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

347. Briefing Memorandum From the Assistant Secretary of State-Designate for Economic and Business Affairs (Enders) to Secretary of State Kissinger¹

Washington, June 8, 1974.

Italy’s Financial Difficulties; Gold; Eurodollar Shakiness

1. Italy’s Financial Difficulties

Italy’s balance-of-payment deficit is running at an annual rate of $10 billion. Having borrowed heavily for more than a year from the Eurodollar market, Italy’s credit is rapidly worsening. Unless a package of internal and external stabilization measures can be put together shortly, there is a risk of a financial collapse.

The payments deficit stems from uncontrolled deficit financing and exorbitant domestic wage increases; it is aggravated by high energy prices; the decay of confidence in Italy’s economic and political future is playing an increasing role. Financial Minister Colombo is in Washington June 10 for a round of talks with US and foreign finance ministers and bankers. Simon, Burns and I have a working dinner with him Monday night.

To succeed, a stabilization package must include not only large scale new credit, but some further devaluation, and above all action to increase revenues and reduce the budget deficit.

So far the Europeans have taken little lead to organize assistance for the Italians; they must be encouraged to do so now. Available sources of finance are: the new IMF oil facility to be established at the C–20 meeting (perhaps $900 million), a major medium term bilateral loan from Germany (perhaps a billion dollars), new borrowings on the Eurodollar market with EC guarantees ($2 to $3 billion), additional help from the Belgians, Dutch, Swiss drawings on existing $3 billion Federal Reserve swap rolled over so as to constitute medium term assistance. If necessary, Italy could under our new gold proposal use its gold as collateral for new bilateral loans at prices somewhere between the official return and the present market.

Action by Italy this week to devalue the “green lira” (accounting currency used for intra-EC agricultural trade) discriminates against us and will have to be offset as we participate in a rescue operation.

2. Gold

Our new position on gold was put to the Germans, French, and Dutch (latter as the conduit to the EC) on June 4 at Under Secretary level.

On June 6, the EC finance ministers met, noted US position is evolving, and decided not to take up gold formally at the June 12–13 C–20 meeting in Washington.

Our position envisages gold collateral loans at market-related prices which could be used to provide immediate relief for Italy. We thus cannot be accused of being in a position of obstructing the solution to the Italian problem.

France is not sending a Minister to the C–20 meeting (there is a conflict with the first French Government Cabinet meeting on combating inflation). Simon and Burns will discuss our gold proposal with the Germans and British, and possibly in a larger group if reaction is favorable.

3. Worries over the Eurodollar Market

Rumors about the insolvency of large US and foreign banks operating in the Eurodollar market continue to be common.

The problem is this: The great bulk of new Arab money continues to be deposited at site or very short term (a few days). The deposits are in very large amounts, and are volatile. As is customary in the Eurodollar market, these funds are relent at terms running up to five to ten years.

In normal times the fairly predictable pattern of Eurodollar deposits, and the banks’ own capital, enable them to act as financial intermediaries, borrowing very short and lending medium to long. But bank capital is not great (maybe 8% of deposits for the best American banks, but 2% for some of the European banks active in the Eurodollar market, and as little as 1% for the Japanese banks) and the volatility of the new Arab oil deposits is posing an increasing strain.

The fact that there is no government lender of last resort for the Eurodollar market, as there is in the Federal Reserve system, aggravates the problem.

Adjustments needed are:

—Eurobankers must discourage short term high turnover Arab deposits by offering a lower interest rate (this is already happening on a wide scale);

—Eurobankers must return to more conservative bank practices, in particular increasing the ratio of capital to deposits (a concerted effort by US, European, and Japanese central banks is in order here);

—Central bankers must make clear that they will stand behind the major US, European and Japanese banks that operate in the Eurodollar market, provided these institutions also make clear that they stand behind their Eurodollar operations and affiliates (a larger effort among central bankers is required here).

As always in the banking area informal talks may be superior to formal meetings. Burns is the key, and we are trying to make sure of using the C–20 meeting to the fullest for the purposes outlined above.

1. Summary: Enders discussed Italy’s financial difficulties.

   Source: National Archives, RG 59, Records of the Office of the Counselor, Helmut C. Sonnenfeldt, 1955–1977, Entry 5339, Box 5, Germany 1974. Confidential; Exdis. Concurred in by Sonnenfeldt. Enders did not initial the memorandum. Under cover of a June 7 memorandum, Sonnenfeldt forwarded to Kissinger a letter in which Schmidt urged the need to mobilize EC gold reserves and for Kissinger “to weigh in with Simon on the political necessity of the ‘gold solution.’” (Ibid.) On June 11, G–10 Finance Ministers and central bankers meeting in Washington agreed that a country could borrow against its gold reserves valued at a price determined by itself and the lending country, that is, above the official price of gold, which remained $42.22 per ounce. See Foreign Relations, 1969–1976, vol. XXXI, Foreign Economic Policy, 1973–1976, Document 69.