342. Memorandum From the Acting Assistant Secretary of the Treasury for International Affairs (Nachmanoff) to Secretary of the Treasury Miller 1

SUBJECT

  • U.S. Policy on Debt Relief

In light of recent discussions of debt relief for Pakistan, Fred Bergsten suggested we give you a background paper on current U.S. Government policy.

A decade ago, there was no coherent U.S. policy on debt relief. Since then, partly in response to Congressional concerns and partly in the context of North/South negotiations, a fairly elaborate policy has [Page 1080]emerged. It is designed to ensure that debt relief is a financial policy instrument with enough flexibility to be supportive of our broad foreign policy objectives. Flexibility requires that Congressional constraints on the use of debt relief be minimized. Key elements of our policy—which are strongly supported by OMB—include the following:

1. Debt relief should not be used as development aid.

If extended as aid, debt relief encourages disregard for contractural repayment obligations. Also, debt-relief is “no strings” aid compared to project and program aid which give us some continuing leverage on policies and administration.

There is also a compelling practical argument. The Executive Branch has the authority to extend debt relief without prior Congressional approval even though it decreases federal receipts and therefore has a clear budget impact. If the Executive Branch uses this authority too freely, Congress is likely to take it away. Congressional constraints progressively imposed on our authority include: (a) requiring that loan repayments return to Treasury instead of allowing the creditor agencies to reprogram them; (b) prior notification of debt-rescheduling negotiations; (c) a 30-day waiting period for possible Congressional action before rescheduling agreements go into effect; and (d) an annual report to Congress on debt relief operations. (See Tab A for further details.)2

2. Debt relief should only be extended in a situation of default or imminent default.

Otherwise, debt relief will be requested by every country we aid whenever it wants larger assistance flows. While we do have some flexibility in determining when a default situation exists, we have not extended debt relief except where it is clear that payments due in the near term will not be made.

3. The effective implementation of a comprehensive economic stabilization program is a precondition for debt relief.

This is designed to ensure that debt relief restores the debtor country’s creditworthiness as quickly as possible so it can resume scheduled debt-service payments and normal borrowing activities. An IMF standby arrangement is usually the test for meeting the precondition.

4. Debt relief should only be provided on a multilateral basis in a creditor-group operation (e.g., the “Paris Club”).3

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This has been a key issue in North/South negotiations. LDCs have sought a new international mechanism that would provide debt relief “on demand” in effect. This element was reaffirmed in discussions leading up to a PRC meeting in February 1978 on U.S. debt policies.4

5. The terms of debt relief are determined on a case-by-case basis.

The case-by-case approach provides another important source of flexibility. It is possible to show more generosity when the political stakes are large (e.g., Indonesia in 1970, Chile in 1974, Nicaragua under discussion).

6. Private creditors (e.g., banks) should extend comparable relief.

Three years ago, during the hearings on U.S. participation in the IMF’s Supplementary Financing Facility, concern was expressed (especially by Congressman Cavanaugh) that governments would “bail out” banks that were heavily exposed abroad. The most formal statement of our policy on debt relief dates to that time when we made “comparable treatment” an explicit part of our policy. (See attached NAC Action at Tab B.)5

  1. Source: Carter Library, Anthony Solomon Collection, 1977–1980, Chronological File, Box 7, 1/1/80–1/18/80. No classification marking. Drafted on January 14 by Alexis Rieffel (IDN) and reviewed by Robert Pelikan (IDN). Sent through Solomon, and this copy bears his stamped initials.
  2. Tab A, attached but not printed, is an undated paper entitled “Recent Legislation on Foreign Debts.”
  3. The Paris Club, an informal and voluntary consortium of creditor countries that develops coordinated policies to help countries having trouble repaying their debts, first convened in 1956.
  4. See Document 300.
  5. Tab B, attached but not printed, is a January 6, 1978, National Advisory Council paper on “Proposed Policy Statement on Debt Reorganization.”