Foreign Relations of the United States, 1969–1976, Volume E-15, Part 2, Documents on Western Europe, 1973–1976, Second, Revised Edition

242. Briefing Memorandum From the Assistant Secretary of State for Economic and Business Affairs (Katz) to Secretary of State Kissinger¹

Washington, September 30, 1976.

U.K. Seeks Large IMF Loan

During the week ending September 28, the pound declined by nearly 8 cents to $1.6378, a record low. This downward movement reflected general lack of confidence in British economic policies rather than any specific economic event. The Bank of England remained on the sidelines, making no real attempt to shore up sterling through exchange market intervention. In order to bolster confidence, however, the U.K. announced September 29 that it would seek to draw its remaining credit tranches from the IMF. Taking into account the 45 percent expansion of credit tranches agreed at Jamaica, these loans would total roughly $3.9 billion. At least $1 billion would be needed to repay earlier short-term credits from Group of 10 nations.

First reactions in the market to the British move were skeptical but the tone today was somewhat more positive with sterling rising sharply and topping $1.70 at one point. In general, speculators are not yet convinced that the British Government can implement domestic economic measures tough enough to relieve pressure on the pound.

Senior British officials have told our Embassy in London that there is no disposition in the British Government to change existing economic policies. The IMF will probably, however, insist on some tightening as a condition for the credit tranche drawings. Our Treasury has also been urging more restrictive policies in private talks with British counterparts. We are concerned that the Department has not been consulted sufficiently by Treasury on this sensitive issue and are taking steps to assure closer coordination.

If, as is likely, the IMF standby provides insufficient financing to get the British out of the current crisis, they will probably ask us for bilateral support in the form of medium-term credits. They have already made some tentative approaches along these lines. In addition, we will have to put up considerable money under the “General Agreements to Borrow” to provide the IMF with enough liquidity to meet yesterday’s British request for funds.

1. Summary: Katz discussed the declining value of the British pound.

   Source: National Archives, RG 59, Records of the Office of the Counselor, Helmut C. Sonnenfeldt, 1955–1977, Entry 5339, Box 10, POL 2 United Kingdom. Limited Official Use. Drafted by Thomas Forbord in EB/IFD/OMA; cleared by Ernest Preeg in EB/IFD and Norman Achilles in EUR/NE. Katz did not initial the memorandum. In a July 22 message to Ford, Callaghan discussed the UK budget cuts announced that day. (Ibid., Box 4, Britain 1976) In a July 29 memorandum to Kissinger, Sonnenfeldt said “that the British economic actions are almost certainly right in economic terms;” however, he cautioned that “there should be no illusion as this process of retrenchment proceeds, hopefully bringing with it a measure of economic stability, the British defense and international role will continue to diminish. It may be quite true that there is no immediate impact on the UK NATO contribution but obviously there will be an impact as weapons and equipment procurement gets slowed down; and there is also a ripple effect as other countries similarly retrench.” (Ibid.)