Office of the Historian

205. Information Memorandum From the Assistant Secretary of State for Intelligence and Research (Abramowitz) and the Assistant Secretary of State for Economic and Business Affairs (McMinn) to Acting Secretary of State Whitehead1

Washington, August 12, 1986

SUBJECT

  • Rethinking the LDC Debt Strategy

The LDC debt problem has evolved in several significant aspects since 1982, as shown in the attached INR study:2

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The commercial banks have trimmed their LDC portfolio and have strengthened their capital reserves against LDC losses.
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LDCs have not dared to break decisively with creditors, but most have also resisted taking the tough steps needed to reform their economies.
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The debt problem is now less a threat to the international financial system than in 1982. It is evolving into a predominately development and foreign policy problem, in part because the flow of commercial capital to LDCs may be curtailed for the foreseeable future.

Policy Implications: As it becomes widely recognized that the debt problem is now more political than financial, it will be increasingly difficult to maintain the emphasis on policy reform in the debtor countries. The debtors will increase their efforts to politicize the problem; our allies will be soft. Yet policy reform is vital to preserve domestic support for the resource outlays (IBRD, IDA, IMF, etc.) that are an integral part of our debt strategy; it is also necessary if we are ever to see the problem alleviated, voluntary capital flows picking up a large part of the financing necessary for development, and solid growth and development in Latin America and Africa to begin again.

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The World Bank’s lending programs should be enlarged, on the condition that increased Bank lending is for rigorous structural reform; thus we should get off the fence soon on a new GCI.
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We need to develop a strategy to ensure that we and the other major industrial countries are committed in fact—as well as in word—to policy reform in the debtor countries.
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We need to study other questions to see if there are ways to depoliticize the debt problem:
(i)
does bank regulation exacerbate the problem and politicize it, forcing banks to keep debt on their books when following market incentives would have led them to sell it at a discount, write it off, or accept a default? Would a more market determined system lead to new voluntary lending?; and
(ii)
is there a way to cushion more effectively external factors (i.e., an oil price decline) so that long-term creditworthiness can be determined more fully by domestic policy as it affects long-term real growth prospects?

We are preparing a paper for you on these and other such questions. The policy proposals in this memorandum are the responsibility of EB alone.

  1. Source: Department of State, Executive Secretariat, S/S–I Records, Official Correspondence of Deputy Secretary John C. Whitehead, July 1982–Jan 1989, Lot 89D139: [no folder title]. Confidential. Drafted by Marshall Casse (EB/PAS). Sent through Wallis, who initialed the memorandum on August 15. Mueller initialed the memorandum and wrote “8/13.” A stamped notation on the memorandum reads: “Aug 1986 J.C.W. has seen.” Whitehead wrote in the top right-hand corner of the memorandum: “I’m not quite as sanguine as this paper and the INR paper. Latin America is better—except for Mexico, Peru, and Bolivia, which are worse. But the Middle East is worse—Israel, Egypt, Tunisia, Morocco and Sub-Saharan Africa is worse. We’ll probably muddle through, but we can’t relax yet. J.”↩
  2. The INR study, “The International Debt Problem After Four Years: Good News, Bad News,” dated July 29, is attached but not printed.↩