Office of the Historian

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

Washington, August 22, 1986

SUBJECT

  • Your Comment on Our August 12 Memo on Rethinking the LDC Debt Strategy2

We agree that the LDC debt situation remains serious, especially from the point of view of the US Government and the major debtors in Latin America and elsewhere. What we meant to underscore by our August 12 memo is that the nature of the problem may have fundamentally changed, bringing the foreign policy and developmental issues [Page 533] more to-the-fore. The US may need to alter its debt strategy to deal with the new shape of the problem.

The INR paper points out the decreased vulnerability of the banking system in the US and abroad to LDC debtors.3 This means that one leg of the Baker Plan—the new money from the private banks—may be loose, if not missing. The banks will be much harder to drag into financing efforts for many debtors, though for Mexico (perhaps a couple of others) it is still in their interest to protect the value of the loans (assets) they have on their books as long as the cost, in their view, is not excessive. For most debtor countries, we will need to rely more on official financing (IMF, IBRD, etc.) at a time of budget stringency in all industrialized countries. A question, in this regard, is whether there is a way to base LDC creditworthiness only on domestic policy and performance, insulating the borrower from exogenous shocks.

Thus, the focus of the debt problem may be much more political than financial in the coming years. Debtor countries are likely to seek increasingly to politicize this problem with us and other creditor countries. It may, therefore, be in our overall best interest to find ways progressively to “depoliticize” the debt problem.

  1. Source: Department of State, Executive Secretariat, S/S–I Records, Files of the Deputy Secretary of State (D), Lot 95D334: Debt. Confidential. Drafted by William Milam (EB/IFD) and Ralph Lindstrom (INR/REC); cleared by Casse. Sent through Wallis, who initialed the memorandum on August 25. Mueller initialed the memorandum and wrote “8/23.” A stamped notation on the memorandum reads: “Aug 1986 J.C.W. has seen.”↩
  2. Attached and printed as Document 205. See also footnote 1 thereto.↩
  3. See footnote 2, Document 205.↩