153. Memorandum From Secretary of State Muskie to President Carter 1

SUBJECT

  • Turkish Debt Rescheduling

Summary

I recommend that you authorize the U.S. Delegation to the July 22 OECD Turkish debt rescheduling negotiations to reschedule payments on Turkey’s previously rescheduled debts falling due during the 18 month period, July 1, 1980–December 31, 1981. Secretary Miller concurs in this recommendation.

Our economic analysis for the next six months of this 18 month period indicates that the Turks might be able to service their debt payments, although they have said they will not be in a position to pay because they need the foreign exchange for critical imports. For calendar 1981 our analysis indicates that there is a high probability that Turkey will not be able to service its debt payments unless previously rescheduled debt is included in the debt relief agreement under negotiation. These negotiations broke off June 19 over this issue.

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The Turkish government believes that the $457 million in debt relief resulting from rescheduling previously rescheduled debt over the next 18 months is critical to the successful continuation of their economic stabilization program. They see the U.S. position as pivotal in the negotiations. Our European allies (particularly the FRG) are willing to go along with the Turkish request if we do. The Turks see this issue in political terms, noting our “best effort” commitment of assistance under the recently signed U.S.-Turkey Defense and Economic Cooperation Agreement. Rescheduling previously rescheduled debt was the only substantive request made of me by Prime Minister Demirel. Our refusal to change our position on this critical issue affecting the Turkish economy and political stability will inevitably make it more difficult for us to work with the Demirel government effectively to get movement on Greek reintegration and Cyprus.2

Budget Director McIntyre’s views will be presented in a separate memorandum.3

Background

Negotiations between the Government of Turkey and its OECD creditors broke down on June 19 over the issue of including debt service payments on debt previously rescheduled in 1978 and 1979 agreements. Creditor nations tabled a generous package, but, due to the opposition of the U.S. and some other creditors, these payments were not included in the offer. The Germans (who have been leading international efforts to assist Turkey) and the IMF supported Turkey’s request to include these payments. The negotiations resume July 22.

Following the breakdown, the Turks suggested a compromise to break the deadlock by reducing their request for a three-year rescheduling of previously rescheduled debt to eighteen months, July 1, 1980 through December 31, 1981. The Turks insist that without this relief, Turkey will be forced to default on its public and private debts, which would violate the terms of its stabilization program with the IMF, reduce new private bank lending and threaten economic and political disruption.

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Economic Analysis of the Turkish Compromise

Our comments on the merits of providing 18 months of additional debt relief follow:

—The economic justification for additional relief during the first 6 months is uncertain: the Turkish figures support their request, while the creditor figures seem to demonstrate no additional relief is essential.

—On the other hand, for the remaining 12 months an economic justification can be made that the Turks will face imminent default.

The present creditor offer would provide debt service relief of $1.1 billion in 1980, but only $510 million in 1981 and $500 million in 1982. Combining this with other receipts, we believe that the level of earnings in 1980, given our import estimate, will enable the Turks to meet their nominal foreign exchange obligations with $137 million left over. In 1981, however, the figures indicate that Turkey would be unable to meet its obligations, heading for a financing gap of $300 million (see attached table).4

Rescheduling 18 months of Turkey’s previously rescheduled [Page 466]debt service would provide an additional $144 million in foreign exchange in the first six months and $313 million for the remaining twelve months. In 1980, this would increase Turkish foreign exchange availability. In 1981, the additional relief would correspond to the foreign exchange shortfall our figures project.

The Turks argue that to replenish depleted stocks of oil and industrial inputs needed to resume economic activity, minimum imports in 1980 will exceed our estimate by at least $300 million. (Even at this higher level, Turkish imports will be less than their 1978 level in real terms.) They assert that all available foreign exchange, including any incremental debt relief, would be used for further imports needed to increase the chances of success of their reform program.

Political Considerations

The U.S. position on the issue of previously rescheduled debt is the key to ultimate agreement by the creditor nations as a group. If the U.S. resists providing additional relief, the Turks will view our position as being at variance with the “best effort” assistance commitment in the recently signed U.S.-Turkey Defense and Economic Cooperation Agreement. The Turks know that a decision on previously rescheduled

debt is within your power to grant and will not understand a U.S. refusal to advocate a debt relief package that supports the Demirel Government’s stringent economic stabilization measures. These measures hold out a realistic hope of economic recovery.

