The Multinational Monitor

WINTER 19878-79 - VOLUME 1 - NUMBER 1


Private International Banks Support Chilean Junta

'Now that the military has destroyed fifty years of progressive social change in Chile, the banks are making sure that the junta does not run short of cash.'

By Michael Moffitt and Isabel Letelier

In the first five years since the Chilean military junta led by General Augusto Pinochet overthrew the democratically elected government of President Salvador Allende, the Chilean people have suffered greatly. Civil liberties have been trampled; political parties and trade unions have been banned; thousands have been tortured and murdered or have simply disappeared. Hunger and unemployment are widespread.

International condemnation of the junta's human rights record led many governments to reduce their assistance to Chile in an attempt to force changes in the junta's policies. But the repression continues unchecked. New data from a confidential source shows why: an enormous influx of private multinational bank loans since 1976 has enabled the junta to thumb its nose at the international campaign designed to improve the human rights situation in Chile.

After the September 11, 1973 coup, the Pinochet dictatorship was supported politically and financially by various agencies of the United States government. While Pinochet dismantled the democratic institutions that Chileans had enjoyed for over 160 years, the Nixon and Ford administrations quickly restored the aid programs that were halted under Allende. Multinational lending agencies such as the World Bank and the Inter-American Development Bank quickly followed suit. In 1974 alone, the junta received commitments of $125 million in direct U.S. assistance, whereas the Allende government received less than $25 million during its three years in office. Since 1973, the Chilean junta has received nearly $350 million in bilateral assistance from the United States and roughly another $400 million from multilateral development banks. The International Monetary Fund (IMF) also provided Chile with another $380 million in balance of payments help.

This was no accident. According to a U.S. Senate report, the C.I.A. helped Chilean economists and businessmen who were plotting to overthrow Allende to prepare a "blueprint" for the Chilean economy based upon the conservative "monetarist" theories developed by Milton Friedman and others at the University of Chicago. Following the coup, Pinochet selected the "Chicago Boys" as his top economic policy makers. These economists, most of whom were trained at the University of Chicago, began almost immediately to dismantle the public sector of the economy in order to reverse decades of social change. To implement the Chicago "shock treatment," as Business Week put it, the junta had to eliminate politics from Chilean society. After 4 years of starving social services, holding down wages, and increasing unemployment, Central Bank President Alvaro Bardon declared that: "The success of the economic program has been fantastic. Who would have thought that you could do such a thing in Chile? We were always too political. We never wanted to make sacrifices."

The junta's economic policies generated a dramatic redistribution of income from workers and the poor to the propertied classes and foreign enterprises. In 1972, according to a confidential IMF staff report, wage and salaried workers received 63% of total income in Chile whereas 37% went to the propertied sectors in the form of profits, dividends, and rents. By 1974, the shares had literally been reversed. 66% of the total income was received by the propertied classes and only 38% by the workers.

Chileans have been forced to endure conditions of poverty and , degradation unknown in Chile in recent times so that a tiny minority can engage in unlimited personal consumption and financial speculation. Today in Chile, the real unemployment is nearly 25% of the labor force. Despite the junta's claim that the unemployment picture has improved since 1976, 7% of the labor force must participate in the minimum employment program (PEM) just to stay alive. They earn less than $40 U.S. per month, while most prices have risen to U.S. levels.

The massive flow of foreign assistance from the United St and multilateral institutions continued unabated until early 1976; however, this aid became increasingly difficult to justify in the light of the junta's abysmal human rights record and the desperate plight of the majority of Chileans. After repeated condemnations of the junta by the UN, the International Labor Organization, Amnesty International, and individual U.S. congressmen who visited Chile, the U.S. Congress cut off direct American assistance to Chile. In 1976, over the opposition of the Ford Administration, the U.S. Congress banned any further military assistance to the junta and limited economic assistance for fiscal year 1977 to a maximum of $27.5 million - an amount that Pinochet ultimately rejected. In June 1976, under the leadership of Representative Tom Harkin (D-Iowa), Congress passed legislation directing the U.S. representatives to the Inter-American Development Bank to vote against further loans to Chile unless it could be demonstrated that the funds would directly benefit the poor people in Chile.

