1. SUMMARY: THE EC COMMISSION IS DRAWING UP SPECIFIC PROPOSALS
FOR INTERNATIONAL BORROWING AND CONCERTED FLOATING--IDEAS WHICH IT ORIGINALLY RAISED AT THE EC COUNCIL (FINANCE) MEETING JUNE 6
(REFTEL). ON THE PREMISE THAT THE INTERNATIONAL BANKING SYSTEM
IS FACING SERIOUS PROBLEMS IN RECYCLING OIL REVENUES, THE
COMMISSION IS WORKING SERIOUSLY ON A PROPOSAL FOR (A) THE
FLOATING OF A MAJOR COMMUNITY LOAN FOR MEMBER STATES IN DEFICIT,
AND (B) THE CREATION OF A COMMUNITY FINANCIAL FUND THAT WOULD
ACT AS A MAJOR BANK IN THE EURODOLLAR MARKET. ON CONCERTED
FLOATING, THE COMMISSION IS REPORTEDLY TORN BETWEEN CREATION OF
A NEW SNAKE (VIEWED AS HIGHLY IMPROBABLE) AND A MECHANISM FOR
PLACING THE EXISTING MINI-SNAKE IN A "COMMUNITY" FRAMEWORK.
THE COMMISSION HAS PREPARED A BRIEF STATUS REPORT ON GOLD--
WITHOUT SPECIFIC PROPOSALS--BASED ON THE ZEIST PROPOSALS AND
THE C-20 MEETING IN WASHINGTON. THE COMMISSION'S IDEAS ON
THESE SUBJECTS ARE STILL VAGUE AND PRELIMINARY. THEY WILL BE
DEVELOPED FURTHER IN PREPARATION FOR DISCUSSION BY THE COUNCIL
(FINANCE) AT ITS NEXT MEETING JULY 15. END SUMMARY.
2. THE PROPOSALS ON RECYCLING, WHICH ARE STILL IN THE DIS-
CUSSION STAGE, ASSUME A COMMUNITY DEFICIT OF $18 TO $20 BILLION
PER YEAR, A NET SURPLUS OF OIL EXPORTERS OF $60 BILLION A YEAR
AND A EURODOLLAR MARKET OF AT LEAST $160 BILLION. GROWTH IN
EURODOLLAR CREDITS IS ESTIMATED AT $12 BILLION DURING THE FIRST
QUARTER OF 1974 AS COMPARED WITH $21.5 BILLION IN ALL OF 1973.
3. THE PROPOSALS DRAW ATTENTION TO RECENT PROBLEMS OF THE
EURODOLLAR MARKET IN RECYCLING--PARTICULARLY (A) VERY SHORT-TERM
DEPOSITS (LESS THAN ONE MONTH); (B) PROGRESSIVE LOSS OF CON-
FIDENCE DUE TO THE ABSENCE OF A LENDER OF LAST RESORT; (C) GROW-
ING RISKS OF A LIQUIDITY CRISIS IN THE TRANSFORMING OF SHORT-
TERM DEPOSITS INTO LONG-TERM LENDING; (D) CEILINGS ON DEPOSIT-
ASSET RATIOS; AND (E) GROWING UNWILLINGNESS OF MANY INTERNATIONAL
BANKS TO BORROW BEYOND CERTAIN LIMITS.
4. THE COMMISSION WOULD ENVISAGE TWO STEPS IN THE FACE OF THE
ABOVE: THE FIRST WOULD BE THE PLACING OF A LARGE LOAN BY
SOME COMMUNITY INSTITUTION WITHIN THE NEXT THREE OR FOUR MONTHS
TO PROVIDE CREDITS TO DEFICIT MEMBER STATES ON CONDITIONS
DETERMINED BY THE COMMUNITY. CONSILTATIONS WITH MAJOR BANKING
GROUPS IN THE COMMUNITY CONCERNING SUCH AN OPERATION ARE REPORTEDLY UNDER WAY, AND THEIR REACTION IS VIEWED AS POSITIVE
PROVIDED THAT THERE IS A MECHANISM FOR COMMUNITY RESPONSIBILITY
OR THAT THE EC MONETARY COOPERATION FUND ACTS AS THE BORROWER,
WHICH WOULD IMPLY COMMUNITY RESPONSIBILITY. THE SECOND STEP
WOULD BE THE CREATION OF A COMMUNITY FINANCIAL FUND WHICH WOULD
BE ABLE TO ACT AS A MAJOR BANKING ORGANIZATION IN THE EURODOLLAR
MARKET. SUCH A FUND WOULD CONTRIBUTE GREATLY TO RESOLVING THE
KEY PROBLEM OF DIFFERING MATURITIES ON THE BORROWING AND LENDING
SIDE. THE FUND WOULD TAKE DEPOSITS AND LEND TO A NUMBER OF
INSTITUTIONAL BORROWERS. IT WOULD BE A PERMANENT ORGANIZATION
WHICH WOULD BE OPERATED BY THE EUROPEAN INVESTMENT BANK WITHIN
THE FRAMEWORK OF DIRECTIVES DETERMINED BY THE GOVERNORS OF THE
BANK. THE COMMISSION'S PROPOSALS ENVISAGE THAT SUCH A FUND
WOULD BECOME A MOJOR FACTOR IN THE LONG-TERM MARKET AND OPERATE
INCREASINGLY IN THE EURO-BOND MARKET, ON WHICH IT COULD FLOAT
LONG-TERM BONDS EVENTUALLY DENOMINATED IN A COMMUNITY UNIT
ACCOUNT.
