The Debt Dilemma
Tyler, Adrian
The U.S. government, especially William Simon's Treasury Department, has looked with favor on the junta not only because of its repression of a socialist challenge, but because of its professed...
...However, so severe was the impact of the austerity measures required to meet debt service on Chile's internal market and capital base that foreign investors remained wary...
...exports, an uncertain environment for investment, and provides a devastating commentary on capitalist development...
...Chile Economic News, CORFO, various issues...
...2 Some of these contradictory objectives may resolve themselves once the initial crisis has passed: for example, once firms have raised prices sufficiently to insure profitability and the inflationary psychology subsides, prices 12 0 C N. 013 may stabilize...
...With the rescheduling option blocked by the Europeans, the junta might have chosen default...
...The loan/debt cycle has driven Chile through the halycon days of electoral politics to the period of permanent state of seige...
...government and to private U.S...
...government, especially William Simon's Treasury Department, has looked with favor on the junta not only because of its repression of a socialist challenge, but because of its professed intent to install a "free market" model tightly integrated into international capital and trade streams...
...Politically, the depression has further eroded support within Chile for the junta...
...During its first year, despite world record copper prices, the junta was unable to restore equilibrium to the balance of payments...
...6 Only with considerable diplomatic pressure did the United States drag in the French, who chair the Club...
...However, a contradiction that will not disappear is the foreign debt...
...In 1975 industrial production fell a devastating 28 percent and failed to recover in 1976.' The economic disaster in Chile arises from the fact that U.S...
...In comparison, private banks and suppliers had lent $906 million - only half of that lent by official aid agencies...
...Percent Suppliers 433,780 12 USA 88,732 (2) Private Banks 472,465 13 USA 179,851 (5) Nationalizations 502,733 13 USA 486,407 (13) Public Bonds 32,557 1 USA 12,894 (0) Other Private 68,336 2 USA 3,291 (0) International Organizations 194,570 5 Governments 1,824,903 49 USA 992,606 (27) Other 201,228 5 Total 3,730,572 100 USA 1,763,781 47 Source: World Bank, Economic Memorandum on Chile, 12/24/75...
...In 1975, Britain, Italy, Belgium, Sweden and Holland refused to attend the Paris Club rescheduling and demanded complete payment of debts falling due...
...Lenders are hardly encouraged when a nation is regularly unable to honor its debt obligation...
...5) meeting debt service, so as to reestablish Chile's international creditworthiness...
...In 1976, debt service consumed all new aid flows, and then some...
...Secondly, the cartel-like arrangement insures that all creditors share in the rescheduling, such that relief granted by one creditor is not then used to make payments to an absent creditor...
...This tribute to foreign lenders places a tremendous burden on every Chilean worker, where the average per capita income is about $730...
...As Chile moved from its position of being a recipient of massive aid in the 1960s to being a net reimburser in 1976, the ruling political rhetoric underwent a parallel transformation from populistic consumerism to one of restrictive elitism and enforced austerity...
...Yet it was all too obvious that in 1972 the United States had tried to block a debt rescheduling for Allende, had successfully put off another Allende attempt to renegotiate in 1973, while the United States had carried the junta's brief in 1974 and 1975...
...Excludes payments made on credits with maturities of less than one year, or credits made to private borrowers not guaranteed by the Chilean government...
...copper companies, although the debt burden was eased by a multilateral rescheduling worked out by the Paris Club...
...3. Ibid., p. 3. 4. Ibid., p. 11, and footnote I. 5. Report on Developing Countries External Debt, U.S...
...The continued repression that the depression impels scars the image of the junta and its patron, the United States...
...As will be argued below, the United States appreciates the junta's prompt payments in part because over half of the debt is owed to the U.S...
...Furthermore, the rising consumption enjoyed by certain groups kindled heightened aspirations among broad sectors that the Chilean economy - even with U.S...
...The net impact on Zaire's balance of payments of default was not immediately obvious...
...The objectives are: 1) restoring a market system where prices are "freely" set, and such prices then determine the distribution of income and investment...
...Objectives three and four conflict because a sharp reduction in government spending cuts demand and harms the investment climate...
...As Table II-A shows, capital inflows in 1975 were just sufficient to cover amortization on the debt...
...in 1975 it was able to reschedule a smaller portion, while in 1976 the full amounts falling due had to be met (Table II-C, p. 16, shows who got paid...
...Despite these adverse effects, the main creditor, the United States, cannot permit its ally, the junta, to write off the debt because of global concerns, while the junta feels compelled to pay in order to regain the confidence of foreign capitalists...
...Chile's workers and the unemployed have suffered most of all, thereby solidifying their commitment to resist the junta...
...concerns as well as by the logic of the junta's economic model...
...Balance was restored to the external account, and timely payments were maintained on the foreign debt...
