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TREAS.
HJ
10
. A13P4
v.311
u.s.
Department of the Treasury
PRESS RELEASES
lillo ne 51 •. 204 '
Dell artm ent of the T~~~SU" • Was hing ton, D.C. • Tele
0U I 0 J j
oJ.Jj
OPENING STATEMENT OF
DEPUTY SECRETARY JOHN E. ROBSON
UNITED STATES DEPARTMENT OF THE TREASURY
BEFORE THE
HOUSE WAYS AND MEANS
OVERSIGHT AND TRADE SUBCOMMITTEES
UNITED STATES HOUSE OF REPRESENTATIVES
WASHINGTON, D.C.
OCTOBER 16, 1991
NB 1502
THANK YOU CHAIRMAN GIBBONS, CHAIRMAN PICKLE, AND MEMBERS OF
THE TRADE AND OVERSIGHT SUBCOMMITTEES FOR YOUR INVITATION TO
DISCUSS THE UNITED STATES CUSTOMS SERVICE'S ENFORCEMENT OF THE
U. S. /CANADA FREE TRADE AGREEMENT eFTA).
MORE SPECIFICALLY, I AM
HERE TODAY TO DISCUSS THE TREASURY DEPARTMENT'S ROLE AND MY OWN
WITH REGARD TO IMPLEMENTATION AND ENFORCEMENT OF THE DOMESTIC
CONTENT REQUIREMENTS UNDER THE FTA FOR AUTOS AND TO A PENDING
AUDIT OF THE HONDA MOTORS CORPORATION'S COMPLIANCE WITH THE FTA
RULES OF ORIGIN.
I WISH TO STATE AT THE OUTSET THAT THE HONDA AUDIT IS NOT
COMPLETE -- AND AS COMMISSIONER CAROL HALLETT HAS PREVIOUSLY
INDICATED TO THE COMMITTEE, WILL NOT BE COMPLETE UNTIL FEBRUARY
OF THIS COMING YEAR.
THEREFORE, NEITHER I, NOR ANY OF THE OTHER
WITNESSES, ARE IN A POSITION TO ADDRESS QUESTIONS PERTAINING TO
INFORMATION THUS FAR ELICITED IN THAT AUDIT.
NOR, AS THE
COMMITTEE HAS BEEN INFORMED, WILL THE DEPARTMENT BE ABLE TO
PROVIDE THE HONDA AUDIT "WHITE PAPER" WHICH HAS BEEN REQUESTED AS
IT IS THE DEPARTMENT'S LONG ESTABLISHED POLICY NOT TO RELEASE
MATERIALS THAT CONTAIN CONFIDENTIAL BUSINESS INFORMATION PROVIDED
IN THE COURSE OF TAX AUDITS, INCLUDING CUSTOMS AUDITS.
I HAVE, HOWEVER, PROVIDED THE COMMITTEE WITH A COPY OF A
MARCH 21 MEMORANDUM ON THIS SUBJECT FROM COMMISSIONER HALLETT TO
ME -- WHICH I UNDERSTAND HAS BEEN SHOWN TO ALL INTERESTED MEMBERS
OF THE COMMITTEE.
FURTHER, WE WILL ATTEMPT TO ANSWER AS MANY
QUESTIONS AS YOU MAY HAVE ON GENERAL ISSUES WHICH HAVE BEEN
- 2 -
RAISED IN THE COURSE OF THE AUDIT.
I.
TREASURY OVERSIGHT ROLE
GOING BACK TO MAY 8TH, 1792, BY AN ACT INITIATED BY THIS
COMMITTEE, THE SECRETARY OF THE TREASURY AND HIS DESIGNEES HAVE
BEEN CHARGED WITH OVERSIGHT OF THE
u.s.
CUSTOMS SERVICE.
IN
FACT, WE HAVE TAKEN THIS CHARGE SERIOUSLY AT THE DEPARTMENT WITH
THE STRONG ENCOURAGEMENT OF THIS COMMITTEE AS WELL AS THE SENATE
FINANCE COMMITTEE.
IN RECENT YEARS THIS ROLE HAS BEEN
SUPPLEMENTED BY THE CONGRESS WITH THE STATUTORY CREATION OF AN
ADVISORY COMMITTEE ON COMMERCIAL OPERATIONS WHICH HAS BEEN VERY
USEFUL TO THE DEPARTMENT ON SUCH IMPORTANT MATTERS AS THE CUSTOMS
MODERNIZATION ACT WHICH IS PRESENTLY PENDING BEFORE THE
COMMITTEE.
WITH RESPECT TO SPECIFIC AUDITS, REGULATIONS, OR
CLASSIFICATION RULINGS, I HAVE BEEN DIRECTLY INVOLVED IN A NUMBER
OF SUCH CASES SINCE COMING INTO MY POSITION AS DEPUTY SECRETARY
OF THE DEPARTMENT IN 1989.
I HAVE, FOR EXAMPLE, BEEN INVOLVED
WITH CUSTOMS CASES PERTAINING TO SPORT UTILITY VEHICLES, ATHLETIC
SHOES, COMPUTER MOTHERBOARDS, TURBINE GENERATORS, AND INCLUSION
OF CERTAIN INTEREST COSTS IN AUTOMOBILE IMPORTS UNDER THE
CANADIAN FTA -- WHICH WAS OF PARTICULAR INTEREST TO MEMBERS OF
THIS COMMITTEE, INCLUDING SOME OF WHOM I CONTACTED WHEN WE HAD
- 3 -
REACHED A DECISION.
I HAVE SPOKEN AND
COP~ESPONDED
WITH A NUMBER
OF OTHER MEMBERS OF THE WAYS AND MEANS COMMITTEE AS WELL AS THE
SENATE FINANCE COMMITTEE ON VARIOUS MATTERS WHICH I HAVE BEEN
ASKED TO EXAMINE.
II.
ROLE WITH HONDA
MY PERSONAL ROLE WITH RESPECT TO THE HONDA MATTER HAS BEEN A
LIMITED ONE.
COMMISSIONER HALLETT BROUGHT THE MATTER TO MY
ATTENTION AND FOLLOWED UP WITH THE MARCH 21 MEMO WHICH YOU HAVE
BEEN FURNISHED.
FOLLOWING THE LEAK TO THE MEDIA OF CONFIDENTIAL
BUSINESS DATA SUBMITTED BY HONDA IN THE COURSE OF THE AUDIT AND
THE MARCH 21 MEMO, I WAS CONTACTED BY AND AGREED TO MEET WITH
REPRESENTATIVES OF HONDA MOTORS.
DURING THAT MEETING ON JUNE 21,
WHICH LASTED APPROXIMATELY 45 MINUTES, I LISTENED TO HONDA'S
PROTESTS ABOUT THE LEAK AND THEIR CONCERNS THAT IT HAD BEEN
DAMAGING TO HONDA MOTORS.
AT NO TIME DURING THAT MEETING DID ANY
OF THE PARTICIPANTS DISCUSS THE SUBSTANCE OF THE AUDIT OR ATTEMPT
TO INFLUENCE ITS OUTCOME.
I MADE ONLY THESE POINTS IN THE MEETING.
FIRST, I CONFIRMED THAT THE AUDIT WAS NOT COMPLETE AND,
THEREFORE NO CONCLUSIONS HAD BEEN REACHED.
WOULD GET A FAIR HEARING.
