[LC]

MIAMI
DOLPHINS

MIAMI DOLPHINS, LTD.
JOE ROBBIE STADIUM
2269 N.W. 199TH STREET
MIAMI, FLORIDA 33056
(305) 620-5000

JOSEPH ROBBIE
Managing General Partner

November 11, 1988

NOV 15 1988.

The Hon. Henry A. Kissinger
Kissinger & Associates
350 Park Avenue
New York, N.Y. 10022

Dear Mr. Kissinger:

In 1994, the United States has been selected to host the world's premier sporting event, the World Cup Soccer Tournament.

The World Cup is bigger than the World Series and the Super Bowl combined. It's even bigger than the Olympics in terms of world popularity and participation.

National Soccer teams from over 150 countries throughout the world begin regional qualification rounds two years in advance of a World Cup tournament. The tournament itself is held every four years, with the next one hosted by Italy in 1990.

After the qualifying rounds eliminate all but the best twenty four national teams in the world, the World Cup Tournament begins. Fifty-one games are played before the World Cup Final determines the champion. The last World Cup Final had a worldwide live television audience that represented over half of the entire world's population!

Joe Robbie Stadium will play a major role in hosting World Cup games in 1994. In fact, officials from FIFA, the world governing body of soccer, have indicated that our stadium stands a good chance of being selected for the final match.

On Saturday, December 3, we are hosting a reception including a buffet dinner at our Stadium Club for Warner Fricker, the President of the United States Soccer Federation, and Paul Stiehl, the Director of World Cup USA 1994, Inc.

The reception will begin at 6:00 p.m. with dinner to follow at 7:00. We would be pleased to have you join us along with your spouse.

Please RSVP to Abby or Barbara at 620-5000 by Monday, November 23.

JR:bl

AMERICAN EXPRESS COMPANY
AMERICAN EXPRESS TOWER, WORLD FINANCIAL CENTER, NEW YORK, N.Y. 10285-5100

JAMES D. ROBINSON, III
CHAIRMAN

December 7, 1987

Dear Henry:

I appreciate your keen interest in DEVCO which is now renamed to The International Debt & Development Fund (IDDF). Attached are two of our latest revised copies.

As you know, we have been evolving this proposal based on a number of conversations with key people in government and the business community, as well as through our ongoing dialogue with the Japanese. While there is skepticism in some quarters, particularly with the question of a "contingent guarantee" from the Sponsoring Governments, all agree that this is a comprehensive and far-reaching approach.

You raised two questions:

(1) Will DEVCO (or IDDF) have too much power to meddle in the local political affairs of the Participating Countries? Striking the right balance for IDDF's negotiating power will be a key item for further discussion. Clearly, it has to have the power to negotiate for acceptable financial terms and those over time will relate to market-oriented growth achievements in the Participating Countries. That is a fact of life that hopefully IDDF can handle wisely. We envision that the World Bank would play a key role in determining LDC debt service capacity and conducting the negotiations on restructuring. Participation, of course, is voluntary.

Henry A. Kissinger

December 7, 1987

(2) What will the participating countries owe IDDF? The answer is the same principal amount as is currently outstanding. The difference is that there will be a new negotiation of interest rates, based on concessionary terms, also that the principal will be subordinated. In the real world, there may be little amortization of principal over time; reduction in amounts outstanding, therefore, would be eagerly be by redemptions at less than face by the Participating Countries from IDDF or IDDF sale of the debt to third parties for debt/equity exchange purposes.

The IDDF principal is based on a sharing of burden or
responsibility by all: the sponsoring developed country
governments, the developing countries, the World Bank and the
IMF, and private financial institutions.

We regard IDDF as a process rather than the full and
final answer. Our plan is to continue our confidential
discussions over the next several weeks with a view towards
going public with the proposal sometime in the first quarter.

By Messenger

Dr. Henry A. Kissinger
Kissinger Associates, Inc.
350 Park Avenue - 26th floor
New York, NY 10022

AMERICAN
EXPRESS
BANK

Memorandum

[Lc]

DEC 14 1987

Subject: **BRAZILIAN BRIDGE FINANCING**

To: James D. Robinson III
Chairman

From: Robert F. Smith

Date: December 10, 1987
City: New York
Office: Executive Office

The Brazilian Government announced in November that it was going to arrange a bridge financing in the amount of $3 Billion to be provided by 85 of the largest banks lending to Brazil.

The purpose of the bridge financing was to finance interest payments for the final quarter of 1987 and to fund temporarily the Country until permanent financing could be put in place, which was estimated to be in June 1988.

A.E.B. (not T.D.B.) was asked to participate in the bridge financing, and we committed to provide $14.2 Million, our pro rata share, on November 30, which was late but well within the time limit established by the Brazilians.

Last Friday, we were informed that the Brazilians had decided to enlarge the number of bridge financing banks to 160, which meant that T.D.B. was now to be included in the bridge financing, as well. Today, prior to receiving your inquiry concerning Brazil, we committed an additional $5.8 Million to the bridge financing, bringing our total commitment to $20 Million. Mr. Bracher, the chief Brazilian negotiator, was very pleased with our prompt response.

We understand that to date only 90 banks out of the total of 160 have responded, but with our added $5.8 Million, they are within $10 Million of their goal, and most likely by now over the top.

Robert F. Smith

RFS/mg
3162A

An American Express company

NEW YORK SALUTE TO SENATOR PETE WILSON

To RSVP, please contact:

Barb Klein in New York City — (212) 333-7251

Suzie Nakasian in Washington — (202) 546-5508

Requested contribution: $1,000 per person

I will be pleased to join Senator D'Amato and the many New York friends of Senator Pete Wilson at the reception on Monday, January 25th.

I'm sorry I can't be with you. But I want to help Pete Wilson win his 1988 re-election campaign, so I've enclosed my contribution in the amount of $______.

Contributions should be made payable to the
Californians for Senator Pete Wilson Committee

(Federal Election Commission regulations require us to ask the following:)

NAME ________________

BUSINESS ADDRESS ________________

CITY/STATE/ZIP ________________

COMPANY/ASSN. ________________ POSITION ________________

OFFICE TELEPHONE NUMBER ________________

Prepared and paid for by the
Californians for Senator Pete Wilson Committee

JAN. 25 '88 09:46 KISSINGER ASOCIATES, WASH. DC

P.02

Cover Story

# DO YOU KNOW ME?

## AN INTIMATE PROFILE OF JIM ROBINSON, CEO OF AMERICAN EXPRESS

Mr. and Mrs. James D. Robinson III were walking down a White House corridor toward the room where they would be presented to President Reagan and the evening's guest of honor, Japanese Prime Minister Yasuhiro Nakasone. One of the reporters lining the hallway asked Robinson if he had his American Express card. Robinson, chief executive officer of American Express Co., jokingly responded with a line from one of his company's ad campaigns.

The exchange was recounted in The Washington Post the next day. "As he arrived," noted the Post in its account of the Apr. 30, 1987, Nakasone dinner, Robinson "asked, 'Do you know me?' Apparently, few did.'

Says Robinson: "It was embarrassing, but the guy was right. The Washington press corps doesn't know me."

Those Washington reporters have plenty of company. Not many people really do know Jim Robinson. At a time when celebrity businessmen are popping up on lists of best-selling books and unannounced candidates for President, the chief of American Express is curiously unknown.

It's certainly not because he's new to the job. Robinson, though still only 52, has headed American Express for a decade now. Nor is it for lack of drama. The saga of American Express' diversification has been one of the longest-running executive suite soap operas of the 1980s. With a string of bold acquisitions, Robinson has transformed the company from a rather stodgy purveyor of charge cards and traveler's checks into the unrivaled colossus of financial services.

**ESTABLISHED PILLAR.** In fact, American Express is the largest U. S. services company of any sort and the first to top $1 billion a year in income (in 1986). The company is also America's largest investment manager, responsible for more than $298 billion in other people's money. It has 28 million cardholders and ties to many thousands of stores, restaurants, hotels, and other businesses in every corner of the globe. After Coca-Cola Co., American Express is perhaps the single best-known corporate name in the world.

The political press may not know him yet, but Robinson is quietly becoming a force in Washington, too. His involvement in trade matters "is greater than any other CEO in the country," says Clayton K. Yeutter, the U. S. Trade Representative. "He handles the jargon as well as any trade policy expert in the government." Confides an aide to Yeutter: "He's almost a member of the Administration."

Jim Robinson is a paradox: a very private man who has climbed to the top of a very public company. Unfailingly polite, a bit formal, reserved, and impeccably groomed, Robinson is, in fact, just what he appears to be—a pillar of the Establish-

COVER STORY

72 BUSINESS WEEK/JANUARY 25, 1988

PHOTOGRAPHS BY JOHN B. ABBOTT

JAN. 25 '88 09:49 KISSINGER ASSOCIATES, WASH. DC

P.04

Cover Story

ment. But he also happens to be one of the most driven men in American business—as relentless and uncompromising in his own genteel way as those maverick antagonists of the Establishment, the corporate raiders.

As a vehicle for CEO self-promotion, a company such as Chrysler Corp. is no match for American Express. But unlike Lee Iacocca, Robinson has never appeared in one of his company's commercials and has shunned personal publicity of all kinds—until now. This is the first full-fledged profile of him ever published. In agreeing to cooperate, Robinson mentioned one caveat: "I don't like to talk about myself."

But talk he did, at length—about his company and about himself. What emerges from many hours of interviews with Robinson and those closest to him is a portrait of an enormously self-demanding yet unpretentious man who has endured a protracted ordeal and now is having the time of his life. "Jim is finally getting to the point of enjoying who he is instead of who he's striving to become," says Stanley S. Schuman, a New York investment banker who has known Robinson since business school.

"Through a large part of my business career I did not have the best balance in my life," says Robinson, who was divorced in 1983 and remarried in 1984. "Now I think I do," he adds, a touch defiantly. "I have inner peace."

One Saturday during his college days at Georgia Institute of Technology, Robinson traveled to Birmingham to see Tech play the University of Alabama. Robinson's best friends at school were all football players, but at 5 feet, 8 inches, and 125 pounds, he was too slight for the game. His buddies called him "the razor's edge." After the game, Robinson took his date to a restaurant. A Bama rooter came over and started harassing her. Robinson intervened and was thoroughly thrashed for his gallantry. The razor's edge returned home and started pumping iron three hours a day. At graduation, three years later, he was a muscle-bound 205 pounds. Says Robinson: "I just got tired of having sand kicked in my face."

Robinson's other nickname was "Jimmy Threesticks"—as in James III. It's a tag he despises, but it stuck to him like wet skin to dry ice until he was almost 50 years old. The name was rooted in the prevalent misconception that Robinson's success was foreordained by his father's wealth and influence—that the throne of American Express was passed on to him as a sort of birthright. "The Robinsons were very aristocratic," says one longtime Atlanta resident. "They came from money, and it showed."

**SHEER TENACITY.** Jimmy was an average kid despite his aristocratic lineage. "The thing I remember about him is that, although he came from wealth, he was always a regular guy," says Willis Everett, who grew up in Robinson's neighborhood and is now a money manager in Atlanta.

Robinson's great-grandfather and his grandfather had been bankers in Atlanta. His late father, James Jr., was president of First National Bank of Atlanta and one of the nation's most prominent regional bankers. "Big Jim" was an outgoing, demanding man and, at 6 foot 4 and more than 220 pounds, a physically imposing one. "He was a very tough-minded person," says Robinson. "However hard I was working, he'd say, 'Work a little harder.'"

