Gunboat diplomacy and a Mexican initiative

One of Reagan’s fi rst acts as president in early 1981 was to use his powers of offi ce to dissolve the trade union of the airline traffi c controllers, PATCO. This served to signal other unions not to attempt to seek relief from the soaring interest rates. Reagan was mesmerized by the same ideological zeal to ‘squeeze’ out infl ation as was his British counterpart, Thatcher. Some informed people in the City of London even suggested that a major reason for the Thatcher government’s existence in the fi rst place was to infl uence the monetary policy of the world’s largest industrial nation, the United States, and to shift economic policy throughout most of the industrial world away from the direction of long-term nuclear and other industrial development.

If that was in fact the plan, it succeeded. Six months after Thatcher took offi ce, Ronald Reagan was elected. Reagan as president reportedly enjoyed repeating at every opportunity to his cabinet the refrain, ‘Infl ation is like radioactivity. Once it starts, it spreads and grows.’ Reagan kept Milton Friedman as an unoffi cial adviser on economic policy. His administration was fi lled with disciples of Friedman’s radical monetarism, much as Carter’s had been with exponents of David Rockefeller’s Trilateral Commission.4

This entire radical monetarist construct, fi rst advanced in the early 1980s by the British regime of Thatcher and soon afterwards by the U.S. Federal Reserve and the Reagan administration, was one of the most cruel economic frauds ever perpetrated. But its aim was other than what its ideological ‘supply-side’ economics advocates claimed.

The powerful liberal establishment circles of the City of London and New York were determined to use the same radical measures earlier imposed by Friedman to break the economy of Chile under Pinochet’s military dictatorship, this time in order to infl ict a devastating second blow against long-term industrial and infrastructure investment in the entire world economy. The relative power of Anglo-American fi nance was thus to become again hegemonic, they reasoned. What was to follow in the 1980s would have appeared inconceivable to a world which had not already been stunned and disoriented by the shocks of the 1970s.

GUNBOAT DIPLOMACY AND A MEXICAN INITIATIVE

It would be no exaggeration to say that there would not have been a Third World debt crisis during the 1980s had it not been for Margaret Thatcher’s and Paul Volcker’s radical monetary shock policies.

As the average cost of their petroleum imports, denominated in US dollars, rose some 140 per cent following the Iran oil shock in early 1979, developing countries this time around found that the dollar itself, in terms of their local currencies, was also rising like an Apollo rocket because of the high U.S. interest rates caused by Volcker’s policy. Not only could most struggling developing countries barely manage the borrowings to fi nance the oil defi cits built up from the 1974 oil crisis; by 1980, an entirely new element faced them—fl oating interest rates on their Eurodollar borrowings.

As noted earlier, as early as 1973 the Anglo-American fi nancial insiders of the Bilderberg group had discussed using the major private commercial banks of New York and London, in the London-centered Eurodollar market, to recycle what Henry Kissinger and others referred to as the new OPEC petrodollar surpluses. The sudden glut of new OPEC oil funds, which was steered into the London Eurodollar banks during the oil crises of the 1970s, was to be the source of the greatest unregulated lending spree since the 1920s.

London had evolved as the geographical center for this Eurodollar ‘offshore’ market because the Bank of England, over a period since the 1960s, had made it clear that it would not attempt to regulate or control the fl ows of foreign currencies in the London Eurodollar banking market. It was part of their strategy of reconstructing the City of London as the center of world fi nance. This meant, despite vague public utterances of various bankers about the safeness of Eurodollar loans, that the billions of dollars fl owing out of the London-based Eurodollar banks to the accounts of developing country borrowers during the 1970s, had no ‘lender of last resort’—no single sovereign government was legally bound to make good the losses in the event of a major default on the bank loans.

