491. Telegram From the Embassy in Peru to the Department of State1

432. Subject: Program Loan Negotiations and Military Spending. Ref: State 9115.2

Stedman, Acting AID Mission Director, and I called on President this morning. Said we had come in response to his request made to Dentzer and me earlier this month (Lima 192)3 for emergency financial assistance; that we were instructed to leave a memorandum with him embodying offer and requirements accompanying it. However before going over memorandum I said I would like to make a few observations orally. Belaunde agreed and I proceeded as follows:
Program loan offered in memorandum was additional to regular program of project lending.
All negotiations for program loan would be terminated if position of IPC was permitted to deteriorate. In view of pending legislation on expropriation and nationalization La Brea y Parinas and its anticipated promulgation into law USG could not continue negotiations on program loan or later conclude loan agreement or later disperse funds under it if position of IPC were impaired.
President interrupted me to explain that position of IPC would not be altered even with promulgation of new law which he said he was going to sign last possible moment (we assume July 26 or 27); otherwise Congress would promulgate law for him which was politically undesirable in light all his other problems with legislative body. He intends issue supreme decree at time of signing law providing for status quo at La Brea y Parinas until final solution its future operation can be worked out. While status of IPC would thus he said not be impaired, he expressed irritation at what he considered constant interference over the years of this company with his development program. He complained that company was stubborn and had refused to make concessions necessary for him politically to reach agreement. He referred again to formation of dummy corporation with majority Peruvian shareholders which he said would make it easy for him to sign operating contract immediately. Otherwise he implied negotiations would have to continue beyond 30-day period granted by pending bill.
My third observation on program loan, I continued, related to level of military expenditures. I explained that domestic political facts of life in US were such that it was not possible for US to provide program loan assistance to countries whose military expenditures were substantial. For example purchase of supersonic aircraft by Peru now would endanger Foreign Assistance Appropriation for this year not only for Peru but for all LA. To negotiate program loan we would require understanding with GOP that budget of armed forces next year would be no greater than this and of course that there be no purchase of supersonic fighters. President reacted violently to this point saying he could not limit Peruvian military in their defense requirements nor could he admit of any interferences in internal affairs of Peru for $15 million or $50 million or $100 million. Said he must make it absolutely clear that he would sign no document which limited sovereign powers of Peru. If this were our requirements he would forget about assistance from US and “seek other routes.”
I explained again problems of administration in Washington with Congress over this sensitive issue and showed President copy of draft Congressional amendment to Foreign Aid act introduced into lower House committee making mandatory suspension of aid to countries that purchase supersonic aircraft. Said I understood similar amendment had also been introduced in US Senate. While administration was opposed to this kind of limitation and amendment to Foreign Aid bill it was reflective of attitude of Congress and of political problem which Department and White House had at moment in relation to our overall foreign aid program.
I handed President memorandum (section b of reftel with informal Spanish translation). He went through first paragraphs hurriedly until he came to $15 million figure where he expressed some disappointment [Page 1023] that it was not $40 million figure originally discussed with him. I said lower figure might be considered “first tranche” and then if various steps outlined in memorandum were successfully completed we could begin next year discussion of remaining $25 million. I urged President to study memorandum carefully, discuss it with his advisors and, if he decided to proceed along these lines, to inform us when Stedman could begin negotiations with FinanceMin and President Central Reserve Bank. I said USG had no desire to limit Peruvian sovereignty as he had suggested but rather we hoped that with understanding of political problems in Washington, President would be willing in spirit of collaboration to work out with us various understandings necessary to proceed promptly with program loan. We spoke of relationship of this offer to IMF standby, to Peru’s self-help efforts and to our desire help Peru not only with its development but with its immediate financial problem. Because Belaunde had said earlier he would never put his signature to any agreement that mentioned military or limited their activities Stedman and I assured him that understanding on level of military expenditures would not need be reduced to written agreement.
Belaunde was obviously upset by various conditions regarding program loan offer, particularly those relating to limitations on military. He spoke of his happy relations with military which so essential to any regime in Peru and with some bitterness over what he felt USG was doing to weaken its relations with Peruvian military who were bulwark against Communist infiltration in this continent. We were together one hour and 10 minutes and I believe at end, although we left him somewhat dejected, he had decided to make effort to meet conditions surrounding program loan offer.4
  1. Source: Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67. Confidential; Priority. Forwarded to the President under the cover of a July 27 memorandum from Rostow. (Ibid.) Additional documentation on the meeting is in telegram 443 and airgram A–44 from Lima, both July 27. (National Archives and Records Administration, RG 59, Central Files 1967–69, PET 15–2 PERU and POL PERU–US, respectively)
  2. Telegram 9115 from Lima, July 19, contained the Department’s instructions on the program loan negotiations and military spending. (Ibid., AID(US) 9 PERU)
  3. See Document 486.
  4. On August 3 the Peruvian Government informed the Embassy that the terms of the program loan were unacceptable; the amount of the loan was too small in relation to the severity of its conditions. The government also had “great problems” in discussing the aircraft issue, since military matters were secret and “not subject to negotiations with foreign governments.” (Telegram 542 from Lima, August 4; National Archives and Records Administration, RG 59, Central Files 1967–69, AID(US) 9 PERU) The Embassy recommended shelving the program loan until developments allowed a more favorable opportunity for negotiation. The Embassy admitted, however, that a policy of withholding financial assistance could lead to “further cooling in US–Peru relations,” which, by its own assessment, “have not been at such low ebb for several years.” (Telegram 602 from Lima, August 8; ibid.) The Department concurred. (Telegram 18729 to Lima, August 10; ibid.)