narrow margin, and there is real reason to believe that in the event of his failure, a drastic swing to the far left in Chile might occur.

To meet the political and economic requirements of this situation, we propose that the Chileans be informed at an appropriate point in the negotiations that the Eximbank would be willing to open credit lines to cover acceptable economic development projects on condition that Chile reach prior agreement with the IMF on a renewal of the standby and show satisfactory performance under its terms. We believe that a credit of between $30 and $50 million would be appropriate, but no indication of the amount should be given to the Chileans until after the agreement with the IMF is signed. The announcement of credits would not need to wait until negotiations for the individual projects are concluded. In addition, the possibility of loans from the DLF can be pointed out to the Chileans. There should be no great difficulty in working out excellent development projects as the Eximbank has on file applications for over $40 million, including a paper mill and electric power works. The IBRD has been considering for some time large-scale highway and railroad projects on which action has been deferred because of inflation. The DLF has on file applications totaling $18 million and a recent report by the USOM in Santiago indicates the existence of other projects suitable for DLF consideration to the extent of $108 million.

1. Source: Department of State, Central Files, 825.10/2–1359. Confidential. Co-drafted by Siracusa, Albert Post of the Office of Inter-American Regional Economic Affairs, and Samuel D. Eaton, Financial Adviser, International Finance Division, Bureau of Economic Affairs.
2. A covering note from Rubottom to Dillon attached to the source text reads:
   “The attached memorandum on Chile’s interest in obtaining financial assistance has been prepared for your background information.”
   “No action on your part is believed necessary at this time.”
3. The following handwritten notation by Assistant Secretary Mann appears on the source text: “It may be necessary to spread out installments on foreign debt which are bunched up at this time.”
4. We are thinking of a range of from 330 to 350 million. [Footnote in the source text.]