Nobody seemed concerned, as long as this Eurodollar roulette wheel kept turning. Foreign debts incurred by developing countries expanded some fi ve-fold, rising from $130 billion in the ‘halcyon’ days of 1973, before the fi rst oil shock, to some $550 billion by 1981, and to over $612 billion by the decisive year 1982, according to International Monetary Fund calculations. Even this omitted signifi cant short-term lending of less than one year. The leading banker of New York at the time, Citicorp’s Walter Wriston, justifi ed the private bank lending to countries such as Mexico and Brazil by arguing that ‘governments have assets that are in excess of their liabilities, and this is, shorthand, governments don’t go bankrupt …’

A crucial feature of these private Eurodollar loans to developing countries was ignored in the aftermath of the first oil shock. Manufacturers Hanover Trust of New York, a major Eurodollar bank, had pioneered the petrodollar recycling of huge sums to developing countries such as Mexico, Brazil, Argentina, even Poland and Yugoslavia. While developing countries were able to borrow on far more favorable terms than if they had submitted their economies to the conditionalities of the International Monetary Fund, the AngloAmerican bank syndicates extracted a little-noticed concession, pioneered by Manufacturers Hanover. All Eurodollar loans to these countries were fi xed at a specifi ed premium over and above the given London Inter-Bank Offered Rate (LIBOR). This LIBOR rate was a ‘fl oating’ rate, which would fall or rise, as determined by short-term interest-rate levels in New York and London. Before the summer of 1979, this seemed an innocuous precondition to borrowing needed funds to fi nance oil defi cits.

But with the application of the Thatcher government’s interestrate monetary shock beginning June 1979, followed that October by the same policy from Paul Volcker’s Federal Reserve, the interest rate burdens of Third World debt compounded overnight, as interest rates on the London Eurodollar market climbed from an average of 7 per cent in early 1978 to almost 20 per cent by early 1980.

Due to this one factor alone, Third World debtor countries would have collapsed into default as the altered debt service conditions imposed on them by the creditor banks added an unpayable new amount to their previous onerous debt burden. But even more unsettling were the uncanny parallels of policy then imposed by the leading London and New York bankers, virtually a letter-by-letter rerun of the same banks’ Versailles war reparations debt-recycling folly of the 1920s, which had collapsed into chaos in October 1929 with the crash of the New York stock market.

As interest rate burdens on their foreign debt obligations soared to the stratosphere after 1980, the market for Third World debtor country commodity exports to the industrial countries, which were critical to repaying those debt burdens, collapsed, as the industrial economies were plunged into the deepest economic downturn since the world depression of the 1930s—a result of the impact of the Thatcher–Volcker monetary shock ‘cure.’

Third World debtor countries began to get squeezed in the blades of a vicious scissors of deteriorating terms of trade for their commodity exports, falling export earnings, and a soaring debt service ratio. This,

in short, was what Washington and London preferred to call the ‘Third World debt crisis.’ But the crisis had been made in London, New York and Washington, not in Mexico City, Brasilia, Buenos Aires, Lagos or Warsaw.

Events came to a predictable head during the summer of 1982. As it became obvious that the Latin American debtor countries would soon explode under the onerous new debt repayment burdens, infl uential circles around Margaret Thatcher and the Reagan Administration, notably Secretary of State Alexander Haig, Vice President George Bush and CIA Director William Casey, began to prepare an ‘example,’ to deter debtor countries from considering nonpayment of their debts to the major U.S. and UK banks.

In April of 1982, Prime Minister Thatcher told the British House of Commons, ‘Britain won’t flinch from using force’ to retake the disputed Malvinas Islands in the desolate waters of the south Atlantic off Argentina’s coast, known as the Falklands in Britain. The issue was not that Argentina’s Galtieri government had, with justifi cation, claimed sovereignty over the islands, and retaken them on April 1, after years of unsuccessful attempts at negotiation of the issue. Nor was the issue that the surrounding area was believed by some to contain rich untapped petroleum reserves. The real issue of Thatcher’s military confrontation with Argentina was to enforce the principle of the collection of Third World debts by a new form of nineteenth-century ‘gunboat diplomacy.’ Two-thirds of Britain’s Naval fl eet was dispatched to the south Atlantic during April 1982, for a shooting war with Argentina which Britain nearly lost due to Argentine deployment of French Exocet missiles.

The British intent was to trigger a crisis in order to attempt to place the military might of all NATO behind the policing of Third World debt repayment, under the changed terms of sky-high fl oating interest rates. Argentina was the third largest debtor nation at the time, with $38 billion in foreign debts, and the country which appeared closest to default. Thatcher had been advised to make a test case of Argentina. The staged Malvinas confl ict, details of which were to emerge almost ten years later, was merely the pretext to persuade other NATO members to back what was termed ‘out of area’ NATO military response. A tentative step in that direction came at a May 7 NATO Nuclear Planning Group meeting that spring in Brussels, but aside from American backing, Britain largely stood alone in its demand to expand the purview of NATO beyond the defense of western Europe.