That the United States moved to cut off assistance to Chile was especially damaging to the junta's image. While Britain, Holland, and the Scandinavian countries had largely cut off aid to the junta, until 1976 the U.S. government had remained strongly supportive of the Pinochet regime. But while Congress was applying tougher human rights standards to its foreign aid program, representatives of the Ford administration were busy drumming up support for the junta elsewhere. In May 1976, Treasury Secretary and former Wall Street investment banker William Simon visited Chile and publicly congratulated Pinochet for bringing "economic freedom" to Chile. This positive assessment of Chile's economy by a prominent Wall Street figure promptly improved Chile's reputation in the financial community.

Although the junta began to court foreign investment immediately after the coup, private investors were unwilling to risk their money on a regime that they believed was inherently unstable from the outset. However, beginning in mid-1976, there was an abrupt change in the sources of Chile's foreign borrowing. Private U.S.-based multinational banks, operating through off-shore banking havens in Panama and the Bahamas, began to lend hundreds of millions of dollars to the Chilean Central Bank, various other state agencies, and the private sector. Other banks in Canada, West Germany, Spain, the Netherlands, and the United Kingdom, also managed sizable loans.

Between 1975 and 1976, with U.S. bilateral aid drying up and Chile's old debts falling due, private multinational bank lending to Chile increased from less than $100 million to $520 million - a fivefold jump in one year. Private bank lending soared to $858 million in 1977. As a percentage of Chile's borrowing, private bank loans and suppliers' credits increased from less than 25% of Chile's foreign borrowing in 1975, to 59% in 1976, to more than 80% in 1977. Confidential estimates indicate that, by 1978, private sector loans will account for more than 90% of Chile's total foreign borrowing.

Six U.S. banks, Citicorp, Bankers Trust, Morgan Guaranty Trust Co., Wells Fargo, Chemical Bank of New York, and First Chicago have managed consortia that account for most of the loans. Together, these banks have arranged about $700 million in loans to the Chilean government in the last two years. The leader is Morgan, which has managed groups providing the government with $230 million in loans. Morgan is followed by Bankers Trust with $180 million, Wells Fargo with $155 million, Chemical Bank with $125 million, Citicorp with $102 million, and First Chicago with $77 million.

While the vast majority of Chileans are flatly opposed to the junta's economic policies, the private banks were delighted. The junta had conformed perfectly to the bankers' conception of "sound economic policies." They had given top priority to meeting their debt obligations, controlling inflation, cutting the budget, holding down wages, and allowing maximum freedom for private enterprise. Despite the tremendous internal costs of these policies, the banks began to lend the large sums needed to prop up the Chilean economy. The junta would simply have been unable to obtain these funds elsewhere unless it had been willing to modify its treatment of political prisoners and fundamental freedoms.

The junta's policymakers also found the new gush of credit ex tremely useful in financing Chile's $500 million current account deficit incurred in 1977. The deficit was largely due to the lowering of import barriers and the tremendous costs of paying off old debts. Since 1976, private banks have given Chile huge amounts of money so that Chile can import luxury goods from the U.S., Western Europe, and Japan and pay off their past debts to public and private creditors. But despite paying out billions in debt service payments, Chile still has a huge debt burden: the difference is that Chile is now indebted to private, not public, institutions. In 1977, while Chile's exports stagnated, the country still had to meet foreign debt payments of nearly $1.2 billion. This left Chile with a ratio of debt service to exports of 54.2%, the highest debt service ratio in the world. In other words, for every $1 of its export earnings, Chile must use $0.54 simply to pay off old debts.

The boom in private bank lending has continued in 1978. In January, the Wells Fargo Bank headed a consortium that granted the Central Bank a new line of credit totalling $125 million. In early April, a consortium of forty banks led by Morgan Guaranty Trust Co., loaned the Central Bank $210 million, the largest single private loan in Chile's history.

