Foreign Relations of the United States, 1969–1976, Volume E-15, Part 2, Documents on Western Europe, 1973–1976, Second, Revised Edition

260. Memorandum From the President’s Assistant for National Security Affairs (Scowcroft) to President Ford¹

Washington, December 18, 1976.

I. Purpose

To review recent discussions with the British on sterling balances, to work out a compromise between the British and the US positions, and to emphasize the need for flexibility on the loan to Portugal.

II. Background, Participants, and Press Plan

A. Background: On Wednesday, Chancellor Healey announced to Parliament new measures to stabilize the UK economy and to qualify for a $3.9 billion standby credit from the IMF. At that time he also indicated, with our concurrence, that talks in Basle in the Bank for International Settlement (BIS), and with the US Treasury and FED, have “revealed a general desire on the part of those concerned to achieve a satisfactory arrangement for the sterling balances”. He also expressed his belief “that it will be possible to reach an agreement before long”.

Subsequently, Callaghan wrote to you (Tab A), indicating his “strong preference” that “we should go ahead with the BIS scheme for a contingency safety net facility. This should be a forerunner to a longer-term funding scheme, if that proves to be workable; but such a scheme would take too long to negotiate to be a practical possibility for the immediate solution which is needed. We remain at risk until we have a good arrangement, and I still hope that this can be achieved quickly.”

There are clearly major differences between the Treasury and FED on one hand, and the British on the other, with respect to the sterling balances issue. The FED and the Treasury have developed a proposal (Tab B, given to the British last week) for a longer-term arrangement to convert officially-held sterling balances (those in the hands of foreign governments) into long-term UK debt obligations, denominated in dollars or other hard currencies. This “funding” proposal would also require Britain, over a 10-year period, to reduce and eventually eliminate its holdings of official sterling balances. The approach would be linked to the UK’s domestic economic performance, which would be evaluated annually to determine whether new credit could be extended.

The British envisage a less ambitious scheme under which a line of credit would be provided on which the UK could draw in the event of large-scale withdrawals by official sterling holders. A scheme of this sort has been under discussion for several weeks at the BIS in Basle. Our Treasury and FED have indicated to the UK that the US could not participate in a scheme of this sort because it would mean extending short-term credit to Britain knowing that such credits would be rolled over every several months; such credits would thus constitute a long-term credit. The FED’s “swap arrangements” are not designed to provide long-term credit. And the Treasury argues that it has been told by the Congress not to use the Exchange Stabilization Fund to extend credits of more than six-months in duration; although there is at present no legal restriction on its doing so. Ed Yeo has explained to his British counterpart, Derek Mitchell (who was here earlier this week), our objections to the BIS scheme and suggested that we begin discussions on a longer-term arrangement similar to the US proposal. Mitchell was apparently not instructed to begin such discussions, and left Washington on Tuesday without having commented on the US paper. As the Prime Minister’s message to you indicates, the British believe that negotiations on a US-type scheme would take too long to serve their purposes, although they appear willing to discuss it as a long-term solution. They believe that in the near-term a safety net facility is still necessary as a protection against the withdrawal of sterling.

The Treasury-FED arguments in favor of a longer-term arrangement on sterling are essentially sound. And the Treasury is justifiably upset that Britain has not yet begun a serious discussion of it. On the other hand, the British apparently feel they need something quickly, especially since they will probably suffer a serious political embarrassment if nothing has been agreed on soon. In addition, those holders of sterling who have been led, rightly or wrongly, by Healey to believe that an agreement will be forthcoming are likely to become extremely nervous if no agreement is announced reasonably soon; the result might be significant sales of sterling. One possibility would be to develop a proposal for discussion with the British which would provide a short-term safety net facility as a first step, or a transitional device, to a longer-term arrangement of the type proposed by Treasury and the FED. Yeo leaves for Europe on Sunday and, given the urgency of the timing, failure to take advantage of his discussions there to make progress with the British, or at least move toward breaking the impasse, would mean a further, and perhaps dangerous, delay.

You might also raise the issue of Portugal. A Portuguese delegation was in Washington on December 15–16 to attempt to work out the first step of a three-stage financial assistance package. (The second stage is a $1.3 billion multilateral loan, and the third is full utilization of IMF’s standby facilities.) Treasury has offered the Portuguese a $300 million loan of gold (2.5 million ounces) which Portugal would then sell to raise necessary currency. Portugal would be obliged after a year to repay the gold or an equivalent amount of currency.

