Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

148. Action Memorandum From the Assistant Secretary of State for Economic and Business Affairs (McCormack) to Secretary of State Shultz¹

Washington, October 14, 1983

SUBJECT

• Commodity Credit Corporation (CCC) Lending as a Debt Management Tool

ISSUE FOR DECISION

Whether to write to David Stockman in support of USDA’s request for a $5.4 billion increase in CCC’s FY 1984 guarantee authority.

ESSENTIAL FACTORS

The USG strategy for managing the debt crisis would benefit substantially from increased use of our trade finance facilities, particularly CCC guarantees. The strategy recognizes that while adjustment on the part of debtor countries is necessary, the adjustment process requires adequate financial lubrication to proceed with a minimum of economic, social and political disruption.

In this context, an interagency group (IG) has reached general agreement that USG trade finance facilities (primarily EXIM and CCC) should be used more actively to support the adjustment process in selected debtor countries. EXIM is financially prepared to meet such “extraordinary” financing requirements, but CCC is not. The existing budget gives CCC guarantee authority of $3 billion in FY 1984, a level established before the onset of the debt crisis (two years ago). It is a budget for a different time.

USDA has requested from OMB (no Congressional action is necessary) an additional $5.4 billion in guarantee authority for FY 1984 to cover “extraordinary” financing requirements. OMB is stalling. Meanwhile, the IG proposal for use of trade financing facilities as a debt management tool has not been brought to the SIG–IEP for final blessing due, in large part, to the budgetary constraint on USDA.

We have an important foreign policy interest in developing the trade finance facilities to the maximum extent. A few examples will suffice to make the point:

— It is virtually certain that Brazil will need additional financing beyond the $10 billion-plus package currently planned. Food shortages in Brazil are a real possibility and have the potential for short-circuiting adjustment. From a commercial standpoint, the market development prospects are attractive. CCC guarantees have been a major component of the official assistance package for Mexico.

— The Yugoslav assistance/refinancing package for 1984 will depend importantly on a substantial CCC program to lever the Europeans/Japanese into a full measure of participation. A CCC program in Yugoslavia next year may not be possible absent an increase in CCC’s budgetary authority.

— We need to develop further our capability to respond to emerging problems—the Philippines is a case in point.

It would be irresponsible to extend CCC guarantees indiscriminately, and the use of the CCC program should be conditioned on countries pursuing adequate adjustment programs and on the participation of banks and other governments (IG guidelines cover these issues). It would be equally damaging to our effort to manage the debt crisis to hamstring an important financing tool.

RECOMMENDATION

That you sign the attached letter to David Stockman supporting USDA’s request to OMB for an increase in CCC’s FY 1984 guarantee authority.

Attachment

Letter From Secretary of State Shultz to the Director of the Office of Management and Budget (Stockman)²

Washington, October 26, 1983

Dear David:

Our response to debt crises in individual countries and efforts to alleviate strains on the international financial system have, I believe, been a qualified success. We have overcome the initial crisis, but we need staying power, and it is not clear that we have it in adequate measure. The U.S. must use to the maximum extent all the tools at its disposal to support the adjustment process in key debtor countries, help maintain U.S. exports in a recessionary world and to pursue objectives central to our strategic interests.

Active use of U.S. trade financing facilities is important in the pursuit of these goals. While EXIM appears financially capable of playing such a role, CCC does not. I understand that CCC has requested that OMB increase substantially CCC’s guarantee authority to meet extraordinary financing requirements in FY 1984.

My strong view is that the CCC should have the financial resources to help contain adverse political and financial pressures. Your approval of USDA’s request for increased budgetary authority would contribute materially to the attainment of our central objective—to preserve an international political and economic environment conducive to the attainment of U.S. interests.

Sincerely yours,

George P. Shultz³

1. Source: Reagan Library, George Shultz Papers, Official Memoranda (10/14/1983). Confidential. Drafted by Paul McGonagle (EB/IFD/OMA) on October 13; cleared in EB/OFP, EB/IFD, ODF, EA/EP, EUR/EEY, ARA/ECP, EB/IFD, EB, and in substance in T. Sent through Wallis and Eagleburger, neither of whom initialed the memorandum. An unknown hand initialed for McCormack. McKinley’s stamped initials appear at the top of the memorandum.
2. Confidential.
3. Shultz signed “George” above his typed signature.