Moreover, since the beginning of 1978, private multinational corporations began to demonstrate renewed interest in Chilean investments. Exxon's $107 million purchase last January of the state-owned La Disputada copper mines was by far the largest investment in Chile since 1973 and one of the largest in Chilean history. [see "Exxon Diversifies" this issue. ed. ] This investment came on the heels of Goodyear Tire's decision to purchase CORFO-INSA, the stateowned tire factory, for $36 million. The Exxon investment was significant not only because of its size, but also because it may serve as an indication to other firms that the Chilean junta is now considered stable enough in financial circles to warrant large direct investment. Like the influx of private bank loans, increasing investments by multinational corporations will surely be exploited by the regime in its attempt to gain internal political legitimacy and diffuse international criticism of its human , rights violations. I

Private multinational banks have been financing the Pinochet dictatorship since 1976. While most governments have reduced or eliminated economic and military assistance to Chile because of the junta's human rights violations, the tremendous increase in private bank loans has allowed the junta to ignore international criticism while retaining access to unlimited financial--resources. Thus the lending, operations of private multinational banks based in North America and Western Europe have directly circumvented the stated official policies of Chile's official creditors.

Unfortunately, President Carter does not seem to share this assessment of the human rights implications of multinational banks' lending practices. Asked how he would respond if the U.S. Congress attempted to withhold U.S. private bank loans from countries which violate human rights, he stated that, " would be inconceivable to me that any act of Congress would try to restrict the lending of money by American private banks.. .under any circumstances. This would violate the principles of our free enterprise system. And if such an act was passed by the Congress, I would not approve it." There is, he said, no "incompatibility between a belief in the free enterprise system where a government does not dominate the banks ...and a deep and consistent and permanent and strong belief in enhancing human rights around the world .... [T] he American business community[s] completely a commitment of our nation to human rights." There is, he concluded, " conflict between human rights on the one hand and the free enterprise system on the other."

Clearly, in the case of Chile, there is a direct conflict between the freedom of private enterprise and the international efforts to restore human rights to a country which enjoyed them for so long. The large bank loans to the Chilean government have given the junta a green light to go on violating human rights. Freed from international pressure, Pinochet has acted with impunity while attempting to solidify and enhance his rule. In some ways, the repression is now more subtle than before, but the dictatorship is still intact.

What has changed in Chile is the business climate. For nearly three years, the junta was largely unable to attract private loans or investments. Now, however, private banks have lent Chile over $2 billion, suppliers' credits have soared, and multinational corporations have begun to return.

Fortunately, the role of multinational corporations and banks in propping up the Pinochet dictatorship has not gone unnoticed. Senator Edward Kennedy and Representative Tom Harkin have introduced legislation which would require detailed disclosure by the banks of their loans to governments whose U.S. aid has been cut for human rights reasons. The United Auto Workers (UAW) union has condemned the Pinochet regime as a "mortal enemy of free trade unionism" and called for a grass roots coalition to pressure the banks to stop lending to countries that destroy trade union rights, such as Chile and South Africa.

The efforts of the UAW, Senator Kennedy, and Congressman Harkin are important first steps in coming to grips with the power of multinational banks. The internationalization of the U.S. banking system has revolutionized world monetary affairs. This process, like the worldwide expansion of industrial corporations during the 1950's and 1960's, has created a range of conflicts between the interests of private firms and the needs of public policy, including the power to determine whether governments will stand or fall. During the Allende years, the corporations "destabilized" the regime to ensure that democratic socialism could never become a reality. Now that the military has destroyed fifty years of progressive social change in Chile, the banks are making sure they don't run short of cash.

Michael Moffitt and Isabel Letelier are fellows of the Transna tional Institute in Washington, D.C. Their spouses, former Chilean am bassador Orlando Letelier and Ronni Karpen Moffitt, died in a September 1976 car bombing in Washington. Recently, the U.S. government charged four officials of the Chilean secret police with conspiring to murder Letelier - one of the most vocal opponents of the Pinochet regime.

As critics of the continuing human rights violations of the regime, Mr. Moffitt and Mrs. Letelier assembled data from confidential sources proving that private multinational banks have become the Chilean junta's chief source of financial support.

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