ETA–15. Memorandum from the Deputy Director for Operations of the International Cooperation Administration (FitzGerald) to the Director of that Agency (Smith)1
SUBJECT
- Proposed Inter-American Development Banking Institution
Insofar as I understand what is contemplated, the establishment of an Inter-American Development Banking Institution seems to have limited value. Perhaps my doubts as to its usefulness would be reduced or eliminated if I could see how it fitted into the already existing [Typeset Page 51] institutions now making loans in Latin America, particularly the IBRD, the Export-Import Bank and DLF. It would also help if one had some general idea of the likely loan terms, i.e., interest rate, length of loan, etc. It is possible that the loan conditions contemplated would enable the proposed bank to complement, rather than replace IBRD and Ex-Im on the one hand and DLF on the other, although, as I understand it, DLF would discontinue all direct loaning activities in Latin America and local currency repayable loans would be handled by the special loans department of the proposed bank.
According to the NAC paper, the ordinary loans department, in addition to dollars, would receive and lend local currencies to be repaid in the same currency as lent. This would appear to be of marginal value in Latin America. The only instance I know in which borrowing countries would be able to repay the local currency of another Latin American country easier than dollars would be in the case of Paraguay and possibly Bolivia. These two countries might be able to repay Argentine pesos easier than U.S. dollars.
Unless the loans contemplated by the ordinary loan department involve a much longer repayment period than IBRD and Ex-Im Bank typically provide, I do not see how there could be very much business done over and above that which the IBRD and the Ex-Im Bank are prepared to do. Almost inevitably, it seems to me, the IBRD will reduce the ceiling on the loans it would make to any particular Latin American country to the extent that that country undertakes repayment obligations in dollars or other convertible currency through the proposed Inter-American Banking Institution. The trouble is not that IBRD and Ex-Im Bank do not have authority to make substantially larger loans to Latin America, but, rather, the capacity of Latin American countries to repay these loans. Adding another banking institution would not increase that repayment capacity.
[Facsimile Page 2]Nor, in general, will the requirement that the Latin American countries contribute part of the capital of the proposed Institution increase the total capital available for borrowing by the Latin American countries. Perhaps any contributions by Venezuela might be a net contribution because of its relatively large foreign exchange reserve, but surely in the case of most other countries—Brazil, or Argentina, or Ecuador—contributions by these countries to the capital fund will inevitably reduce almost pro rata the capital availabilities within the country. Much the same considerations apply to the special loans department. Latin American countries traditionally are chronically short of local currency, so they are likely to be unenthusiastic about contributing local currency to the proposed Institution. I think they would be doubly reluctant to contribute from their already limited [Typeset Page 52] dollar reserves capital for the special loans department that would be repayable in the local currency of the borrowing country. I simply cannot imagine that this proposal will be looked upon with any favor at all by the Latin American countries.
Presumably the argument for the proposed institution is that the necessity for making a capital contribution will instill in Latin American countries a greater sense of financial responsibility and take a great deal of the odium from the United States which we have acquired because of our unwillingness to meet all the requests of the Latin American countries for loans. I am not at all sure that this will be the result. As long as each country gets back in loans no less than the capital it contributed, then any additional borrowings are “gravy” and the pressure to get them will be as great as ever. As soon as the Institution runs out of money, the pressure again will be on the United States to make further capital contributions.
I feel that a great deal more thought needs to be given to the proposed Inter-American Banking Institution than has so far been given it; particularly, its relationship to other lending agencies. I realize that the United States has publicly committed itself to participating in a regional institution, but this does not require us to jump in with our eyes closed.
Deputy Director for Operations
- Source: Department of State, Central Files, 371.814/1–2159. The source text was attached to a memorandum from ICA Director Smith to Under Secretary Dillon, dated January 21, 1959, which reads as follows: “I am attaching a memorandum written to me by Dr. FitzGerald, which sets forth some of the questions which come to mind concerning certain aspects of the proposal.”↩