Treasury's Debt Plan
Jude Wanniski
March 8, 1989


In the nick of time, a new Third World debt-relief scheme, cooked up by Assistant Treasury Secretary Charles Dallara, has been put on hold by the White House. The plan, sold to Dallara's boss, Undersecretary David Mulford, to have been unveiled in a speech tomorrow night, by Secretary Nick Brady, would pour more gasoline on the incendiary situation in South America. In exchange for debt relief and vague government guarantees to U.S. banks, debtor nations would be pushed into another round of IMF-designed currency devaluations and austerity packages. The emergency in South America, characterized by riots in Venezuela, a Peruvian central bank deal with the drug trade to stabilize the currency, Bolivian refusal to cooperate with Attorney General Thornburgh on drug control, and new demands by Mexico on debt relief, is in fact a currency stabilization crisis already fueled by the IMF.

A group of senior White House officials, alerted to the Dallara power play, and pressed by Mulford as if the plan had to be released immediately to ease the riots in Venezuela, suspended action on it while there is further review. The plan was almost certainly cooked up by the Institute for International Economics, the Washington think tank headed by C. Fred Bergsten and Peter G. Peterson. The White House meanwhile has asked Treasury to explain why Dallara, brought into Treasury by Bergsten during the Carter administration, has been given such a key post. There's little doubt that if Dukakis had won the presidency, Dallara would have been named Undersecretary, given Bergsten's central role in the Democratic establishment.

Vice President Quayle's office and NSC Adviser Brent Scowcroft are said to be especially concerned about reports that Peru, in attempting to end the rampant inflation wrought by IMF prescriptions, has cut a deal with the drug cartel. Reports from the Neue Zuercher Zeitung, 3-5, p. 15, and the Peruvian weekly Caretas say that the inti has risen sharply against the dollar on the open market because the central bank made a back-door deal to persuade drug traffickers to deposit their funds in local currency. Half the cocaine coming into the U.S. is from Peru.

The central issue is conditionality. Some measure of debt relief would be appropriate, I think, but not if the Treasury/IMF condition is that further taxation and currency devaluation is taken as "medicine." The IMF should be helping stabilize currencies instead of forcing Peru to follow Columbia's lead in treating cocaine as a cash crop in order to keep the banking system afloat. And conditionality has to include supply-side tax reforms in the debtor nations, permitting them to attract capital to legitimate farm, mine and mill activities instead of the drug trade.

The Baker Plan hasn't worked, but at least it's neutral on questions of currency devaluation and taxes. The Treasury twist on the Baker Plan would make it destructive. (New Jersey Senator Bill Bradley, by the way, a critic of the Baker Plan, has been in bed with Bergsten for some while against my advice.) The good news is that with Dallara caught in the spotlight, it's unlikely his scheme will go forward, and his future influence at Treasury will be impaired. The critical IMF post that Dallara vacated in order to take the assistant secretary job, no less than U.S. executive director, will not so easily go to a Bergstenite. Having found this Democratic "mole" at work in Treasury, the White House is on the alert and not feeling especially generous to the Loyal Opposition these days.