SECOND, THAT HONDA
THIRD, THAT IF EMPLOYEES OF TREASURY
- 4 -
OR ANY OF ITS BUREAUS WERE RESPONSIBLE FOR THE LEAK TO THE MEDIA
OF CONFIDENTIAL BUSINESS DATA, IT WAS INCONSISTENT WITH OUR
AGREEMENT WITH HONDA TO SAFEGUARD SUCH DATA SUBMITTED IN THE
COURSE OF THE AUDIT, AND, IN MY VIEW, UNPROFESSIONAL.
AND,
FINALLY, THAT I HAD NO VIEWS ON THE SUBSTANCE OF THE AUDIT, AND
THAT WHEN THE AUDIT WAS COMPLETE WE WOULD MAKE OUR FINDINGS AND
CONCLUSIONS AS TO THE FACTS AND LAW AND LET THE CHIPS FALL WHERE
THEY MAY.
THAT IS WHAT I SAID.
AND LET ME EMPHASIZE AGAIN THAT AT NO
POINT WAS THERE ANY DISCUSSION OF THE SUBSTANCE OF THE AUDIT.
III. LEGAL
AND POLICY ISSUES RAISED BY FTA
AS IS FREQUENTLY THE CASE WITH THE IMPLEMENTATION OF
COMPLICATED TRADE LAWS, PREVIOUSLY UNFORESEEN LEGAL AND POLICY
ISSUES WILL
~SE
DURING THE COURSE OF IMPLEMENTATION AND
ENFORCEMENT OF SUCH LAWS.
THIS HAS BEEN TRUE AS WELL IN THE CASE
OF THE U. S. -CANADA FTA.
ALREADY WE HAVE ADDRESSED A RATHER COMPLICATED DETERMINATION
ON THE INCLUSION OF CERTAIN INTEREST COSTS AS A DIRECT COST OF
PROCESSING AND NOW WE ARE FACED WITH A NUMBER OF ADDITIONAL LEGAL
AND POLICY ISSUES IN ORDER TO DETERMINE DOMESTIC CONTENT UNDER
THE PTA.
IT IS CLEAR THAT WE ARE WORKING WITH AN EVOLVING AREA
-
5 -
OF THE LAW -- AND AN AREA WHERE WE MOST CERTAINLY WILL BE SEEKING
A GREATER DEGREE OF CLARITY IN THE CONTEXT OF THE UPCOMING NORTH
AMERICAN FREE TRADE AGREEMENT.
IT IS IMPORTANT THAT WE PROVIDE
AS MUCH CLARITY AS POSSIBLE BEFORE MOVING FORWARD WITH THE
AGREEMENT AND THAT WE LEARN FROM OUR EXPERIENCES WITH THE
CANADIAN AGREEMENT.
AS HAS BEEN INDICATED, THE HONDA AUDIT IS NOT COMPLETE.
VARIOUS LEGAL AND TECHNICAL ISSUES THAT WILL HAVE TO BE ADDRESSED
UNDER THE FTA REMAIN UNDER REVIEW AND ARE NOT MATTERS ON WHICH I
AM CONVERSANT AT THIS POINT.
THEREFORE, I WILL BE LEAVING
DISCUSSION OF THESE MATTERS TO COMMISSIONER HALLETT, DEPUTY
ASSISTANT SECRETARY FOR ENFORCEMENT JOHN SIMPSON, AND THE
TREASURY • S GENERAL COUNSEL JEANNE ARCHIBALD.
I WOULD, HOWEVER,
BE HAPPy TO ADDRESS ANY QUESTIONS I CAN ON MY OVERSIGHT ROLE AT
THE TREASURY AND MY INVOLVEMENT TO DATE WITH RESPECT TO HONDA.
THANK YOU.
THIS CONCLUDES MY INTRODUCTORY REMARKS.
TREASURY N,EWS
,allanment of the T.easurv • washlntl~~~~ D~C,.. Talellhona 5 •• -204'
u .. IUUld/8
Rell1arks by
Secretary of the rrreasury
NicholRs F. Brady
(Pre&ented by Assistant Secretary Olin Wethington)
at the Mornino Session of
the Inter1~ Commitieo
of the International Monetary Fund
Banqkok, Thailand
OctoD~r
13, 1991
Wor l~l ECPGomiQ
Ou~
look
We last met six months ego at a tima o! remarkabl~ change,
tsUU u,\.J"luL'-uni.ly in the c;lobal p()litical economy_
Since then, the rate Of POlitical and eeonomic change has
Accelerated even further, and the opportunities and challenges
have orown even larger.
chall~rll;iC,1'
'Zlhe leeds or economic reform are germ~n~ t inC1 in f:as !.;.eX'll
Etlropl, but will need ~areful cultivation for y~ars to come.
After years of drift, th~ Soviet Union an~ ita republica are
be9inn1ng to make the tundamcntal onanges that ar~ 80 urgently
ne~deQ to create a haeis for healthy ana balanced economic
growth. Latin America hal ~mbraced market m~ehan18m8 more
Quietly, but with impressive d~termination. And here in Asia,
there il g.owing aPDreciation of the lar.~el; benefits that come
with more open and accessible markets and financial systems.
sound
couri~, th~ key to ~UCO~S6
an~ consistent policy choiceG
Of
themselves.
Only they
~re
in any of thes~ efforts is
by the reforming countries
masters ot th~ir own future.
But we also reco9nize our own
reBPon8~bilitie6
to support
the
clobal economic
environment. We and the developinq countries sb.re a need for
solid, sustained qrowth, expanding tra6e and capital flows, low
inflation, and r~asonablG exchange market "tability.
acceler~te the transition pro~es~.
First
indu~tr!al countries must promote a favorable
and
The global eCO}lOmy, however I
and foremost,
renlain.!5 (:haracterized by
widespread weaknesse~, including inadeauato overall Qrowth ot
output an~ trade. We believe that th~ basic concerns we raised
at the Sprin9 meotinq rem~in va11d, and that the task of
achievin~ a dural,le qlobal expanlion remains to be completed.
~1~-15D3
- 2 -
The ~icture is mixe~ in the industrial countries. Aided by
modest recovery in housinQ activity ana a elowin9 of inventory
liQuidGtion, the U.S. economy appears to be recovering after
8
thr~e Quarters of contraction.
!ut there are still weakne$se~ in
key sectors and reqiona. The other major economies in receSSlon
are also lending mixed liQnals and on curr~nt estimatei will
bring only limited str~n~th into 1992. Meanwhile, growth in
J~pan and Germany has already cooled 8ubstan~iAlly, and will
likely slow even furthet' in the months ahead, And the wider
etfeets Of alower German gruwth are oleatly being Seen throughout
the rest of Europe, where growth and growth expectations have
been reduced oonsider.bly,
Por the industrial oountries as a group the outlook is tor
growth of only around 1 ~~cu.nl Lhls year, pioking up to perhaps
the 2-1/2 percent range in 1992. Yet we should reoall that our
recent forecast., and those of the IMF statt, have erred fairly
consistently on th~ side of optimism, and we must remain alert to
sions of qreater-than-expected weakness in the recovery.
We believe that • few elements
our special attention.
or
this overall picture merit
firat, on current projeetions the industrial eountrien ~j.ll
av.~a~ed only about 2 p~rcent annual growth between
1990 and 1992. This i. well below tb~ nearly 3-1/2 percent
averaqa growth performanoe of th~ 1980., and weaker even than
likely have
aVl!rage gl'owth in the 19'1Os
inadeQuate.
