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299. Memorandum From Guy Erb of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)1

SUBJECT

  • PRC on U.S. Policies Regarding International Debt

On Wednesday, February 22, 1978, the PRC will meet to consider international debt issues, in particular, the U.S. position for the March meeting on debt of the Trade and Development Board of the United Nations Conference on Trade and Development (UNCTAD). The Board will meet at the “Ministerial” level: Richard Cooper will lead the U.S. delegation.

A discussion paper for the PRC is attached at Tab III. Annexes to the paper provide background on debt issues and North/South relations (Tab A);2 the current debt situation, U.S. debt policy and the positions of other donor countries (Tab B);3 the text of the proposal prepared by the United States and the European Economic Community at the time of the Conference on International Economic Cooperation— PRC decision issue (Tab C);4 a note on retroactive terms adjustment— PRC decision issue (Tab D);5 and a note on a means of allowing a debtor country to forego payments on principal under certain circumstances—the Bisque clause (Tab E).6 As Background, I attach CIA assess[Page 934]ment of LDC Positions on Debt Relief Issues and a CIA research paper on Non-OPEC LDC debt.7

The developing countries, especially India and Pakistan, have called for rescheduling of commercial and official debt and/or debt moratoria. Their proposals have proved unacceptable to the United States, whose current debt policies are based on an April, 1977, EPG recommendation that the United States oppose calls for generalized debt relief as well as the use of debt relief as a normal means of transferring aid resources.8

However, the UNCTAD secretariat is seeking a compromise that would involve an outcome for the Ministerial meeting that would be rather modest from the point of view of the LDCs. In effect, proposals regarding commercial debt (already questioned within the group of developing countries) would be dropped and emphasis placed on 1) adjustment of the terms and conditions of outstanding loans, and 2) a mechanism to continue international discussion of features or guidelines for treatment of severe external debt problems.

The main issues that require PRC decision prior to the UNCTAD Ministerial are as follows:

1) Should the U.S. agree to table the USEEC debt proposal, and, if so, should the U.S. accept the use of debt relief on a case-by-case basis as a means of implementing the section of the US/EEC proposal on the structural balance of payments problems of developing countries?

2) Should the U.S. seek Congressional approval for retroactive terms adjustment on a case-by-case basis to provide assistance to poor countries?

A decision of secondary importance at this time concerns the possible analysis of a) the role of aid consortia and creditor clubs in debt relief exercises and (b) bisque clauses.

The first two decision issues could involve a modification, but would not overturn, current U.S. debt policies. In assessing these decision issues we have to bear in mind the impact of debt policies on 1) other OECD countries, 2) the overall North-South relationship, 3) the credit worthiness of individual debtor countries, and 4) prospective requests for debt reschedulings.

Regarding the two main issues before the PRC, the discussion paper poses the following options:

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(1) U.S. opposition to tabling the US/EEC proposal and to taking any other initiatives.

(2) U.S. support for tabling the US/EEC proposal, but opposition to taking any other initiatives.

(3) U.S. opposition to tabling the US/EEC proposal, but support for an initiative on retroactive terms adjustment.

(4) U.S. support for tabling the US/EEC proposal, and for an initiative on retroactive terms adjustment.

I recommend Option (4).

US/EEC Proposal

The US/EEC proposal, although a relatively weak reed, should be tabled.

—Even if the United States does not agree to table the US/EEC paper, other OECD countries probably will table it, perhaps with changes that we would find objectionable.

—Agreement to table the proposal does not commit the United States to any specific action, but merely to further discussion of the proposal and to consideration, in consultation with the Congress, of various means of implementing the proposal (see Discussion Paper, p. 5).

—Failure to table the proposal would divide the OECD and leave the initiative on debt entirely with the Group of 77 developing countries. Even if the G–77 rejects the proposal, as it is likely to do, the US/EEC paper would remain as an element of subsequent discussions (Note: there is a risk here because we cannot agree, at this time, to major revisions in the US/EEC paper).

—Failure to table the proposal would give an impression that the US was backsliding on the debt issue.

Retroactive terms adjustment

I recommend that the United States agree to retroactive terms adjustment on a case-by-case basis for the least developed countries (LLDCs—15 of which owe the United States debts on past Foreign Assistance Act and PL 480 loans) plus those IDA eligible countries with outstanding loans on harder than current U.S. terms. This course of action—sub-option #3 on p. 7 of the Discussion Paper9—would affect a total of $1.5 billion of debts outstanding on U.S. loans, at a real cost to the United States of less than $500 million. The reduction in annual debt service receipts would be less than $50 million in 1987. (See table on p. 8 of the Discussion Paper.)