His path to the top was indeed smoothed by such powerful friends of the family as Eugene R. Black, the former head of the World Bank. But a lot of fortunate sons of Robinson's generation ended up washing out on Wall Street. What mainly fueled Robinson's career rocket was sheer tenacity. Although to the manor born, Robinson is as much a creation of his own willpower as any up-from-the-streets striver.

PHOTOGRAPHS BY JOHN S. ABBOTT

COVER STORY

74 BUSINESS WEEK/JANUARY 25, 1988

JAN. 25 '88 09:51 KISSINGER ASSOCIATES, WASH. DC

After graduating from Tech a year early, he went to Harvard business school and then worked at some of the WASPIest firms on Wall Street. "Jimmy was a white-shoe [version of] what makes Sammy run," says Abram Claude Jr., who supervised him for a time at Morgan Stanley Trust Co. "He just ate all the breads and sat there, and the rest of us worked."

"I've never, ever seen someone work so hard."
Howard Clark Sr., AmEx chairman, knew all about Robin-
son. "Everybody in town wanted to hire him when he came out
of Harvard," says Clark, who knew Robinson's father and
counted Black among his trusted advisers. In 1970, Clark, then
54, approached Robinson through Black and told him that he
planned to retire at 60. Join AmEx, he said, and you'll get a
shot at succeeding me. Robinson jumped at the chance.

'LEVEL HEAD.' Clark sent his new recruit to Geneva to revamp
ailing American Express Bank. Robinson then was put in
charge of the newly created Travel Related Services Co. (TRS),
which included the card and traveler's check operations. All
the while, Clark was testing a dozen other contenders. "Those
other guys all were smart," recalls Clark. "But it really is a
big company. You need a guy who can work hard, keep a level
head, and hold it all together."

In 1977, Clark's 17-year reign ended, and Robinson was
elevated to chairman and CEO. He inherited a company badly
in need of rejuvenation. Earnings had risen for 29 straight
years, but AmEx managed to maintain "the Record" into the
mid-1970s only by resorting to fancy accounting. TRS's growth
rate was slowing worrisomely, and the company's Fireman's
Fund Corp. insurance unit was struggling. After acquiring
Fireman's Fund in 1968, Clark spent the rest of his reign
fruitlessly scouting acquisition prospects.

Robinson did a superb job of revving up the highly profit-
able charge-card operation that remains AmEx' heart. But his
attempts at diversification began disastrously in 1979 with a
run at McGraw-Hill Inc., the publisher of BUSINESS WEEK.
When Robinson came calling, Harold McGraw Jr., the compa-
ny's chairman, told him he wasn't interested. Mistaking
McGraw's lack of vehemence for acquiescence, AmEx' chief
announced a tender offer. McGraw fought it tooth and nail,
and Robinson retreated amid much snickering on Wall Street.

In 1981, Robinson finally got the acquisition monkey off his
back by buying Shearson Loeb Rhoades Inc., one of Wall
Street's fastest-growing brokerages. In short order, AmEx
then acquired Investors Diversified Services, Trade Develop-
ment Bank, and Lehman Brothers. Late last year, Shearson
(now 60%-owned by AmEx) snapped up E. F. Hutton Group
Inc. In six years, Robinson had invested $8.5 billion in what is
widely considered the most successful financial services diver-
sification drive of the 1980s.

Inside AmEx, it's called—with considerable exaspera-
tion—"the book." Every year, Robinson requires each oper-
ating unit to compile an exhaustively annotated list of all
issues that might arise at the annual meeting. The result is
a voluminous loose-leaf binder that few people are ever
allowed to see. Only once in this decade has Robinson been
stumped by a shareholder question. "The joke is that Robin-
son takes the book home and memorizes it," says one
AmEx insider. "At least I think it's a joke."

For all his achievements, Robinson was unable to shake
the hated Jimmy Threesticks label until Aug. 1, 1985.
That was the day Sanford I. Weill resigned as presi-
dent of American Express. In bringing Weill into
American Express, Robinson precipitated the supreme test of
his career—the final exam in his long effort to prove himself

COVER STORY

BUSINESS WEEK/JANUARY 25, 1988 78

JAN. 25 '88 09:53 KISSINGER ASSOCIATES, WASH. DC

P.06

Cover Story

to himself. AmEx' CEO emerged from the whirlwind years of
1981-85 as radically changed as the company he ran.

Sandy Weill was everybody's idea of the self-made entrepreneur. He is a cigar-smoking, Brooklyn-born scrapper with charm and energy to burn. At Shearson, he'd created the ultimate Wall Street upstart—a profitable, swaggering brokerage that swallowed competitors insatiably.

Many AmEx directors balked at the idea of plunging into
the volatile brokerage business—and at affiliating with as
sharp-toothed a firm as Shearson. But Robinson was emphatic,
and the board went along. Although the acquisition would
rank as Robinson's single greatest dealmaking triumph, it had
the immediate effect of stoking speculation about how long
Mr. Threesticks would be able to hang on to his job. Not long
at all, was the general conclusion.

Robinson is easily underestimated. Soft-spoken, even-tempered, deliberate, he seems entirely too reasonable—too nice—to be tough. He neither dazzles with wit nor IQ. “I’m not as smart as a lot of people by a long shot,” says Robinson. “But I thoroughly enjoy getting smart people around me, and often I can pull together a consensus better than they can.” But Robinson, Weill would learn, is indomitable.

Robinson and Weill seemed the oddest of couples. But for
the most part, they got along famously and even saw a lot of
each other socially. "There was and still is a genuine respect
and friendship between them," says Kenneth J. Bialkin, a
Manhattan lawyer who represented Shearson in its sale to
AmEx and who is close to both Weill and Robinson. "Sandy
threw himself into the business,
but he was never after Jim's job.
He really only wanted to be
Jim's partner."

WATON YOUR BACK: Not everyone was so sure. Robinson's friends—including some AmEx directors—continually whispered words of advice in the chairman's ear: Watch your back. He did. In 1988, Robinson promoted Weill to president (he came in as chairman of the executive committee) but gave him a three-page memo defining the limits of his authority.

It didn't help that Weill was unable or unwilling to alter his free-wheeling style to conform to AmEx' structured management regimen. He never wrote memos, for example, and only rarely read those he received. And instead of working through organizational channels to get something done, Weill tended just to go and do it.

Moreover, he plainly was not satisfied with just being president and pressed for the additional post of chief operating officer. Robinson, however, delegates a great deal of authority to the heads of the operating subsidiaries, and he was leery of diminishing their power. Although Weill carefully remained within the bounds of his job, he openly chafed under Robinson's direction. Says one AmEx insider: "We all were waiting for Jim to assert his authority vis-a-vis Sandy."

Instead, Robinson thickened the

plot by acquiring Trade Development Bank. Robinson was as keen on acquiring Edmond J. Safra, TDB's chairman, as his bank. Safra was a legend—a secretive, Lebanese-born banker with a net worth topping $1 billion. "Edmond is a guy who sits in an office all day alone and who has always controlled his own destiny," says Peter A. Cohen, who succeeded Weill as CEO of Shearson and once worked for Safra.

'CAGED RAGING LIONS.' A more unlikely corporate team player could scarcely be imagined. Robinson, however, harbored ambitious plans for American Express' new banking genius. "The idea," says Cohen, "was that he would be treated just like Sandy. With Jim, they would form a triumvirate to guide the whole organization."

As it turned out, though, Safra rarely left Switzerland and resisted AmEx' efforts to integrate TDB with its own bank. Still, he complained that Weill hadn't consulted him before announcing AmEx' agreement to buy Investors Diversified Services. Meanwhile, Cohen, a very strong-willed executive in his own right, thought Weill had overpaid for IDS and, furthermore, was getting fed up with his ex-mentor's continued involvement in Shearson. Just one big, happy family.

"Jim was under enormous strain trying to hold it all together," says a source close to him. "At that point everybody was like caged raging lions testing Jim Robinson every instant. It wasn't that they wanted to tear him down. But they wanted to see how big a piece they could tear off of him."

The denouement came courtesy of the worst setback of

JAMES HARRIS

T&O BUSINESS WEEK/JANUARY 26, 1988

JAN. 25 '88 10:34 KISSINGER ASSOCIATES, WASH. DC

P.02

Robinson's reign at AmEx. In late 1983, AmEx' Fireman's Fund insurance unit spun out of control. Heavy losses dragged the whole company into the red, shattering "the Record." Robinson fired the subsidiary's top management and asked the board of directors to cut his own annual bonus. He got his wish.

AmEx stock plunged, infuriating Safra, who was the compa-
ny's largest shareholder. He resigned in a huff. With Robin-
son's blessing, the AmEx board sent Weill out to San Francis-
co to fix Fireman's Fund. The assignment removed Weill from
to the mainstream of management. He never returned. After
turning the insurance unit around, Weill offered to buy it.
Robinson and the board said no, and Weill said goodbye.

Weill and Safra were gone, but the companies they'd creat-
ed were securely tucked into American Express. Jimmy
Threesticks was dead; long live Jim Robinson. "My attitude in
any situation is that I know how hard I'm going to work,"
says Robinson. "If I'm successful, the results will speak for
themselves. I don't have time for the political game."

Robinson's virtue-conquers-all philosophy contains an ele-
ment of naivete. Certainly, his vision of a ruling triumvirate
was fanciful if not grandiose. On the other hand, Robinson
was well aware that Weill and Safra weren't pussycats. In
acquiring Shearson, TDB, and the rest, Robinson's overriding
aim was to strengthen AmEx. But some of his associates
believe that he was just as purposefully—perhaps even com-
pulsively—testing himself.

"People thought I was nuts to bring in Sandy," he says. "But one of the things I'm proudest of is that we've had some very strong people in this company. A lot of managers like to hire weak, but the stronger the people around me, the more turned on I feel."

The era of management Sturm und Drang at AmEx is over,
brought to a close not only by Weill's departure but by a shift
in strategic focus from acquisition to divestiture. Weill was
succeeded by Louis V. Gerstner Jr., TK, the president of the
Travel Related Services division. Although Gerstner, too, is an
exceptionally forceful executive, he and Robinson have worked
together since the early 1970s. Half of AmEx' departments
now report to Robinson, the other half to Gerstner.

"I still think the best possible merger partner for Shearson was American Express," says Weill, who now is CEO of Commercial Credit Co. Although there is a sardonic edge to some of Weill's observations about Robinson, the two remain friends. "Jim is a very strong person who understands what's going on," he says. "I learned a lot from him about how to deal with a board of directors. He's an expert at that."

On his 50th birthday, Robinson and his wife went to see
the Broadway musical revue, Tango Argentina. When Rob-
inson arrived at the Mark Hellinger Theater, he was
stunned to see his own name in lights. "One night only,"
the marquee read. "Starring Jim Robinson." Inside, he
found 200 of his friends.

The producer came out on stage. "As

The producer came out on stage. "As you know," he said. "Jim Robinson is New York's greatest tango star. We are honored that he will be performing for us tonight on his birthday." During the show, Robinson studied the dancers' steps and mentally rehearsed a speech of apology to the hundreds of paying customers who had never heard of him. "I thought right up until the show was over that I really might have to tango," he says.

Linda Gosden Robinson had struck again. "For once, Jim was in complete shock," says Mrs. Robinson, 85, who is expert in finding ways to loosen up her intense husband. "You've got to work at it, but there's a fun side to Jim," adds Weill. "I'll tell you this," he adds laughing, "he married someone who's as alive as I am."