Tha prospect
which was widely
0' West European
rogar~ed
gro~th
as
of only ubout 2
per~ent next year is a particula~ conc~rn, given the s~ecial
r~11ance of our new Eastern partners on growing export markets
there.
rhe hasic point is eimple. We are currently operating in a
global economic .nv1~onment characteriz~d by inadequate 9fowth,
high unelnployment and unused' capacity. We e.re toregoina trade
and investment at a time when the world arguably neecs th~m most.
Seconct, impreesivQ p~ogres! hae be~n m~de toward the prioe
stability we need tor long-term sustainable growth. But we have
seen once again that unemployment is a costly and only partially
affective route to low inflation. Experience shows that
underlyinq pressures reflect 8tru(~tur81 riQid1t1es that are beet
de~lt with directly by mArshall~ng the political will to change
the .tatus QUO.
Thir~,
proJected trends raise the prospect of backslidinq on
some of the important proQress that hal been made in reducing key
external imbalances in recent years.
- 3 fourth,
eubetAnt lell t:AdlaHY~ 111~,,"~'" L
ti
tabllll.y
has
been
achieved OYer the past few years, despite 4 number of market
disruptions.
On the whole, this
h~8
been a positive
developm~n·t.
And finally, I would note that the current situation or 1~le
resources ana capacity qivel us the opportunity to raise both
laving and investment and better meet 1.~t1~~te capital needs as
th~y emorge.
Tho
ClUX'rent.
oit"eUl'I\8tclicoee
--
.~·.l\l jllt:alluUl- Lt:LIIl
~L'U:O;j,J~t,; 1.,.1;1
--
would therefore seem to give us fairly cle~r pollcy guidanee.
Our shared ~riority ahould be to return as rapi~ly as we can to a
path or solid, durable ;rowth -- by which I m~an Qrowth that does
not reignite in(l~tion DreGDUre but thftt rlnA~ mAk~ thA mn~t nf
available resource.. Fiscal and monetary policies should
therefore be dirG~ted to achi~ving sustained medium-term growth,
with price stability and lower real intere~t rate ••
Indiv1~ual oiroumstances and polioies will differ.
That is
inevitable. For our part, we .re oommitted to 8 medium-term
ti6cdl v~u~ram which, temporary setbackn notwithstanding, ~111
substentially improve our national savin9 without sacrificing the
~rowth we need to achieve both domestic and external objectives.
Our strong hope is that, together, we can maintain a policy
COUrse that gives ~dequate wei9ht to th~ unique and compelling
~luL~l ch~llenges
~ha~
L1e aneao.
The task is not an easy one. But the rewards
Let's make the most of our unique opportunities.
wi~l
be
gr~at.
TREASURY NEWS
,epartment of the Treasury • Washington, D.C. • Telephone 5&&.204
FOR RELEASE AT 2:30 P.M.
October 16, 1991
CONTACT:
Office of Financing
202/219-3350
TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $22,500 MILLION
The Treasury will auction $13,500 million of 2-year notes
and $9,000 million of 5-year notes to refund $10,636 million
of securities maturing October 31, 1991, and to raise about
$11,875 million new cash. The $10,636 million of maturing
securities are those held by the public, including $465 million
currently held by Federal Reserve Banks as agents for foreign
and international monetary authorities.
The $22,500 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and international monetary authorities will be added
to that amount. Tenders for such accounts will be accepted
at the average prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $1,686 million of the maturing
securities that may be refunded by issuing additional amounts
of the new securities at the average prices of accepted competitive tenders.
The reductions in weekly bills announced yesterday and
in today's 5-year notes reflect improvement in Treasury's cash,
largely as a result of reduced spending for financial institution resolutions. The 2-year notes announced today include
an amount that is sufficient to hedge the call, announced
October 9, 1991, of the $0.9 billion held by private investors
of 7-1/2% Bonds of 1988-93. The Treasury offered $13.0 billion
of 2-year notes in September.
Details about each of the new securities are given in the
attached highlights of the offerings and in the official offering circulars.
000
Attachment
NB-1S04
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 5-YEAR NOTES TO BE ISSUED OCTOBER 31, 1991
October 16, 1991
Amount Offered to the Public
$13,500 million
Description of Security:
and type of security ..... . 2-year notes
Series and CUSIP designation .. . Series AG-1993
(CUSIP No. 912827 C7 5)
October 31, 1993
Maturity date
To be dete~ined based on
Interest rate
the average of accepted bids
Investment yield .............. . To be determined at auction
Premium or discount ........... . To be determined after auction
Interest payment dates ........ . April 30 and October 31
Minimum denomination available . $5,000
Te~
Terms of Sale:
Method of sale ................ . Yield auction
Competitive tenders ........... . Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders ........ . Accepted in full at the average price up to $1,000,000
Accrued interest payable
by investor .................... None
Payment Terms:
Payment by non-institutional
investors ...................... Full payment to be
submitted with tender
Deposit guarantee by
Acceptable
designated institutions
........
Key Dates:
Receipt of tenders ............ . Wednesday, October 23, 1991
a) noncompetitive ............. . prior to 12:00 noon, EDST
b) competitive ................ . prior to 1:00 p.m., EDST
Settlement (final payment
due from institutions):
a) funds immediately
Thursday, October 31, 1991
available to the Treasury
Tuesday,
October 29, 1991
b) readily-r.ollectible check
$9,000 million
5-year notes
Series U-1996
(CUSIP No. 912827 C8 3)
October 31, 1996
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
April 30 and October 31
$1,000
yield auction
Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the average price up to $1,000,000
None
Full payment to be
submitted with tender
Acceptable
Thursday, October 24, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Thursday, October 31, 1991
Tuesday, October 29, 1991
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
CONTACT: Office of Financing
October 17, 1991
202-219-3350
UCT I U vi 0 u I b I 0
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Tenders for $12 ,.531. ~i:llioriof: 52-week bills to be issued
October 24, 1991 and to mature October 22, 1992 were
accepted today (CUSIP: 912794YZ1).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.11%
5.12%
5.12%
Investment
Rate
5.41%
5.42%
5.42%
Price
94.833
94.823
94.823
Tenders at the high discount rate were allotted 34%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
16,500
34,423,335
9,495
13,300
20,050
14,385
1,200,655
19,010
10,110
19,245
8,810
484,315
262.160
$36,501,370
Accepted
16,500
11,985,995
9,495
13,300
16,750
10,725
124,355
13,690
6,150
18,585
8,810
44,715
262,160
$12,531,230
Type
competitive
Noncompetitive
Subtotal, Public
$33,153,450
497,920
$33,651,370
$9,183,310
497.920
$9,681,230
2,850,000
2,850,000
Federal Reserve
Foreign Official
Institutions
TOTALS
o
o
$36,501,370
$12,531,230
An additional $530,000 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1S0S
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~E~ FIGU~ES~
THEY Dlt ~EPFFIFM 1hE FIGU~ES T~AT HAD
~LREPtV £EEN F~u~lCEC.
~c
DIC ~Cl Dl~CU~S ~l'k l~E~
A~Y FARTICULA~ FI~~NCI~G ~RRA~~E~ENTS THAT ~IGHT
ULTl~~TEL~
1
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FG~THCC~lNG.
EE FCRT~CC~I~G' ~EC~US£, AS YOL
ThIS CCMML~ICLE, T~E (-7 CEPU1IES
~~E TC ME~T I~ ~csco~ .IT~ SC\lET REF~ESE~TATIVES I~
.. ~·AT ~s CESCRIEEC HEF-E AS "ShCRiLY;" THEf;E ISN'T A
SPECIFIC SCHECLLE AT ThIS pel~T THAT'S 6EE~ ~(REED 1C.
