Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

6. Memorandum From Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)¹

Washington, February 24, 1977

SUBJECT

• Debate Over Financial Support Fund (FSF)

There is currently debate, presently confined to the Solomon-chaired International Monetary Group, on whether the US should support, and seek Congressional ratification of, the OECD Financial Support Fund (FSF), or abandon this approach and seek instead to expand the resources of the IMF.

The FSF was originally proposed by Kissinger as one element in a comprehensive industrialized nations response to the economic problems arising from the 1973–74 oil price increases. It was designed to provide mid-term financing to OECD countries on a “last-resort basis” at market-related interest rates.² All OECD countries except for France and the US have authorized participation—when confirmed, all pledges would add up to $25 billion. Congress has opposed participation to date, arguing: lack of need; undesirable competition with, and duplication of, IMF functions; insufficient link to tough stabilization conditions by recipients; skepticism that the two-year life of the FSF was adequate to deal with what is obviously a longer-term problem.

State continues to support the idea of the FSF, arguing that it has been ratified by nearly all other participants and should not now be abandoned by the US, that it can provide a substantial amount of official financing relatively quickly, that the terms of the FSF are already agreed upon and negotiated, and that it can be put into action immediately upon ratification by the US. Treasury opposes the FSF citing strong Congressional opposition to it on the grounds that the FSF competes with the IMF, is linked to a non-existent energy cooperation effort, that there would be a divergence between FSF conditionality and IMF conditionality raising the possibility of conflicts in program and approach, that the FSF excludes many important third-world countries with potential financing needs, and that it will not be able to take advantage of key OPEC donors.

Treasury believes that we should strengthen the role of the IMF either through an ad hoc borrowing facility, expanding the General Arrangements to Borrow (i.e. borrowing additional funds directly from industrialized and perhaps the OPEC nations) or forming a new creditors club. All of these have various degrees of merit. All would clearly be better able to induce Saudi Arabia to provide financial support to the weaker economies than the FSF—an important objective which I have been pushing for a number of months.

This memo is intended primarily to acquaint you with the problem, and secondarily to solicit your political judgment among the two approaches. A US contribution to the FSF would require a major effort on the Hill. On the other hand, it would generate new resources quickly (which might be essential to aid Portugal, Italy, or even perhaps Spain over the coming year). It would also be a major manifestation of financial cooperation among the Trilateral nations,³ although with the admitted drawback of not including important third-world countries. Abandoning this approach for an IMF-oriented approach would serve the essential objective of bringing in third-world nations, but might take a considerable amount of time to negotiate.

My preliminary view is that a number of industrialized nations may need assistance over the next year; there would need to be funds available to avoid our having to scurry around for money as we are now doing in the case of Portugal. The British specifically warned Mondale against abandoning the FSF unless we were sure we had something to put in its place.

Moreover, it will be difficult, as our initial venture toward the longer-term goal of bringing the Saudis, the UAE, etc. into the system, to ask them abruptly for money before they felt at home in the “club”. Indeed, doing so might turn them off to longer-term cooperation. Instead, we should begin to bring them into the “club” through inviting them first to participate in meetings of central bankers and finance ministers in order to improve their understanding of the system itself and their stake in it. This would set the stage for their contributing resources to strengthen the functioning of the system. Absent the FSF, we would need to go to the Saudis almost immediately. Recognizing that we had no other recourse over the next year but to strengthen the IMF mechanisms, their bargaining position on the terms on which they would provide resources to the Fund would be considerably strengthened, if they did not reject the idea entirely.⁴

I anticipate that a USG decision on this will have to be made within the next two or three weeks. Indecision and delay only complicate matters further, and weakens American leadership in a vital area of international economic cooperation.

Do you have a preference:

FSF approach

Prefer IMF-oriented arrangement

Prefer to wait

See me⁵

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 24, Financial Support Fund (FSF): 2/77–4/78. Confidential. Sent for action. At the top of the page, Brzezinski wrote “plse assess more the implications of the two choices—FSF or IMF—and let us discuss it. ZB” and drew an arrow pointing to Hormats’ name. Aaron also initialed the memorandum.
2. Kissinger made this proposal in a November 14, 1974, speech before the University of Chicago Board of Trustees entitled “The Energy Crisis: Strategy for Cooperative Action.” (For the text of Kissinger’s speech, see the Department of State Bulletin, December 2, 1974, pp. 749–756.) On April 9, 1975, all OECD members, with the exception of Turkey (which signed on May 30, 1975), signed the agreement that would establish the Financial Support Fund, pending its ratification by member governments. (Telegram 15709 from USOECD Paris, June 18, 1975; National Archives, RG 59, Central Foreign Policy File, D750213–0034)
3. Apparently a reference to countries represented on the Trilateral Commission, a non-governmental organization founded in 1973 by Chase Manhattan Bank Chairman David Rockefeller as an organization devoted to promoting strong relations among the countries of North America, Western Europe, and Japan. Zbigniew Brzezinski was a founding member, and Jimmy Carter was a member before his presidency.
4. Aaron highlighted the last sentence of this paragraph and wrote “Excellent point” in the margin adjacent to it.
5. Brzezinski did not indicate his preference among these options. Below the options, Aaron wrote: “ZB—I would be inclined to support FSF if we can link it to IMF ‘conditionality.’ We do not want it to undercut the IMF. We should discuss with Hormats + maybe others like Ed Fried. DA.”