Linda now runs her own corporate consulting firm (page 82). She and Robinson were married in mid-1984; for both of them, it was a second marriage. "They're still like newlyweds—very publicly affectionate." Ask Mrs. Robinson about how marriage has changed her, and she's instantly mis-ty-eyed. "It's corny. I know," she says. "But I'm the luckiest person in the world."

While a 21-year-old Georgia Tech student, Robinson had married Bettye Bradley, an Atlanta woman who, it is said, looked a lot like Elizabeth Taylor. They had two children—Emily and James IV. "Bettye and Linda are complete opposites," says a woman who knows them both. "Bettye was a pretty little doll, and Lin-

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JAN. 25 '88 10:32 KISSINGER ASSOCIATES, WASH. DC

P.01

After graduating from Tech a year early, he went to Harvard business school and then worked at some of the WASPIest firms on Wall Street. "Jimmy was a white-shoe [version of] what makes Sammy run," says Abram Claude Jr., who supervised him for a three-year, $10-million investment in the firm's securities and other investments.

"Over the years I've seen someone work so hard."

Howard Clark Sr., AmEx chairman, knew all about Robinson. "Everybody in town wanted to hire him when he came out of Harvard," says Clark, who knew Robinson's father and counted Black among his trusted advisers. In 1970, Clark, then 54, approached Robinson through Black and told him that he planned to retire at 60. Join AmEx, he said, and you'll get a shot at succeeding me. Robinson jumped at the chance.

"LEVEL HEAD," Clark sent his new recruit to Geneva to revamp ailing American Express Bank. Robinson then was put in charge of the newly created Travel Related Services Co. (TRS), which included the card and traveler's check operations. All the while, Clark was testing a dozen other contenders. "Those other guys all were smart," recalls Clark. "But it really is a big company. You need a guy who can work hard, keep a level head, and hold it all together."

Robinson did a superb job of revving up the highly profitable charge-card operation that remains AmEx' heart. But his attempts at diversification began disastrously in 1979 with a run at McGraw-Hill Inc., the publisher of BUSINESS WEEK. When Robinson came calling, Harold McGraw Jr., the company's chairman, told him he wasn't interested. Mistaking McGraw's lack of vehemence for acquiescence, AmEx' chief announced a tender offer. McGraw fought it tooth and nail, and Robinson retreated amid much snickering on Wall Street.

In 1981, Robinson finally got the acquisition monkey off his back by buying Shearson Loeb Rhoades Inc., one of Wall Street's fastest-growing brokerages. In short order, AmEx then acquired Investors Diversified Services, Trade Development Bank, and Lehman Brothers. Late last year, Shearson (now 60%-owned by AmEx) snapped up E. F. Hutton Group Inc. In six years, Robinson had invested $3.5 billion in what is widely considered the most successful financial services diversification drive of the 1980s.

Inside AmEx, it's called—with considerable exasperation—"the book." Every year, Robinson requires each operating unit to compile an exhaustively annotated list of all issues that might arise at the annual meeting. The result is a voluminous loose-leaf binder that few people are ever allowed to see. Only once in this decade has Robinson been stumped by a shareholder question. "The joke is that Robinson takes the book home and memorizes it," says one AmEx insider. "At least I think it's a joke."

For all his achievements, Robinson was unable to shake the hated Jimmy Threesticks label until Aug. 1, 1985. That was the day Sanford I. Weill resigned as president of American Express. In bringing Weill into American Express, Robinson precipitated the supreme test of his career—the final exam in his long effort to prove himself

COVER STORY

BUSINESS WEEK/JANUARY 25, 1988 V8

[w]

ANOTHER IMBALANCE IS THE DEBT BURDEN OF THE LESS DEVELOPED COUNTRIES, AND THE FAGILITY OF THE WORLD FINANCIAL SYSTEM THAT IS RELATED TO THESE TROUBLED ASSETS IN BANK PORTFOLIOS.

ECONOMIC GROWTH AND PROSPERITY AROUND THE WORLD HAS BEEN SERIOUSLY HURT BY THESE IMBALANCES. THE PAIN HAS RANGED FROM FEWER JOBS AND LOWER STANDARDS OF LIVING IN DEVELOPED COUNTRIES TO DEVASTATING POVERTY AND REVOLUTION ELSEWHERE.

HOW MUCH PAIN AND RISK ARE WE PREPARED TO ACCEPT BEFORE SOUNDER, MORE COMPREHENSIVE APPROACHES TO ADDRESSING THESE STRUCTURAL DIFFICULTIES ARE SOUGHT?

REDUCING THE U.S. BUDGET AND TRADE DEFICITS IS AT THE TOP OF THE POLITICAL AGENDA. IT'S BEEN THERE FOR SEVERAL YEARS. PROGRESS HAS BEEN SLOW -- EMBARRASSINGLY SLOW. EASING THE LDC DEBT BURDEN HAS HAD A MUCH LOWER NATIONAL PRIORITY. INDEED, LDC DEBTS SEEM TO BE A FARAWAY PROBLEM FOR MOST AMERICANS. SOME THINK OF IT SOLELY AS A PROBLEM FOR THE BIG BANKS.

-2-

THE BLUNT REALITY IS THAT LDC DEBT HAS BEEN A NOOSE AROUND THE WORLD ECONOMY. FOR MANY LESS DEVELOPED COUNTRIES, IT HAS ALREADY TIGHTENED, SQUEEZING OUT GROWTH AND DEVELOPMENT. FOR THE DEVELOPED COUNTRIES, LDC DEBTS ARE A SILENT, HEAVY BURDEN, CONSTRICTING TRADE AND ECONOMIC ACTIVITY. AT ANY TIME, THE LDC DEBT PROBLEM COULD ERUPT INTO A FINANCIAL CRISIS, TRIGGERING WORLD-WIDE RECESSION OR DEPRESSION.

NOW, I AM NOT PREDICTING AN IMMINENT FINANCIAL OR ECONOMIC CRISIS OF MAJOR PROPORTIONS. BUT I AM SAYING THESE IMBALANCES, DESPITE MANY GOOD EFFORTS, HAVE PROVEN HIGHLY RESISTANT TO ANY REMMEDIES ON THE MARKET TO DATE. OUR BEST ANTIDOTES HAS BEEN SERIUMS CALLED "MUDDLING-THROUGH". IN THE LDC AREA THAT'S BEEN BANK RESCHEDULING, IMF AUSTERITY PROGRAMS AND THE BAKER PLAN.

-3-

AS THE WORLD BANK SAID IN ITS REPORT ON LDC DEBT IN JANUARY, ALL PARTICIPANTS IN LDC DEBT ARE SUFFERING FROM "DEBT FATIGUE." JUST THIS WEEK THE POPE'S ENCYCLICAL DESCRIBED INTERNATIONAL DEBT AS A BRAKE UPON DEVELOPMENT INSTEAD OF A MEANS FOR DEVELOPMENT. IN SHORT, MANY BELIEVE THE LDC DEBT PROBLEM IS NOT GETTING BETTER. THE CURRENT STRATEGY OF CASE-BY-CASE NEGOTIATIONS BETWEEN THE BANKS AND THE LDCs AND THE IMF HAS SO FAR HELD A CRISIS AT BAY. BUT IT HAS NOT PROVIDED ADEQUATE RESOURCES TO SUPPORT SUSTAINED GROWTH IN LDC ECONOMIES.

I BELIEVE THE TIME HAS COME FOR EXPLORING IMAGINATIVE NEW APPROACHES ... APPROACHES THAT ARE COMPREHENSIVE ... THAT'S WHAT I WANT TO TALK ABOUT TONIGHT.

MY OBJECTIVE IS TO ELEVATE THE DIALOGUE TO A COMPREHENSIVE PLATEAU ... A PLATEAU THAT ACKNOWLEDGES THE INTERRELATIONSHIP BETWEEN TRADE AND DEBT, GROWTH AND SECURITY, PROSPERITY AND PEACE ... A PLATEAU FOUNDED ON THE INEVITABLE

-4-

CONCLUSION THAT BETTER SOLUTIONS CAN ONLY COME
FROM A MORE PRO-ACTIVE ROLE BY CREDITOR AND
DEBTOR GOVERNMENTS, THE INTERNATIONAL
INSTITUTIONS AND THE BANKING COMMUNITY ACTING
TOGETHER. WHAT I AM CALLING FOR IS A NEW
APPROACH BASED ON AN ELIGHTENED AWARENESS OF
INDIVIDUAL INTERESTS THAT SEEK TO SHARE THE
BURDENS, RISKS AND REWARDS OF LDC DEBT
RESTRUCTURING.

THE APPROACH MY ASSOCIATES AT AMERICAN
EXPRESS AND SHEARSON LEHMAN HUTTON AND I HAVE
DEVELOPED FOR DEALING WITH THE LDC DEBT PROBLEM
CENTERS ON THE CREATION OF AN INTERNATIONAL
REORGANIZATION FACILITY. WE'VE CALLED THE
FACILITY THE INSTITUTE FOR INTERNATIONAL DEBT
AND DEVELOPMENT, -- NICKNAMED I²D². ITS PURPOSE
IS TWO-FOLD: FIRST, TO ACT AS AN ADJUDICATOR
... A FACILITATOR FOR THE IMF AND WORLD BANK IN
DEALING WITH FOREIGN GOVERNMENTS. SECOND, TO
ACT AS A REORGANIZATIONN ENTITY BY ACQUIRING
OUTSTANDING SOVEREIGN BANK DEBT,
COUNTRY-BY-COUNTRYDIN EXCHANGE FOR its

-5-

OBLIGATIONS. TONIGHT I OFFER THIS PRESENTATION
AS AN EXAMPLE OF THE TYPE OF COMPREHENSIVE-
SOLUTION WE BELIEVE IS NECESSARY, AND AS A
CATALYST TO START AN ACTIVE DIALOGUE.

BEFORE I DESCRIBE THE I²D² PROPOSAL,
HOWEVER, PLEASE PERMIT ME TO DISCUSS WHY I
BELIEVE THE LDC DEBT PROBLEM REQUIRES SUCH AN
APPROACH. AGREEMENT ON THE NEED FOR ACTION IS
IN MANY WAYS JUST AS IMPORTANT AS AGREEMENT ON
SPECIFIC SOLUTIONS.

WHEN THE LDC DECT CRISIS SURFACED
FIVE-AND-A-HALF YEARS AGO. THE RESPONSE ADOPTED
IN MEXICO, AND SUBSEQUENTLY ELSEWHERE, WAS THE
CLASSIC SOLUTION TO A LIQUIDITY CRUNCH:
TEMPORARY RESCHEDULING OF LOAN REPAYMENTS,
BELT-TIGHTENING BY THE DEBTOR COUNTRIES TO FREE
UP FUNDS FOR DEBT SERVICE, AND NEW LOANS BY THE
BANKS TO TIDE THE DEBTOR COUNTRIES OVER UNTIL
IMPORVED ECONOMIC AND TRADE CONTITIONS ALLOWED
NORMAL DEBT SERVICING.