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—Retroactive terms adjustment for LLDCs and IDA eligible countries would be a constructive U.S. action that would have a positive impact on our overall North-South relations, but at a relatively low cost to the United States;

—In my judgment, the effect on the credit worthiness of developing countries would be minimal. The impact on future requests for reschedulings is uncertain, but is unlikely to be sufficiently great to overturn the traditionally cautious U.S. approach in creditor clubs or other fora;

—Comparable action is under consideration by the British and the Danes. The Dutch are pressing for this type of measure within the EEC, as well as within the OECD. The Japanese are interested in the proposal. The Danes have also indicated a willingness to consult with the Germans on this issue. The recent Swedish, Swiss, Dutch and Canadian debt cancellations or reschedulings (see Annex B to the Discussion Paper, Tab II, pp. 6–7) have created a climate in which a negative US decision would be unfavorably compared to other OECD approaches to the debt issue. On the other hand, an affirmative U.S. decision would be in step with actions envisaged by several OECD countries although the French and Germans are said to have problems with this approach.

—Conversion of past loans to current terms has a logic that provides an excellent basis for the necessary consultations on Capitol Hill: for example, the proposal brings terms on past loans up to the standards now accepted by the Congress (grants for LLDCs and soft loans for other IDA eligible countries) and is a policy that takes into account the distribution of aid as well as the economic circumstances of individual countries and their development policies. The Discussion Paper suggests that the United States seek LDC commitments to use freed resources for agreed development objectives. Such a proviso might enhance the proposal’s prospects on Capitol Hill. However, the amounts are small and U.S. leverage will be slight. This factor plus the disadvantages of setting up another accounting procedure lead me to recommend against this form of conditionality.

By tabling the US/EEC paper and announcing its willingness to consult with Congress on retroactive terms adjustment the USG would give the UNCTAD secretariat a fighting chance to pull off its proposed compromise. Secretary General Corea’s attempt to reach an intermediate position between the G–77 and the OECD countries (as usual, the Soviets are at the margin of these discussions) is a significant move, with implications for the common fund talks and future North-South discussions. We are uncertain as to whether the G–77 will accept the UNCTAD proposals. However, the constructive U.S. action that I recommend would greatly strengthen the hand of the moderate LDCs within the group of developing countries. Without such U.S. action, it [Page 937]is very likely that the developing countries will stick to a hard line on debt issues between now and the next major UNCTAD meeting in 1979. As a consequence, the UNCTAD Secretariat’s attempt to act as a “broker” would have been set back, an outcome contrary to our interests.

Aid Consortia vs. Creditor Clubs and Bisque Clauses

The PRC is also asked to review two other questions: 1) the use of aid consortia or creditor clubs for debt rescheduling and 2) the use of bisque clauses in loan agreements.

Neither one of these questions has yet been adequately examined within the Government. The issues are familiar to those responsible for debt policy and I recommend that a study be requested by the PRC, to be completed before the U.S. delegation leaves for the UNCTAD Ministerial. Bisque clauses might well be offered during the UNCTAD meeting as a possible item for consideration by a working group comprised of experts from developed and developing countries. Such a U.S. initiative could prevent the contrasting approaches of the US/EEC paper and the LDC proposals from dominating the follow-up to the Ministerial meeting.

Tab III

Discussion Paper Prepared for the Policy Review Committee 10

U.S. POLICY ON DEBT RELIEF FOR DEVELOPING COUNTRIES

February 22, 1978 The Situation Room

SECTION I: INTRODUCTION

Virtually all the LDCs are avoiding militancy on North/South issues, at least for the moment, in part because of the continuing slackness in the world economy and the press of immediate economic problems. However, no significant progress has been made on such issues as the codes on technology and multinational corporations, and the UN Overview Mechanism got off to only a modest beginning. At the same time, prospects for movement on issues of importance to the [Page 938]developing countries (Group of 77) as a whole, the Common Fund and debt, are uncertain.

