100. Memorandum of Conversation1
PARTICIPANTS
- The Secretary
- Edward Yeo, Department of Treasury
- Under Secretary Rogers
- Assistant Secretary Shlaudeman
- Robert Hormats, NSC
- Jock Covey, Notetaker
The Secretary: I told your boss he would have made a great Vice President, except it would have made his department totally insufferable.
Yeo: I thought we were already insufferable.
The Secretary: Did you hear the line that I used at the meeting with the Young Presidentials? I told them how glad I was to be in Kansas City to witness the reconciliation of two parties that had for so long been at odds with each other—and at the end I said I was thinking about the State Department and the Treasury Department (laughter).
Yeo: He is still recovering from all of that.
The Mexican reserves are about $150 million. They can add to that about $250 million by borrowing to bring them up to a total of $400 million. But they are losing about $150 million per week.
The Secretary: What happens when a country goes bankrupt? I mean what are the mechanics of it?
Yeo: They have to declare a debt moratorium.
The Secretary: That means no new borrowing. How much of that $150 million a week is debt servicing?
Yeo: Most of it is being used to maintain the peso. You know currency maintenance is a three- or four-corner stool. If you pull one leg out, the whole thing collapses. Some of it goes into economic expansion which produces inflation, of course, and results in a large deficit in the current account.
The Secretary: Then the peso is over-valued and that makes imports cheaper, right?
[Page 317]Yeo: Yes, and it makes exports more expensive. That is why the current account shows a deficit of about $3 billion. But in the litany of Mexican political wisdom, stability of the peso is the number two or number three commandment.
The Secretary: What do they get out of supporting the peso?
Yeo: They get screwed.
The Secretary: Then why do they do it?
Yeo: Ever since they floated the peso in ’49, one of the biggest symbols of effective Mexican leadership has been a steady exchange rate for the peso.
The Secretary: That shows the continuing influence of the upper class.
Yeo: Yes, and it has the following effects. It keeps the exports down; it makes imports much more attractive. . .
The Secretary: Which screws their own domestic industries.
Yeo: Yes. And third, it means that a lot of money is going out of the country. People see the crunch coming and they’re getting their money out before it comes.
The Secretary: Tell me one thing. Is your perception of the situation shared by the Mexicans? Mexicans like Lopez Portillo?
Yeo: It probably is, but Lopez Portillo wouldn’t say so for his own good health.
The Secretary: He seems to be avoiding a number of things for his own good health lately. So what do you think should be done?
Yeo: Echeverria will have to change his entire economic program.
The Secretary: Before December 1?
Yeo: He cannot make it as far as December 1.
The Secretary: Do you agree?
Shlaudeman: He obviously has been cheating heavily on his figures.
Yeo: He has to reduce the budget deficit. 9% of the GNP is enormous. He must devalue the peso by 40–50% and he has to put on a very tough monetary squeeze.
The Secretary: Who would all of that hurt? That would make imports expensive.
Yeo: Yes. It would hurt everybody.
The Secretary: The prices would rise?
Yeo: Yes.
The Secretary: More than the present inflation is causing prices to rise?
[Page 318]Yeo: It would produce a reduction in real income. It would be a very brutal squeeze.
The Secretary: Do you think it’s conceivable he would do that?
Rogers: The alternatives are pretty stark too. If he has to declare a debt moratorium, his whole house of cards could come tumbling down.
The Secretary: If I know Echeverria, he will drag it out one way or another until December 1. He doesn’t care Lopez Portillo gets dragged under. No average Mexican would understand that Lopez Portillo inherited the problem, and no new President would ever be able to make the hard decisions in the first week of his government. So it will get deferred until the first part of the new year when Lopez Portillo will have to carry the whole burden of the blame.
Hormats: They are already trying to borrow now to draw it out. They are shopping around the U.S., Japan. . .
Rogers: The U.S. is not willing to do very much and the IMF says they have to straighten out their exchange rate and their monetary policy before they will do anything.
The Secretary: How could you help if you wanted to? I’m not saying we should but if you wanted to, how would you do it?
Yeo: We could probably dig up $500 to $700 million. That would give them five to seven weeks more life.
The Secretary: I am [sure?] that Echeverria would just turn on us.
Shlaudeman: It is an Allende formula. He would have to blame us.
Rogers: There is no doubt that they are arguing exactly this point. They are probably going through agonies trying to decide whether to do this before the election.
The Secretary: As I see it there are two issues. One, should it be done before the election; and two, should they do it as a confrontation with the United States?
Yeo: If they are to hold on they will need a substantial chunk of financing and this we cannot do.
The Secretary: Can anyone?
Yeo: No one can come up with $2 billion unless Echeverria is willing to mortgage a part of Mexico, like a forward deal on oil or something.
The Secretary: That he might do. How long would $2 billion hold the peso up?
