406. Memorandum from Ball to Hamilton, February 81
SUBJECT
- Your Memorandum of February 6, 1962, on Terms of AID Development Loans
I have looked over your memorandum and have a few comments. I think, however, that this is a matter on which you should make the final decision, since you have the problem of defending the program before Congress. Consequently, I am prepared to recommend to the Secretary that he forward your memorandum to the President, if you wish me to do so.
In making the following comments, I do not mean to appear too categorical. I recognize that this is a question on which there can be varying shades of opinion.
I shall address my comments to the numbered paragraphs, beginning at the bottom of page 2 under the heading of “Advantages of AID Policy.”
Paragraph 1.
It seems to me that you overstate Gene Black’s position. As I understood his views, he felt that if AID terms were hardened very much, the IBRD might feel that it had to reduce, not eliminate, its participation in the consortia. It was my impression that he was speaking primarily of interest rates and not of the maturity of the loans. The maturity of loans might be reduced, for example, from 40 years to 25 or 30 years, without greatly affecting the Bank’s willingness to participate in consortia.
[Facsimile Page 2]Black seemed primarily concerned with the burden of annual payments. While this burden reflects not only interest rates but also the amortization schedule, it would, I should assume, be possible to shorten the maturity of loans and still maintain a low level of annual amortization payments provided one were prepared to see a substantial balloon of unpaid principal left at the end. The repayment of such a balloon could then be a matter for negotiation at that time.
With respect to interest rates, my feeling, after talking with Black, was that both he and Burke Knapp were doing a certain amount of bargaining. I cannot believe that an increase in interest rates to 2½% [Typeset Page 1667] for example, would materially affect the amount of the Bank’s contribution to consortia.
Paragraph 2.
As an abstract proposition, the statement seems to be eminently correct. It does not, however, seem to me to meet the point—which is whether the United States alone of all lenders should, through its aid program, take the full responsibility for meeting the inadequate transfer capacities of borrowing countries.
Paragraph 3.
I disagree completely with this paragraph so far as it relates to Germany and the other European countries. I have spent as much time as anybody—perhaps more—trying to persuade the Germans to liberalize their credit terms—not only in the course of two trips to Bonn, but two DAG meetings. We have, it seems to me, exhausted the possibilities of exhortation. I think the only chance we have of getting the Germans to move appreciably is by proposing to narrow the gap, which would enable them to come more closely within range of our approbation and thus acquire the kind of self-respect they are looking [Facsimile Page 3] for. If, however, we continue our present policies further pressure on the Germans to liberalize would merely be nagging and likely to have a negative effect.
The effect on the International Development Association raises different questions. I am not clear as to whether the movement of AID to harder terms and the isolation of IDA as the single agency committed whole-heartedly to soft lending would work for or against larger contributions to IDA. I am certainly not persuaded that it would impair IDA’s situation and one can argue that it might improve it.
Paragraph 4.
I have never thought that we were talking about having AID loan terms approach those of the IBRD or the Export-Import Bank. What has been suggested is a modest move in the direction of hardening the terms. But this would still leave AID loans far softer than those of the World Bank or Export-Import Bank. I can’t imagine that Congress would seriously attack the AID program on the ground that it was moving toward harder loans. Congress has never shown any great enthusiasm for the IBRD.
Paragraph 5.
I cannot argue with the conclusions of this paragraph that AID loan term policy ought to be flexible.
Paragraph 6.
The complaint of borrowing countries about our policy of tied loans relates to the amount of funds available. This sense of outrage is unlikely to be assuaged by the fact that they can delay for ten years payment of amortization with no or low rates of interest.
[Typeset Page 1668]Comments on paragraph 2, under heading “Objections to AID Policy”:
[Facsimile Page 4]The statement in this paragraph “If Germany makes half of its loans on relatively hard terms and half on short terms comparable to those of AID, therefore, its total lending policies would be comparable to ours” seems to misstate the situation. There is no possibility that Germany will make half of its loans on terms comparable to those now provided by AID. The question remains how we can justify the fact that liberal AID loans are indirectly supporting both hard and relatively hard loans made by such countries as Germany.
Comments on section of memorandum headed “Proposals to Deal with Objections”.
Paragraph 1.
I can’t believe that this is a very serious proposal. Even if Libya, for example, were to develop the greatest oil production in the world, it would take generations for it to become anything other than an underdeveloped country. In spite of the fact that it might have large gold and foreign exchange balances, it would still make a poor mouth. We would, I suspect, be extremely reluctant to push it very hard for faster repayment.
In any event, I have assumed that the really important question was not so much the maturity of the loans as interest rates. The ability to accelerate repayment would thus be of only limited value to us.
I have absolutely no confidence in the power of continued exhortation to bring about a softening of terms on the part of our European friends. We have long since passed the point of diminishing returns and, I’m afraid, we would merely produce an attack of ennui if we promoted a DAC Ministerial meeting in Paris in the spring with the sole purpose of providing a forum for further admonishment to persuade other countries to hit the sawdust trail. I have a strong feeling that we have a chance of making [Facsimile Page 5] further progress, particularly with the Germans, only if we change the dialogue—if, for example, we have something to offer in the way of a prospect that we ourselves would be prepared to move slightly in the direction of slacking the gap if they move themselves.
In any event, I was told this morning that there will probably be an OECD Ministerial meeting toward the end of May and that present plans suggest the likelihood of having the DAC Ministerial meeting held at the same time and combined with it.
- Terms of AID Development Loans. No classification marking. 5 pp. Washington National Records Center, RG 286, AID Administrator Files: FRC 65 A 481, Development Financing, FY 1962.↩