93. Memorandum From the President’s Assistant for National Security Affairs (Brzezinski) to Vice President Mondale 1
- Turkey’s Financial Problems
Turkey’s foreign exchange reserves have been declining gradually for a long time. Recently, however, the rate of decline has accelerated. We are now beginning to get reports of foreign banks denying letters of credit to the Turkish Central Bank, but it is difficult to know how drastic the problem is until more information comes in. Meanwhile, it is clear that some of Turkey’s financial authorities are urgently exploring ways to build up their reserves: loans from abroad, quick sales of agricultural commodities from stockpiles, transfer of workers’ deposits from Germany. The situation has worsened at a very awkward time for Demirel, who has had good luck in managing Turkey’s finances over the past two years and hoped to benefit from this record in the elections which take place on 5 June.
The problem is not basic unsoundness. Over the past six years, Turkey has had one of the best sustained economic growth rates in the world. The precarious political balance in the country, where proportional representation keeps producing weak coalitions, has prevented governments from taking firm measures to put the country’s finances on a sound long-term basis. Instead, short-term high-interest loans from foreign banks have been used to keep reserves up. This short-term indebtedness needs to be converted into medium or long-term loans. This is difficult to do in the midst of a heated election campaign. Demirel was hoping he could get by without having to face the problem yet. He may still be able to.[Page 299]
Turkey has no place to turn except Western bankers and governments for help with its financial problems. When she needed similar help in the 1960’s, several of her NATO allies joined to refinance her indebtedness and the arrangement paid off handsomely. A similar arrangement is quite conceivable now, but it would have to be accompanied by domestic austerity measures which would slow economic growth and force cutbacks in social services and long-term development projects. (In other words, Turkey would have to accept commitments like those the British have agreed to in return for loans and concessions.) These measures can only be taken by a strong government. If either Ecevit or Demirel wins a working majority on 5 June, prospects for working out these problems will be good. If the elections are indecisive, Turkey is likely to degenerate into political and financial crisis.
There is no way the present financial problems of Turkey could be exploited to make the Turks more forthcoming on Cyprus. Any hint that we were trying to do so would, in this tense election period, unleash a wave of nationalist protesting that would rile up the political situation and make the outcome of the elections even more uncertain than it is. After the elections, Turkey’s need for friends who can help her sort out her indebtedness and get her financial affairs in order for the long haul will in all likelihood encourage her leaders to move to settle current political problems such as Cyprus and relations with Greece.
- Source: Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 75, Turkey: 1–12/77. Secret. Sent for information. In a May 3 covering memorandum to Mondale, Brzezinski reported: “You noted a [text not declassified] yesterday which stated that the Turkish Government fears that it may be unable to meet its financial obligations if foreign bankers liquidate their Turkish lira accounts. The item added that the government hopes to stave off a politically damaging payments crisis by borrowing abroad. It has approached the First National City Bank of New York for a $300 million loan and intends to sound out the IMF during meetings this week in Washington. You asked whether the above could be used to get Turkish cooperation. The attached memo responds to your question.”(Ibid.) Although no drafting information appears on the memorandum, Henze forwarded a draft to Brzezinski on May 2 and commented that the United States “should not appear to be crassly exploiting” Turkey’s economic situation. (Ibid.)↩