Yeo: Until a little bit before December.
The Secretary: The important thing is how it is done. Does this have to be anti-American?
[Page 319]Yeo: Well, the alternative is first to declare a moratorium on debt. Secondly, to impose exchange controls.
The Secretary: That would hurt the tourist trade, wouldn’t it?
Yeo: Yes, it would hurt it some. And third, to move his entire domestic policy further to the left. That in turn would dry up some of the outside investment.
The Secretary: Then they would have to generate all their capital domestically. How would they do that?
Yeo: They would have to go over to a siege-type economy.
The Secretary: Would he have domestic support for that?
Rogers: It would split the country right down the middle. It is a highly import-dependent economy.
The Secretary: Then where would they get the capital from? Wouldn’t that stop the U.S. from investing?
Yeo: Yes.
The Secretary: I don’t think they can do that. Do you? Just on political grounds. Echeverria will get plenty of support for an anti-American policy, as long as it doesn’t cost anybody anything. But if they can’t drive cars, or it forces them to change their way of life. . .
Okay, I see two choices. If they do it in the orthodox way, it will be a terrifically austere program. Prices will be up and it will maintain the conditions for investment, but it will mean that Echeverria will expose himself as a failure. He will have no fall guy. The other choice is to go to a state economy and use the U.S. as a fall guy. The end result would just be about the same, except that the first course would give him a good chance of producing a strong economy in two or three years. But the second course means a long-term depressed economy—but it would get him to December 1.
Rogers: One thing you will have to reckon with is the possibility of a leak. The pressure is increasing tremendously now that Hurtado has talked to the IMF. As soon as people mention anything about the devaluation of the peso, the possibility of a leak runs very high. Hurtado’s talk with the IMF has in a way started the clock ticking.
The Secretary: How did it ever go so far without anyone knowing?
Yeo: It is one of the great all-time con jobs. It makes Bernie Kornfeld look like an amateur.
The Secretary: I do not understand how a bank can put $1 billion into a country and not know more about the domestic situation.
Hormats: It is a cumulative effect. Once they start investing, they can’t stop. They are committed and they have to keep pouring it in.
Rogers: The biggest problem here is that if Mexico goes, there are other countries that these banks are loaning to and they will say to [Page 320] themselves: “If Mexico has gone under, which was the darling of the investment company, what does it mean for Brazil and Peru?”
The Secretary: Then what is the solution? He certainly won’t pick the first choice.
Rogers: He would only do it kicking and screaming.
The Secretary: That’s very well. He will certainly not end his term with an orthodox plan for economic reform. His wife would kill him if no one else did. You know him, Bill. What do you think?
Rogers: No, I don’t think he would.
The Secretary: Maybe there’s enough pressure in the establishment to force him to do it. But he would not go on TV of his own accord and say that the country is insolvent.
Yeo: We will get the blame either way. From what little I know about the man. . .
The Secretary: Can he mortgage future oil production?
Yeo: In effect, he already has to some extent. The question is whether he can get a double mortgage. The Japanese might do it.
Shlaudeman: Do you think Hurtado told him how serious the situation was?
Yeo: I think so.
The Secretary: What are our choices? How would we pull it off if we do want to try to cooperate?
Yeo: Hurtado was asking us for a substantial swap . . . phantom swap. That is, we would announce a loan. We actually would loan nothing. We would make an announcement that they are borrowing, but they would put everything they took back into escrow.
The Secretary: That would give you a psychological advantage. Does this sort of thing happen often? Don’t economists read the fine print. Wouldn’t they notice that it is bullshit?
Yeo: We wouldn’t disclose the fine print.
$150 million a week is the past average. They might be able to control things a little better for now and use somewhat less than that, but if Murphy’s Law comes into effect. . .
The Secretary: Which is Murphy’s Law?
Yeo: That the worst possibly thing will happen at the worst possible time, and one of the worst things that could happen now is a leak. That would blow the top off the whole thing.
The Secretary: What’s the solution?
Yeo: There is no real solution. That is, we have a solution but we need someone to sell it politically.
The Secretary: Maybe I could run for the job of President of Mexico. It is a remunerative position. Have you ever seen the house [Page 321] that Echeverria had as a junior minister? You can imagine what it’s like from that to be President.
Yeo: I can solve the economic problem. . .
The Secretary: Can you just see Echeverria now saying on TV: “Boys and girls, I’m sorry, but we’ve been overspending . . .” Maybe they can make him do it—but who would “they” be? And maybe the President shouldn’t see Echeverria in San Antonio on September 7.
Rogers: I’m not at all sure he should call that off now. Echeverria was very flattered by your visit. When we make an effort to show him we are not out to get him, it may be very helpful.
The Secretary: Is that visit to San Antonio set?
Hormats: It’s not at all clear.
