506. Information Memorandum From the Assistant Secretary of State for Inter-American Affairs (Oliver) to Secretary of State Rusk 1

SUBJECT

  • Peru—Delicate Political Situation Threatens Upset of Recent Economic Advances and Possibly Constitutional Government

The decisive action of the Hercelles Cabinet to remedy the deteriorating economic situation in Peru and to solve the long-standing IPC problem has brought about a reaction from the right and the left which now threatens the stability of the Cabinet, its economic recovery programs, and quite possibly the constitutional process.

Background

After a steadily deteriorating economic situation had continued for ten months, the Peruvian Congress granted the executive branch sixty days of extraordinary powers to cope with the situation. The Cabinet of Premier Oswaldo Hercelles acted quickly to remedy the economic deterioration. New taxes such as a large gasoline tax increase, however, were bound to elicit adverse reaction.

The package of measures taken by the Finance Minister, Manuel Ullos, re-established confidence on the part of the IMF, foreign banks, and foreign investors, and they are cooperating with the Government on stand-by arrangements and foreign debt rescheduling.

The Government also arrived at a settlement of the long-standing dispute with the American-owned International Petroleum Company. A complicated arrangement was devised in which the Company turned over the disputed oil lands in return for an exoneration from all alleged past debts and the right to continue its other operations in Peru.

The good effect of the Peruvian Government’s actions of the past three months and its capacity to continue its recovery program are now in jeopardy because of domestic political considerations.

In addition to the public reaction against the new taxes, the IPC settlement is under strong attack. Die-hard elements on the extreme right and the extreme left have joined together to attack the solution as being unfavorable to Peru and a “give-away.” The Peruvian military [Page 1053]has been reported as being quite concerned about the reaction to the IPC solution and there are even rumors of certain elements considering this as a pretext for a coup.

Present Situation

At the present moment, according to our Embassy, [less than 1 line of source text not declassified], and even the Peruvian Embassy here, the situation is delicate. President Belaunde is in his sixth and final year, with elections scheduled for June, 1969. The apparent probable winners of next year’s elections, APRA, hold one of the keys in the situation. Its majority congressional bloc supported the President in granting extraordinary powers and on settling the IPC dispute. Nevertheless, APRA does not wish to be tied to the program if it becomes unpopular, especially with regard to taxes or the oil dispute. More importantly, it desperately wants elections to be held and realizes it must give Belaunde at least enough support to ward off coup-minded elements. However, influential elements in the military still fear APRA, and would prefer a coup to a democratic Aprista victory.

The Peruvian military thus holds another key in the situation. They can, of course, intervene at a moment’s notice and often have in the past. During the last year of crises, however, despite the numerous opportunities at hand, the military has refrained from taking action. As the presidential elections draw closer, this crisis is a greater danger to constitutional government.

President Belaunde is the third key element. He is a skilled politician, and on many occasions has fashioned solutions from apparently irreconcilable political problems. His will to finish his term in office and preside over an orderly and democratic transition is an important element in the equation.

Since the President is not directly threatened by a Cabinet crisis, one of the safety valves in moments of extreme stress is the resignation of the Cabinet. In the past year, there have been four Cabinets in Peru. The present Cabinet is by far the strongest Peru has had in years. Its demise would be a body blow to the economic recuperation of the country and would inflict a staggering set-back to confidence both within and outside of Peru. Further, the fact is there are practically no competent individuals left who would accept Cabinet positions in this lame duck Government. Therefore, the military might feel compelled to take over or to install military officers in key civilian ministeries.

The United States is largely on the sidelines in this situation. Our aid involvement has varied from minimal to naught (in 1968) and our relationship has been beset by serious and emotional problems—IPC, the Mirage purchase, tuna boat seizures, etc. Unfortunately, at almost any moment these U.S.-Peruvian bilateral issues can create problems of [Page 1054]great importance in Peruvian politics. This is especially true when the problem involves possible application of legislation such as the Symington, Conte–Long, Hickenlooper, Pelly and Ship Loan Recall Amendments.

We expect Mr. Hercelles (who holds both Prime and Foreign Minister portfolios) to attend the UNGA—probably after October 5—if the political situation is sufficiently calm. We will provide you with current briefing material when an appointment with you is arranged.

  1. Source: National Archives and Records Administration, RG 59, ARA Files, 1967–69: Lot 74 D 467, September 1968—CTO Chron. Confidential. Drafted by Shumate on September 20 and cleared by Vaky and Stedman. The memorandum is an uninitialed copy.