Debt issues will be the focus of the ministerial-level session of the Trade and Development Board of UNCTAD next month (March 6–10). The only other agenda topic relates to development and financial problems, including debt, of the least developed countries (LLDCs). The G–77 views the meeting as an opportunity to secure commitments from the developed countries for increased resource transfers, and in particular will be pressing for generalized debt relief on official debt owed by low-income LDCs. The pressure for generalized relief comes predominately from the few LDCs (India, Pakistan, and Bangladesh) that stand to benefit the most, although for a number of others (particularly African LDCs) the issue has developed political importance.

Last week in Washington, UNCTAD Secretary General Gamani Corea spoke with U.S. officials.11 His presentation represented a move away from the original G–77 position. He said that a procedural solution could be devised to handle proposals on debt relief mechanisms. However, on the issue of debt relief or alternative measures to transfer resources, he felt that something needed to be done. He allowed, though, that each creditor country could, on a case by case basis, decide on how such relief would be provided.12 Corea emphasized that he could not guarantee that the G–77 would accept his position.

Differences between the developed countries (Group B) and the G–77 remain broad and substantive. The G–77 will almost certainly raise the discussion in the new Overview Mechanism in the United Nations,13 and probably at UNCTAD V in May 1979. (See Annex A on the debt issue in North/South relations.)

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U.S. POLICY ON DEBT RELIEF FOR DEVELOPING COUNTRIES

U.S. debt policy recognizes the distinction between an immediate debt crisis and a structural balance of payments problem of which debt is one element. U.S. debt relief is provided on a case-by-case basis in situations of default and imminent default where necessary to ensure future repayment. Debt relief should not be used as a form of development assistance and debt reorganizations should normally take place in the framework of a multilateral creditor club. Furthermore, in April 1977, the EPG agreed to recommend opposition to all proposals for generalized debt rescheduling and to the use of debt relief as a normal means of transferring aid resources.

The U.S. policy on debt relief reflects: (a) the economic necessity of a case-by-case approach; (b) the importance of honoring contractual obligations; (c) a desire to adhere to the budgetary process and avoid “back door” financing, and (d) the need to maintain the confidence of private capital markets.

In considering the alternative positions discussed below in Section II for the UNCTAD Ministerial meeting, two issues arise which could lead to modification of U.S. policy on debt relief:

—Should the U.S. use debt relief to provide assistance to LDCs on a case-by-case basis in implementing the structural balance of payments section of the US/EC proposal? (See Annexes B and C.)

—Should the U.S. use, with Congressional approval, retroactive terms adjustment (a form of debt relief) on a case-by-case basis to provide assistance to the least developed LDCs?

SECTION II: ISSUES FOR THE UNCTAD MINISTERIAL MEETING

The U.S. objectives for the meeting are to: (1) preserve the long-term financial interests of the U.S.; (2) maintain a unified position among the major creditor countries; (3) keep discussion of the debt issue and the problems of the LLDCs on a constructive level; and (4) avoid adverse effects on overall North/South relations. These objectives must be delicately balanced; too much emphasis on one will undercut the others.

The major questions that need to be addressed with regard to the U.S. position at the UNCTAD Ministerial are: (a) whether or not to support tabling the US/EEC CIEC proposal on debt; and (b) whether or not to support any other debt-related initiatives. There are four possibilities:

(1) U.S. opposition to tabling the US/EEC proposal and to taking any other initiatives.

(2) U.S. support for tabling the US/EEC proposal, but opposition to taking any other initiatives.

(3) U.S. opposition to tabling the US/EEC proposal, but support for an initiative on retroactive terms adjustment.

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(4) U.S. support for tabling the US/EEC proposal, and for an initiative on retroactive terms adjustment.

A discussion of each of these four possibilities follows.

A. NO US/EEC PROPOSAL AND NO OTHER INITIATIVES

Proposals from the developing countries (G–77) for generalized debt relief will be on the table at Geneva. The developed countries (Group B) have not yet agreed to place proposals on the table. Last year at the Conference on International Economic Cooperation (CIEC), the U.S. and the EEC tabled a joint proposal on “features” to guide international action in situations involving debt-servicing problems. It was tabled as part of the CIEC package of the developed countries on a take-it-or-leave-it basis. The proposal was not accepted by the LDCs, but the Ministers agreed that it could form a useful basis for consideration elsewhere. The proposal was rejected by the LDCs. At USG insistence, this proposal has not been “activated” for consideration at the UNCTAD Ministerial. The EEC, supported by Japan, has been pressing to table it as the centerpiece of the Group B position for the Ministerial. If the LDCs rejected it a year ago, there is a presumption that they would reject it again.

