Foreign Relations of the United States, 1981–1988, Volume X, Eastern Europe

239. Telegram From the Embassy in Yugoslavia to the Department of State¹

2917.

Belgrade, April 1, 1986, 1531Z

SUBJECT

• Yugoslav Official Debt Rescheduling.

REFS

• (A) Paris 11312;²
• (B) Belgrade 386;³
• (C) Belgrade 2585.⁴

1. Confidential—Entire text.

2. Summary: Creditor governments will meet with the Yugoslavs in Geneva on April 14 to discuss official debt rescheduling. The Yugoslavs insist they should be granted a multi-year rescheduling arrangement (MYRA) covering debts payable between May 16, 1986 through 1988. They have obtained a MYRA, running from 1985 through 1988, from their commercial bank creditors and believe a similar arrangement with official creditors is merited on both political and economic grounds. We know that this is the position they intend to open with in Geneva. Despite our preference that any decisions taken at Geneva, and subsequently in Paris, be perceived as having been made on a multilateral basis, the Yugoslavs firmly believe that the views of the USG will be decisive. They point to Secretary Shultz’s remarks during his December visit to Belgrade⁵ and other high-level USG statements as indicative of USG sympathy and understanding and have asked for a clarification of our views prior to the Geneva meeting (Ref C). Some creditor governments, however, appear at least at times to believe that IMF Article IV enhanced monitoring, as included in the commercial bank MYRA, is not by itself adequate for an official MYRA.

3. I strongly believe that our long-term political interests demand that the USG and other creditors very conscientiously seek arrangements that can satisfy both our own requirements and what the Yugoslavs think they must have and deserve. In this regard, we must bear in mind the effects that decisions taken at Geneva will have on the Yugoslav Government which will take office in mid-May, and in turn the implications for our efforts to cope successfully with the global debt problem.

4. There is no question that the creditor governments will reschedule Yugoslav debt falling due between 1986 and 1988. The only real question is how to do it. Will we be creative and imaginative up front in seeking means to accommodate simultaneously the Yugoslavs and their creditors? This route would hold the promise of potential political dividends. Or will we opt for lengthy, agonizing and disruptive negotiations leading to mechanisms of short-term limited rescheduling and the prospect of a virtually continuous politically disruptive process over the next few years? The USG is in the position, like it or not, to determine the spirit of relations we will have with the new Mikulic government at the very moment it takes office. Any who might hesitate at the prospect of setting a precedent for other debtor countries should ponder that any, repeat any, arrangement for Yugoslavia will be ad hoc, on the basis of this country’s responsible conduct as a debtor and unambiguously improved economic performance in recent years. If any other debtor country has turned in an equally good or better record, then it also deserves forthcoming consideration on rescheduling in any case, and any that has not, does not.

5. I have carefully considered these several interrelated issues and offer proposals which may satisfy the fundamental requirements of Yugoslavia and its official creditors. First of all, I propose that we come out quickly and clearly for a “serial” rescheduling through 1988 instead of a straightforward MYRA or a succession of shorter-term reschedulings. While I can agree with Paris Club Chairman Trichet that we should search for quantitative measures to gauge Yugoslav economic performance so that the IMF on their behalf or the creditors directly may keep score, I also believe what is really needed is a reliable “leading indicator” of GOY policy commitment rather than a simple and limited green eyeshade approach. Finally, I suggest there may be an appropriate role for the World Bank, to provide both financial resources and conditionality for Yugoslavia to supplement a reduced role for the IMF. End summary.

6. Creditor governments and the GOY have agreed to meet in Geneva on April 14 and two days later in Paris to thrash out an official debt rescheduling to follow the current 17-month arrangement, which will expire on May 15. After difficult and prolonged bargaining with its commercial bank creditors last year, Yugoslavia obtained a MYRA for debt maturing between 1985 and 1988, with a review at the beginning of 1987 and enhanced IMF Article IV surveillance continuing until 1991. Though the GOY will argue that creditor governments should be prepared to offer a similar arrangement, some official creditors (in some venues) do not consider this arrangement adequate for a corresponding official MYRA.

