Transcript of meeting of the Executive Directors of the Bank, held on Thursday, September 12, 1957

STRICTLY CONFIDENTIAL Bubley INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TWO HUNDRED NINETY-FIRST REGULAR MEETING of EXECUTIVE DIRECTORS Board Room International Bank Building Washington, D. c. Thursday, September 12, 1957 The meeting was convened at 11:30 a.m., Mr. Eugene R. Black, President, presiding. STRICTLY CONFIDENTIAL DETAILED TABLE OF CONTENTS FOR THE 291st REGULAR 1'-IB:STING HEID SEPTI:l1BSR 12, 1957 Afternoon Session  56 STRICTLY CONFIDENTIAL Bubley MR. \KNAPP: ii It II may continue on Argentina. I recall to you that we Ii ' ii I j sent a ndission to Argentina in the spring ot this year. in i I April ~ Jllay, to undertake a review of the Argentine econom11 situatio~. their development problems and aspirations. and to appraise ~he general situation in the country from the point ot view or Bank lending. The report ot the mission was circulated to the Board recently.I It was IQY' purpose while in Bueonos Aires to talk to the Argentine authorities about the report and about the general conclusions that we were inclined to draw from it. I would describe these discussions as strictly exploratory. We have had no formal loan application from Argentina. It was a stage of getting together and reaching an understanding. The next stage. ot course. will be the Annual Meeting. particularly it the Finance Minister comes up as we hope -- and we are still sort of feeling our way. My discussions were conducted primarily with the Finance Minister and with Dr. Krieger Vasena and with Dr. Coll Benegas who is the President or the Banco de las Nacion. and also the chairman ot the committee created by the government to con- sider all external debt negotiations. I had the honor ot calling on the President. and I met a number ot the other leading officials ot the government.  57 STRICTLY CONFIDENTIAL 2 But I should say that m;y primary talks were with the Finance Minister. We showed him the economic report which we had prepared, and got some very interesting comments on it from him. We pointed out to him that basically the economic report came up with a finding ~hat the Argentine economy basically was a very strong economy which, with reasonably good policies on the part of the government, with just reasonably good manage- ment, let's say, had great development potential. We further came quickly to the conclusion that within the Argentine economy, if the Bank were to inaugurate a lending program in Argentina, the railways appeared clearly the pri- ority field within which we might take our first operation. The railway problem there is a ver'Y serious one, and I don•t need to elaborate on that. It has been badly run down under the previous regime. They are making a determined effort now to get the railways back on their feet, and they have re- ceived an interim -- I call it interim -- they have received a credit during the interim, so to speak, when we are con- sidering our action -- they have received a credit from the ;Export-IJ1i>ort Ban1c in the amount of $100 million, of which i i I the great bulk will be devoted to financing the railways. Well, we told the Argentines this, and said that in principle we would be very interested 1n pitching in and help- ing them work out the problem of the rehabilitation of this  II 58 STRICTLY CONFIDENTIAL 3 vitally important railway system. But we told them that we did think there were formidable questions of the timing of a loan operation. We pointed out to them that if the Bank were to finance the railways., some :fundamental decisions needed to be made which have not been made in Argentina about the railway pro- i: gram as such. Ii i They have taken action to establish the railways as an ii Ii autonomous enterprise to be operated on an independent basis. 11 Ii And that is a very important step forward. But they have not Ii ii Ii li yet come to grips or even started to come to grips with the !i financial problem of the railways., and the railways are in desperate financial straits. The losses on the railways are a very considerable drain upon the government., and it is :! obvious to everybody there -- nobody was inclined to defend ,I ii : that position., but simply to say that it was a problem that '1 :'. must be tackled., but the tackling of the problem would take time. That is to say., the preparation or a program. for the , financial rehabilitation of the railways would take time., and even after it was launched it would take many years before there was any hope of getting the railways back on their feet ' financially. Well., I said that we woUld understand that., that you coUldn't take the railways in their present position and over- night convert them into a self-liquidating operation., but I  I'I 59 4 STRICTLY CONFIDENTIAL did say we felt if we were to come into the railway picture we ought to have an agreed program for achieving financially self~support1ng position within a reasonable period of years. The present government is not at the moment concentrat- ing on this problem, tor reasons which I will explain in a moment, and they are unlikely to tackle this problem in the very near future. We also discussed the kinda of assurances that we would hope to get from the government in Argentina regarding the more general economic and financial policies before the Bank could enter upon any large-scale lending there. These policies come under various headings. One is just general monetary and fiscal policies. In general., the pre- sent government is following a very constructive program in trying to rehabilitate the finances of the country which also., as you will note from reading the economic report, were left in a pretty chaotic state with the passage of the Peron 11 , regime. II ii In the field ot public services outside the railways, I\ very important decisions need to be made about how and in ii i what manner the public services are going to be rehabilitated (\ and developed. 