-6-

THIS _AD HOC_ POLICY PUT INTO PLACE WITH THE ORIGINAL MEXICAN CRISIS HAS REMAINED THE PREDOMINANT SOLUTION TO THE LDC DEBT CRISIS SINCE 1982. IT HAS GENERALLY BEEN LABELED "MUDDLING-THROUGH," BECAUSE IT SOUGHT TO AVOID MORE RADICAL AND PAINFUL ACTIONS SUCH AS WRITE-OFFS OR FORGIVENESS OF LDC DEBTS. NOW, MUDDLING-THROUGH IS NOT NECESSARILY DISPARAGING. WHEN FACED WITH UNPALATABLE CHOICES, HALF-STEPS AND FINESSING OF CRISES MAY WELL BE THE RIGHT STRATEGY. BUT, UNLESS TIME IN FACT WILL SOLVE OR EASE THE PROBLEM, MUDDLING-THROUGH MAY SIMPLY ALLOW CONDITIONS TO GROW WORSE AND THE PROBLEM TO GET LARGER.

FOR SEVERAL YEARS, MUDDLING-THROUGH SEEMED TO WORK WITH THE LDC DEBT PROBLEM. THE AUSTERITY PROGRAMS MANY LDCs ADOPTED UNDER IMF PRODDING SHARPLY CUT THEIR IMPORTS. A PICK-UP IN WORLD GROWTH IN 1983-85 AND LARGE DEVALUATIONS OF LDC CURRENCIES HELPED THEIR EXPORTS. AS A RESULT, MANY DEBTOR COUNTRIES WERE ABLE TO RUN LARGE ENOUGH TRADE SURPLUSES TO

-7-

GENERATE FUNDS FOR DEBT SERVICING: FINALLY, THE SECULAR FALL OF INTEREST RATES REDUCED FINANCING COSTS.

BUT HAS THE CALM BEEN AN ILLUSION? THE LDC DEBT BURDENS THAT SPARKED THE CRISIS HAVE NOT GONE AWAY. MANY SAY THEY HAVE NOT GOTTEN BETTER.

IN ALMOST ALL CASES, LDC DEBTS ARE HIGHER TODAY THAN THEY WERE IN 1982. MEXICO, FOR EXAMPLE, HAD TOTAL DEBT AT THE END OF 1982 OF $88 BILLION; IN 1987, IT WAS $104 BILLION. FOR BRAZIL, TOTAL DEBT EXPANDED FROM $84 BILLION TO $105 BILLION IN 1987. FOR EIGHT MAJOR LATIN AMERICAN DEBTORS, TOTAL DEBT GREW BY MORE THAT $50 BILLION OVER THIS PERIOD.

OF COURSE, GROWTH IN DEBT BY ITSELF MAY NOT BE A SIGN OF TROUBLE, IF ECONOMIC GROWTH OR THE ABILITY TO SERVICE THE DEBT INCREASE MORE RAPIDLY THAN THE DEBT. GENERALLY THIS HAS NOT HAPPENED. LDC DEBT HAS GROWN FASTER THAN EITHER

-8-

THEIR ECONOMIES OR THEIR EXPORTS. RATIOS OF DEBT TO GNP HAVE WORSENED FOR PROBLEM DEBTOR LDCS FROM 43% IN 1982 TO 49% IN 1986. RATIOS OF DEBT TO EXPORTS -- AN IMPORTANT MEASURE OF THEIR ABILITY TO GENERATE INCOME TO SERVICE DEBT -- HAVE GONE UP.

AS THE LDC DEBTS HAVE GROWN, SO HAVE THEIR BURDENS.

* ON THE LDCs, BOTH ECONOMICALLY AND POLITICALLY;

* ON WORLD TRADE IN GENERAL;

* ON U.S. EXPORTS IN PARTICULAR; AND

* ON THE WORLD'S FINANCIAL SYSTEM.

MOST LDCS HAVE EXPERIENCED AS MANY AS FIVE STRAIGHT YEARS OF AUSTERITY, WITH DECLINES IN REAL PER CAPITA INCOME OVER THE 1981-1987 PERIOD FOR ALL MAJOR DEBTOR LDCS, EXCEPT BRAZIL. INFLATION RATES HAVE BEEN HIGH, POVERTY HAS WORSENED, AND THE ECONOMIC COSTS OF TRYING TO

-9-

GENERATE EXPORT EARNINGS TO MEET DEBT PAYMENTS
HAS GROWN. THESE ARE THE INGREDIENTS OF
POLITICAL INSTABILITY OR WORSE.

WORLD TRADE, EXPECIALLY THAT BETWEEN THE
U.S. AND LATIN AMERICA, HAS ALSO BEEN
DISTORTED. SINCE 1981 DEBT PROBLEMS HAVE CAUSED
U.S. EXPORTS TO LDCs TO FALL. FOR EXAMPLE, U.S.
EXPORTS TO LATIN AMERICA IN 1987 WERE $11
BILLION LOWER THAN IN 1981.

Maybe this material might make you

U.S. EXPORTERS HAVE SUFFERED AS A RESULT,
AND AMERICAN WORKERS HAVE LOST JOBS. IF THE
U.S. COULD REGAIN JUST THE $11 BILLION IN LOST
EXPORTS TO LATIN AMERICA, UP TO 200,000 JOBS FOR
U.S. WORKERS COULD BE CREATED. IF IT COULD
REGAIN THE $150 BILLION IN LOST EXPORTS RECENTLY
ESTIMATED BY OVERSEAS DEVELOPMENT COUNCIL, 1.7
MILLION U.S. JOBS COULD BE RECOVERED.

-10-

FINALLY, THE LDC DEBTS HAVE BEEN A GROWING BURDEN ON THE WORLD FINANCIAL SYSTEM. QUESTIONS ABOUT THE VALUE OF LDC LOANSHAVE UNDERMINED THE CREDIBILITY OF MANY BANK INCOME STATEMENTS AND BALANCE SHEETS. STOCK PRICES OF MONEY CENTER BANKS ARE WELL BELOW BOOK VALUE, LIMITING THEIR ACCESS TO MUCH NEEDED NEW EQUITY CAPITAL. LAST YEAR, U.S. BANK PROFITS WERE THE LOWEST SINCE THE 1930s. BANK EFFORTS TO KEEP EARNINGS UP TO OFFSET POOR PERFORMANCE ON LDC LOANS HAVE UNDOUBTEDLY PUT UPWARD PRESSURE ON OTHER INTEREST RATES, PARTICULARLY FOR CONSUMER CREDIT.

IN SHORT, "MUDDLING-THROUGH" DESPITE ITS CONTRIBUTIONS, HAS LEFT US WHERE WE ARE TODAY:

* LARGER LDC DEBT BURDENS,

* SLOW LDC GROWTH,

* POORER LDC POPULATIONS AND GOVERNMENTS,

* WORSE TRADE IMBALANCES, AND

* BANKS BURDENED WITH LOANS THAT ARE CONTINUALLY DECLINING IN VALUE FROM PAR.

-11-

AS A RESULT, THE TOTAL WORLD-ECONOMIC PIE IS EXPANDING TOO SLOWLY, AND THERE IS LITTLE REASON TO EXPECT MUCH IMPROVEMENT IN SERIOUS IMBALANCES THAT REMAIN DANGEROUSLY HIGH.

SO, THE RISK OF A DEBT CRISIS REMAINS HOVERING OVER THE FINANCIAL MARKETS. CAN "MUDDLING-THROUGH" CONTINUE TO KEEP IT AT BAY, AWAITING A BETTER TOMORROW?

WHAT WILL HAPPEN? NO ONE KNOWS. DEBT DEFAULT, A TERM NO ONE UTTERS BEYOND CLOSED DOORS, HAS ALWAYS BEEN A RISK. AS DEBT SERVICE BURDENS REMAIN HEAVY, THE PROSPECTS LIMITED FOR NEW LOANS AND GROWTH IN DEVELOPED COUNTRIES INADEQUATE, DEBTOR COUNTRIES ARE LEFT WITH DIFFICULT OPTIONS. ANY UPTICK IN INTEREST RATES ON THE LARGER DEBT BASES WILL SERIOUSLY INCREASE THE PRESSURE.

-12-

PROLONGED NONACCRUAL, MUCH LESS DEBT DEFAULT WOULD OF COURSE BE DANGEROUS TO BANKS IN THE U.S. AND ELSEWHERE. IN SOME CASES, LDC LOANS ARE MORE THAN THE BANK'S TOTAL CAPITAL. THE U.S. GOVERNMENT, WHICH INSURES DEPOSITS, MAY HAVE TO ACT AS A LENDER OF LAST RESORT. THE RESCUE OF CONTINENTAL ILLINOIS IN 1984 COST THE FDIC SEVERAL BILLION DOLLARS. HOW MUCH GREATER WOULD THE COST BE IF SEVERAL BANKS WERE PLACED IN JEOPARDY BY ANY MAJOR MORATORIUM OR REPUDIATION OF LDC LOANS? HOW MUCH GREATER WOULD THE COST BE IN LOWER GROWTH IN WORLD TRADE OR FROM A WAVE OF PROTECTIONISM AND LOST JOBS?

DEBT DEFAULT IS OBVIOUSLY A SERIOUS MATTER FOR DEBTOR COUNTRIES, AS WELL. IT WOULD MEAN THE LOSS OF NEW TRADE CREDIT; AND IT WOULD IMPAIR FOR MANY YEARS ACCESS TO CAPITAL MARKETS. CAPITAL FLIGHT WOULD SURELY ACCELERATE.

-13-

NOW DEBT REPUDIATION BY ONE-OR MORE MAJOR
LDCs REMAINS HIGHLY UNLIKELY, BUT, DEBT...
REPAYMENT MORATORIUMS OR SUSPENSIONS, CEILINGS
ON REPAYMENT, AND OTHER UNILATERAL ACTIONS BY
DEBTORS ARE INCREASINGLY POSSIBLE IF NOTHING IS
DONE TO ALTER THE CURRENT DIRECTION...

BRAZIL LAST YEAR. WILL IT BE ARGENTINA IN
1988? THE REALITY IS WE ARE LIVING WITH A
QUASI-DEBTOR CARTEL TODAY. IN NOVEMBER, THE
HEADS OF EIGHT LATIN AMERICAN COUNTRIES AGREED
TO MAINTAIN A UNIFIED FRONT IN NEGOTIATION OF
NEW TERMS ON THEIR DEBT.

IN THE FACE OF THIS REALITY, BANKS, BOTH IN
THE U.S. AND ELSEWHERE, HAVE BEEN INCREASING
RESERVES AND WRITING OFF LDC LOANS, ESPECIALLY
SINCE MAY OF 1987. THE SECONDARY MARKET FOR LDC
LOANS, WHILE ADMITTEDLY THIN, HAS MOVED IN ONE
DIRECTION -- DOWNWARD. REGIONAL BANKS WITH LESS
EXPOSURE HAVE BEEN ABLE TO WRITE OFF OR SELL
MOST OR ALL OF THOSE DEBTS. THAT ACTION, OF

-14-

COURSE, PLACES PRESSURE ON LARGER BANKS TO DO -
THE SAME; ALTHOUGH, THE MAGNITUDE SUCH BANKS
WOULD HAVE TO TAKE MAKES SIMILAR ACTIONS MORE
DIFFICULT. IF, OF COURSE, THE FINANCIAL
ACCOUNTING STANDARDS BOARD GOES AHEAD WITH ITS
PROPOSED REQUIREMENT THAT U.S. BANKS MARK DOWN
THE LDC LOANS TO SECONDARY MARKET VALUE THERE
WOULD BE LITTLE CHOICE.

