Foreign Relations of the United States, 1977–1980, Volume XX, Eastern Europe

292. Memorandum From the Executive Secretary of the Department of State (Tarnoff) to the President’s Assistant for National Security Affairs (Brzezinski)¹

Washington, June 7, 1980

SUBJECT

• Yugoslav Financial Situation

In response to your memo of June 2² asking for a report on what we are doing to be responsive to Yugoslav request for economic assistance, we convened a meeting of the Interagency Group for Europe on June 5 to review steps under consideration.³

Treasury will be responding separately concerning Secretary Muskie’s [ Miller’s] efforts to arrange for discussions between Yugoslav National Bank and US bankers about a major new loan. At the IG meeting we stressed the importance of making it clear to the Yugoslavs before the President’s trip that the Yugoslav bankers would be welcome here for discussions as soon as possible. The President will certainly be able to stress his personal interest in this matter and Secretary Miller’s efforts to arrange for meetings. The Yugoslav request for an IMF standby of some $400 million came before the IMF board on June 6 and was approved, with the active support of the US Executive Director. The President will be able to point to our consistent support for Yugoslavia in the IMF and the importance of close cooperation with the IMF in resolving Yugoslavia’s balance of payments problem.

The Export-Import Bank representative at the IG meeting pointed out that the Bank would continue to provide projected financing for Yugoslavia in 1980 in amounts consistent with past years. The President will be able to point to Exim’s active role in US-Yugoslav trade over the years and confirm that the Bank will continue to be active in Yugoslavia in the time ahead.

The Treasury representative reported to the IG that he expected Treasury approval of payment of monthly federal benefits to Yugoslav beneficiaries in dollars rather than dinars before the President’s trip. The sum involved, some $14 million, will not have a major impact on Yugoslav finances but the action would be an important indication of our readiness to be helpful.

State and AID are discussing the possibility of establishing Yugoslavia’s eligibility to compete on US-Yugoslav tenders for local service contracts overseas. Again the impact would be small but it would be a welcome gesture to the Yugoslavs. On the question of financing military sales to Yugoslavia, State and Defense agreed that there was no possible solution outside the US Foreign Military Sales program which the Yugoslavs are reluctant to use because they believe it would tarnish their non-aligned image. During the forthcoming US-Yugoslav Joint Military Committee meeting the week before the President’s arrival,⁴ Defense will be prepared to explain the FMS program in more detail and describe the nature of our programs with other nonaligned countries. If the question of financing of military sales comes up during the President’s visit, it was agreed that the best solution would be to recommend that the Yugoslavs reconsider their position on FMS.

The Agriculture representative pointed out that the PL480 Title I program would not be available for Yugoslavia given policy and budgetary constraints.

There was considerable discussion of the possibility of assisting Yugoslavia in some way to increase its exports to the US, thus closing the sizeable trade gap. It was agreed that there was little prospect of greater Yugoslav use of the Generalized System of Preferences to provide concessionary access to the US market. However, we have included language in the draft joint statement to be issued during the President’s trip pointing to the importance of expanded mutual trade.

Late news received today indicates that there is greater urgency than we had assumed to help the Yugoslavs with their financial situation, and to act before the President’s visit. The Yugoslavs today announced a 30 percent devaluation and Yugoslav Ambassador Loncar told Ambassador Eagleburger in Belgrade that, as a result of a June 5 decision by the Yugoslav Government, they will ask us for an urgent swap arrangement.⁵ This may result from pessimistic reactions the Yugoslavs have received from US banks on their interest in new balance of payments borrowings and the “political strings” which certain Arab countries want to attach to loans they would grant Yugoslavia.

In response to Ambassador Loncar’s request, Treasury is attempting to arrange a meeting for him with Secretary Miller early next week.⁶ Treasury’s initial reaction is that use of the Emergency Support Fund may be the best way to respond to the new Yugoslav request.

Peter Tarnoff⁷

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 87, Yugoslavia: 6/80–1/81.
2. Not found.
3. The Department forwarded a summary of the meeting, chaired by Barry, in telegram 154463 to Belgrade, June 12. (National Archives, RG 59, Central Foreign Policy File, D800286–0983)
4. The U.S-Yugoslav Joint Military Commission meet in Belgrade June 17–18. The Embassy reported on the meeting in telegram 4906 from Belgrade, June 19. (National Archives, RG 59, Central Foreign Policy File, P870123–0429)
5. The Embassy reported Loncar’s meeting with Eagleburger in telegram 4516 from Belgrade, June 6. (National Archives, RG 59, Central Foreign Policy File, P870123–0432)
6. In telegram 3956 from Belgrade, May 19, Eagleburger provided his analysis of the Yugoslav economic situation. Stressing that “the GOY is having trouble getting its act together,” Eagleburger concluded that, unless the Yugoslav Government corrected the current trends, the economic situation “can get very much worse.” (National Archives, RG 59, Central Foreign Policy File, D800248–0729) Secretary Miller met with Loncar on May 23 and Loncar asked him to “meet with five or six of the leading U.S. bankers” and persuade them to lend to Yugoslavia. (Telegram 136134 to Belgrade, May 24; National Archives, RG 59, Central Foreign Policy File, D800254–0226) On May 30, Miller told Loncar that, following his discussions with David Rockefeller, he believed that the best way to proceed was to have the Yugoslav Government seek a syndication loan organized by a leading U.S. bank, possibly Chase. Miller recommended that the Yugoslav Government be prepared to send representatives from the Yugoslav National Bank to New York to discuss such a loan with private lending institutions sometime in early June. (Telegram 141461 to Belgrade, May 30; National Archives, RG 59, Central Foreign Policy File, D800264–0731)
7. Seitz signed for Tarnoff above this typed signature.