In the absence of any U.S. initiative, other Group B countries might:

a. choose not to move forward on debt at this juncture; or

b. choose to go ahead with the US/EEC proposal (or a modified version of it) without the U.S.; or

c. abandon the US/EEC proposal with each country advancing as far as it can to meet LDC demands.

In the absence of significant Group B initiatives, the G–77 might:

a. downplay the significance of the setback by agreeing to hold further technical discussions; or

b. hold fast to their more extreme demands for generalized relief and pursue them in other UN fora, such as the UN Overview Mechanism;

c. break off the discussions charging bad faith on the part of Group B, and raise the stakes by making debt relief their major objective at UNCTAD V (May 1979 in Manila).

In short, the pros and cons of going to the UNCTAD Ministerial “with an empty bag” are the following:

PROS:

—Ensures that the U.S. position on debt is not eroded.

—A hardline position, if supported by Group B, might defuse expectations for future concessions in the debt area.

CONS:

—Destroys Group cohesion on debt.

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—Isolates the U.S., thereby exposing the U.S. to greater pressure.

—Risks bringing the dialogue on debt to a halt and reducing chances for compromise on other North/South issues.

B. THE US/EEC PROPOSAL, BUT NO OTHER INITIATIVES

The value of tabling the US/EEC proposal at the meeting is essentially tactical. Tabling the US/EEC proposal is probably the only course of action that would keep Group B together and allow the developed countries to say they are being responsive to LDC concerns.

The other members of Group B could be persuaded that the US/EEC proposal should be “activated” without any substantive changes, and not for negotiations. Having rejected it once, it is unlikely that the G–77 would accept this proposal at the UNCTAD Ministerial. The G–77 might decide to break off the dialogue on debt in the expectation that the developed countries would sooner or later feel enough pressure to move further toward meeting LDC demands (perhaps at UNCTAD V). However, it seems most likely that the G–77 will insist on continuing discussions on debt proposals.

There is one significant drawback for the U.S. in tabling the US/EEC proposal: we would have difficulty implementing the proposal if it were accepted by the G–77. The section of the proposal addressed to countries having debt problems of a longer-term structural nature outlines a new international procedure for dealing with these situations. The U.S. and other donor countries would be committed to “enhance” their assistance to a country that opted to take advantage of the new procedure. (See Annex C, page 4, subpara. (v).) This would be done by increasing the quantity and improving the quality of their aid by various measures with special emphasis on program aid and other flexible forms of fast disbursing aid, as well as debt reorganization. Thus the US/EEC proposal clearly implies a U.S. commitment to extend assistance to LDCs experiencing structural balance of payments problems that impinge unduly on their development.

The U.S. has no aid instruments which lend themselves readily to this purpose. Bilateral Development Assistance, P.L. 480 and Security Supporting Assistance (SSA) are all subject to varying policy and legislative constraints. Moreover, Congressional concerns expressed during the recent Witteveen Facility hearings about the use of official financing for balance-of-payments support suggest that the Executive Branch might face considerable criticism if it attempted to implement the US/EEC proposal.

It is difficult at this late stage to change the language of the US/EEC proposal to eliminate our problem with implementation. The changes we would want to make are unacceptable to the EEC, and might open up the proposal to changes that the U.S. could not accept.

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Thus, there are three alternative approaches to implementing the proposal for benefiting countries:

ONE: Reschedule debt due on official development assistance (ODA). This could be justified under current FAA legislation which permits rescheduling to ensure repayment.

TWO: Adopt an ad hoc approach. Each time a country takes advantage of the procedure, the U.S. would explore the various ways of putting together a package of new aid from development assistance, SSA, and P.L. 480 funds (as was done for Jamaica). If in exceptional circumstances, debt relief were also utilized, consultations with the Congress would be required.

THREE: Seek Congressional authorization and appropriations for the amounts of balance-of-payments support required to meet commitments resulting from the new procedure. Only a prior authorization and appropriation of funds would allow fast disbursal of assistance for this purpose.