NOW LOAN WRITE-OFFS OR RESERVE INCREASES ARE
NOT REALLY A BLESSING FOR THE LDCs. A
WRITTEN-OFF LOAN REMAINS A LEGAL OBLIGATION OF
THE LDC, AND BANKS WILL TRY TO COLLECT WHATEVER
THEY CAN. NEW CREDITS THAT LDCs DESPERATELY
NEED ARE EVEN LESS LIKELY TO OCCUR UNDER THESE
CONDITIONS. ALSO AS REGIONAL BANKS AND OTHERS
EXIT THE BUSINESS, THE POOL OF BANKS READY TO
MAKE INTERNATIONAL LOANS GROWS SMALLER AND
SMALLER. DOES ALL OF THIS MEAN MAJOR BANKS AND
THE LDCs ARE INCHING TOWARD WHAT WOULD BE A
MUTUAL SUICIDE PACT?

-15-

ARE WE AT A TURNING POINT? IS THERE, OR SHOULD THERE BE, AN ALTERNATIVE TO "MUDDLING-THROUGH" ... A NEW, MORE COMPREHENSIVE APPROACH THAT SUPPLEMENTS AND GOES BEYOND THE CAPACITY OF EFFORTS TO DATE? I THINK THERE IS. INDEED, THERE MUST BE. AT THE VERY LEAST, WE SHOULD ELEVATE THE DIALOGUE TO STIMULATE COMPREHENSIVE THINKING.

THE BAKER PLAN, FOR EXAMPLE, WAS A GOOD INITIAL STEP, AND IT STILL PROVIDES A VALUABLE FRAMEWORK. DEBT EQUITY SWAPS, AND OTHER INITIATIVES, HAVE EXPANDED THE MENU OF OPTIONS. ALL OF THESE REPRESENT IMPORTANT CONTRIBUTING PIECES. WHAT THE BAKER PLAN HAS LACKED, HOWEVER, IS ADEQUATE INCENTIVES FOR LDCs TO ADOPT FREE-MARKET POLICIES AND MECHANISMS TO ENCOURAGE ADEQUATE NEW BANK LENDING.

-16-

MORE RECENTLY, THE MORGAN/MEXICAN PLAN HAS ATTRACTED ATTENTION AS A WAY FOR MEXICO TO REDUCE SOVEREIGN BANK DEBT. WE ALL HOPE THE TENDER IS SUCCESSFUL. YET EVEN THIS PLAN WILL HAVE ONLY LIMITED IMPACT FOR MEXICO AND ITS UTILITY ELSEWHERE IS LIMITED TO LDCS WITH ACCESS TO FOREIGN-EXCHANGE RESERVES.

IS THERE A MORE COMPREHENSIVE APPROACH FOR DEALING WITH THE IMBALANCES AND PRESENT REALITIES? AN APPROACH THAT ALLOWS ALL PRESENT INTITIATIVES TO CONTINUE YET ESTABLISHES AN ADDITIONAL FRAMEWORK OF BROADER POTENTIAL AND PROMISE. A MECHANISM THAT ALLOWS THE CREDITOR AND DEBTOR COUNTRIES, TOGETHER WITH FINANCIAL INSTITUTIONS, TO COME TOGETHER ON A COUNTRY-BY-COUNTRY BASIS IN A PROGRAM THAT INVOLVES SIGNIFICANT CONTRIBUTIONS BY EACH PARTY, IN EXPECTATION OF MAJOR BENEFITS FOR ALL.

-17-

* BANKS FACILITATE THE PROCESS BY EXCHANGING THEIR LOANS AT A DISCOUNT FROM FACE VALUE FOR HIGH QUALITY OBLIGATIONS ISSUED BY A NEW INTERNATIONAL ENTITY.

IN OUR EFFORTS TO OFFER A MORE CONSTRUCTIVE SOLUTION TO THE LDC DEBTS, WE DID NOT HAVE TO REINVENT THE WHEEL. SOME VERY BRIGHT PEOPLE AROUND THE WORLD HAVE BEEN THINKING ABOUT THIS QUESTION. AND HAVE DEDICATED TIME, ENERGY, AND PROPOSALS. IN THE U.S., SENATORS SARBANES AND BRADLEY, CONGRESSMEN LAFALCE, FOLEY, AND OTHERS -- FELIX ROHATYN, JEFFREY SACHS, FRED BERGSTON -- ALL COME TO MIND.

WE HAVE BENEFITED FROM ALL THESE PROPOSED IDEAS AS WE HAVE FROM DISCUSSIONS WITH A NUMBER OF GOVERNMENT AND BUSINESS LEADERS AROUND THE WORLD. ALL THESE DELIBERATIONS HAVE LED US TO CONCLUDE THAT ANY WORKABLE SOLUTION TO THE LDC DEBT CRISIS MUST HAVE SIX ELEMENTS. I²D² INCORPORATES THESE ELEMENTS:

-19-

LOCAL CURRENCY WHICH AN INVESTOR INVESTS IN THE COUNTRY OR EXCHANGES FOR COMMODITIES. THIS REDUCES THEIR EXTERNAL DEBTS. THESE INITIATIVES ARE IMPORTANT AND EXPAND THE MENU OF OPTIONS. HOWEVER, THE OPPORTUNITIES FOR SUCH SWAPS ARE FINITE, AND THEY ARE NOT BY ANY MEANS A COMPLETE ANSWER.

MORE RECENTLY, THE MORGAN/MEXICAN PLAN TO CONVERT SOME BANK DEBT AT A DISCOUNT TO BONDS HAS ATTRACTED ATTENTION. ASSUMING THIS PLAN TO REPLACE MEXICAN BANK DEBTS AT A DISCOUNT WITH GOVERNMENT BONDS WORKS -- AND I HOPE IT DOES -- THE LDC DEBT BURDEN WILL BE REDUCED. YET EVEN THIS PLAN WILL HAVE ONLY A LIMITED IMPACT. IT WON'T HELP MANY OF THE WEAKER BANKS THAT COULD NOT AFFORD THE DISCOUNT IN LDC LOANS, NOR WILL IT HELP LDCs WITH LIMITED FOREIGN-EXCHANGE RESERVES.

-20-

IN OUR EFFORTS TO OFFER A MORE CONSTRUCTIVE
SOLUTION TO THE LDC DEBTS, WE DID NOT WANT-TO
REINVENT THE WHEEL. SOME VERY BRIGHT PEOPLE
HAVE BEEN THINKING ABOUT THIS QUESTION, AND WE
RESPECT THEIR WORK AND CONTRIBUTIONS. AMONG
THOSE WHO HAVE DEDICATED TIME AND ENERGY TO THIS
ISSUE ARE SENATOR PAUL SARBANES AND REP. JOHN
LAFALCE, WHOSE THIRD WORLD DEBT MANAGEMENT ACT
IN THE TRADE BILL HAS SOUGHT TO LEGISLATE A NEW
DEBT TRADING INSTITUTION. FELIX ROHATYN OF
LAZARD FRERES AND PETER KENIN OF PRINCETON HAD
EARLIER PROPOSED SIMILAR SOLUTIONS. SENATOR
BILL BRADLEY AND JEFFREY SACHS OF HARVARD HAVE
SOUGHT TO MITIGATE THE DEBT ON DEBT PROBLEM OF
EXISTING APPROACHES BY PROVIDING VARIOUS FORMS
OF FORGIVENESS. OTHER EXPERTS HAVE URGED THE
CREATION OF AN INTERNATIONAL FUND SUPPORTED BY
THE WORLD BANK, THE IMF, GOVERNMENTS AND BANKS
TO SUBSIDIZE REAL INTEREST RATES FOR HIGH-DEBT
COUNTRIES.

-22-

WE HAVE BENEFITED FROM THOSE AND OTHER
PROPOSED IDEAS BASED ON OUR DISCUSSIONS AND
DELIBERATIONS ON THESE PLANS, WE DECIDED THAT
ANY WORKABLE SOLUTION TO THE LDC DEBT CRISIS
MUST HAVE SIX ELEMENTS.

FIRST, THE GOVERNMENTS OF THE DEVELOPED
COUNTRIES MUST BE INVOLVED IN THE SOLUTION. ALL
PARTIES, INCLUDING THE DEVELOPED COUNTRIES, HAVE
PARTICIPATED IN CREATING THE LDC DEBT PROBLEM;
ALL PARTIES, INCLUDING THE DEVELOPED COUNTRIES,
MUST BE PART OF THE SOLUTION. INDEED, A MAJOR
OBJECTIVE OF A COMPREHENSIVE APPROACH IS TO GET
THE U.S. AND OTHER G-7 GOVERNMENTS OFF THE SIDE
LINES AND DIRECTLY INVOLVED IN THE GAME. WORLD
TRADE GROWTH DEPENDS ON IT. WE THINK 1²D²
PROVIDES A REALISTIC BASIS FOR CREDITOR
GOVERNMENT INVOLVEMENT.

-23-

SECOND, DEVELOPING COUNTRIES WANT AND NEED BROADER FLEXIBILITY IN BALANCING ECONOMIC GROWTH WITH RESPONSIBLE DEBT SERVICE OBLIGATIONS.
MEANINGFUL NEW MONEY SOURCES, BOTH TO FINANCE TRADE AND SOUND LOCAL DEVELOPMENT, ARE REQUIRED.
I²D² CREATES THE CAPACITY FOR THE IMF AND WORLD BANK TO OFFER MAJOR INCENTIVES AND TAILORED DEBT RELIEF IN EXCHANGE FOR SUBSTANTIVE STRUCTURAL REFORM PROGRAMS.

THIRD, ANY NEW COMPREHENSIVE APPROACHES MUST BE VOLUNTARY FOR THE LDCs AND MUST OFFER ALTERNATIVES THAT COMPLIMENT AND DON'T CONFLICT WITH PRESENT APPROACHES. I²D² DOES THAT.

FOURTH, ANY SOLUTION MUST HAVE THE CAPACITY TO OFFER SELECTIVE DEBT RELIEF YET THE DISCIPLINE TO PROVIDE CREDIBILITY, LONGER REPAYMENT PERIODS, LOWER INTEREST RATES, INTEREST CAPS, AND, WHERE APPROPRIATE (OR EARNED), DEBT FORGIVENESS ARE ALL POLICY OPTIONS THAT MUST BE AVAILABLE. I²D² IS DESIGNED WITH THE FLEXIBILITY TO ALLOW THIS.

-24-

FIFTH, RESPONSIBLE PROGRAMS NEGOTIATED BY I²D² WITH DEVELOPING COUNTRY GOVERNMENTS ARE INTENDED TO BE MUTUALLY IMPLEMENTED SO THAT THE POWER OF THE INCENTIVES AVAILABLE FACILITATE ADJUSTMENT. TRADE CREDIT, FOREIGN INVESTMENT, BETTER MOBILIZATION OF LOCAL CAPITAL AND REPATRIATION OF FLIGHT CAPITAL ARE ALL TARGET OPPORTUNITIES FOR NEW MONEY SOURCES UNDER THIS SCENARIO.

SIXTH, ANY COMPREHENSIVE APPROACH MUST STRENGTHEN THE WORLD BANKING SYSTEM. I²D² DOES THAT COUNTRY-BY-COUNTRY AS AGREEMENT IS REACHED AND HIGH GRADE SECURITIES OF I²D² ARE EXCHANGED FOR LOWER QUALITY DEBT PRESENTLY IN BANK PORTFOLIOS. THIS CAPS THE UNCERTAINTY PRESENTLY PLAGUING BANK INCOME STATEMENTS, BALANCE SHEETS AND STOCK PRICES.

