411. Memorandum From the Acting Assistant Secretary of State for Inter-American Affairs (Rubottom) to the Assistant Secretary of State for Economic Affairs (Kalijarvi)1
SUBJECT
- Chilean Stabilization Program
Embassy Santiago has reported, and the Klein–Saks group has explained to me here, that the Chilean stabilization program is in serious danger of failure unless outside assistance is made available soon to Chile.
At the heart of the problem is the budgetary situation. Several unforeseen factors have increased budgetary needs since the original budget was promulgated, while revenues have been less than anticipated, largely the effect of the precipitous drop in copper prices. Probably the situation could have been substantially ameliorated had the Government earlier acted with more decisiveness. Nevertheless, even if the Chilean Government were to institute at this time all the corrective measures recommended by the Klein–Saks Mission, it appears that there would still be a budgetary gap this year of approximately 20 billion pesos, roughly equivalent to the short-fall in copper revenues. The Government has already begun substantial deficit financing which if continued will, in the opinion of the Embassy and the Klein–Saks Mission, seriously jeopardize the stabilization program.
It has been suggested that, in these circumstances, Chile draw on the already existing exchange stabilization fund. However, the Government and the Klein–Saks Mission believe that this would be an admission of crisis which could have dangerous psychological [Page 836] effects. Moreover, they fear that utilization of this short-term credit at this time would prejudice Chile’s chances of obtaining badly needed long-term development loans which the IBRD is now actively considering for Chile. They also hold that the purposes for which this drawing would be made are not consonant with the letter and spirit of the Standby Agreement with the IMF (Paragraphs 2 (B) and (C) of the Agreement).
The head of the Klein–Saks Mission in Chile, Mr. Carter, is now in Washington presenting the case for a United States Government loan to Chile. I anticipate that we will shortly be receiving a formal request for a loan from the Chilean Government. As you know, the Chilean Ambassador has already broached this possibility to the Export-Import Bank. While we do not accept all of Mr. Carter’s reasoning or necessarily agree that a loan as large as he had indicated is required, I do believe that the Chilean stabilization program has indeed reached a critical point and that some assistance from the United States is indicated. The overall momentum in Chile so far has been favoring the ultimate success of the stabilization program and speculative activity bred by an inflation psychology has been significantly curtailed. Once the program begins to evidence signs of deterioration, this momentum could rapidly take the opposite direction. Failure of the Chilean effort, which appears to be a real danger at this time, would severely impair any possibilities of putting into operation in the future similar stabilization programs in other Latin American countries.
Members of my staff have been discussing this problem with your staff. An ARA proposal was embodied in a paper circulated on May 21, a copy of which is attached.2 Since I hope that an agreement with Chile could be worked out to be effective for the second half of 1957, I would appreciate having your views on our proposal or other suggestions you might have for confronting the present financial situation in Chile. We recognize, of course, that any assistance which might be extended Chile at this time would have to be joined to firm commitments on the part of Chile to institute necessary corrective measures.