5. THE COMMISSION WOULD GIVE ABSOLUTE PRIORITY IN THE NEAR
FUTURE TO MAJOR BORROWING AS DESCRIBED ABOVE WITH THE
CREATION OF A FINANCIAL FUND FOLLOWING AS SOON AS POSSIBLE
THEREAFTER. OVER A LONGER PERIOD THE COMMISSION WOULD
CONSIDER THE POSSIBILITY OF A COMMUNITY INSURANCE SYSTEM
MODELED ON THE FDIC.
6. ALTHOUGH THE COMMISSION'S IDEAS ON RECYCLING SEEM AMBITIOUS,
OUR SOURCES TELL US THE COMMISSION IS SUFFICIENTLY IMPRESSED
WITH THE GRAVITY OF THE PROBLEM TO PRESS ITS IDEAS WITH VIGOR
AND DETERMINATION.
7. COMMISSION OFFICIALS ARE ALSO PREPARING PROPOSALS ON SOME
FORM OF CONCERTED FLOATING. THESE RANGE FROM A MAXIMALIST
APPROACH INVOLVING CREATION OF A NEW "SNAKE" TO A MINIMALIST
SOLUTION LIMITED TO SOME SORT OF COMMUNITY PARTICIPATION IN
THE MANAGEMENT OF THE PRESENT MINI-SNAKE (THE FRG, DENMARK
AND BENELUX, PLUS SWEDEN AND NORWAY). ALTHOUGH THERE IS SOME
SUPPORT WITHIN THE COMMISSION FOR A NEW SNAKE, OUR SOURCES TELL
US MOST COMMISSION MEMBERS HAVE REPORTEDLY REACTED NEGATIVELY--
AND WITH BEWILDERMENT--TO THIS RATHER SKETCHY PROPOSAL. THOSE
WITH THIS ATTITUDE SAY THE TIME IS HARDLY RIPE FOR NEW MONETARY
LIMITED OFFICIAL USE EXPERIMENTS AND INTERVENTION SYSTEMS--EVEN ASSUMING FLUCTUATION
MARGINS CONSIDERABLY WIDER THAN THE CURRENT 2.25 PERCENT.
LITTLE IS EXPECTED TO COME OF THIS INITIATIVE. ON THE OHTER
HAND, THERE IS A STRONG DESIRE IN THE COMMISSION TO SEE AN END
TO ADMINISTRATION OF THE MINI-SNAKE SOLELY BY THE PARTICIPATING
NATIONS. THERE MAY THUS BE A SERIOUS EFFORT TO PLACE IT IN A
COMMUNITY FRAMEWORK, WHICH WOULD IMPLY SOME COMMISSION PARTI-
CIPATION AND BROADER CONSULTATION AMONG ALL THE MEMBER STATES.
8. AS YET THERE ARE NO CONCRETE COMMISSION PROPOSALS ON GOLD.
COMMISSION SERVICES ARE DIGESTING THE AGREEMENT IN PRINCIPLE
AT WASHINGTON ON USE OF GOLD AS COLLATERAL, TRYING TO DETERMINE
PRECISELY WHAT WAS AGREED UPON AND ITS IMPLICATIONS, AND ASKING
THEMSELVES WHERE THE COMMUNITY GOES FROM HERE. IT IS GENERALLY
RECOGNIZED THAT ALL ANY OF THE NEEDIER MEMBER STATES REALLY WANT
IS REVALUATION OF THEIR RESERVES--PROPOSALS ON GOLD SIMPLY BEING
A MEANS TO THIS END. THESE MEMBER STATES MAY THEREFORE BE EX-
PECTED TO PRESS FOR COMMUNITY PROPOSALS DESIGNED TO ACHIEVE
THIS REVALUATION.
9. SO FAR THE COMMISSION HAS MERELY PREPARED A SHORT PAPER OUT-
LINING THE CURRENT STATUS OF THE GOLD ISSUE WHILE RETAINING THE
COMMUNITY'S ZEIST PROPOSLAS AS THE BASIS FOR EVENTUAL COMMUNITY
INITIATIVES. ONE POINT ON WHICH THERE SEEMS TO BE UNANIMITY
WITHIN THE COMMISSION IS THAT ANY SPECIFIC SOLUTIONS SHOULD NOT
BE BILATERAL--SUCH AS A DIRECT ARRANGEMENT BETWEEN THE FRG AND
ITALY--BUT RATHER SHOULD BE IN THE FRAMEWORK OF COMMUNITY
INSTITUTIONS SUCH AS THE MONETARY COOPERATION FUND. ON THIS
BASIS, ITALY'S GOLD WOULD BE PLEDGED TO THE FUND IN EXCHANGE
FOR EC UNITS OF ACCOUNT.
10. THE EC COUNCIL (FINANCE) IS EXPECTED TO DISCUSS ALL THE
ABOVE ISSUES AT ITS NEXT MEETING JULY 15. GREENWALD
Source: https://www.wikileaks.org/plusd/cables/1974BERN04676_b.html
Summary: Timeline overview
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