;. (.t-:ERE YO\., "Sf.l1SFIED" \cITH Tr.E FIGURES ThE
SCVIET5 F~OVICED?)
~. (SECRETARY 5RPCY).
~rEN Yew ~s~ Tt-:E ~CRD
"SA1!SFIEt" I DO~'l .iJt\T 'TOU 10 f.SSU~E T~;"T ilE
THCUG~T T~AT THEY HAD~'T FRCVIDEC ~Hf.1 Tt-:EY TFIEt TO
PROVICE. THERE'S A LeT CF I~FCR~~Tlet\ Tk~T ~}S 1e eE
FILLEt CUT. ~s YCU Kt\CW, THE SOvIETS ARE l~ THE
FROCESS ~c~ CF C~EATlt\c: ~ WHOLE hE~ ECONC~IC CRDER
I~SIDE THE seVIE1 UNIC~ A~D TH~ FIGURES THEY PRE
PUT1I~G TCGEThER ~RE heT CNES TH~i T~EY ~EPi lNOER
THE FREVICUS ARRA~GE~EhTS A~D hE~I~ES, SC THEFE'S A
Lei Cf MO~k TC EE OOt\E.
AS YOU WELL K~O~, THE I~f HAS A ~ISSICN Cf SC~E 20-3C
PEOPLE O~fR THERE RIG~l ~CW, 10 EE JCINED EY FEOFLE
FRC~ THE .ORLt 5P~K; IT'S HOPED ThAT l~AT fhCLPI~E OF
F~CPLE WHC KhCk HC~ TC HA~DLE THESE KINDS OF FROELE~S
~ILL ~AKE A EIG CIFFE~EN(E IN THE KI~L OF INFCP.~~TIG~
S~Y
KNC~,
·Ulll~ATELY
F~C~ REACI~G
* * * * * * * * * * -
~
* * * * * • * *
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* * * • *
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• (SECRE1ARY 3R~OY). WELL, ITIS QUIlE ClEA~ TH~l
HE U.S. IS GCING TO JCI~ ~Il~ T~E 01hER E-7
GU~1RIES TO TrtY TO CC~E LP ~11H A P~CGK~~ TH~T ~IlL
~ Cf ASSISTANCE TO T~E seVIEl U~ICN.
T~ERE 1S ~c
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~~AT T~=Y
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T~EY SAle YOL~ HELP ~ILL
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(SEC~=lARY 2?ACY).
1 ~OULD~'l CH~~~C1ErtIZE 11
ThAT ~AY.
I ~CULO Spy T~tT THESE CC~P!TIC~S, ~HICH
A~E C~ES 1HAT YC~ ARE tLL f~~ILI~R ~ll~, ~R~ CNES
~HICH ~~~ AGREED 10 EY T~E SC~IET UNICN t~D E) T~~
(-7 fl~A~(~ '1~:51~RS A~C GCVE~~C~S. ANC THtT T~CSE
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~CULO~'T EE ry ICEA; I T~l~~ ~HAT ~E ~AVE F~C\lDED IS
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A
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CA~ :: kCFKED CUT, T~~T Tf-E G-7 15 P~EPAFE~ TC
?wC~lC~ ll~UICITY ASSIST"~CE 1C T~E ~CVIET U~IO~1
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(SECR=lARY c~PtY). NC, TnERE IS ~C AG~EE~ENT IN
FRI~CIPL£.
ELl l~A' CCE:~'T ~E~~ TnE~E ~C~'l 8E.
ar.Al THIS CO~~Uh!'UE I~CICATES IS THAT YCL C~~'T,
2~SED O~ A ~EE1I~G LAST ~lGhT _~D A ~EETl~G Tf-IS
rC~h1hG, ~RRIVE AT SLCh A~ AGREErEhT.
~E ARE
C5VICLSLY, THE G-7 Kl~lSlERS ~ND CEN1~AL ~OVE~NO~S,
!N l~E SL~INESS CF T~YINE TO HELF THE SC~IETS FACE
THE ECCNcrIC FR05LEMS TH,., ThEY t.AVE. 1 CC~'l WA~T,
=Y "~S.ERING lHAT QUESTIC~ tiNe," .HICr. IS THE CO~f;ECT
A~S.E~, lC INCIC~lE If-tT THAT'S ~C1 ~rAT .EIRE T~YIN~
TC co; 11 IS ~HAl WEI~E l~YI~E TC DO.
'. ~HAT IS T~E MCST SIGNIF'ICA~T 'HI~( TH~l H~5
lRAN5PIREt HERE 1~ YCL~ ~lE~?
A. (SECRE1ARY ER~CY).
T~E ~CST SIG~IFIC~~T 1~IN( IS
ThAT lH~ SOVIETS fEEL lHAl ThE SCLVI~~ OF THIS
F~CEL£~ ~lLL EE reST ~GG~ESSl~ELY ~OVED FC~~.~D IF
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* * * * * * * * * * * ,. * ,. ; * ; * * *
l:~Cl"~~IFIEr
THE (-7 REFRES~N1P1I~ES ~FE l~vCLVED IN l~IS
~RCeESS.
I THI~K IT'S OulTE CLE~~ F~eM lnE
~E?RESEST~TIVES ~E TALKEt TO TCD~Y A~D F~e~ l~E TRIPS
AE'VE TAKt~ EEFO~E, ThtT THE ~-7 (ROLP H~S E~CRMCUS
~TAhOING INSICE ThE sevIEl UNICN I~ lERYS CF ~HAT
:O~ES NEXT ~ITH REGARC Te Ece~C~IC A~~"N(E~E~TS.
~ DC~'T ~EA~ THAT IMFLIES ~E PRE (or~( TC GET I~TC
,NY KIND CF AF1ICuLA11CN CF ~~AT SHCLlD EE THE
.R~A~CE~t~T EETWEE~ TrE CE~TE~ A~D THE REFUclles;
hAT'S TrEIR t~SI~ESS. ELT 1 THl~K '~11E CLE~RL) THE
, C .3 ,.
1", P C ~ T A~ T T f- Iii G AE 0 l T 1 Ii 1 S ~ ~ D ?
i( ::
VI 0 lJ S '" EEl HI GS
IS CNE THAT THEY rAV~ fRE~l
:ChFICE~CE I~.
lhEY FEEL IT ~AS GREtT 51PNCl~G l~
;H~lR OW~ COL~lRY.
IT'S rELP THEY ~~~T JhD SEEK ON t
;l~ST hAht &A51S ,,~C lr~ ~CO~~R THE EETT~~.
:. (It\Ai.JCI::Lt).
~. (SECR=TARY c~AtY).
r lHI~K T~E~E IS ~~
J~D~~5TA~tING ~MGh~ T~E (-7 T~AT ~HAT ~E'~E fcr ~E~E
ts ~H~T'S BEEh OE5CRI~ED IN THE CCY~~~!QLE:
:I~p~CrAL ANC ~CChO~rC PRCbLE~S ~HICr HA~E TC fE
:CDrE5S=D. CERTAI~L~, T~E ~~~A~CE~E~TS E~ ~~JCH THE
~OVIETS FLT TCGETh~~ ~ ~A~K~' cMSED ~CO~C~lC ~EFC~~
IS ~ VERY IMFeRT~~T FA~T CF 'H~T.
C~~IOl5LY, AS THAT
~Ct.S FC~\l.tRD ,eI\D THeSE TrlrlGS G£T FL~SH=-: elT, wE'LL
GET l~TO The elHE~ DtT~ILS.
:5 TH: G-7
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u;
(5ECR~TAR~ SRACY).
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T~C DlfFEREhT lklh(S.