I WOULD NOW LIKE TO SUMMARIZE THE FEATURES OF I²D². WE HAVE AVAILABLE FOR YOU A BOOKLET WHICH COVERS THE DETAILS IN GREATER DEPTH.

-25-

OUR PROPOSAL CALLS FOR:

1. THE CREATION OF I²D² AS AN ADJUNCT OF THE IMF AND WORLD BANK, DRAWING SUBSTANTIALLY FROM THEIR STAFFS AND CAPABILITIES.

2. I²D² WILL OPERATE AS AN INTERNATIONAL REORGANIZATION FACILITY THAT NEGOTIATES WITH DEBTOR COUNTRIES ON A CASE-BY-CASE, TAILORED BASIS, AND PRESENTS A REORGANIZATION PACKAGE TO THE BANKS FOR THEIR ACCEPTANCE.

3. THE EQUITY OF I²D² WILL BE SUPPLIED BY MAJOR DEVELOPED COUNTRY GOVERNMENTS, EITHER DIRECTLY OR THROUGH THE IMF. WE HAVE PROPOSED A RATIO OF $I OF EQUITY FOR EVERY $10 OF I²D² DEBT. IN THE DETAILS YOU WILL ALSO SEE A TRAUNCH OF PREFERRED STOCK. AS TO THE EQUITY, I HAVE PERSONAL REASON TO BELIEVE THE JAPANESE ARE WILLING TO CONSIDER PROVIDING AT LEAST 50%.

-26-

[10]

4. I²D² ISSUES ITS DEBT IN THE FORM OF FLOATING RATE PERPETUAL CONSOLS TO THE BANKS. THE RATING ON THIS PAPER WOULD BE AT LEAST AA BECAUSE OF SUPPLEMENTAL STAND-BY COMMITMENTS FROM THE DEVELOPED COUNTRIES' GOVERNMENTS.

5. THE I²D² BOARD OF DIRECTORS WOULD INCLUDE REPRESENTATIVES OF THE SPONSORING GOVERNMENTS, THE IMF, THE WORLD BANK, THE PARTICIPATING DEBTOR COUNTRIES AND THE CREDITOR FINANCIAL INSTITUTIONS.

THE CONCEPT OF I²D² IS SIMPLE. I²D² BUYS LDC DEBT FROM THE BANKS AT A SIZEABLE DISCOUNT FROM FACE IN EXCHANGE FOR ITS OWN CONSOLS AND PREFERRED STOCK. BECAUSE OF THIS, I²D²'S SERVICING NEEDS ARE CONSIDERABLY LESS THAN PRESENT DEBT SERVICE REQUIREMENTS ON THE FULL NOMINAL AMOUNT OF THE LDC OBLIGATIONS OUTSTANDING. FOR INSTANCE, LDC SOVEREIGN DEBT OF THE FIFTEEN RESCHEDULING

-27-

COUNTRIES IS ALMOST $250 BILLION. IF I²D² ULTIMATELY ACQUIRED ALL OF IT AT, SAY AN AVERAGE OF 60% OF FACE, ONLY $150 BILLION WOULD BE NEEDED. BANKS WOULD TAKE A 40% LOSS, WHICH I WILL DISCUSS LATER. TO SERVICE ITS DEBT, I²D² WOULD NEED A CASH FLOW FROM THE LDCs SUFFICIENT TO SERVICE $150 BILLION, AND TO BUILD PRUDENT RESERVES. THE PRICE THAT I²D² WOULD PAY THE BANKS WILL TAKE INTO ACCOUNT SEVERAL FACTORS INCLUDING ESTIMATES OF THE DEBTOR'S ABILITY TO PAY INTEREST, CONCESSIONS DEEMED APPROPRIATE AND THE SECONDARY MARKET.

TONIGHT, I WILL REFER TO $250 BILLION AS THE SIZE AND SCOPE OF THE PROPOSAL, BUT THAT IS SIMPLY THE FRAMEWORK. I²D² WOULD BE IMPLEMENTED VOLUNTARILY, SO ALL COUNTRIES LISTED MAY NOT CHOOSE TO PARTICIPATE OR IT MIGHT NOT BE POSSIBLE TO REACH MUTUALLY ACCEPTABLE TERMS WITH A PARTICULAR COUNTRY. IN ADDITION, THE AMOUNT OF CAPITAL THE CREDITOR COUNTRIES ARE PREPARED TO COMMIT MAY NOT ALLOW I²D²'s ULTIMATE SIZE TO BE THAT LARGE. THE CONCEPT IS WHAT I WANT TO ESTABLISH -- THE ACTUAL SIZE WILL DEPEND ON A

-28-

[il]

NUMBER OF CONSIDERATIONS. THE PROGRAM IS
MODULAR, ALTHOUGH PART OF ITS FLEXIBILITY AND
STRENGTH COMES FROM A POOLING OF CASH FLOWS FROM
A NUMBER OF PARTICIPATING LDC COUNTRIES PAYING
THEIR NEGOTIATED DEBT REQUIREMENTS TO I²D².

FUNDING TO ENABLE I²D² TO BUY DEBT AND
ESTABLISH A RESERVE FUND FOR MEETING ITS
FINANCIAL COMMITMENTS WOULD COME IN THREE
FORMS. THE SPONSORING GOVERNMENTS WOULD MAKE
EQUITY CONTRIBUTIONS TO CREATE A RESERVE FUND,
EQUAL TO 10% OF THE DEBT ISSUED BY I²D². THESE
CONTRIBUTIONS MAY BE ACTUAL OR CALLABLE. IF
ALL $250 BILLION OF THE LDC BANK DEBT FOR THE 15
RESCHEDULING COUNTRIES WERE ACQUIRED AT AN
AVERAGE 40% DISCOUNT, THESE EQUITY
CONTRIBUTIONS, ACTUAL AND CALLABLE, WOULD TOTAL
$12.5 BILLION.

I²D² WOULD BUY LDC BANK DEBT OF
PARTICIPATING COUNTRIES FROM THE BANKS IN
EXCHANGE FOR "CONSOLS" AND PARTICIPATING
PREFERRED STOCK. THE CONSOLS, WHICH WOULD BE

-29-

EQUAL TO 50% OF THE FACE VALUE OF THE BANK DEBT, WOULD PAY A FLOATING RATE OF INTEREST TIED TO LIBOR, BUT PROBABLY SUBJECT TO A FIXED RATE CAP. THE PREFERRED STOCK, WHICH WOULD EQUAL 10% OF THE DEBT'S FACE VALUE, WOULD PAY DIVIDENDS WHEN EARNED. THAT IS, AS THE LDC DEBT PAYMENTS TO I²D² EXCEEDED THE AMOUNT NEEDED TO PAY INTEREST ON THE CONSOLS AND TO ESTABLISH CERTAIN REQUIRED RESERVES.

A KEY FEATURE OF I²D² -- A POWERFUL FEATURE -- IS THAT, ONCE IT BUYS THE LDC DEBT FROM THE BANKS, IT SUBORDINATES THAT DEBT TO ALL NEW DEBT ISSUED BY THE COUNTRY DURING THE PERIOD OF TIME THE SUBORDINATION REMAINS IN EFFECT -- AND THAT PERIOD MAY BE FOR A NUMBER OF YEARS IF THE COUNTRY FULFILLS ALL ITS STRUCTURAL ADJUSTMENT COMMITMENTS. THE VERY STEP OF SUBORDINATION IS A KEY FACTOR IN IMMEDIATELY OPENING UP NEW SOURCES OF CREDIT FOR THE COUNTRY, BECAUSE NEW LOANS WOULD HAVE FIRST CLAIM ON RESOURCES OVER ALL OLD DEBT.

-30-

DEBT SUBORDINATION AND THE CONCESSIONARY TERMS WORKED OUT FOR ANY PARTICIPATING COUNTRY, WHICH MAY INCLUDE FORGIVENESS FEATURES, ARE POWERFUL NEGOTIATING TOOLS THAT ARE PRESENTLY UNAVAILABLE TO THE IMF. $1^2D^2$'s POWERS OF DEBT RELIEF AND DEBT SUBORDINATION OFFERED TO CONTRACTING DEBTOR COUNTRIES ARE VERY ATTRACTIVE INCENTIVES TO "STAY THE COURSE" ON THE ECONOMIC REFORMS NEEDED TO RESTORE ECONOMIC HEALTH AND CREDIBILITY. SUBORDINATION AND FORGIVENESS CAN BE SUSPENDED IF A COUNTRY DOES NOT MEET $1^2D^2$ COVENANTS ON STRUCTURAL ADJUSTMENTS, LIMITS ON NEW SENIOR BORROWING, DEDICATION OF MINIMUM PERCENTAGES OF EXPORT REVENUES TO SERVICING DEBT, OR WHATEVER THE AGREEMENT IN FORCE PROVIDES.

ALL SOVEREIGN BANK DEBT OWED BY A CONTRACTING DEBTOR COUNTRY MUST BE ACQUIRED BY $1^2D^2$ TO MAKE SUBORDINATION FEASIBLE. TO ENCOURAGE BANK PARTICIPATION IN FULL, BANK REGULATORS WOULD BE DIRECTED TO ALLOW THE

-31-

DISCOUNT FROM THE DEBTS' FACE VALUE TO BE
TREATED AS A RESERVE IN CAPITAL BASE AND/OR
AMORTIZED OVER SERVERAL YEARS. DISINCENTIVES
AGAINST NON-PARTICIPATION BY THE BANKS WOULD
COME FROM LOWER YIELDING EXIT BONDS FOR BANKS
THAT OPTED OUT AND THE REQUIREMENT THAT THEY
WRITE DOWN THE VALUE OF THEIR LOANS TO MARKET
WITHOUT THE SPECIAL RESERVE TREATMENT.

WELL, THAT'S ENOUGH ON THE DETAILS OF
I²D². WHILE I HOPE YOU ARE INTRIGUED BY THE
COMPREHENSIVE CONCEPT, I'M SURE YOUR REACTION
IS, "BUT WHAT'S THE COST TO THE SPONSORING
GOVERNMENT AND WHY WOULD THEY PUT UP ANY MONEY?"

WELL, I BELIEVE THE COST IS FAR LESS THAN
THE COST OF NOT FIXING THE PROBLEM BEFORE IT
GETS WORSE, OR OUT OF HAND. FOR THE U.S.,
ASSUMING IT MADE A COMMITMENT TO A 20% SHARE IN
THE I²D² AND ASSUMING FULL PARTICIPATION BY THE
TARGET LDCs, A $2.5 BILLION EQUITY COMMITMENT
WOULD BE REQUIRED, UPON WHICH IT WOULD RECEIVE A
RETURN WHEN AND IF PUT UP. IN ADDITION, A WORSE
CASE POTENTIAL ANNUAL CALL ON

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$2.5 BILLION WOULD EXIST IN THE EVENT THAT ALL PARTICIPATING LDCs FAILED TO MEET ALL OF THEIR COMMITMENTS TO ¹²D². IT'S POSSIBLE IN NEGOTIATIONS AMONG SPONSORING GOVERNMENTS THAT THE AMOUNT OF ANNUAL EXPOSURE COULD BE SET AS A FUNCTION OF EXTERNAL BALANCE OF PAYMENT SURPLUS OR DEFICIT. I BELIEVE JAPAN AND PERHAPS GERMANY ARE OPEN FOR DISCUSSION ON THIS POINT.

