FROI 1 SUBJECT PanZL1 la Canal Treaty -- Last Decisions Yon vill be h eti1 g with iuub ssadors Deneke and Lino vitz and Pan 'mz 'e r 'ridc' l orning zd 9 Hl a m Our Negotiatoys recornrnendcd that you do th t to convey to then and inciilcctly to Torrijo i yo '1' strong commi tm 'nt t a n ' v treaty and y01 r equally strong fedings about WIlat the United can do to help liJrt ltl0re impo -tantly U S Co I1I10 s lO To eli that you will probably first want to exarnine and make decis ons suggested in Vance's memora ldum attached at Tab A As c result of the discussion with the Parl ilm m' ' U on t 1- te various elemonts of the economic package our Y'' l'cgC tiatol'S believe that the Panam n i ans expect an economic package and that negotiations would bJ eak off if we did not present on e So the issues for decision have narrowed to • How big should the pac1cage be • What items should be in it As a way of underscoring the hnportance of these decisions let me just sketch very briefly tNO alternative scenarios which might follov r from these decisions Scenario 1 If you decide on a small package or for HI t matter any pa ckage which is not satisfactory fo the Panamanians then it is quite probable that negotiations will indeed breal down 'With equally high probctbility theJ 'c Iill be l'io' ing in Panama which wIll spill over into the Zone The Canal would be jc'Opardized md relations with Panama and all of Latin America axd UlO developjng world would be seriously perhaps irreparably halmed I Scenario II If you d2cic1o on the full package and the Panam l niar s accept il the it is quite p0ssible iklt Sencdc would Hot ratify the treaty All agencies agree th 3 i the fight in Congress -vill be much tougher jf such a p ck age exists A defeat in the Congn ss on tbis issue w'ill not only jeopardize the Canal 2nd our rebtioDs with Panama and Latin Americ l because you will h ve to invest so much of your politic d capital in thif effort 3 defeat might strike 3 signHicant blow at your ove cal1 effectiveness Thus the decision is a momentous one and you might first want to consult with the Vice Presid mt who hM been I 1E eting periodically with SenatorE to discllss thi s issue and vlith Hamilton Jordan and also perhaps to speak with several Congressional leaders Byrd Cranston and Humphrey 'Nill probably take the lead on this issue The decisions become even more difficult when one examines the indivi dual elements in the package Raising tolls by 30-35 percent -vill cause serious economic and more serious political problems with U S and forei gn shippers who stin complain over the two toll increases totalling about 50 percent in the past two years On the other hand the economists say that the Canal Vlould increase its revenue as a result of the toll hike though it is hardly certain that it will earn as much as $40-50 million On the other elements of the package -- Eximbank AID Housing Guarantees OPIC military assistance -- we will clearly need more detailed consultations but the important point is that they v ill be viewed as parts of an overall package with a bottom-line dollar figure of $345 million plus $50 million from tolls $395 million On the question of the use of interest payments both State and Treasury are indifferent on whether we should use the $20 million to establish a $200 million co-financing scheme or as a fixed payment The co-financing scheme 1ay not be acceptable to Congress but the alternative of a fixed payment the Negotiators with a fall-back position Where State and Treasury disagree is whether we should guarantee a fixed payr lent State prefers or guarantee such a payment only if revenues P lit Treasury and I prefer Torrijos but if you prefer I am sure th y would be satisfied to convey lust c T ral l1r' SS age SECRET - GDS