The diplomatic benefits for the U.S. of joining with Group B in tabling the US/EEC proposal are considerable. Against these advantages, the costs in terms of tension between the Administration and the Congress must be weighed. If the PRC agrees on one of these alternatives, it would be necessary to consult with Congress prior to agreeing to table the proposal at the ministerial in order to avoid a reaction by Congress that could affect adversely more important actions sought by the Administration (such as larger FAA and IFI appropriations, or approval for U.S. participation in the Witteveen Facility of the IMF). While there may be costs in terms of Congressional relations, the risk of incurring these costs are likely to be small since there is a strong expectation that the G–77 would not accept the US/EEC proposal.

In short, the pros and cons of joining with other Group B countries in tabling the US/EEC proposal are the following:

PROS:

—Helps assure Group B cohesion.

—Minimizes the chances of a breakdown in the discussions on debt without yielding any additional ground.

—Serves as a counterproposal to LDC proposals that are already on the table.

CONS:

—Risks some damage to the Administration’s relations with Congress and a possible adverse impact on Congressional actions on bilateral and multilateral assistance.

—The USG would have difficulty implementing the US/EEC proposal unless it made a commitment to provide assistance to LDCs facing structural balance of payments problems.

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—Since the LDCs are likely to reject the proposal and because Group B could not agree to substantive revisions in it, tabling the proposal would be an empty tactical ploy.

—Tabling the proposal may make it an important part of subsequent discussions of debt relief with developing countries.

C. AN INITIATIVE ON RETROACTIVE TERMS ADJUSTMENT, BUT NO US/EEC PROPOSAL

The terms of old aid are harder than the terms of new aid for a number of LDCs. For the least developed, which generally receive grants now, there is a significant discrepancy between current terms and past terms. At the moment, AID assistance to the LLDCs is solely in the form of grants; P.L. 480 is extended on a mixture of grants and loans.

In a DAC meeting last month, the Netherlands proposed that donor countries give consideration to some form of retroactive terms adjustment for the poorer developing countries. The UNCTAD Secretariat sees agreement on this as the major accomplishment of the March ministerial meeting.

Section 208 of the International Development Cooperation Act of 1978 (S.2420) would partially modify current U.S. policy by authorizing the new aid agency—on a case-by-case basis—to waive interest payments and use payments of principal (in the form of local currency) for development purposes. The authority would extend only to existing Foreign Assistance Act loans to the LLDCs. The authority proposed is similar to existing authority covering new P.L. 480 loans under Title III. If approved, the Humphrey Bill would, in effect, permit retroactive terms adjustment for past FAA loans for LLDCs.14 The rationale for and the effect of retroactive terms adjustment is to increase resource transfers through a debt relief process.

There are three basic options for case-by-case retroactive adjustment of past loan terms; two with respect to the least developed countries and one with respect to other low-income countries.

1) For the 15 least developed countries that owe the U.S. ODA debt, convert the loans provided under the Foreign Assistance Act (FAA) to grants. (This is basically consistent with the debt provision contained in the recently proposed Humphrey Bill.)

2) For those 15 countries, convert both FAA and P.L. 480 loans to grants.

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3) In addition to action for the LLDCs, for non-LLDC IDA eligible countries (per capita income less than $550 in 1976), adjust past FAA and P.L. 480 loans which are at harder than the currently most favorable loan terms (ten years grace at two percent interest, thirty years amortization at three percent interest) to these most favorable loans terms.

There has been staff level considerations of other options, but they were discarded as either impractical or too costly.

The cost to the U.S. and benefit to the LDCs of these options is described in the table below.

As a general principle, specific action would only be taken on a case-by-case basis to exclude countries which, for example, violate human rights. In addition, we could seek to obtain LDC commitments to use freed resources for agreed development objectives. This would enhance the likelihood of obtaining Congressional approval but reduce the attractiveness of the initiative for the LLDCs.

US Costs of Alternatives for Retroactive Terms Adjustment ($ million—For Debt as of December 1, 1977)
Reduction in US Annual Debt Service Receipts Real Economic Cost to U.S. from Adjustment Present Value of Debt Outstanding Subject to Total Debt Outstanding Subject to
1977 1987 Action (Change in Present Value) Adjustment Adjustment
Option 1
Convert LLDC FAA Debt to Grants—Humphrey Bill 5 25 156 156 512
Option 2
Convert LLDC FAA and PL 480 Debt to Grants 25 47 362 362 1051
Option 3
(2) Plus Non-LLDC IDA Eligible Convert to Best Current Loan Terms 2515 47 * 425 666 1479

The pros and cons of U.S. support for a Group B initiative on retroactive terms adjustment are the following:

PROS:

—Retroactive terms adjustment is a means of increasing resource transfers quickly to the countries most in need of additional aid.