...Note: Excludes credits to private Chilean borrowers not guaranteed by the Chilean government, and excludes credits with original maturities of less than one year.15 ments, allowed the Alessandri (1958-64) and Frei (1964-70) regimes to divert funds that would have been spent on such priority projects toward immediate consumption...
...In fact, one could look at new aid flows as simply a means whereby Chile refinances its debt: new aid is used to pay off old lenders...
...Of the $236 million in postponed debts, $96 million were to the United States...
...But the U.S...
...Economically, Chile has been set back to the level of national income that existed a decade earlier, such that per capita income is even below that of the mid-1960's...
...2) halting inflation such that prices correctly reflect the relative values of traded items and give meaningful signals to investors...
...The inevitable results of these policies - massive unemployment, bankruptcies, a depleting capital stock - did produce the desired result: domestic production fell in 1975 TABLE II-A BALANCE OF PAYMENTS ($U.S...
...Therefore, much of the foreign aid, while allowing for temporary indulgences, failed to increase Chile's productive capacity...
...The repayment of the debt is also conditioned by, and has an impact upon, internal developments...
...The wealthy creditor nations are thus able to unite to exact important concessions from the suppliant, that generally include economic reforms to insure eventual payment of the debt, as well as alteration of the debtor's growth model toward a more open, "free market" approach...
...For more on the economy, see NACLA's Latin America & Empire Report November 1976...
...Solidarity Poster/Germany their Creditor Club...
...The dissention among creditors weakened the Club at the moment when the industrial countries were countering the demands of the developing countries for a generalized debt moratorium with offers to reschedule within the Paris Club framework...
...Government Printing Office, Washington, D.C., April 5, 1976), p. 2. 6. The 1975 Paris Agreement was signed by the United States, Canada, France, Japan, Spain, Switzerland and West Germany...
...government has played an important role in the accumulation of Chile's debt...
...A depressed economy imports fewer goods, and since domestic purchasing power has declined, producers must look for foreign buyers, thereby increasing exports...
...meeting debt service destabilizes prices, because the central bank is forced to print pesos to cover the deficit in the foreign-exchange budget...
...In 1976, because European creditors refused to grant the junta debt relief, Chile has paid out $815 million to cover debt service, which amounted to between 40 and 45 percent of income gained from exports.'The figure is extremely high...
...The anger of the workers and frustrations of the middle class could be mollified only so long as their life-styles were permitted to meet "rising expectations...
...The politically motivated aid programs, however, were not without their hazards - those programs that organized workers and peasants into Christian Democratic organs ran the risk of losing control of their members, as new levels of consciousness were reached...
...Because of these measures, more and more workers were laid off...
...financial support - could not fulfill...
...President Giscard d'Estaing had been trying hard to present a humane, responsive image to counter a growing leftist electoral threat in France...
...This and the following were principal sources in preparing this section: Situation, Principal Problems and Prospects of the Economy of Chile, Organization of American States, CEPCIES (March 25, 1976...
...These arduous payments have been necessitated by global U.S...
...In 1975, despite postponement on $236 million in debt payments, $460 million in principal and interest - which consumed 30 percent of export earning - still had to be paid...
...Had the junta not been faced with a debt burden, it would still have implemented austerity measures, to offset the shortfall in copper earnings, as well as to "restructure" the economy...
...At the same time tight credit, low consumer demand, and the sudden absence of fiscal stimuli reduced the incentive for Chilean capitalists to invest...
...For the United States to have pressured for another Paris Club rescheduling for Chile in 1976 would have been to further irritate European allies, and to damage the image of the Club at an inopportune time...
...Credit to industries was restricted, thereby restraining business activity...
...Suppliers 90,014 Private Banks 147,918 Nationalizations 81,226 Public Bonds 8,209 Other Private 21,606 International Organizations 25,475 Governments 325,.109 (USA) (128,037) Other 38,406 Total 737,963 Source: World Bank, Economic Memorandum on Chile, 12/24/75...
...No nation in the world is currently paying as much as Chile of its foreign exchange on debt servicing...
...policy is to hold debt renegotiations in a multilateral framework, the most common being the Paris Club, an ad16 hoc meeting of the debtor's major creditors...
...and forced great losses on many industrialists...
...Moreover, private firms and banks would have been less enthusiastic about Chile had official agencies not been providing complementary flows...
...Wages were held down for those workers lucky enough to get jobs...
...Chile will continue to face throughout the rest of the 1970's massive debt payments, in the $800 million range that crippled the economy in 1976...
...in addition, massive compensation payments were made to the U.S...
...3 Central to the junta's balance of payments problem, as table II-A shows, has been the required debt service...
...Another copper producer, Zaire, selected this option...
