596. Study Prepared by the National Security Council Interdepartmental Group for Latin American Affairs1 2

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I. Problem and Situation 1
II. Action Program to Implement NSDM–11 2
A. Economic Pressures 2
B. Effectiveness of the Pressures 3
C. Political Campaign in the Hemisphere 4
D. Fisheries and Overflight Problems 9
III. Contingency Actions—In Problem 12
CASE A: No Solution—Sanctions 12
CASE B: Solution—No Sanctions 16
ANNEX 1 U.S. Action Program 18
ANNEX 2 USIA Activities 23
ANNEX 3 Department Spokesman Themes 26
ANNEX 4 Economic Indicators 27
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[Omitted here are Sections I through III.]

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U.S. Action Program On Possible Economic Pressure Points

1. SUGAR—Quota for calendar 1969 is 406,644 tons. Peru shipped 125,000 tons before April 9, and could ship about another 125,000 tons in period April 9 to August 6. Sugar production is off this year in Peru and after August 6, Peru would have only another 125,000 tons to ship. Thus it cannot fill its 1969 quota; even if Peru receives its pro rata share of any future allocation of Puerto Rican or other deficits, it could not benefit. (Treating Peru normally on sugar allocations can yield a public relations “plus,” without easing overall economic pressures.)

The U.S. price is 7.82 cents per pound, resulting in a net of 6.82 cents per pound (less 1 cent freight and tariff). The world price is now 3.73 cents. Accordingly, the 125,000 tons that could flow from April 9 to August 6 would be worth $17 million of which the premium would be $7.5 million.

U.S. sugar trade has been sensitive to Peru for fear of being exposed were the U.S. to invoke Hickenlooper on April 9. In the deferral period the uncertainties are greater since no cut-off deadline is set. Thus, even less than the permitted amounts may be taken, which will add to the other economic pressure on Peru.

2. A.I.D.—In the deferral period, we expect to make no new loans to Peru. Of the existing pipeline of $36 million, we will cancel some $7 million in loans which are not moving. We would expect to make disbursements for work scheduled for completion prior to August 6 of about $2.5 million. Other problems may further slow the rate of disbursement apart from the deferred sanctions, such as GOP delays on payments to contractors, and GOP failures to meet past due obligations.

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We will make no new PL 480 sales agreements, nor enter into any housing or investment guarantees. (We will continue to make surplus foodstuffs available at the rate of $5–6 million yearly.)

We will review staffing of our AID mission to ensure that its size will be consistent with the reduced level of AID activity.

3. Export-Import Bank

Since the coup in October the Ex-Im Bank has made no direct loans to Peru either to the government or the private sector, except for a credit to a W.R. Grace subsidiary which had been a long time in negotiation. The Bank has continued to guarantee and insure normal medium term commercial export transactions. Some of these may have gone to the government. This assistance is a small percentage of the total U.S. exports to Peru of about $300 million a year. During the deferral period, the Bank will continue the foregoing policy.

This will result in the deferral of the large copper expansion project of Southern Peru, which would have involved an investment of $335 million. Ex-Im was to have financed about $190 million of the total. Other investment have been mentioned involving possible Ex-Im financing in the future. Holding back on the Southern Peru loan will have little economic impact in the short run. To go ahead at this point would be a signal to the private sector in the U.S. which would lessen the program of economic pressure. (There will be economic consequences from holding back this loan [Page 5] by 1970.) In the early period of the new investments about 75% would go for equipment shipped from the U.S. and thus have no economic effect on Peru.

4. IBRD—The World Bank has just been pressed by the Peruvians to go ahead with a $20 million loan for agriculture in light of the Hickenlooper deferral. The Bank has used its own internal policy against lending to countries with unresolved expropriation problems as a reason for not going ahead. Since most of the technical requirements for this loan have been completed and the loan has been more than two years in preparation, the GOP will push hard for this. We will however, be able to dissuade the IBRD staff from going ahead. The IBRD will hold the line on freezing new loans so long as Peru leaves the compensation issue unresolved.