Yeo: I don’t think you should cancel it if it’s been set.
The Secretary: Is the Lopez Portillo visit set? Do we have a firm date?
Shlaudeman: We don’t have anything from the White House yet.
Yeo: The IMF cannot do anything for another two or three months. The question is what we can do to help in the meantime.
The Secretary: Who can do it? Who can talk to Echeverria? Bill Rogers would be best, but he will be in Africa at that time. It must in any case be someone who is known to love Latin America. Who else is there—Sol Linowitz? It must be someone who can give an abrotzo [abrazo?] and then begin a very friendly talk. Otherwise, we will have a macho confrontation.
Yeo: I told them a two-month stop-gap was not satisfactory. We have worked out a program but we did not tell him what he has to do.
The Secretary: Will the IMF tell him what he has to do?
Yeo: Yes.
The Secretary: The only way to talk to Echeverria is as a friend. But who can we send? It can’t be me. That’s too high a visibility and it will panic them.
Shlaudeman: Bill Rogers is the best.
The Secretary: No, he is absolutely necessary on the Africa trip. Ed, you would have to go along. It would be mad to try this without you, but we can let the IMF carry the can.
Yeo: I agree entirely. The second thing was once they start working with the IMF they can begin announcing everything they have been doing up until now. Then once everything is out in the open, we can come up with everything we can scrape together to help out until the IMF money can be made available. The right guy to speak for the IMF is H. Johannes Witteveen. He should be the deliverer of the economic message.
[Page 322]The Secretary: When should he do it?
Yeo: When he comes back from vacation, they should have a secret meeting.
The Secretary: The best man to carry the political message is clearly Bill Rogers. Do you think it’s better to send you first or Witteveen, Bill?
Rogers: Witteveen should go first. The bitter medicine must come from the IMF.
The Secretary: Then maybe you can do it early next week. If nothing else, I will succeed in breaking your marriage. But you could go down and do it in a day, but then maybe I should take Suki on the next trip.
Rogers: That would help. Is Nancy going?
The Secretary: She gets exhausted on these trips and I’m not sure they are good for her. Maybe Larry Eagleburger should go and Marlene.
Rogers: I plan to be back by the weekend.
The Secretary: We are off again on Friday, but first you should see Echeverria alone with no interpreters. Then you could say that Yeo is along with you to help.
Rogers: Yes, but there should be a letter from you first to say that I am coming.
The Secretary: You have to be careful. He is a very dangerous man when he is cornered.
Rogers: He most certainly is. He is a wild man and is capable of destroying everything around him to demonstrate his historical significance.
The Secretary: He would be delighted to announce to the world that “I personally am responsible for international debt rescheduling.” It is possible he has not understood the full significance of what is going on. He wants to get through until December 1 and make it miserable for Lopez Portillo if he cannot control him. But in any case, Echeverria would not want to go down in history as the Mexican president who introduced conservative financial policies to pay off international bankers unless he can find some sleight of hand. . .
Yeo: If we say we have a way to finance through December 1, he would be elated. But I would not know how to do it, and anything we do in the exchange stabilization fund, will be under very close scrutiny. There are a number of reporters now following Mexican affairs with some care.
The Secretary: Okay, suppose the bad news is conveyed to him by Witteveen. Then what?
Yeo: Then we should wait to see if the IMF hears back from Hurtado. The response is supposed to come from the Mexicans now. We [Page 323] would go down to Mexico if the Fund has not heard from them in the next two or three days.
The Secretary: Suppose they turn down the Fund’s proposal? Then what? I think it’s 50–50 they say that this proposal works against Mexican sovereignty. I think Witteveen should get down there before they get the Mexican answer. You can never be too sure what those people around him are telling him, and he is capable of anything. If he unilaterally rescheduled international debts, he would be a hero to 125 countries. The Mexican upper class wouldn’t like it, but I wonder if they have enough balls to force the issue. He is no Callaghan, you know.
Rogers: Nor even an Andreotti.
The Secretary: I would get Witteveen down there as soon as possible. Then Bill, as soon as possible after that—that is after Tanzania and Zambia.
Rogers: What about Mozambique?
The Secretary: Maybe you better do Mozambique too. Those guys will wet themselves when they see a real dictator.
I don’t suppose there’s anything else we can do right at this moment, but I wanted to thank you for bringing this to our attention. I hope you will keep us informed.
Yeo: It was a pleasure, and I will.
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Summary: Kissinger, Yeo, Rogers, Shlaudeman, and Hormats discussed the financial crisis in Mexico.
Source: Ford Library, National Security Adviser, NSC Staff for International Economic Affairs Files, 1975–1976, Box 2, Country File, Mexico. Secret; Sensitive. All brackets are in the original except “[sure?]” and “[abrazo?],” added for clarity.
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