...In the 1958-70 period, Chile's economic performance was spotty, the average annual per capita growth rate tottering along at around two percent...
...Government fiscal outlays were slashed, especially for investment...
...Indeed, a primary reason for U.S...
...WHY CHILE MUST PAY In 1974 Chile was able to postpone payment on most of the debt due...
...these measures, which aimed to "restructure" the economy by increasing the scope and profitability of the private sector, would inevitably have an immediately negative impact on income...
...policy makers considered at that time that growing consumption was a prerequisite for keeping in power a "democratic" government which furthered U.S...
...Direct support was provided to U.S...
...Some loans were targeted toward immediate political objectives: for example, a $55 million credit was authorized during the 1964 Frei-Allende electoral contest, to increase the availability of "essential" imports...
...any reduction in capital inflows because of cancellations was probably offset by monies saved by not meeting debt service...
...Further, since Chile's population is only ten million, to meet the $815 million debt burden, each Chilean family had, in effect, to forego approximately $320...
...5 The junta's commitment to pay the debt (and the fate of Allende who wasn't so committed) is an important object lesson to these countries...
...In this way, as in others discussed above, the continued commitment to pay off the debt undercuts the junta's economic plans and U.S...
...support for the junta is its priority commitment to timely debt service...
...Thus, the broad majority of the Chilean population had their purchasing power drastically cut...
...Table II-B, which lists the outstanding debt by creditor, shows that of $3.7 billion in outstanding disbursed debt, $1.8 billion is owed to governments, $195 million to international organizations (primarily the World Bank and Inter-American Development Bank...
...Executive has worked so assiduously to muster...
...The balance of payments measures a country's receipts of foreign exchange, acquired by exporting or by contracting foreign loans and investments, and balances them against expenditures on imports and capital outflows (such as profit remittances and debt service...
...Yet, after three years of junta policies, the Chilean economy* remains in deep depression...
...The sharp increase in oil prices combined with an import boom to consume foreign exchange...
...The costs of the debt-induced depression have been great...
...4) stimulating investment by returning control of the economy to private capitalists and by increasing profit margins...
...From an economic perspective, chronic rescheduling was not helping Chile's creditworthiness...
...That is, the junta's very efforts to restore its creditworthiness had the indirect impact of making Chile a less attractive environment for foreign capital...
...The abstentions from the Paris Club meant that the United States had to bear a greater portion of the debt relief granted Chile...
...Treasury Department (U.S...
...The junta, for example, has been firmly committed to reducing state expenditures and lowering wages...
...Even the Western Europeans were annoyed at the Americans' politicization of TABLE II-C 1976 PUBLIC FOREIGN DEBT SERVICE PAYMENTS, BY TYPE OF CREDITOR Foreign Creditor Payments Made ($U.S...
...policy toward Chile...
...Note: Includes interest and principal payments made on loans committed by December 31, 1974...
...The massive injection of foreign aid in the 1960s permitted this happy coexistence in Chile of rising personal consumption and electoral politics...
...Export growth remained a function of international copper prices...
...Giscard did not wish to be identified with the junta, the symbol of a capitalist regime where the violence implicit in class relations had become so explicit...
...The debt collector cannot rely upon the ballot box...
...THE DEBT DILEMMA 1. Chile - Recent Economic Developments, International Monetary Fund (Washington, D.C., May 25, 1976), p. 63...
...A second mechanism , which the junta would also adopt, is devaluation, which makes imported goods more expensive and exports cheaper for the foreign buyer - but devaluation is not nearly as powerful a tool as slashing national income...
...firms and banks...
...The economic contraction has hurt the middle class...
...Objective five undermines efforts to halt inflation...
...The junta, however, could not take this default option without undermining the central tenet of its model that pretended to attract foreign capital through assurances of absolutely responsible behavior...
...A negative-growth Chile offers a weaker market for U.S...
...The United States cannot be happy with these results...
...Chile's debt burden is also costly for the United States because it eats away at the aid flows that the U.S...
...Over the next ten years, the United States poured in official loans (as well as covert monies) to strengthen "democratic" alternatives...
...Toward the end of 1974, the picture grew dimmer: the price of copper was plummeting, and a larger debt service loomed ahead for 1975...
...1975 1976 (est...
...is nevertheless thoroughly committed to seeing that the debt be paid...
...From the junta's perspective, to return to Paris in 1976 meant to face European pressures for a let-up in repression...
...THE DEBT AND THE BALANCE OF PAYMENTS The junta's economic woes have been dominated by the crisis in the balance of payments...
...Other loans went for economic development projects - electric power, railroads, mines...
...However, the existence of the debt burden impelled the junta to depress the economy much more severely...
...ORIGINS OF THE DEBT Just as it is impossible to understand the junta without examining the class struggle within Chile, so must that struggle be considered in analyzing the origins of the debt crisis...