5. INTER-AMERICAN DEVELOPMENT BANK—We will discourage all new IDB loans to Peru. We have enough voting power in the Fund for Special Operations (FSO) to make our policy effective. Our first recourse in stopping Ordinary Capital (OC) loans is through vigorous representations to the management concerning the damage to the Bank’s image in the U.S. if it makes loans to Peru. If such representations fail, we are able to stop OC loans only by giving to such lengths as being absent from the Board meeting. In the latter case, we would have to weigh the risks of a political confrontation and of damage to our relations with the Bank.

We can at the technical level hold up new applications for a time, but three requests submitted earlier have advanced fairly far—a $10 million OC loan for small mine development, and two FSO loans—one a $10 million road loan, and the other a $20 million loan for irrigation projects. These may get to the Board despite our efforts at delay and require the United States to vote. If they do, we will vote against the FSO loans arguing Peru’s inability to provide “counterpart” as a reason for doing so. In case of the ordinary capital loans, we will be faced with a hard problem of weighing risks of going ahead or holding back.

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An old piece of business was the extension of time for concluding formalities for a $12.8 million housing bank loan from the FSO. We have voted to approve this to avoid a direct confrontation with Peru in the IDB. Both the management of the Bank and the Peruvians made this a matter of honor.

6. PRIVATE U.S. BANKS AND U.S. INVESTORS—Several New York banks under the leadership of Manufacturers Hanover have put together a $65 million standby arrangement for Peru but have not formally completed it. They are continuing to stall, but have been delaying for such a long time that they will soon be under heavy pressure to go ahead. We will continue to urge the leading banks to stall, stressing uncertainties in the Peru situation in the deferral period. They understand the situation and are reluctant to go ahead, but do feel quite exposed. Peru will make every effort to blackmail them with threats to withdraw deposits into going ahead. We shall contact them at frequent intervals to stress the lack of credit worthiness of Peru, the present inefficiencies of the Central Bank, and the continuing problem of an unresolved expropriation.

Major U.S. investors in new copper mines in Peru will also be sought by the Peruvian authorities. Southern Peru Copper, Cerro and Anaconda want to negotiate better terms before putting sizable new investments into Peru, and may be able to delay further to seek these concessions. However, the GOP will likely threaten them with cancellation of concessions unless investments proceed. We do not think there are alternative sources of financing for these investments from other countries, so that we believe that continued stalling by the American mining companies will not be very risky. To the extent that these investments require Export-Import Bank financing, the U.S. Government can block them. We have discussed the Peru situation with key officials of the mining community and they do not plan to go ahead at this time. They are particularly struck by the infiltration of militant Marxists in the Ministry of Energy and Mines with which new mining investments will have to be associated.

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State and Commerce have or will shortly contact all major U.S. banks and investors in Peru to elicit cooperation with the deferral policy. We will also work through the Council for Latin America to stiffen private sector resolve to hold back on the flow of funds to Peru. We will stress the uncertainties of the situation and that the Hickenlooper sanctions still hang over the country.

7. IMF STANDBY—Peru is scheduled to draw from its $75 million standby agreement on May 31, 1969. The IMF staff believes that Peru may be ineligible to make the drawing because of financial mismanagement. State and Treasury will make every effort behind the scenes to cooperate in sharing information which may help lead to this technical conclusion. We would not vote against drawing were the Fund to make a technical finding of eligibility to draw.

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[Omitted here are Annexes 2 through 4.]

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–146, NSSM Files, NSDM 42. Secret. Copies were sent for information to Helms, Kennedy, Hanna, Shakespeare, and Laird. (Ibid., Department of State, RG 59, S/S Files, Lot 80 D 212, NSSM 42)
  2. The NSC–IG/ARA study outlined seven possible economic pressure points that the United States could use to put pressure on the Velasco regime: sugar exports, loans from U.S. AID, the Export-Import Bank, the IBRD, the Inter-American Development Bank loans, private U.S. investors, and the IMF.