497. Memorandum From the President’s Special Assistant (Rostow) to President Johnson 1
SUBJECT
- Tuesday Luncheon: Peru
At today’s luncheon Secretary Rusk may raise the problem of the deteriorating political and economic situation in Peru and what we can do about it. Both State’s Intelligence Bureau and CIA see the possibility of a military takeover in the next few weeks if Belaunde continues his do-nothing attitude and public confidence in him keeps on slipping.2
How Peru got into this Situation
During the past 18 months, increasing Government budget deficits and excessive use of foreign credits by both the public and private sectors accelerated the underlying inflationary tendencies and triggered mounting speculation against the Peruvian currency. These economic difficulties were intensified by a breakdown in the tenuous political relationship between the opposition-controlled Congress and the Executive, leading to an impasse that prevented Congress from meeting for 39 days in August and September.
The Government finally was forced to allow a devaluation on September 1. This devaluation of nearly 50% could provide a basis for certain beneficial adjustments to take place in the economy. However, because of the Government’s inability to put into effect necessary economic and financial measures to complement the devaluation and cope with its effects, a general atmosphere of drift in national leadership has developed. This has produced a crisis of confidence between the Government and the Peruvian people which is aggravated by a sudden rise in the cost of living.
[Page 1035]The military is increasingly nervous over this drift and deterioration. We are getting more frequent reports that the military is ready to oust Belaunde in order to introduce a strong economic recovery program and prevent public unrest from snowballing.
What We Have Tried to Do
We have been urging Belaunde to take corrective fiscal and budgetary measures for the past 18 months. You will recall that we offered him a $40 million program loan last May, conditioned on certain self-help actions. At that time, the Mirage question was only a cloud on the horizon, but we warned him about it. He found our conditions too stiff; in fact they were not any more onerous than those accepted by Chile, Colombia and Brazil for program assistance.
Belaunde by July had taken sufficient self-help measures for us to offer him $15 million, with the remaining $25 million of our original offer to come after he had met the pending conditions. In the meantime, our information on Peru’s Mirage acquisition had hardened, so we were more precise in making this a condition. Belaunde’s reaction to this offer was that the conditions were too steep for the amount of money involved.
Early this month we made a third offer to Belaunde: $40 million based on virtually the same economic conditions and no Mirages. This time Belaunde said that the Mirage deal was a fact and not subject to change. If we made it a condition, then Peru would forego the program loan.
Where We Go From Here
If we allow matters to drift, we can expect a military coup in Peru. This would trigger a series of reactions—e.g., holding up aid to Peru, Peruvian military intransigence on Mirages, Brazilian military pressure to acquire Mirages, and sharp Congressional reaction—which could seriously undermine your Alliance for Progress effort.
The key issue at this stage is the Mirages. If we can devise some way for Peru to cancel the contract or resell the aircraft to a third country, the road is open to give Belaunde the aid he needs. This kind of support from us translates itself into public confidence which can enable Belaunde to climb out of the present quagmire.
What I find disturbing is that neither our Embassy nor State are applying imagination and energy to finding a formula for heading off the catastrophe. We need to be doing two things:
- —contact key political and military leaders in Peru to urge patience and flexibility and asking them for their views on how to get around the impasse.
- —develop formulas to offer the Peruvians to get them to cancel the Mirage contract or resell the Mirages to a third country.
We have urged Covey Oliver to work along these lines (Bill Bowdler has given him two possible formulas).3
- Source: Johnson Library, National Security File, Country File, Peru, Vol. III, 10/67–1/69. Secret. Apparently drafted by Bowdler and based on an October 27 memorandum from Oliver to Rusk. (National Archives and Records Administration, RG 59, ARA/EP/P Files, 1967: Lot 70 D 139, POL 1 Plans) Bowdler forwarded the Oliver memorandum, and two intelligence reports (see footnote 2 below), to Rostow under the cover of an October 31 note. Bowdler remarked that Oliver had apparently recovered from the “passive attitude” reflected in his memorandum, i.e., that “the U.S. can probably do little to influence the situation.” (Johnson Library, National Security File, Country File, Peru, Vol. III, 10/67–1/69)↩
- The INR assessment is Intelligence Note No. 857, October 27. (National Archives and Records Administration, RG 59, Central Files 1967–69, POL PERU) The CIA estimate is Special Memorandum No. 8–67, October 28. (Johnson Library, National Security File, Country File, Peru, Vol. III, 10/67–1/69)↩
- The President wrote the following instruction on the memorandum: “Walt—Let’s meet on this.” A note on the memorandum indicates that Johnson did not receive it until 7:35 p.m. on October 31. According to the President’s Daily Diary the Tuesday luncheon group met on October 31 from 1:57 to 4:10 p.m. (Johnson Library) A handwritten note by Rostow explains that the subject was “important, but not discussed at lunch.” Another note on the memorandum indicates Bowdler was notified on November 1.↩