7. It has been informally suggested that Yugoslavia should submit to a “shadow” IMF standby, under which it would accept full Fund conditionality but not draw any additional IMF resources. The GOY, at the same time, considers that it has defined its relations with the Fund under the enhanced monitoring arrangement. It will strongly resist, if not reject outright, any demand for a “shadow” standby—as a punitive and unjustified restraint on its freedom in domestic economic policy making. The Yugoslavs would interpret such a demand as a clear public expression of lack of confidence and goodwill on the part of official creditors, who have been very supportive in the past. Furthermore, the GOY will be able to identify precisely the driving force behind what it would regard as an outrageous demand. Deputy Foreign Secretary Loncar recently listed for me (Ref C) the positions of other major creditors on the MYRA issue as authoritative representatives of their governments have described them to him. To wit: Italy—favors a MYRA; FRG—favors a MYRA; France—favors a MYRA; Japan—will follow the USG lead; and, the U.K.—without a developed position, will support a MYRA if the USG does. Loncar’s statement to me is perfectly consistent with what the Embassies of those governments have been telling us in Belgrade. If we are going to take a hard line, we are also going to be held responsible for it and, in the official GOY perception, held solely responsible for it. The USG position on Yugoslav rescheduling is likely to determine the outcome at Geneva and Paris. We know that; the other creditors know it; and the Yugoslavs know it.

8. The Yugoslavs are firmly convinced that they have earned an official MYRA on the basis of the country’s economic performance and sacrifices over the past three years. They proudly point out that they have achieved three consecutive annual current account surpluses while enduring declining real personal incomes from 1979 through 1984 to support economic recovery. Price controls have been slowly and haltingly, but steadily, lifted; a stable real exchange rate for the dinar has been maintained; revised legislation has materially improved the investment climate; banking and other major reform legislation has recently been passed and is being implemented. The Yugoslavs insist that the new Federal government of Branko Mikulic, to be installed on May 15, will continue the reform orientation it will inherit from the outgoing Planinc government.

9. Some governments may fairly wonder if the progress achieved thus far will continue uninterrupted and if the Mikulic government will be able to maintain resolve and prevent backsliding without some element of external coercion. Both the doubters and believers in Yugoslav resolve can make reasonable cases on the available evidence. The recent IMF/GOY dispute over interest rate policy provided legitimate grounds for questioning the depth of Yugoslav commitment to necessary reform without at least occasional serious lapses. While the future is necessarily uncertain, Yugoslav performance thus far has been generally highly commendable, especially in comparison with many other debtor countries. Two recent IMF documents (686/8638 and SM/86/39)⁶ include comprehensive and objective summaries of reform measures taken so far, as well as discussion of their weaknesses and further measures that are required.

10. I believe it should be possible to reconcile Yugoslav and creditor views on the basis of a “serial” rescheduling rather than the polar opposites of single-year reschedulings or an out-and-out MYRA. I believe that governments should seriously consider offering a serial rescheduling for the period May 16, 1986 through 1988, subject to Geneva-type consultations in early 1987 and 1988 prior to actual refinancing for those years. The GOY could consider such an arrangement a MYRA, while the creditors retain their ability to review and judge economic performance periodically prior to essentially annual reschedulings. To satisfy creditor desires for greater assurance of adequate economic performance than is provided by semi-annual Article IV consultations with the IMF, governments could request the GOY to provide more frequent, perhaps quarterly, economic performance reports similar to those already being provided to the commercial banks. In addition, I suggest consideration of the following possibilities.

11. More monitoring triggers: Paris Club Chairman Trichet has suggested (Ref A) that creditors consider asking the IMF to help develop additional “triggers” and values to assign to them, with a view toward identifying one or more “leading indicators” of performance. Net domestic assets of the banking system and real government expenditure levels, for example, could be useful in judging whether the Yugoslavs are pursuing an adequate anti-inflation policy. Depending upon the role assigned to the IMF, bad numbers would then signal the Fund to ring alarm bells or the creditor governments to do so themselves. Such indicators, however, may be of very limited value for an economy undergoing rapid and significant change. Although I think that Trichet’s suggestion merits exploration, I believe we should keep in mind that we and other creditors are really much more interested in continued implementation of appropriate policy measures than mere numbers recording past events. If so, at Geneva the creditors should seek means to promote commitment to sound policies.

12. Statements of action programs: It may be possible to augment IMF surveillance by requiring the GOY to specify in advance either to the IMF or the creditors directly, actions it intends to take in connection with development of economic plans called for under enhanced monitoring. A list of such intended policy measures—as opposed to general policy statements—could be more useful than quantitative indicators or triggers. Such statements of intended actions should inhibit any inclination—as was exhibited during the interest rate imbroglio—to declare sound policy while contemplating contrary behavior. This device would obviate possible dilemmas in which the numbers fortuitously turn out right when policy is in fact wrong or the numbers are not good though the GOY is doing all, or most of, the right things. The GOY could not legitimately argue that mere provision of such a list of intended actions constitutes interference in domestic policy making. The creditors, however, would have a fairly simple means (a real “leading indicator”) for judgment prior to and during annual performance reviews in a “friends of Yugoslavia” forum. They could directly, or through the Fund, also question as appropriate, the soundness of measures taken or intended.

