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

96. Memorandum From Norman Bailey of the National Security Council Staff to the President’s Assistant for National Security Affairs (Clark)¹

Washington, March 5, 1982

SUBJECT

• The Romanian Financial Situation

The Romanian government on Tuesday² suspended payments on its debt to the private banks after trying to shift its funds in the U.S. to a bank where it has no debt exposure. These instructions were refused by several banks.

Last weekend some European banks refused to accept the rescheduling agreement worked out in Bucharest by nine Western banks. On Monday at a meeting in New York, several U.S. banks also refused to accept the agreement.

Romania in the meantime made a payment of $5.6 million to several U.S. banks acting as agents for the CCC. These banks forwarded only $1.2 million to the CCC, keeping the rest to cover their Romanian exposure. Eximbank was subsequently paid by Romania. Any payments to U.S. Government agencies made after March 2, 1982 will be contested by the banks as violating the pari-passu rule. At least one bank has diverted Romanian funds without authorization to cover its exposure, and it is reliably reported that on March 8, 1982 Chemical Bank intends to do the same.

It would thus appear that the first in a series of shaky dominoes may be falling. A Romanian default (or moratorium) would probably be followed by Poland declaring a moratorium or being declared in default. The result of all this would be a complete cessation of private bank lending to Eastern Europe (without home government guarantee).

That, in turn, would probably lead to default at least in Hungary, Yugoslavia and East Germany. We must assume West Germany would try to bail out East Germany. I presume we, along with others, would try to launch a rescue effort for Yugoslavia, perhaps costing us upwards of $1 billion.

It is quite conceivable that a scenario such as the above might lead to a substantial cutoff of credit flow to the Soviet bloc for years to come and a much greater willingness of the allies to cooperate with us in controlling official credit flows.

It is equally possible that it could lead to a contraction of international bank lending worldwide, which coupled with a much lower OPEC oil surplus to recycle and an unprecedented concentration of international debt maturities in the first half of the year, as well as recession throughout the Western world, might result in an international financial crisis of unmanageable proportions.

The Romanians have asked our permission to send a high-level mission to the U.S. to discuss the situation urgently. In connection with this, it should be noted that Marc Leland of Treasury and I will be away March 13–20 as part of the Buckley mission.³

1. Source: Reagan Library, Paula J. Dobriansky Files, Romania—EE Memoranda (2). Limited Official Use. Sent for information. Copies were sent to Weiss, Nau, Pipes, Reed, and Gregg. Poindexter wrote underneath the date, “3/8, Mentioned to President. JP.” According to a fax cover sheet attached to another copy of the memorandum, it was sent to the attention of Poindexter, who was in California with the President. (Ibid.)
2. March 2.
3. See footnote 3, Document 10.