1 The most important problem outside railways is power, where at the moment there is great uncertainty as to the futur in power development, as to the role of public and private  60 STRICTLY CONFIDENTIAL 5 enterprise, and as to what the government is going to do about the development of power. Related to this power question, but also coming up in other fields is a general question about the role of private enterprise. A lot of declarations are being ma.de in Argen- tina these days that are very encouraging to private capital, both domestic private capital and foreign private capital, but some more specific things than declarations need to be done, and the present government is somewhat hesitant to form- ulate specific policies in this field at the present time. There is the whole question, the very important question from our point of view, as to what policies they will follow in incurring external debt, how much external debt do they propose to incur, in what directions, for what purposes. They have in mind, for example, a verry i~ortant borrowing for petroleum development which is a subject of great lllldertainty at the present time, how far they can find lenders abroad, and if they find lenders abroad, how much money they would expect to borrow for that purpose. so there are a lot of open issues, and we had a prelimin- ary sort oof skirmishing discussion about that, and the views of some of the people in the present government were made clear to us. But what was also made clear was that on many of these decisions the present government doesn't feel that it can  11 61 STRICTLY CONFIDENTIAL 6 enter into long-term commitments -- and here I have to point to the schedule of events which is presently contemplated 1n Argentina on the political side. At the present time elections are scheduled -- well, there has been, firstly, an election tor a constitutional convention, and a constitutional convention is about to convene, charged with finishing its work by November, to develop a new constitution for the country. And incidentally, Just here, in the preparation ot this constitution, are some very important bridges to be crossed in terms ot the structure or the econorQ" ot the country and the nature ot its institu- tions. Railways and power -- some ot these matters are mat- ters ot constitutional provision as to basically what the character shall be of the development of the country. Then, after you get past the stage ot constitutional convention, elections are to be held in February, and the new regime -- and everybody speaks ot it as "the new regime;" it is going to be a new page in Argentine history; it will be their first democratically elected government tor a long while -- this new government would take over as of about the first ot May. And the present government has the feeling and conveys the feeling to us, that they are doing their very best to keep the boat stable in this time prior to the elections. Their philosophy is -- as you know, it is a military Junta which is  62 STRICTLY CONFIDENTIAL 7 presently in power 1 with a civilian cabinet. The philosophy of the military Junta is just to keep things going until the elections 1 when a mandate will be given by the people to the Government to solve some of these basic issues. And you get the reaction on a thing like the power prob- lem1 "Well 1 we don't have a mandate to deal with this. This i ua ! is too illl)ortant in the long-range future of the country for ! to deal with it at the present time." Now 1 it is this as much as anything else that creates the timing problem1 and we told our Argentine counterparts frankly that we wanted to get right to work and work out things with them1 work out a program on the railways 1 work out some under-: standing on some of these other policy problems 1 ask for declarations from them as to their intentions. But as we discussed this and it became clear that it was going to be ! extremely difficult for this government to give the kind or commitments and assurances that would be of a sufficiently lasting nature to carry real weight with us1 we had to tell them that it looked to us as if -- "Let's go ahead and work these things up 1 " but it looked as if we would have to have some kind of confirmation of the understandings which we reached from the successor government 1 let's call it the new government 1 which will be elected in February and take office in May. Now 1 this is 1 of course 1 a pretty short time. Even at  63 STRICTLY CONFIDENTIAL 8 best if we taclcled this ve-r:, difficult railway picture we might not be ready with a loan betore early next year anyway. But nonetheless, this political course or events may lead, therefore, to some delays. One point I would like particularly to mention is illus- trative of the kind ot problem. Perhaps you are all familiar with this, that a few days before the election tor the constitutional convention -- and the significance of this timing has not been lost on anybody -- a few days betore the elections tor the constitutional convention the government terminated the concessions ot the private power companies that served Buenos Aires. You may have seen a good deal of publicity on this, and outcry, and it undoubtedly has done serious damage to Argentina 1 s repu- tation so far as its treatment of foreign capital is concerned There is a long controversy about the position of the power 1 companies there, and the case certainly has two sides, but this was a pretty arbitrary and abrupt action, and its timing had an unfortunate impact abroad. But worse than that, and I think more fundamentally, it has confronted the government, these concessions-~ the Kade Concession, which is the most important company, expires on December 31, and the government simply hasn't got a policy as to what is going to happen after December 31 1n the pro- vision of power for the industrial heart of Argentina.  64 9 STRICTLY CONFIDENTIAL Many declarations are made about their reluctance to take it over, about their hope to secure the collaboration of private capital and private enterprise in tinding a solution, but again when we really tried to tind out what policy would be formulated, we couldn't get an answer or the answer was, at best, that this is probably something that can only be solved by a new government. It is an acute political problem in Buenos Aires and in Argentina generally, and the present government doesn't feel it has a mandate to really deal with it. Now, our Argentine co\Ulterparts with whom we talked were, ot course, disappointed that we couldn't contemplate a taster time schedule on lending. They realized that it would take a time to work out a loan in any case. They further realized that the actual physical ettects ot a loan that the Banlc might make tor the railways would not have -- there would be no physical consequences, no physical improvements in the rail- ways in the time before this present government turns over to its successor. And yet they felt, or course, it would be ot !i very important psychological ettect, let 's say, tor the Bank I: i Ii at this time or in the fairly near future to announce loans ii I i\ ;1 in Argentina. \! We lett it on the note that what we proposed specifically ii was that we get ahead in the field of the railways. We proposed that after the Annual Meeting a team of experts and I  STRICTLY CONFIDENTIAL 10 executives from the Argentine railways come up to Washington and sit down with our technical departments and start talking about railway programs, how we had financed them elsewhere in the world, what their needs were, what their procurement methods were, begin bu1.Lding up a background from which an understanding on general principles could come about, from which we could gradually develop a specific railway loan. And I think that is probably about the way things will work out. We didn •t firmly agree on Just the next steps. We wer~ going, of course, to meet again soon at the annual meeting, and it was agreed that we could pursue tbe discus- sions at that time.