13. A role for the World Bank: A revised approach to conditionality could be made via the World Bank, which has been discussing a possible second structural adjustment loan (SAL) with Yugoslavia with increased co-financing (Ref B). IMF report DBS/86/38⁷ produces a scenario with a reduction of the Yugoslav debt service ratio with a modest increase in foreign borrowing, which would support increased imports, exports and domestic economic activity. Such an IBRD SAL program, something of a “Baker Plan” approach, could be attractively packaged for presentation to the GOY. I understand, however, that such a package almost certainly cannot be put together before April 14 or before the change in the Yugoslav Government on May 15. Nevertheless, the terms of “serial” rescheduling could specify that the GOY continue discussion with the IBRD aimed at conclusion of a second SAL by the end of this year, producing another policy-type “leading indicator”. This possibility has the added advantage of forcing the Mikulic government to engage in serious discussion of key economic policies at the beginning of its mandate.

14. Each of the possibilities I have sketched carries with it unattractive as well as attractive features. Just a few—quantitative indicators do not get to the heart of the issue any more than do more frequent submissions of data; the “friends of Yugoslavia” may not wish to become more directly involved in evaluating GOY policy implementation or be able to coordinate their individual views on this process into consensus if the burden of judgment is not left entirely with the IMF; an effective World Bank role replacing the financial assistance and some of the discipline of the Fund may not be manageable in the short time available to create it. While these and other problems confront us, we are also confronted with the unavoidable necessity of arriving at a reasonable and workable solution to Yugoslav debt rescheduling. I hope that concerned Washington agencies can work with my suggestions and their own thoughts to construct a package satisfactory to the creditors and Yugoslavia.

15. There are undeniably compelling political dimensions to the current consideration of Yugoslavia’s next official debt rescheduling. The GOY firmly sets this in the context of our long-term strategic interests, our historically good bilateral relations and high-level USG statements of support and understanding of its efforts to deal with Yugoslavia’s serious economic difficulties. The decision on Yugoslav debt rescheduling will be taken on the eve of installation of the new Federal government of Branko Mikulic. These two events, one so closely following the other, will be both symbolically and then practically related. In effect, the US position at Geneva will signal the kind of relationship we intend to have with the incoming Yugoslav Government. The most powerful voices in the current leadership understand that an economic recovery here will largely depend upon the degree to which Western free market oriented reforms are undertaken, and a few are also tempted to consider political reform in the same direction. This view, however, is hardly unanimous. There are certainly those, whose voices are also heard, arguing for an opposite course. Our decision on rescheduling will have a powerful influence on the continuing argument. We should take an initiative that will strengthen positive forces and inclinations. Our rescheduling decision must be considered with this fully in mind. We know the direction in which we want this country to move, and it would be terribly shortsighted to miss such an obvious opportunity to provide encouragement.

16. More broadly, it is clearly in our interest to maintain Yugoslavia’s thus far moderate, responsible position among debtor countries. The GOY has consistently handled its international debt problem responsibly, ignoring radical proposals that others say they find attractive. The Yugoslavs have impressive credentials in the G–24, G–77, and other fora in which debtors are prominently represented. The USG position on rescheduling will not only give a strong message to the Yugoslav leadership but also to others around the world seeking appropriate solutions to their own problems. Thus a satisfactory official debt relief arrangement for this country will serve well our broader interests in coping with the global debt issue, just as failure to reach such an accommodation would have the contrary result.

Scanlan

1. Source: Reagan Library, Paula J. Dobriansky Files, Yugoslavia (11). Confidential; Immediate; Exdis.
2. Telegram 11312 from Paris, March 17, provided the details of a Yugoslav conversation with Paris Club officials regarding debt rescheduling. (Department of State, Central Foreign Policy File, D860205–0881)
3. Telegram 386 from Belgrade, January 15, discussed Yugoslav efforts at economic reform and World Bank consideration of expanded lending. (Department of State, Central Foreign Policy File, D860038–0384)
4. Telegram 2585 from Belgrade, March 21, conveyed the request received by the Ambassador from Loncar for U.S. support of a multi-year rescheduling agreement. (Department of State, Central Foreign Policy File, D860223–0218)
5. See Document 235.
6. Not found.
7. Not found.