—Announcing this initiative at the UNCTAD meeting may have a political payoff in the North/South dialogue.

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—Section 208 of the Humphrey Bill reflects some Congressional support for adjustment.

—By restricting use of retroactive adjustment to a case-by-case basis, U.S. opposition to generalized debt relief is not compromised.

—Aid distribution, economic conditions in LDCs, and their development commitment are taken into account.

—The cost to the U.S. is small.

CONS:

—It would not be additional if Congress responded by making off-setting cuts elsewhere. It would not be additional for other donors that provide debt relief within aid budget ceilings.

—It is unlikely to be of any real interest to the LDCs and thus may buy little in the debt negotiations.

—We have been told that the French and the Germans may not be able to support this initiative due to both statutory and political constraints.

—It removes the main argument that the U.S. has used to resist use of debt relief as an aid instrument—i.e., that the Executive Branch cannot support it because of Congressional restraints. Thus it may give rise to pressures to widen the list of countries eligible for retroactive adjustment or to provide other forms of debt relief.

—It would require both authorizing and appropriations legislation from the Congress.

If the PRC decides that the U.S. should support a retroactive adjustment initiative, the U.S. delegation at the UNCTAD meeting would only be able to support the principle and to express the intention of the Administration to support legislation for it.

D. THE US/EEC PROPOSAL AND AN INITIATIVE ON RETROACTIVE TERMS ADJUSTMENT

U.S. support for tabling the US/EEC proposal plus support for an initiative on retroactive terms adjustment would combine the advantages and disadvantages of each component.

SECTION III: OTHER ISSUES

A. ADDING BISQUE CLAUSES TO ECONOMIC ASSISTANCE LOANS

A bisque clause allows a debtor, at its option, to skip a few payments of principal on a loan containing such a clause if it faces debt-servicing problems. These principal payments can be added onto the end of repayment schedule or stretched out over the remaining life of the loan. Interest on the remaining payments can be increased so that [Page 946]in present value terms there is no net loss to the creditor. (See Annex E on bisque clauses.)

As a further initiative for the UNCTAD Ministerial, the U.S. might propose that donor countries agree in principle to adding bisque clauses to aid loans. However, there has been little discussion of this possibility and it is unlikely that the other members of Group B would be prepared to support this on such short notice. Since this device is closely related to aid terms, it lends itself to examination at the technical level.

In general, the pros and cons of adding bisque clauses to aid loans are the following:

PROS:

—The addition of bisque clauses to F.A.A., P.L. 480, and SSA loans would not require legislation. However, prior consultations with key congressional committees should be undertaken.

—A bisque clause is not a debt-relief device if it is written into the original loan contract.

CONS:

—The financial benefit derived from adding bisque clauses to aid loans would be very small, which means that an initiative of this nature would get Group B little mileage in the dialog on debt.

—If introduced in the context of negotiations on debt relief, this limited initiative would compromise the U.S. position on generalized debt relief, making it more difficult to resist other LDC proposals.

—The G–77 would not view this initiative as being responsive to their current debt problems.

B. AID CONSORTIA VS CREDITOR CLUBS

The U.S. has participated in negotiations to reschedule official and officially-guaranteed external debts of a dozen developing countries on more than twenty separate occasions since 1956. Except for India and Pakistan—where extraordinary conditions pertained—these negotiations took place in ad hoc creditor clubs convened when a debt crisis clearly existed.

At UNCTAD IV in 1976, the U.S. announced that it would reschedule debt only in creditor clubs. This policy statement was a consequence of an early decision to stop providing debt relief to India in the Indian aid consortium. However, because of the precedents of India and Pakistan, a question has arisen as to whether any exceptions to the basic policy of rescheduling in creditor clubs should be allowed in the future. The question is particularly relevant because Pakistan has for[Page 947]mally requested that debt relief be negotiated at the next meeting of its aid consortium.

Although other creditors are willing to address ODA debt reorganization in aid-consortia, debt renegotiation in aid-consortia poses three serious problems for the USG:

(1) Aid-consortia are by definition concerned with the provision of economic assistance, and dealing with debt through them suggests that debt relief is being used as a substitute for aid.