...In April, 1975, the junta announced several measures to cut national expenditures...
...government, via Eximbank loans and AID investment guarantees, encouraged continued concentration on the copper sector, in spite of its obvious instability as a source of foreign exchange earnings...
...capitalists, the U.S...
...The Paris Club was presented as a technical exercise, without political bias...
...In 1958 Allende, the candidate of a left coalition, narrowly missed being elected president...
...Since the junta's entire development strategy depends upon attracting foreign capital, restoration of its depressed credit rating had top priority...
...Such loans, however, while earmarked for investTABLE II-B PUBLIC FOREIGN DEBT OUTSTANDING, DISBURSED AS OF DECEMBER 31, 1974, BY SOURCE Source Amount ($U.S...
...Since the main objective of aid was to dull class conflict, it is not surprising that the loans failed to propel growth...
...and in those two years, Chile was the only country to be granted debt relief by the Paris Club...
...According to Jorge Cauas, Minister of Finance, "The principal objectives of the Economic Recovery Program (announced in April 1975) were to reduce the expected balance of payments deficit to a level compatible with the financing available...
...and Chilean policy-makers have been pursuing contradictory objectives in an attempt to complete the long-term goal of restructuring the Chilean economy in favor of international capital...
...Over half of Chile's outstanding debt is accounted for by past aid...
...government, while not entirely adverse to granting the junta a third debt rescheduling in 1976, had to recognize that the costs were clearly rising...
...Those agencies that are dependent upon reflows (i.e., debts paid back) as a major source of funds - notably Exim and the Commodity Credit Corporation - were most hesitant to again postpone payment on debts...
...With some luck, reducing state expenditures may combine with higher profit margins to eventually call forth private capital...
...The first and second objectives are clearly contradictory, as freeing previously suppressed prices guarantees inflation...
...The primary mechanism for correcting a serious balance of payments deficit is to lower national income through fiscal and monetary restraint...
...Increasingly isolated, the military has responded with continued repression...
...Indeed, the U.S...
...agencies that have lent to Chile include the Agriculture Department (PL 480, Commodity Credit Corporation), the Export-Import Bank, the Agency for International Development, and the Defense Department...
...Further, the United States faces an increasing threat from less developed countries in their growing demands for a debt moratorium (the developing countries owe U.S...
...The nationalization "debts," of course, do not derive from loans at all...
...2. This contradiction has been admitted by Jorge Cauas, the Minister of Finance, in his Statement to CEPCIES, April 6, 1976, as reprinted in Chile Economic News, May 1976, p. 10...
...Merchandise Trade Account (net) -275 150 Exports 1500 1900 (Copper) (855) (1100) Imports -1775 -1750 Capital Flows (net) 25 -230 Net direct investment 50 50 Profit remittances -25 -30 Medium and long-term loan disbursements 460 565 Medium and long-term debt -460 -815 (Interest payments) (-170) (-550) (Principal amortization) (-290) (-265) Omissions and Errors (net) 0 -20 Balance of Payments -250 -100 Source: World Bank, IMF, Chilean Central Bank, Chile Economic News.14 by 15 percent and remained down through 1976.4 The demand for imports - whether for consumption or investment - fell precipitously, and non-copper exports picked up as firms had to look abroad for customers...
...3) reducing state expenditures, so as to slow inflation and reduce the role of the government in the economy...
...investors by the Eximbank, which made large loans to subsidiaries of Kennecott, Anaconda, Cerro and Dow Chemical...
...While a country need not be in perfect balance, large or continual deficits require either a reduction in imports or an expansion of exports, or both...
...The burdensome debt service has gravely worsened Chile's balance of payments crisis, which in turn has deepened the depression, and weakened the economic and political position of the junta...
...and Ercilla, various issues...
...government agencies $27 billion...
...must insist that Chile pay its debts, this insistence undermines the welfare of an ally, as the junta desperately struggles to meet foreign obligations...
...Just as the loans themselves permitted increased consumption and thereby facilitated "democracy," the period of repayment requires austerity and, if the debt burden is to be thrown primarily on the shoulders of the workers, dictatorship...
...Private bankers and State Department analysts usually give 25 percent as the figure which represents the maximum percentage of foreign exchange income a nation can pay on its foreign debt and not be in extreme crisis...
...The United States, therefore, is caught in a major contradiction that it cannot resolve: while the U.S...
...government as a whole was concerned about the impact of another attempt at rescheduling on relations with European allies and upon the difficult ongoing negotiations with the developing countries over their demands for a debt moratorium...
...At the same time as the debt burden takes a heavy toll on the junta's economic and political fortunes, which hurts some U.S...
...goals...
Vol. 10 • December 1976 • No. 10