What did result from the British military action against Argentina in the spring of 1982 was the severe worsening of Washington’s relations with its Latin American neighbors. The Reagan administration had been persuaded, after much internal wrangling, to come out on the side of British gunboat diplomacy against Argentina, in de facto violation of the United States’ own Monroe Doctrine.

Perhaps unknown to President Reagan, Assistant Secretary of State Thomas Enders had traveled to Buenos Aires in March that year to privately assure the Galtieri government that the dispute between Argentina and Britain over the Malvinas would not draw U.S. participation. This assurance was considered in Buenos Aires as the ‘green light’ from Washington to proceed. It bore remarkable parallels to similar ‘assurances’ which a U.S. ambassador was to give to Iraq’s Saddam Hussein in July 1990, some days before the Iraqi invasion of Kuwait. Certain circles in the Washington establishment were in full accord with the London Foreign Offi ce policy. Argentina had to be maneuvered into giving the pretext for military action by Britain.

One country which did not appreciate Washington’s support for Thatcher’s replay of nineteenth-century British colonialism was Mexico, which shared a border with the United States. Under the presidency of José López Portillo, beginning late 1976, Mexico had undertaken an impressive modernization and industrialization program. López Portillo’s government had determined to use its ‘oil patrimony’ to industrialize the country into a modern nation. Ports, roads, petrochemical plants, modern irrigated agriculture complexes, and even a nuclear power program were undertaken. Signifi cant and nationally controlled oil resources were to be the means for modernizing Mexico.

By 1981, after the Volcker interest rate shock, certain Washington and New York policy circles determined that the prospect of a strong industrial Mexico, a ‘Japan on our southern border,’ as one American establishment person derisively called it, would ‘not be tolerated.’ As with Iran earlier, a modern independent Mexico was considered by certain powerful Anglo-American interests to be intolerable. The decision was made to intervene to sabotage Mexico’s industrialization ambitions by securing rigid repayment, at exorbitant rates, of her foreign debt.

A well-prepared run on the Mexican peso was orchestrated beginning the fall of 1981, signaled by a New York Times interview with former CIA chief William Colby, then a consultant on ‘political risk’ to multinational corporations. Colby stated that he was advising

his clients regarding investment in Mexico to ‘expect a devaluation of Mexico’s currency before next year’s general election.’ Colby’s theme was echoed by articles throughout the U.S. media, including the Wall Street Journal.

Colby had been connected with a ‘private’ international consultancy, known as Probe International, on whose board sat Lord Caradon (Hugh Foot), a British Foreign Offi ce intelligence specialist in Middle East and American affairs, and a leading advocate of Malthusian population reduction policies in the developing sector, as opposed to increasing industrial and agricultural productivity.

Probe’s president, a former U.S. State Department senior offi cial named Benjamin Weiner, planted a series of articles in U.S. papers during the early weeks of 1982, fostering the idea that knowledgeable Mexican businessmen were rushing to smuggle their funds, converted into dollars, out of Mexico into Texas and California real estate, before the country exploded. The articles were dutifully reported in major Mexican dailies, further fueling capital fl ight. President López Portillo, in a speech broadcast nationally on February 5 that year, attacked what he termed ‘hidden foreign interests’ who were trying to destabilize the country through panic rumors and fl ight of capital out of the country and to force a devaluation of the peso against the U.S. dollar. Three years earlier, the same Probe International had played a critical role in fueling the capital fl ight which helped to weaken the Shah of Iran, preparing the way for the Khomeini revolution.

By February 19, 1982, the Mexican government was forced to impose a draconian austerity program, in the desperate hope of stabilizing the fl ood of fl ight capital out of Mexico into the United States. Powerful vested fi nancial interests exerted strong pressure on López Portillo to prevent his taking what would have been the necessary defense of reimposing Mexican foreign exchange controls. The capital fl ight accelerated.