The Portuguese believe, however, that more conservative elements in the country would strongly object to sales of gold, even US gold, by the Government of Portugal. The Portuguese were seeking a dollar loan of roughly $300 million instead. Treasury believes that a gold loan would have greater chances of repayment, and is better economically, if not politically, for the Portuguese; thus it has continued to insist on that approach. President Eanes believes, however, that gold sales would lead to unrest, which he cannot afford, Ambassador Carlucci believes that the government could fall if pushed to sell gold.

The Treasury-Portuguese negotiations broke down on Thursday morning. Portuguese experts will remain in Washington for the next several days to try to work out arrangements. Ed Yeo will visit Portugal on the 22nd to see if further progress can be made. Your emphasis, at this meeting, on the need for flexibility might encourage Treasury to come up with an approach which meets the needs of the Portuguese in a fashion consistent with Treasury’s legitimate desire for security of its loan. The situation is urgent. Portugal’s cash reserves are so low that they must either receive a loan soon or sell gold by the beginning of January.

B. Participants: Secretary Kissinger, Secretary Simon, Chairman Burns, Alan Greenspan, Ed Yeo, Brent Scowcroft.

C. Press Plan: No announcement.

III. Talking Points

1. I wanted to have this meeting because I will be leaving town tomorrow and would like to be brought up to date on where we stand with the British. These are difficult issues. I want to say how much I appreciate the efforts that Treasury and the FED have made to be supportive. I know that your financial experts are often concerned lest the politicians get too heavily involved in your work. I have, as you know, taken a hands-off attitude in letting the British and the Fund work out an agreement without American intervention.

2. I am aware that there are differences between the Treasury and FED on one hand and the British on the other regarding the sterling balances. (The British want support for a safety net arrangement, which they are discussing in Basle; Treasury and the FED favor a longer-term “funding” of sterling balances.) I am aware also that serious discussions between ourselves and the British on the FED-Treasury plan have not yet taken place.

3. I would like to know the status of your discussions with the UK. What precisely are the differences between you? How far have discussions gotten in the BIS in Basle? What do the Germans, Japanese, and others think?

4. While I don’t want to comment on the details of your differences with the UK, I want to make clear that the US has a commitment to the UK, and I have a personal commitment to Jim Callaghan, that we will be cooperative and sympathetic, and that we will work to resolve these issues as quickly as possible. I don’t doubt that some of the problem lies with the way the British have handled the situation from their side. But it is extremely important to the United States, and to me personally, that we now make every effort to reach a reasonable compromise with the UK consistent both with our domestic interest and with our desire to be responsive to the British.

5. (This is illustrative. Your decision and instructions will depend in part on the course of the discussion.) I would like the FED and the Treasury to provide me as soon as possible a paper outlining an approach reconciling the British and the American positions. I would like to have this by early next week. I leave the details to you, but I want you to find some way of bridging these differences. I think it is essential to reach an agreement quickly. The longer we go without an agreement, the more difficult it is for the British politically, and the more vulnerable sterling is to lack of market confidence.

6. With respect to Portugal, I would like to know what the differences are between us and the Portuguese. I know that Ed Yeo will be in Portugal on the 22nd. These people have fought a courageous battle to restore democracy. It would be a historic miscalculation of the worst sort if, for want of adequate assistance, this heroic effort were to fail and the Portuguese political system were again to become unstable. If our terms on gold are too difficult for them to accept politically, however correct they are economically, we may end up with a Government which can take none of the reforms which we believe are necessary because it will be too weak. Frank Carlucci fears that the Government will fall if it is forced to sell gold. I think, therefore, it is essential to use our ingenuity to come up with a solution to this. What sort of thing might we do?

7. (Depending on the course of the discussion) I would like to see a plan for resolving this problem before your meetings begin with the Portuguese on the 22nd. We must be flexible. We must be able to come up with something.

1. Summary: Scowcroft briefed Ford on a forthcoming meeting on UK economic issues.

   Source: Ford Library, National Security Adviser, Kissinger-Scowcroft West Wing Office Files, Box 25, UK (23). Secret. Attached but not published are Tabs A and B. A stamped notation on the memorandum indicates the President saw it. Ford met with Simon, Greenspan, Burns, Seidman, Yeo, Scowcroft, and Kissinger in the Oval Office at 2:35 p.m. The end-time of this meeting was not recorded and no other record of the meeting was found. (Ibid., White House Central Files, President’s Daily Diary)