(2) For the USG, debt relief is in addition to budgeted assistance. This is not the case for most other creditors where debt relief constitutes a portion of the aid budget and thus does not necessarily represent a real increase in resource transfers. Thus on burden-sharing grounds, the USG is placed at a disadvantage.

(3) The IMF “conditionality” of the creditor club exercise has been much stricter than experienced in an aid-consortium.

The question arises, however, as to how the U.S. should respond to a request for a consortium rescheduling by a debtor encountering financial difficulties where ODA debt is a major element and other creditors will not support creditor club action. The U.S. has three basic options for dealing with these situations:

(1) We can strictly adhere to a policy of rescheduling only in a creditor club. This would place the U.S. at odds with other donors that are willing to negotiate debt in aid consortia.

(2) The U.S. could consider a genuine request for a rescheduling in an aid consortium by a debtor country to facilitate the treatment of ODA debt problems in a creditor club; or introduce some creditor club criteria, or conditionality into consortia arrangements.

  1. Source: Carter Library, National Security Council, Institutional Files, Box 68, PRC 053, 2/22/78, International Economics. Confidential.
  2. Annex A, attached but not printed, is an undated paper entitled “Debt in North/South Relations.”
  3. Annex B, attached but not printed, is a February 2 paper prepared by EB/IFD/OMA entitled “Current Debt Situation, U.S. Debt Policy, and Donor Country Positions.”
  4. Annex C, attached but not printed, is the text of the U.S.–EEC proposal. The paper at Annex A (see footnote 2 above) noted that the U.S.–EC proposal “clearly distinguished between debt relief to deal with emergency situations and the provision of appropriate assistance to handle longer term transfer of resources problems” and “preserved the case-by-case approach to the problems of developing countries.” Its provisions “identified measures by debtors and creditors to prevent debt crises from arising;” “laid out guidelines for creditor-club operations, which would insure equitable and efficient treatment for countries experiencing a debt crisis;” and “suggested a new procedure to enhance assistance to developing countries experiencing structural balance of payments problems, of which debt is an element, which unduly impinge on development prospects.”
  5. Annex D, attached but not printed, is an undated paper entitled “Retroactive Terms Adjustment.”
  6. Annex E, attached but not printed, is an undated paper entitled “Bisque Clauses.”
  7. Attached but not printed are two papers prepared in the CIA. The first, ER 78–10095, dated February 1978, is entitled “LDC Positions on the Debt Relief Issues.” The second, ER 78–10001, dated January 1978, is entitled “The Non-OPEC Less Developed Countries: External Debt Positions and Prospects.”
  8. See Tab 1 to Document 263.
  9. Reference is to suboption 3) under Section C of the attached Discussion Paper.
  10. Confidential.
  11. Telegram 48583 to all OECD capitals, February 24, reported on Corea’s February 14–15 visit to Washington. (National Archives, RG 59, Central Foreign Policy File, D780088–0849) In his February 16 Evening Report to Carter, Vance discussed his February 14 meeting with Corea and Cooper’s February 15 meeting with Corea. Vance noted that the developed and developing countries differed over “the call of the developing countries for a ‘second window’ to finance measures to improve commodity export earnings. Dick warned that if the Common Fund took on the aura of a new aid institution, as it would under this approach, Congress would not support any type of Common Fund. We urged Corea to concentrate on the main function of the Fund—financial support for commodity price stabilization agreements.” (Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 19, Evening Reports (State): 2/78)
  12. In his February 16 Evening Report to Carter, Vance noted that, according to Corea, the LDCs had “narrowed their demands and now seek relief of the debt burden of the poorest countries. Corea suggested retroactive adjustment of the terms of past official debt to conform with current aid terms.” Cooper countered that “adjustment of terms of all past loans to a group of countries would be a form of aid, and basic needs and human rights are important US aid allocation criteria;” as such, “each country should be considered separately and on its merits.” (Ibid.)
  13. UN General Assembly Resolution 32/174, December 19, 1977, established a Committee of the Whole to oversee North-South economic negotiations.
  14. Senator Humphrey’s International Development Cooperation Act of 1978 (S.2420) addressed U.S. bilateral and multilateral development policy. Following Humphrey’s death in January 1978, Senators Case and Sparkman introduced the bill in Congress.
  15. *Additional Debt—Mostly Local Currency Repayable PL 480