The vote of confidence Demirel received July 2 assures that he and his policies will continue in power at least until the fall when Parliament reconvenes. The economic aid the OECD nations have already pledged and a successful debt rescheduling should allow Turkey to face this winter with added confidence. When I spoke with Demirel in Ankara, he several times emphasized the importance of rescheduling previously rescheduled debt and I stressed the need for movement on Greek reintegration and Cyprus. Evidence of U.S. support for an acceptable solution to this problem in which he has a personal interest would encourage Demirel to be responsive on the issues I mentioned to him.

Congressional Reaction

The Administration has broad authority to negotiate debt agreements, but Congressional attitudes require us to respect the latitude we now enjoy to avoid direct Congressional controls over debt negotiations. However, consultations with key Congressmen and Senators indicate no objections to using this method to provide additional debt relief for Turkey.

Budgetary Impact

If future payments on previously rescheduled debt are included in the creditor nation offer, U.S. budget receipts will be reduced by $10.9 million in FY’80, $54.6 million in FY’81 and $14.2 million in FY’82, assuming that the Turks would make these payments if they were not rescheduled. With appropriations action completed for 1980, the additional rescheduling will not create Congressional pressures for offsetting reductions. In 1981 and early 1982, however, the increase in net budget outlays (by reducing receipts) could generate such pressure. However, since our analysis suggests that the Turks will not pay in 1981, agreement to improve the debt rescheduling package merely regularizes a shortfall which I believe will take place in any event.

Impact on Future Debt Rescheduling

Further rolling over these debt service payments in a new rescheduling sets an undesirable precedent. The precedent will apply to further negotiations with Turkey regarding payments beyond 1981, although we would attempt to minimize Turkish expectations in this regard at the July 22 meeting. Zaire is the only other country where the Turkey precedent is likely to apply in the next few years.

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DECISION

OPTION 1: Include Previously Rescheduled Debt for Next 18 Months.

You would authorize the U.S. delegation to the July 22 OECD Turkish debt rescheduling agreements to support the inclusion of payments on previously rescheduled debts on the same terms as other debts being rescheduled. This decision would cover payments on previously rescheduled debt falling due over the entire eighteen-month period: July 1, 1980–December 31, 1981. ($79 million in U.S. debt relief) (State and Treasury support this option.)5

OPTION 2: No Previously Rescheduled Debt but Small Face-Saving Measures

That you direct the USG Delegation to oppose the rescheduling of any future payments on Turkey’s previously rescheduled debts, but authorize the USG to make minor improvements in the present creditor nation offer to provide a face-saving gesture to the Turks. This could be done by increasing the portion of rescheduled debts from 90 to 95 percent. (6 million in additional U.S. debt relief)

OPTION 3: No Change in U.S. Position

That you direct the USG Delegation to maintain its present position on the debt relief package. (Additional U.S. debt relief—none)

  1. Source: Carter Library, National Security Affairs, Staff Material, Special Projects, Hazel Denton, Box 64, Turkey: 3/80–1/81. Confidential. In the upper right-hand corner, Carter wrote, “Ed, cc Bill Jim. J.”
  2. Carter underlined “to get movement on Greek reintegration and Cyprus” and wrote in the margin, “ha!”
  3. In a July 15 memorandum to Carter, McIntyre advocated delaying additional debt rescheduling for Turkey “until we can better assess their financial situation.” He further recommended: “The United States should provide assurances that we will review Turkey’s 1981 requirements next year. In addition, I am concerned that these debt rescheduling proposals are proliferating. Therefore, I will send instructions to the agencies that future proposals be sent to OMB under your future budget commitments process, in order to be sure that non-default reschedulings receive the same degree of analysis and budget review as any other spending proposals.” Carter bracketed the last sentence and wrote in the margin, “Ok do so. J.” (Carter Library, National Security Affairs, Staff Material, Special Projects, Hazel Denton, Box 64, Turkey: 3/80–1/81)
  4. Attached but not printed are a table itemizing Turkey’s foreign exchange position for 1980 and 1981 and a table comparing Turkey’s foreign exchange provided by OECD creditors 1979–1983.
  5. Carter approved this option. He crossed out “December 31, 1981” and wrote below the paragraph, “but extend from 7/1/80 only for twelve months. J.”