That February 19, the López Portillo government cracked under the pressure. The Mexican peso was devalued by an immediate 30 per cent to try to stem the capital outfl ow and stabilize the situation. The domestic consequence was that private Mexican industry, which had borrowed dollars to fi nance investment in the previous years, led by the once-powerful Alfa Group of Monterrey, was made bankrupt overnight. Its earnings were in pesos, and its debt service in the vastly more costly dollars. Simply to maintain its previous debtservice position, a company would have had to increase peso prices by 30 per cent, or cut costs by reducing its workforce. The devaluation

also forced reduction in Mexico’s industrial program, cuts in living standards, and increased domestic infl ation. Mexico, only months earlier the most rapidly growing economy in the developing world, had been plunged into chaos by the spring of 1982. A Mexican case offi cer with the International Monetary Fund declared after the severe measures, ‘This was just the right thing to do.’5

Mexico was now put fi rmly under the international spotlight as a ‘problem borrower’ and a ‘high-risk country.’ Leading Eurodollar banks in London, New York, Zurich and Frankfurt, as well as in Tokyo, quickly cut back their lending plans. Mexico, under the double pressures of peso devaluation, loss of billions of dollars in needed capital through capital fl ight, and the decision by the major international banks not to roll over the old debt, by August faced a debt payments crisis of titanic dimension.

On August 20 that summer, at the headquarters of the New York Federal Reserve, more than 100 of the United States’ leading bankers had been summoned to a closed-door meeting to hear a report from Jesús Silva Herzog, the Mexican fi nance minister, on Mexico’s prospects for repaying its $82 billion foreign debt. Silva Herzog told the assembled gentlemen of international fi nance that his country could not even meet the next installment due on its foreign debt. Its foreign exchange reserves were gone.

In Mexico, President López Portillo, facing growing economic chaos, decided to act to stem the capital fl ight, then at crisis proportions. The president announced to the Mexican nation on September 1 that the country’s private banks were being nationalized, with compensation, along with the then private central bank, the Bank of Mexico, as part of a series of emergency measures to restore fi nancial order and stop the outfl ow of fl ight capital from collapsing the nation’s entire economy.

In his nationally televised three-hour speech that day, he attacked the private banks as being ‘speculative and parasitical’ and detailed the capital fl ight which they had funneled out of Mexico’s industrialization effort into dollars and U.S. real-estate speculation. The total was $76 billion, which compared with the entire total of foreign debt contracted in the previous ten years for the country’s industrialization.

López Portillo had established a friendly rapport of sorts with Ronald Reagan, and had informed Reagan personally of his dramatic action to make clear that this was an issue of national emergency, not of irresponsible radicalism against the United States.

Then, appearing before the New York annual General Assembly of the United Nations on October 1, President López Portillo called on the nations of the world to act in concert to prevent a ‘regression into the Dark Ages.’ He effectively blamed the crisis of the fi nancial system on the policy of unbearably high interest rates and the collapsing prices of raw materials.

These were ‘two blades of a pair of scissors that threatens to slash the momentum achieved in some countries, and to cut off the possibilities for progress in the rest,’ the Mexican president stated. Then he bluntly warned of the possibility of unilateral suspension of Third World debt payments, if a commonly benefi cial solution were blocked. ‘Payment suspension is to no one’s advantage and no one wants it. But whether or not this will happen is beyond the responsibility of the debtors. Common situations produce common positions, with no need for conspiracies or intrigue.’

López Portillo attacked the arbitrary imposition of the new debt terms under Thatcher and Volcker.

Mexico and many other countries of the Third World are unable to comply with the period of payment agreed upon under conditions quite different from those that now prevail … We developing countries do not want to become vassals. We cannot paralyze our economies or plunge our peoples into greater misery in order to pay a debt on which servicing has tripled without our participation or responsibility, and on terms that are imposed on us … Our efforts to grow in order to conquer hunger, disease, ignorance and dependency have not caused the international crisis.

López Portillo then addressed the self-interest of the United States and other industrial creditor nations in working together for solutions which allowed countries such as Mexico to grow their way out of the crisis. His comments were echoed by the head of state of the largest debtor nation, Brazil’s João Baptista Figueiredo, who then spoke of ‘symptoms dramatically reminiscent of the 1930s’, in which ‘production investment is being asphyxiated on a global scale under the impact of high interest rates.’

Throughout the summer months of 1982, a behind-the-scenes White House policy debate continued over what to do about the explosive debt crisis. With the U.S. economy falling deeper into decline under the weight of the severe Federal Reserve interest rate levels, a group around President Reagan lobbied for a resolution