~RE
THE
~c~, I THI~K, ~IXl~G
eIRCU~S'A~(~ ThtT
rCu'H~ REFcRH!~G TO IS Tr.E CC~~!hATICh Cf
~~M~~ITARIAN ~ID, ~EtlCAL AND FCeo SlFFLIES, THAT ~A'
~E FC;THCC~lhG.
YCU khO~, THE
hPS CC~~ITTEt lWC
A~D ~ HALF blLLIC~ vCLLA~S CF ceE CR£tIT5 MHlCH ~E
ARE I~ T~E P~CC~5S OF FI~,eLIZI~G AhD CELl\ERI~G. THE
u.s.
:C, I'M LED Te
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A~C1HE~
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A r~LF EILLICN COLLARS
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TH~Y ~AVE HAD IN YEAR~ GC~E EY IS C~E ON ~HIC~ yeu
C~h~Cl EUILD ~ C~THEC~~L.
WE ~EED A ~Ew SYSlE~ ~~D
~E ~A~E PEREEC ~llH l~EI~ l~lERF~ETAlION Cf ~~AT ThAl
NE. S~STc~ OUGhT le EE ~~c I lKI~K IT'S E~ERYEOC~'S
IhlEhTION TO FLAY AS EIG P FA~T I~ ThPT ~s l~EY CAN,
~s ThEI~ (~N PESC~~CE~ ~lLL ~lLC~, ELl BAS~D SURELY,
~~D T~E ~CST I~PC~lAhl Pt~T, ~H~C~ IS TH~l lhEY ~AVE
A LeT CF _ORK 10 CC l~:M~ELVES.
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H~VI~~ O~i C~~lR~L b~h~ l~ l~E SCVIEl U~lCN?)
A. (Cr~lK~AN (~=t~SF~~).
TH= 'UcS1IC~, ts YCL
:C~;:C1LY PHRASE IT, IS t DECISIC:! l~AT ~!lL EE ~~CE
~y l~E SC~I=l FECFlE.
TrEP~ ~~E hCr~~cu~ ~~~~ 11
CCUL~ cerE UL1, ELI C~~lCLSlY, T~E I5~U~ CF ~ SI~(L~
~U~;E~CY t:o A Sl~GLE C~~1EAl ~~~K ~CLL~ ~~KE THE
1KA~~llIC~ EA~I~~.
I'~ ~CT S~YI~G ThPT, ~EKE ThE~E
TC 2E ih~EP=~C~~l CURFENCIES p~n I~CEFE~tE~T CE~lRAL
~AhKS, T~~T 11 ~eLLD Ef L~FuhC1IC~~L, I'~ ~E~ELY
~AYI~E T~FT 11 wCLLD Ef F~R ~CR~ DIFFICULT.
~C~EC~ER, THE EA5IC F~C5LE~ l~AT THEY H'~E hC~ I~ A~
I\FLAlI~~ CUR~E~CY.
F~D tN I~FL~TI~~ CU~RE~C~ CCCL~~
;5 A CONSE~UE~C~ CF T~E FpCT lH~l THEY HtVE VERY
SU2Sl~NT1JL A~D ESCAl~lI~~ ELCGEl DEFICITS, ~~IC~
EXISl cCT~ O~ lri~ REFLELICS' SIDE ANC ON THE CEN1ER'~
~ID:.
U:;lES3 THAT I~SlE IS FESOLV=D, PAFTIC~lAK
:H0ICES ThEY PRE ~AKI~G ~lTn FES~ECI 10 Cl~~E~CIES
_NC C~hT~PL EA~~S 6ECC~E lESS I~FC~T~~T.
SO 1 ~CULD
SUG~E~T T~AT THE C~UCl~L CECI510~S l~_l ~~VE 10 EE
~ACE AME A cCrSr~~TICN OF FISCAL ~~D ~OhElA~l
:CLICIES.
YLL C~~NCT, Al THIS STA~E, S=F~RA1E T~E
T~C
IS~UES.
~.
(I~A~tltLE).
~.
(SECRE1A~Y2?~CY).
:'~
I
lHlh~
T~tT
5TAT~~EhT,
W~ICH
~CT
lCTALlY fA~ILIAR ~IT~, IhC!C~TES ~~Al COLLO
;~ ChE Of THe FRCELE~S (lCNG TER~ DEET) lnAT ~AS TO
~E ACCRES~~D.
3Ll I l~IhK T~AT THE F~CT THAI THE
):?uTIES ~RE GC!~f TC lH~ SOVIET U~IC~ A~ SCC~ A~
jh~Y CAN E~T C~GA~IZEC TC DC SC I~DICAT£~ THAI
r~~~E'S ~CRE ~C~K TO EE CChE.
~E DO~'T h'VE FIR~
~I~URES.
IF kE ~PD FI~M fIGCRES ~E'C 5E E!VI~G T~E~
rc Yeu. THE F~C~LE~ IS l~E S~STE~ ThEY'~E .HPC O~ER
:Hf YEARS DO£S~'T SPIT OLl SlPTI~T!CS THE WAY TH:Y DC
:~ Tr
~tSTERh D:~CCR~CIE~.
T~~T'S FPRT OF TtE
:RCEl r A~~ ~E H~~E TC ~:tRESS IT.
• * * * *
~
* * * * * * * * * • * * • •
U~CLASSIFIcC
* • * * * * * * * * * * • * • * • * * *
- - - * • • • • • • • * * * * • * * * *
lJt\ClAS~IFIEC
:. ~C~ ~ClLD leu SAY lhE ~OVIETS ASSESS T~EI~ NEEO
:CR se-CA llEC E~E~GE~CY ~lMAhllA~IA~ -ID1
T~EY OlC~'T E~lNG IT IF I~
~. (SEC~~1A~Y ERPC Y).
~~~l TO LEPD~CU eFF THE
ceN'T
BlT I
r~lS ~EETl~G.
T~E
~(RICLlTL~E SECRETARY ~ACIGA~ IS IN
r~ACK.
5 CF
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OF
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JS~ICll1U~E AhD THCSE ~HC DEtl ~ITh l~E
A
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ThPT
SC
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leu ~5~EC ME IF 11 C~~E IF I~ THIS
lIbH F~IO~ITY.
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TREASURY Nr:EWS
Dellartment
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• waslllnatOlll- It,,cJ
• .:.""""on8 5&&-204 t
STATEMENT OF THE HONORABLE
DAVID C. MULFORD
UNDER SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE SUBCOMMITTEE OF
DEFICITS, DEBT MANAGEMENT, AND INTERNATIONAL DEBT
SENATE FINANCE COMMITTEE
OCTOBER 21, 1991
Introduction
Thank you Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to review the economic
implications of change and decentralization in the Soviet Union.
These developments will have far-reaching global economic
implications. The Soviet Union is now joining the global shift
toward market-based economies. We can now envision a new era for
the world economy, an era of unprecedented integration,
cooperation, and prosperity.
The Soviets understand that the success of the effort to
transform the Soviet economy to a market system rests primarily
with them. Nevertheless, there is a clear recognition in
industrial nations and the international institutions of the
importance of a supportive response to this historic challenge.
During the recently concluded Annual Meetings of the IMF and
the World Bank in Bangkok, the Finance Ministers and Central Bank
Governors of the Group of Seven met with Soviet representatives
to discuss the challenges faced by the central authorities and
republics of the Soviet Union. This meeting provided a
substantial opportunity for a direct ~xchange with the Soviets
on: current economic conditions, their planned approaqh to
defining political and economic relations among the republics and
with the center, their external indebtedness problems, their
thinking on longer-term economic reform priorities and the need
for economic assistance. I would like to review these
discussions today.
