Manuscripts/Mixed Material Interview with William Primosch
PRIMOSCH: It was on Eastern Europe, but there was also one kind of unique issue which I spent a lot of time on. It involved Foreign Military Sales (FMS) debt. The United States in its effort to help countries build their defenses against the communists, the threats of communism, had lent a lot of money to countries all over the world, particularly the Middle East, to buy weapons. But it was awful the way it was provided, with commercial interest rates as high as 10 percent or more. Basically, we provided the credit at market rates over long terms. Some of these countries, particularly Egypt, had borrowed billion dollars to buy arms. Of course, Egypt is a poor country to begin with. You don't create any economic capacity when you borrow to buy tanks and weapons. Then lo and behold, we're surprised that they can't pay it back. What do we do? The U.S. Congress, being very cheap, didn't want to write it off. They had borrowed, which today seems like extraordinarily high rates, 10 year loans at nine to 11 percent. By the late 1980s, the interest rates had started to decline and these countries were complaining 1) we've got this huge debt and 2) it's at very high interest rates. How can we possibly pay it back? Can't you help us? We did an awful lot of running around in circles trying to figure out how to lower the interest rate payments on that debt. In the end, the solution was provided by the Gulf War. All the countries that had supported the United States or participated in the allied force that went into Kuwait were forgiven their debt. That was the one of the greatest financial benefits offered to Egypt. In one fell swoop, they had billions of dollars of debt written off.
Q: As one was working on this, in one way or another, you were going to have to write this off. One can talk tough, but you're not going to drive a country to its knees when you've persuaded them to buy military equipment.
PRIMOSCH: It seemed pretty evident to me that that was the only outcome, but at the time the Congress was being very hard-nosed that they would just not accept debt write-offs, particularly of this scale. There was a fear of setting a precedent that would migrate over to the commercial debt owed. The Export-Import Bank had also had a lot of loans to these countries that they were having difficulty servicing. Commercial banks were worried about the problem because if you started encouraging countries to think that you could write that off then they would want their civilian private bank debt written off. So there was great resistance to this even though it seemed pretty evident. Egypt is a perfect case. They had billions of dollars in military debt which had very high interest rates and an economy that's not producing much. They were just not going to be able to pay. But when you write off debt, you have to adjust the budget to account for lost income and that means Congress had to cut spending in some other domestic area or in the defense area. At the time Congress was just not willing to do that.
Q: When there was a big debt crisis that involved Brazil and Mexico, did that come at that time?