AGAIN, I SHOULD REITERATE, BASED ON MY PERSONAL DISCUSSIONS WITH A NUMBER OF JAPANESE GOVERNMENT AND BUSINESS LEADERS, I'M CONVINCED THE JAPANESE ARE CLEARLY LOOKING FOR WAYS TO RECYCLE FUNDS IN A MAJOR WAY AND TO TAKE A MORE SUBSTANTIAL ROLE IN WORLD FINANCIAL AFFAIRS. I'M CONVINCED THEY WOULD BE A MAJOR PARTICIPANT IN ¹²D², PARTICULARLY IF THE U.S. AT LEAST ENDORSES THE CONCEPT OF EXPLORING COMPREHENSIVE APPROACHES.

IN CONCLUSION, WE THINK THIS INSTITUTE OF INTERNATIONAL DEBT AND DEVELOPMENT IS A WORKABLE AND COMPREHENSIVE SOLUTION TO THE LDC DEBT PROBLEM. IT IS UNIVERSALLY APPLICABLE, YET CAN BE IMPLEMENTED COUNTRY-BY-COUNTRY.

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WE THINK IT IS MARKET-ORIENTED, WILL FOSTER FREE-MARKET TRADE POLICIES, AND WILL HELP REDUCE U.S. TRADE DEFICITS.

WE DO NOT THINK THAT THIS IS THE ONLY SOLUTION OR MAYBE EVEN THE BEST ONE. IN FACT, WE ARE ALREADY PREPARED TO TALK ABOUT AN ALTERNATIVE. SPECIFICALLY, THE DEBTOR GOVERNMENTS THEMSELVES COULD OFFER TO EXCHANGE CONSOLS UNDER AN 1²D² FRAMEWORK. IT'S NOT THE PRINCIPAL THAT IS THE PROBLEM, IT'S THE INTEREST THAT MATTERS. BANKS COULD BE ASKED TO PAY SIZEABLE INSURANCE PREMIUMS TO 1²D² WHICH WHEN COMBINED WITH CALLABLE EQUITY FROM THE SPONSORING GOVERNMENTS WOULD ALLOW THE INTEREST FLOW TO BE ASSURED. PERHAPS THE COST TO THE BANKS OF THAT ROUTE WOULD BE LESS AND MORE READILY ACCEPTABLE THAN UNDER THE BASIC 1²D² PROPOSITION. AGAIN, MY POINT TONIGHT IS TO LAUNCH A NEW ERA OF COMPREHENSIVE DIALOGUE WITH ACTIVE PARTICIPATION BY BOTH CREDITOR AND DEBTOR GOVERNMENTS AND BY THE FINANCIAL AND BUSINESS COMMUNITY.

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IT'S TIME TO SUPPORT THE GENERAL CAPITAL
INCREASE OF THE WORLD BANK. IT'S TIME TO EXPORT
OUR SUPPORT OF THE URUGUAY ROUND OF THE GATT
NEGOTIATIONS. IT'S TIME TO TAKE THE NEXT STEP
IN THE BAKER INITIATIVE BY FINDING WORKABLE,
COMPREHENSIVE APPROACHES. ALL OF US HAVE A
VESTED AND COLLECTIVE INTEREST IN DOING SO.

YES, IT IS TIME TO EXPAND OUR VISION TO THE
INTERRELATIONSHIP BETWEEN TRADE AND DEBT, GROWTH
AND SECURITY, PROSPERITY AND PEACE.

REMEMBER, GEORGE MARSHALL WAS RIGHT:
WITHOUT ECONOMIC PROSPERITY THERE CAN BE NO
LASTING WORLD PEACE.

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DR. ALFRED HERRHAUSEN

TAUNUSANLAGE 12
6000 FRANKFURT 1
TELEFON (069) 7150-3011

February 18, 1988

Dear Henry,

Belatedly, but all the more cordially I would like to thank you for your letter, dated December 7, 1987, concerning Mr. Robinson's proposal for an "International Debt and Development Fund". I am most grateful to you for having acquainted me with the thinking going on at American Express about the difficult subject of relief to highly indebted countries and the improvement of their economic performance. Of course, we will respect the confidential nature of both Mr. Robinson's letter and the paper.

Generally I feel that the study is rightly aimed at finding mechanisms for granting relief on the basis of conditionality and/or the evaluation of the fulfilment of performance criteria. Theoretically, there can be no objection to the approach of inviting banks to offer discounts on their long-term claims against certain countries and having those discounts converted by an intermediary into interest relief. A neutral intermediary

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could even help to free the banks from the "moral hazard" prob-
lem, i.e. which country deserves "relief" and which country
does not. However, in practice there are a number of critical
observations to be made:

- In fact, we cannot assume that governments of the G-7 group will be ready to put up major amounts of capital for a new institution (although the Japanese position should be explored in this respect); they would rightly point to the process of increasing capital at the World Bank, the IDB and the Fund's new adjustment facility.

- Both banks and recipient debtor countries would prefer to have direct contact in negotiating relief and quid pro quo returns resulting from any concessions made. Actually, debt-equity schemes would lose attractiveness if banks could no longer negotiate directly with their national and foreign customers but instead would have to leave that side of the business entirely to a third party.

- The "IDDF" scheme is simply too big and could not adequately respond to the complexities of the "case by case" situation of various debtor nations and creditors (with their disparate tax and regulatory conditions). The tasks of management, the coordination of decisions etc. for such a "super-fund" appear to me insoluble; in this connection the involvement of the World Bank or the Fund remains unclear in the paper.

- Last but not least, the idea of payment of the banks by "consols" with an interest cap and uncertain redemption would lead to a weakening of the financial position of the banks; they would also lose insight into the performance of the countries if the IDDF were to monitor the process and decide on "subordination", "desubordination" etc.

- 3 -

I think we shall have to explore more tailor-made, specific
solutions for translating the preparedness of certain banks to
make partial concessions on interest or capital into efficient
contributions towards restoring the credit standing of the in-
debted countries and strengthening their position as partners
for trade and investment. My own hope is that individual coun-
tries, through their own endeavours and convincing programmes
as well as on the basis of close cooperation with the Fund and
the World Bank, will ultimately qualify better than up to now
for voluntary concessions from their private creditors.

With renewed thanks and best personal regards,

December 7, 1987

Dear Henry:

You raised two questions:

Henry A. Kissinger

December 7, 1987

page 2

By Messenger

Everyone here agrees that the developing countries in Latin America and
elsewhere must have the resources for new investment if they are to grow.
Yet, over the past five years there has been a $96 billion outflow of
resources away from the seventeen most heavily indebted countries, in the form
of debt service.

Here we are, six years after the debt crisis of the less developed
countries (LDCs) first surfaced, and a remarkable degree of consensus is
finally building in the industrial countries as well as the developing
countries on the need for new strategies to address the investment outflow and
relieve the LDC debt burden.

The consensus is building on three points.

First, LDC debts can no longer be regarded as simply a banking problem.
The debt burden has crippled economic development and investment in the LDCs.
The issue has become a socio-economic problem, a trade problem, a jobs
problem, and a geopolitical problem for the developed countries as well as for
the developing countries.

Second, there is a growing consensus that the current approach to LDC
debts, while it has helped, lacks the resources to address the problem
adequately. As the recent statement by the Institute of International Finance
confirmed, commercial banks are out of gas as a source of LDC funding.

Let me emphasize that the current approach *has* helped.

o It has bought time, allowing banks to build capital and reserves while reducing exposure.

-2-

o Some Latin American countries have made significant progress in restructuring their economies, and some have shown good growth.

o The current approach has set sound principles:

- growth instead of austerity;

- country-by-country, case-by-case negotiations; and

- market-oriented reforms.

But ...

o The current approach has not restored the LDCs to economic prosperity and creditworthiness, or stemmed the devastating outflow of resources from the very countries that are most in need of capital.

o At risk is the progress that has been made toward democracy and market-oriented economies in Latin America and elsewhere.

o A cloud still hangs over the banking system.

o Debt fatigue clearly exists among both debtors and creditors.

Thus, the third area of growing consensus is the need for new approaches that provide meaningful financial support to the LDCs-- both as new credit and as actual debt relief. Yes, it no longer is taboo to speak of debt relief -- as long as that means a negotiated reduction of debt service burdens through any one of several mechanisms.

Why do I say a consensus is building? Because I see more and more business, financial, political and academic leaders in developed countries as well as in the developing countries agreeing on the need for new approaches.

o The Economic Policy Council of the United Nations Association, with its endorsement by several major U.S. banks, is only the latest of many such statements.

-3-

o Alfred Herrhausen of the Deutsche Bank has just called for the
development of an overall plan.

o Some other examples:

- The article in the *Economist* in June by Paul Volcker and other
prominent financial leaders;

- The G-7 Economic Summit Meeting in Toronto and the Japanese initiative
there;

- Congressional hearings this summer;

- Recent reports and public comments from the World Bank and the IMF;

- The UNCTAD report.

Where do we go from here?

I think it's obvious to all of us here that the U.S. government position
on this issue is key, and that basic decisions on LDC debt strategies await
the new U.S. President.

Let me make a prediction: Regardless of which party is in the White House
next year, I believe the new President and his Administration will address the
LDC debt issue with high priority. It is too critical to economic growth at
home and abroad, and too important to U.S. foreign policy, for the next
Administration to ignore. And the consensus on the need for new approaches is
too great for the next Administration to resist.

Let me also suggest a few key principles the new Administration should,
and I hope will, follow in devising new strategies for generating greater
financial support for the LDCs:

-4-

1. The industrial country governments must be more directly involved, and the World Bank, the IMF, the Inter-American Development Bank and the other development banks must be central players.

2. Financial support -- both debt service reductions and new credit -- must be provided to the LDCs case by case, tailored with flexibility to each country's unique needs, conditions, and prospects.

3. Financial support without sound economic reforms will not work.

4. Both incentives and disciplines are needed to ensure sustained implementation by the LDCs of market-oriented policies.

5. The overall soundness of the global financial system must not be compromised.

6. Sufficient incentives must be available to convince the principal creditors to cooperate without providing a bank bail-out.

7. The costs and benefits of a new approach must be shared among the debtor countries, the banks and the industrial countries. All must be at the negotiating table, on a more timely basis.

Now, let me raise three questions that need to be addressed:

First, how should financial support be provided for the LDCs?

Second, how should financial support be linked to economic policy reforms?

Third, what role should the G-7 governments play?

As to the first question, many good ideas exist. I believe a global strategy is needed, with case-by-case applications from a menu of financial support options. For example:

o Earlier this year, I suggested the creation of an international entity to exchange its high-quality paper for LDC loans held by the banks. This international facility, called $I_2D_2$ for short, would extend debt

-5-

relief through various forms of interest reductions and principal deferment, and encourage new credit through subordination of old debt. Such a facility remains an option, particularly as part of longer-term approaches.

)

o A similar idea, particularly for exit purposes, would be for the debtor countries themselves to exchange bonds for loans directly with the banks. Concessions on interest and/or principal would be negotiated as would some form of credit enhancement on the bonds. The credit enhancement would be provided by the industrial countries, preferably through the international institutions. The United Nations Association's Economic Policy Council recently recommended this as a way to provide debt relief relatively easily, without creating new institutions.

o Another option, as the Bank of Nova Scotia and others have proposed, is to encourage banks to reduce the interest paid on loans by establishing insurance on the remaining interest payments.

In short, there are many financial support techniques that can work. Deliberations and negotiations will sort out which approach best serves the needs of a given developing country while protecting the interests of the industrial countries and banks.

These options relate to private sector debt. Similar financial relief can and should also be engineered under the auspices of the Paris Club on bilateral government loans.