NB -1506
2
The Nature of the Challenge
It would be hard to overstate the magnitude and scope of
change sweeping the Soviet Union today. The center and the
republics are literally demolishing one political and economic
system and seeking to build another. This effort encompasses
four difficult and overlapping challenges:
(1) reaching agreement on new center/republic economic and
political relations;
(2) easing the immediate economic crisis;
(3) building a market economy; and
(4) avoiding a politically and economically destructive
disintegration of the country.
Unfortunately, the Soviets do not have the luxury of
addressing these four issues separately. They cannot institute a
comprehensive economic reform program without resolving the
division of economic policy responsibilities between the center
and the republics, and they cannot rejuvenate production without
beginning a broad program of market reform.
By the same token, we in the west do not have the luxury of
standing idly on the sidelines until the uncertainties in the
current Soviet situation are resolved. The stakes are too high.
We have a chance, probably of limited duration, to help anchor
the Soviet Union firmly and permanently in the global market
system.
The challenge for the industrial democracies and the
multilateral institutions is how to provide constructive and
effective assistance in such a chaotic environment. We cannot
and will not control developments in the Soviet Union, but we
might be able to exert some influence on certain aspects of the
situation.
As President Bush has repeatedly stressed, in addition to
providing humanitarian aid, our first priority must be to support
Soviet economic reform efforts, that is, the comprehensive effort
to shift from a command economy to a market-based system. It
will be essential to pursue this effort to a large extent at the
republic level, where much of the policymaking authority is
likely to reside. In the wake of immediate problems facing
soviet consumers and enterprises, which tend to be the focus of
the media, it is easy to lose sight of this crucial long-term
goal. We can take discrete measures to help address current
shortages and liquidity problems. But the transformation to a
market system is the only lasting way to strengthen economic
performance in the republics.
3
As to the relationship between the center and the republics,
this is a matter for resolution by the soviet people and their
leaders at all levels of society. Economic reform itself,
however, will require changes at the republic level that go
beyond the agreement on economic relations.
Center/Republic Relations
As you know, the Soviets are attempting to define
center/republic relations despite formidable and complex
differences among the republics. Prior to the IMF/World Bank
annual meetings, Secretary Brady welcomed the initialing of a
treaty for an economic community by the twelve republics. The
fate of this agreement is still uncertain, but we feel it would
lay some of the groundwork for a viable economic union. The
treaty provides a general framework, allocating responsibilities
for monetary and fiscal policy and outlining the legal and
regulatory principles which are to govern economic activity.
Much work remains to be done before the general principles set
forth in the treaty can be translated into specific, binding
commitments. A number of separate, detailed agreements on such
difficult issues as responsibility for Soviet debt and ownership
of Soviet assets will have to be concluded.
From the perspective of accelerating the transformation of
the Soviet economy, we would hope that the treaty and detailed
agreements produce a politically stable arrangement with a
workable division of economic responsibilities. Clear authority
must be established, at some level of government, over fiscal and
monetary policy if macroeconomic stabilization is to be achieved.
In the fiscal case, this means that those who must control budget
balances must also have the authority to tax and spend. In the
monetary case, it means that there must be a workable system for
limiting the supply of credit. And, as in the case of any
economic community, the greater the degree of clarity and
uniformity in legal and regulatory systems, and the fewer the
restrictions on market forces, the greater the capacity to
conduct mutually beneficial, unimpeded commerce among the
constituent parts of the market.
Current Soviet Economic situation
Negotiations to establish a new political and economic union
are, of course, severely complicated by the sharply deteriorating
economic environment. Our discussions with the Soviets, both in
Moscow and in Bangkok, have revealed wide recognition that the
command system is in collapse. After a decade of medioqre growth
in the 1980s, Soviet output fell by around 5 percent in 1990, and
is expected to drop 15 percent or more in 1991.
The gravity of the budget situation cannot be overstated.
Fed by massive subsidies to consumers and enterprises, the budget
4
deficit will probably run as high as 25 percent of GNP for 1991,
and is being financed almost entirely by the printing of money.
Scviet efforts to issue public debt instruments to the public
have failed. As a result, prices are rising dramatically:
consumer price inflation has accelerated from 25 percent in the
first quarter of this year to 95 percent in the second quarter.
The classic symptoms of hyperinflation are becoming apparent.
The balance of payments has also deteriorated sharply, due
both to declining oil and arms exports. Hard currency debt has
risen to $65-70 billion, large in absolute terms although
relatively small compared to the size of the economy and Soviet
export potential. Foreign exchange reserves available to service
centrally held obligations and access to short-term credit lines
from Western banks are shrinking rapidly.
The breakdown in center/republic relations is contributing
directly to the budget deficit and to debt service difficulties.
Some republic governments have been unwilling to transfer planned
tax revenues to the central government. And foreign exchange
earnings are no longer flowing at previous levels to the central
monetary authorities who are responsible for servicing debt
obligations.
Obviously, the conclusion and subsequent implementation of
the new economic agreement will have significant benefits for
addressing the current economic crisis, as well as for
implementing longer-term comprehensive economic reforms.
crisis Assistance
During the G-7 Ministerial meeting in Bangkok, the Ministers
and Governors and the Soviet representatives discussed the soviet
external payments situation in great detail. Several key
considerations were emphasized during this exchange:
the importance of working with the international
financial institutions on comprehensive economic
reforms;
the necessity to honor external financial obligations
and fulfill any understandings with external creditors
in order to maintain access to new credits;
in the context of the evolving center/republic
relations, the need for a framework to govern the
ongoing financial relations between the Soviet union
and its many creditors; and
the further need for full disclosure of Soviet economic
and financial data.
5
The soviet representatives reiterated their request for
assistance in addressing their immediate external payments
difficulties.
In recognition of this problem, Ministers and
Governors indicated their willingness to consider appropriate
measures in support of the political and economic transformation
now taking place. The G-7 Ministers and Governors accepted the
invitation by soviet representatives to send the G-7 Deputies to
Moscow in order to explore specific approaches to the Soviet
external payments problem as well as to discuss broader financial
and economic concerns in the overall context of economic reform.
The industrial countries are also demonstrating their
commitment, bilaterally and multilaterally, to addressing Soviet
humanitarian needs and to lowering barriers inhibiting trade and
investment links with the Soviets.
The United States has substantially increased its assistance
to the Soviets in the form of support for food and medical needs.
In fiscal years 1991 and 1992, the U.S. has already committed a
total of $2.5 billion in ccc credits. Medical assistance through
Project Hope will also increase in the year ahead.
In addition, the Administration is continuing to work on
removing restrictions on economic relations through: urging
Congress to ratify the U.s.-Soviet trade agreement, resuming
negotiations on tax and investment treaties, waiving restrictions
on OPIC activity, and working with Congress to remove
restrictions on Eximbank activities in the Soviet union and on
the importation of Soviet gold coins into the United states.
Economic Transformation
The external assistance effort, however, will have to extend
well beyond short-term measures to address shortages and
liquidity problems.
This does not mean large-scale official financing of the
kind which has been given priority in the media.
I believe the
Soviets understand that the private sector, both domestic and
foreign, must be the principal source of financing to build a
market economy. They also know that the best way to mobilize and
utilize private financing is to establish a market-based economic
environment conducive to building investor confidence. During'
Secretary Brady's trip to the Soviet Union in September, and
again in Bangkok, the Soviets themselves acknowledged the
futility of seeking large sums of western money at this juncture,
which, as they put it, would be like pouring water on the sands
of Arabia.
