299. Memorandum From Guy Erb of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)1
- 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:[Page 935]
(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).
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.)[Page 936]
—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.
- Source: Carter Library, National Security Council, Institutional Files, Box 68, PRC 053, 2/22/78, International Economics. Confidential.↩
- Annex A, attached but not printed, is an undated paper entitled “Debt in North/South Relations.”↩
- 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.”↩
- 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.”↩
- Annex D, attached but not printed, is an undated paper entitled “Retroactive Terms Adjustment.”↩
- Annex E, attached but not printed, is an undated paper entitled “Bisque Clauses.”↩
- 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.”↩
- See Tab 1 to Document 263.↩
- Reference is to suboption 3) under Section C of the attached Discussion Paper.↩
- 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)↩
- 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.)↩
- UN General Assembly Resolution 32/174, December 19, 1977, established a Committee of the Whole to oversee North-South economic negotiations.↩
- 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.↩
- *Additional Debt—Mostly Local Currency Repayable PL 480 ↩