-6-

Now, how should financial support be linked with economic reforms in the LDC? The objective is to create a reinforcing cycle in which debt relief or new credit provides incentives for sticking to needed economic reforms, and those reforms provide the climate for new investment ... including the return of flight capital. Thus, the new approaches should favor countries that have established a record of progress in these areas or are prepared to provide meaningful commitments to economic reforms. Debtor countries should not expect that financial relief will be provided without conditions and without regard to prior efforts to maintain debt service obligations.

Conditionality programs should cover a broader spectrum of issues than the traditional targets for inflation, real GNP growth, or balance of trade.

Specifically, LDCs need to liberalize their economies:

* by improving the climate for foreign investments and trade;

* by ceasing to overprotect inefficient domestic industries;

* by privatizing state enterprises and encouraging increased competition; and

* by reducing budget deficits and reforming tax systems.

Trade- and investment-related policy reforms designed to open markets, to encourage private enterprise and to mobilize capital, are particularly important. Other conditions might include greater efforts to reduce drug trafficking, or adoption of sound environmental policies, such as preservation of rain forests.

I personally believe a facility, or agent like $I_2D_2$, is needed as a catalyst for change in institutions and attitudes. Such a facility would lead the process of negotiating agreements on financial support and policy conditions and help direct program oversight. While it could be in the IMF or

-7-

the World Bank, it would be better as a joint activity of the two, building on
the precedent of the Development Committee set up in 1974.

That brings me to the role the industrial country governments must play.
Governments have a big stake in a successful resolution of the LDC debt crisis
in terms of trade, jobs, economic growth, geopolitical stability, and a more
secure global financial system. They and only they can muster the political
will to lead the process. They and only they can facilitate a reversal of the
resource transfer from the LDCs without weakening the world's financial system
or crippling the future creditworthiness of the LDCs. Clearly, such
leadership is needed.

The United States and the other G-7 countries have an opportunity to work
in partnership with developing countries around the world to foster
market-oriented economies in conjunction with financial relief for the debt
burden. The countries that have overcome debt burdens in the past -- like
Turkey and Indonesia -- have followed trade-expanding, market-oriented
economic policies. Even the Soviet Union and China recognize the benefits of
market economies.

With consensus building on new approaches to LDC debts, I believe we are
at an economic and foreign policy crossroad ... a crossroad of opportunity for
Latin America, and for the U.S.

Academician A.G. Aganbegian

12 JULY 1988

ECONOMIC REFORMS

The restructuring (perestroika) of our society rests on a groundwork of economic reforms. A new strategy for economic development in our country - the perestroika strategy - was put forward at the April 1985 plenum of the Central Committee of the Communist Party of the Soviet Union (CPSU). The essence of this strategy is to accelerate the social and economic development of the USSR. This implies not only improving economic growth rates, an important task in its own right, but more than that, doubling the national income of the USSR by the year 2000. The essential point in acceleration is to obtain a new quality growth rate, to be achieved by making the economy more consumer-oriented on the one hand, and by using technology to stimulate a more dynamic national economy, on the other. Sweeping changes in the management system are the driving force behind acceleration - we must break with the old administrative system and move to a thoroughly new, comprehensive management system based on the implementation of economic management methods, bearing in mind economic interests, market developments, increased labour incentives, and greater participation of the USSR in the world economic system.

This new economic strategy, designed to guide the country's development, will call for a re-examination of all the aspects of society's diversified economic life, and for a search for new ways in which to qualitatively restructure the economic foundation of the country.

The following elements of the strategy were worked out at the XXVII party Congress and during subsequent plenums of the Central Committee of the CPSU:

- a strong social policy, its top priority being the attainment of well-being in both the social and industrial sectors through the consistent application and implementation of the principles of social justice;

- 2 -

[v]

- a policy for scientific and technical development, which provides for social planning to go hand in hand with the technological revolution in progress throughout the world;

- a new investment policy, aimed to bring about major progressive shifts in the structure of the national economy by means of redistributing raw materials more expansively, priority development of the machine-building and chemicals sectors of the national economy, the formation of sophisticated data processing technology and the entire range of scientific fields, a resource-saving policy, a significant increase in the gross national product of the specific share of consumer goods produced and the services provided;

- a new agricultural policy, including a line to promote the use of intensive technologies, to redistribute investment towards keeping the land intact and to proceed to a fundamental restructuring of the way in which agricultural raw materials are processed, to provide for far-reaching autonomy for state and collective farms and a general extension of the system of leasing agricultural land to collectives and families;

- a dynamic foreign economic policy, consisting of progressive development in foreign trade, improving the effectiveness of imports and exports, providing organizations and enterprises with direct access to world markets, creating joint enterprises with foreign firms and making the Soviet currency convertible;

- a new financing and banking policy within the framework of general management reforms; aiming to provide for a greater role for the money-exchange relationship in economic development, to promote the expansion and consolidation of the socialist market, particularly the goods and services, securities and hard currency markets.

In addition, a pluralistic line has been adopted with regard to the development of various types of ownership. Together with state ownership, which takes different forms, cooperative and individual initiatives in all spheres and branches

- 3 -

[11]

of the economy have grown extensively. The June 1987 plenum of the Central Committee of the CPSU gave added impetus to the formation of a new economic policy by adopting a new management system and programme for the transfer from an administrative to an economic management system. The plenum adopted a law on "the state enterprise (combine)", which provides for the introduction of profit and loss management accounting, self-financing and self-management in the major industrial sectors. On the basis of these reforms, a whole range of party and state resolutions will be worked out and adopted on the restructuring of all facets of the management system, including planning, price-fixing, financing, material and technical supply and trade banks, the organizational structure of branch and territorial management, restructuring the activities of labour, statistics, scientific and technical and other bodies.

All the economic changes which are carried out in accordance with this new policy are being implemented under the decisive influence of the democratisation of society. In the area of economics, this democratisation has been translated in an invitation to large sectors of the masses to become involved in management, which has made it necessary to confer more extensive powers on labour collectives in all sectors of the economy and to transfer them over to a system of self-management.

Why this imperative need for the implementation of such large-scale, diverse economic reforms?

Firstly, it was essential to overcome the stagnation and "pre-crisis" situation which had developed in the economy as a result of the rise of negative economic trends in the 1970's-1980's. This, however, is only a reason of the first order, if I may use that term. At bottom is the pressing need to put an end to the serious deformations which had emerged in the development of the socialist economy of the USSR during the period of Stalin's personality cult as a result of a bureaucratic "command" management system, and which had deteriorated still further during the past 15-20 years of stagnation.

- 4 -

[10]

How is the economy to be restructured? What is to be discarded and what are we striving to achieve? Firstly, we wish to move away from a deficit economy and the related bureaucratic intervention of the producer in consumer affairs. We want to make our economy profitable, one in which the manufacture of goods and services will depend directly on the satisfaction of social needs, one which is based on consumer needs. This process calls for major structural economic changes and a fundamental change of course towards satisfying social needs. This is the way to improve the true effectiveness of the economy, since in a socialist economy, effectiveness is measured by the full satisfaction of social needs. This approach gives priority to quality over quantity, because goods of premium quality can satisfy consumer needs more fully.

Among the social needs to be satisfied, priority is given to all that which is directly related to improving the life of the population in the fullest sense of the term and to providing the people with greater well-being, while creating conditions which would encourage a more global and freer development for mankind. Bearing this in mind, we must move away from the primacy of industrial achievement, from management systems whose first aim is to reach industrial goals. Under these new conditions, first priority is given to social goals and tasks. The entire economy must be directed towards satisfying the needs of the population. People's needs have become the yardstick by which priorities are set, the idea behind the restructuring process is to do what is in the best interests of the population, to improve life for the people. We must therefore move towards a social economy, to an economy with a highly developed social profile and an industry capable of producing the consumer goods needed and providing modern services. The spiritual needs of the population must be satisfied at an even faster pace. Work must be made easier and more creative, hence more attractive. In a socialist society the economy should develop in such a way as to provide the people with the social guarantees of all their rights - the right to work, to leisure, to housing, to social benefits and so on. This must be an economy devoid of unemployment, armed with major developments in health, education and the provision of social benefits. In a word, our new economy must be designed to satisfy the needs of the people in a new socialist society.

- 5 -

[10]

if an economy is to be capable of resolving important social problems, it must develop not on the basis of one advantageous factor, as (we have) in the past, but must be designed for intensive development. Rather than seeking to increase resources, increased effectiveness and quality, to be achieved by using new technologies, should be the main source of economic development. We must switch from a resource-squandering to a resource-saving economy, with the highest possible labour productivity, which is effective and produces high-quality, competitive goods. To achieve this, we must refute our previous goals of societific and technical progress, which have been a fixture of our economy during the past 15-20 years. We must bring about fundamental changes in our technology as rapidly as possible, to produce technologies of a new generation, to introduce a new technoiogical framework as widely as possible. We have yet to attain an economy in which scientific and technocai revolution, leading technical achievements and innovation are the rule.

We must also put an end once and for all to the autarchic trend in our
national development. Priority is to be given to foreign trade relations, with
the aim of developing them faster than our domestic production, so as to strengthen
the role of the USSR in the world economy and its economic ties with other countries.
With regard to economic ties, we wish to move to an integrated socialist economy.
The Soviet economy is becoming progressively more open to the world.

We are in the process of transferring from an administrative management
system based on "command" methods to management on the basis of economic considera-
tions, to a market economy, one with developed financial and credit ties. From
uniformity and frustrated material incentives, we wish to have an economic system
based on economic interests, on profit and loss accounting and encouraging
material incentives.

In line with these developments, the (past) nationaliization of the entire
economic system will be replaced with a more pluralistic form of ownership. We are
moving towards an economy with a developed cooperative sector and the widespread
use of private labour. In lieu of state monopolies in specific economic branches,
economic competition and competitiveness in a socialist framework will be intro-
duced more and more.

- 6 -

From an authoritarian economy, we move to a democratic one, run by the people, in which wide segments of the population take part in managing the economy. With an enhanced role and rights for labour collectives, the participation of each individual worker in work and social life will be strengthened. Economic self-development and self-management are gradually on the rise. To summarize briefly, we might say that we are now in the process of moving to a new type of socialist economic system. This is a restructured system of a different quality, in which all the advantages of a socialist system are fully realized. This will be a modern economy, which has benefited in terms of economic development, from the highest achievements of other countries, an economy of social and scientific and technical progress and at the same time, an economy which continues to afford all the opportunities offered by socialism. This is a renewal of the Leninist idea of socialist economy, adapted to society's development in modern conditions.

Naturally, such an economy will be an integral part of a renewed socialist society, in harmony with a new political, legal and ideological system, and will be strengthened and guaranteed by them.

The move to a qualitatively new economic system will take time and a monumental effort, as well as major transformations of quality. We must proceed to a real economic revolution.

We are now at the first stage of the restructuring process. More than 3 years have passed since that fateful April (1985) plenum of the Central Committee of the CPSU. What has been achieved in the past 3 years in terms of restructuring the economy?

First of all, a far-reaching programme of economic reforms has been charted. This has required a whole series of economic experiments to be carried out, some on an extremely large scale, in the course of which specific aspects of the new management system were being worked out. In the very beginning, the experiments were large-scale, aimed at extending the powers of enterprises to some degree. In 1986 and later in 1987, a second wave of experiments was conducted in the self-financing of enterprises. At the same time, wide-ranging tests were conducted in the leasing of land to families and collectives and in other leasing arrangements,