What is desperately needed is assistance in the formulation
of a comprehensive program for the transformation to a market
economy. The Soviets will partly address this task in the
6
context of negotiating the specifics of the agreed-upon policies
within their economic agreement. The republics, as well as
whatever center emerges, will also need to be prepared to address
problems that emerge as new institutions and economic
relationships begin to be put in place. Once the republics
establish the'basic economic relationships, they will have to
implement a broad range of reforms to achieve economic
stabilization and structural transformation. These programs .ust
encompass the following areas.
First, stability must be achieved through a program for
reducing the budget deficit and reliance on money creation.
Second, there must be a market system that permits buyers
and sellers to determine prices for goods and services, as well
as for labor and capital.
Third, a legal and regulatory framework is required which
permits private ownership of, property and diminishes the role of
state-owned enterprises.
Fourth, the economy must be opened domestically and
internationally to the free flow of goods and investment. There
should be emphasis here on industries that generate substantial
foreign exchange revenues.
Moreover, in the Soviet case, the systematic destruction of
private enterprise over seventy years has created even more
fundamental needs.
o
They need help in building basic economic institutions, such
as a commercial banking system and bond markets.
o
They need basic training on how to run profitable private
businesses.
o
They need practical advice on the operation of a sound
fiscal system: a tax code and collection system, a budget
mechanism, a customs operation, and a data collection
system.
o
They also need assistance on establishing a legal system
which ensures the enforceability of private contracts and
facilitates the functioning of private enterprise.
In a word, there has to be a complete change in orientation
toward private initiative and competition. The items noted above
should be addressed by private individuals and companies in
groups, not just by governments. Attitudes toward the creation
of wealth need to be changed to release the dynamism of the
private sector. Free enterprise and entrepreneurship mean that
businesses and individuals are free to succeed. In such an
7
environment, private economic players can function productively
and profitably, and growth and economic transformation will
follow.
Soviet Relations with the International Financial Institutions
From the start, this Administration has sought to tap the
expertise of the IMF and the World Bank in helping the Soviet
Union chart a course to a market economy. The Bretton Woods
institutions can provide detailed, tested policy and technical
advice, based on practical experience in many countries,
including Eastern Europe. Such advice is crucial in an effort as
complex and broad in scope as the transformation of an economic
system.
In December 1990, President Bush proposed a Special
Association of the Fund and the Bank with the Soviet union as a
means to initiate the relationship and get the advisory process
moving. The basic components of Special Association with the IMF
are:
reviews of the Soviet economy similar to those
conducted in consultations with IMF members;
technical assistance on policy reform to the center and
republics;
access to Fund documents and training courses;
attendance at Fund meetings; and
establishment of a Fund resident office in the Soviet
Union.
For the World Bank, a trust fund of $30 million has been
approved to finance technical assistance for the Soviet Union and
its republics on a wide range of economic reform issues. The
Bank has subsequently developed a work program of activities for
the next three months which focuses on such key areas as basic
social services, private sector development, and the energy,
agricultural, and financial sectors.
After the coup, the President and Secretary Brady pushed
hard for the IMF to initiate special Association to meet the
pressing Soviet need. On October 5, an agreement for a Special
Association was finally signed by the Soviet Union and the IMF,
and consultations have begun. We do not view Special Association
as an end in itself, but we think it is the best way forward for
now. We welcome this agreement and urge that no effort be spared
to work -intensively in the days ahead.
Special Association will
help clear the way for full membership in both the IMF and the
World Bank.
8
In the immediate future, the two institutions will provide
poli~y and technical assistance to further the process of reform.
In h1S speech at the Annual Meetings, the Secretary urged the IMF
and the World Bank to take on a new role in the Soviet Union and
Eastern Europe to address some of the more fundamental needs of
economies which must create the basic institutions, attitudes
and skills necessary for a successful market economy. The ~d
and the Bank must help to build a real understanding of what free
enterprise and entrepreneurship mean. The Secretary urged the
financial institutions to pay much greater attention to the human
capital component of their programs, to place knowledgeable
people in-country capable of providing advice and training on a
broad range of issues, and to expand in-country contacts beyond
central government officials.
Other Technical Assistance
The IMF and the World Bank are expected to work closely with
other institutions, such as the EBRD and the OECD, in
coordinating their efforts. The EBRD itself has already
established a short-term program of technical assistance and
project financing for the Soviet union which will concentrate on
private sector development, privatization, and assistance for
private sector activities in agricultural distribution and
energy. It is already engaged in providing advice to the cities
of Moscow and st. Petersburg on privatization.
'We in the u.S. government are also engaged in an extensive
technical assistance effort to advise Soviet officials about
policymaking and regulation. Treasury has sent a team to several
republics to advise on setting up new tax laws. The Federal
Reserve, the Justice Department, the FTC, and Census have
conducted seminars for Soviet officials on banking and reserve
systems, competition and monopoly policy, and statistics. other
technical assistance is being provided in the areas of energy,
food distribution, and defense conversion.
Secretary Brady has also proposed tapping the expertise of
the U.S. private sector through a professional corps to train
Soviet entrepreneurs to run successful businesses in a market
environment. This would complement the Department of Commerce's
ongoing Soviet-American Business Intern Training Program, unde~
which Soviet entrepreneurs work in American corporations. Dur~ng
President Gorbachev's discussion with Secretary Brady in
September, he expressed particular interest in the idea of
setting up a business training center in Moscow. The Mayor of
Moscow, in fact, has already agreed to provide land and
infrastructure.
9
Conclusion
In closing, I would restate the overriding objective of our
economic relations with the Soviet union: to encourage a
complete transformation to a market system and to integrate the
soviet Union firmly with the world economy.
The transition to a market economy cannot be accomplished
through a simple government declaration or by a quick infusion of
western financial assistance. It will take perseverance and many
years of work for the Soviet people.
We now have the mechanisms in place -- Special Association
with the IMF and the World Bank, the G-7 coordinated effort,
other multilateral efforts, and bilateral assistance -- to
provide crucial support. But we must guard against unfocused
schemes for throwing money at the problem, particularly in an era
of competing demands for scarce global resources. All of our
efforts, financial and non-financial, must be carefully
structured and targeted to promote the goal of transformation and
sound economic policies in the Soviet Union.
Thank you.
UBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • WashinlSton. DC 20239
FOR IMMEDIATE RELEASE
October 21, 1991
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $10,648 million of 13-week bills to be issued
October 24, 1991 and to mature January 23, 1992 were
accepted today (CUSIP: 912794XW9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.02%
5.04%
5.04%
Investment
Rate
5.17%
5.19%
5.19%
Price
98.731
98.726
98.726
Tenders at the high discount rate were allotted 86%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
,New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago.
st. Louis
Minneapolis
Kansas city
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1507
Received
31,705
28,734,820
27,925
44,430
188,675
27,555
1,896,020
54,070
6,090
29,905
22,200
1,107,950
909,640
$33,080,985
Acc e 12ted
31,705
9,101,770
27,925
44,110
74,475
26,275
131,600
14,070
6,090
29,905
22,200
228,670
909,640
$10,648,435
$28,979,015
1,572,310
$30,551,325
$6,546,465
1,572,310
$8,118,775
2,288,660
2,288,660
241,000
$33,080,985
241 1 000
$10,648,435
UBLIC DEBT NEWS
Department of the Treasurv • Bureau of the Public Debt • Washington. DC 20239
FOR IMMEDIATE RELEASE
October 21, 1991
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,649 million of 26-week bills to be issued
October 24, 1991 and to mature April 23, 1992 were
accepted today (CUSIP: 912794YK4).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.08%
5.11%
5.11%
Investment
Rate
5.30%
5.33%
5.33%
Price
97.432
97.417
97.417
Tenders at the high discount rate were allotted 63%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
23,495
24,994,810
14,790
31,545
43,355
24,460
1,266,580
29,405
5,645
29,650
15,550
696,395
652.435
$27,828,115
Acce12ted
23,495
9,593,310
14,790
31,545
41,505
24,090
120,330
9,405
5,645
29,650
15,550
87,145
652.4J5
$10,648,895
Type
Competitive
Noncompetitive
Subtotal, Public
$23,828,580
1.110.035
$24,938,615
$6,649,360
.1.110.035
$7,759,395
2,000,000
2,000,000
889.500
$27,828,115
889.500
$10,648,895
Federal Reserve
Foreiqn Official
Institutions
TOTALS
---_ ..
