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Authorized for public release by the FOMC Secretariat on 8/21/2020

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

July 15, 1974
CONFIDENTIAL

(FR)

To:

Federal Open Market Committee

From:

Chairman Burns

Subject:

Draft Letter to the Secretary of the Treasury Concerning

Possible Use by Italy of the Federal Reserve Swap Line

Even though the Italian authorities now appear to be taking
substantial actions toward bringing about needed adjustments in the
Italian economy, Italy may well need several billion dollars of mediumterm financing over the next year or so to cover its increased petroleum

import costs.
The U.S. Government has indicated to the Italian Government
that it would be prepared to contribute in some way to such financing,
and the Secretary of the Treasury expects to be discussing this matter
during his visit to Europe this month.

In these circumstances, it seems desirable for the Federal

Reserve System to make clear to the Secretary the nature of the
System's swap arrangement with the Bank of Italy, and in particular
to stress that it is a short-term facility which cannot be relied on
for longer-term financing needs.
A draft letter to the Secretary is attached for the Committee's
consideration at its meeting on Tuesday.

In the interest of expediting

discussion of this matter, I hope that the members will concern themselves
with substance rather than with precise phrasing.

Attachment

Authorized for public release by the FOMC Secretariat on 8/21/2020

DRAFT

CONFIDENTIAL

(FR)

Dear Bill:
In view of the possibility that you may be engaging in
talks about the provision of financial assistance to Italy, I

am writing on behalf of the Federal Open Market Committee to
clarify the status of the $3 billion reciprocal currency arrangement (swap line) between the Federal Reserve System and the Bank
of Italy.
The swap facility can be drawn on subject to the conditions
and limitations arising from its nature and purpose.

It has always

been understood by both central bank parties to the swap arrangement that swap drawings are available only to meet short-term needs.
Drawings are normally

made for a period of three months, and while

they may sometimes be renewed, it is in no case envisaged that they

will remain outstanding for longer than one year.

Therefore the

swap line cannot be used to make any contribution to medium-term
or long-term financing needs.
In present circumstances, recognizing that
(a)

the Italian authorities now appear to be taking
substantial actions toward bringing about needed
adjustments in the domestic Italian economy and

in the Italian balance of payments, and that

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CONFIDENTIAL

(b)

-2-

(FR)

some time may be needed to arrange an appropriate

package of external financial assistance for Italy,
the Federal Reserve System would be prepared to allow the Bank of
Italy to make some use of its swap line for interim, short-term
financing purposes.
We have had no specific discussions with the Bank of Italy

about this.

But, for your information, the Federal Open Market

Committee which decides these matters has been thinking along the
following lines.

It would be appropriate for the Bank of Italy

to draw, say, $250 million freely, and to draw up to an additional
$250 million subject to conditions to be specified, such as that
Italy obtain commensurate amounts on comparable terms from other
sources, including other central banks and particularly the U.S.
Exchange Stabilization Fund.

It would be expected that these

drawings would be repaid within three months, subject to periodic

extensions, if necessary, up to one year.
For any drawings by the Bank of Italy on the System
beyond $500 million, the Committee would expect, in addition to
commensurate Italian drawings on other sources, that firm takeout provisions would be negotiated (e.g., by the pledge of proceeds
from prospective IMF drawings or of gold collateral), so that the
repayment of such swap drawings within one year would be assured.

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CONFIDENTIAL

(FR)

-3-

I am sure you will agree that it would be helpful if
you were to note, should the subject of the System's swap arrange-

ments arise in your talks, that decisions concerning these arrangements are in the province of the Federal Open Market Committee.
Sincerely yours,

Arthur F. Burns


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102