NB-1S08
For Release Upon Delivery
Expected at 2:30 p.m.
October 22, 1991
STATEMENT OF
MICHAEL J.GRAETZ
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXES
COMMITT"EE ON FINANCE
UNITED STATES SENATB
Mr. Chairman and Members of the Committee:
I am pleased to be here today to present the
Administration's position with respect to S. 1787, a bill to
provide a new tax credit to purchasers of real property held by
the Resolution Trust Corporation (RTC). Although the
Administration fully supports efforts to minimize the costs of
the savings and loan cleanup, we object to the RTC property
credit for a number of reasons. Before discussing our
objections, I shall describe the provisions of the bill.
Summary of S. 1787
S. 1787 would grant purchasers of real property held by the
RTC a tax credit to be claimed over a five-year period. The
credit may have a present value of as much as 80 percent of the
purchase price of the property. The exact percentage for any
particular property would be set by the RTC in an amount that the
RTC concludes is necessary to sell the property, but the
aggregate amount of credits would be limited to $1 billion. If
the purchased property requires rehabilitation or is not fully
constructed, the credit could also apply to the estimated
rehabilitation or construction costs, as agreed to by the RTC and
the purchaser. A taxpayer's basis in purchased property 'would
not be reduced by the amount of the credit allowed. As a result,
a purchaser receiving a tax credit for as much as 80 percent of
the property's cost would nevertheless be entitled to
depreciation deductions for the full purchase price of the
~'8-1
51)9
-2-
property. Upon a resale of the property by a recipient of the
credit, the RTC would be entitled to receive 20 percent of the
difference between the amount realized from the sale and the
amount the recipient paid for the property.
The RTC property credit would be added to a list of
business tax credits under the Code. 1 However, certain
restrictions currently applicable to other business tax credits
would not apply to the RTC property credit. First, the RTC
credit would not serve to reduce the maximum benefit otherwise
available to corporations for other business tax credits. The
RTC credit, however, generally would not be allowed to reduce by
more than 50 percent the tax liability due after application of
the other credits. Unlike other business tax credits, the RTC
property credit also could be used by all taxpayers to offset up
to 50 percent of their alternative minimum tax liability.
In addition, individual taxpayers would be exempt from the
limitations under the passive activity loss rules enacted under
the Tax Reform Act of 1986 for up to $50,000 of RTC credits.
Finally, any loan extended by the RTC in connection with the
purchase of property to which the credit applies would be exempt
from the original issue discount rules.
Administration Position
The Administration opposes S. 1787. The idea of using tax
incentives in the context of the savings and loan problem is not
a new one. In 1981, the Congress coupled sUbstantial tax
incentives with direct financial incentives for savings and loan
associations. During 1988 and 1989, the Federal Savings and Loan
Insurance Corporation (FSLIC) resolved 199 insolvent financial
institutions in 96 assisted transactions, which combined direct
federal financial benefits and tax savings. The tax benefits
were considered necessary because FSLIC did not have the
financial resources to liquidate insolvent institutions even
where liquidation would have minimized the cost of resolving the
institutions.
The nation's experience in combining tax and direct
financial benefits in these transactions has not been a happy
one. Indeed, the combination of tax and direct financial
benefits in the 1988/89 transactions has created perverse
incentives for institutions to hold assets and to minimize their
value when sold, as well as incentives to maximize expenses, when
institutions believe that both direct reimbursement from the
1The business tax credit provisions coordinate the· use of
most business credits, such as the research credit and the lowincome housing credit.
-3-
Federal Deposit Insurance Corporation (FDIC) and tax deductions
for the reimbursed expenses are available.
In enacting the
Financial Institutions Reform, Recovery and Enforcement Act of
1989 (FIRREA), Congress repealed the special tax benefits
available in the 1988/89 transactions, making the judgment -which remains sound today -- that the creation or maintenance of
artificial tax-driven transactions should be avoided because they
ultimately will increase overall costs to the federal government.
Although S. 1787 contains limitations on the total amount of tax
credits that could be claimed and thereby avoids the unlimited
blank check aspects of some prior tax incentives, it presents
major difficulties.
S. 1787 empowers a federal agency, the RTC, to deliver tax
reductions in amounts it selects to taxpayers it chooses in
circumstances where others who purchase similar assets -- whether
from the RTC or from private sellers -- will not enjoy such tax
relief. This legislation inevitably will produce different tax
burdens for similarly situated taxpayers and will foster a
perception that the tax system is unfair. This seems
particularly likely to occur in circumstances such as these where
the RTC can best reduce its own costs by channeling these tax
credits to taxpayers with sufficient taxable income to make the
tax benefits readily usable without delay.
Moreover, the tax credit provided in this legislation is not
the most efficient means to achieve the legislation's goal of
expediting the RTC's sales of real property that is expected to
have significant management, maintenance and other holding costs.
Analytically, it is clear, for example, that, in circumstances
where savings to the government are possible from the RTC selling
property sooner and reducing its holding costs, the proposed tax
credit would be more costly for the government than a reduction
in the RTC's minimum price for accepting bids. Buyers, who face
higher borrowing costs than the Treasury, would value the tax
credit, which is spread over five years, using a higher discount
rate than the Treasury. Buyers might also discount the value of
the tax credit to reflect the risks that the full credit might
not be used. This could occur, for example, if subsequent
legislation were to restrict the use of the tax credits, if a
buyer were to sell the property within five years of the purchase
date or if the taxpayer has insufficient taxable income to fully
use the credit in one or more of the taxable years of the
relevant five-year period. 2 There is no economic rationale for
offering buyers a tax credit in lieu of explicit price reductions
2Any increased taxes resulting from the actual occurrence of
the events being discounted by buyers would only partially
mitigate the loss to the government from the discounting of those
events.
-4-
or rebates. As a result, the credit proposed in this legislation
would add unnecessarily to the government's cost of the savings
and loan cleanup.
Some proponents of a tax credit approach have claimed that,
because a tax credit would support higher prices for RTC real
properties, nearby real estate would benefit. Such a claim is
not correct. The value that current and potential owners place
on property depends upon the net present value of future income
they expect to receive from owning and managing the property. A
tax credit for RTC property would not affect the expected future
income of properties located in the same area as the RTC
property, and therefore would not affect their appraised value.
While potential buyers of commercial property not owned by the
RTC would observe nominally higher prices on RTC sales of
property that qualified for the tax credit, they could be
expected to understand and take into account the effect of the
tax credit on the actual purchase price.
Proponents of the tax credit approach also claim that the
tax credit would expand the number of potential buyers who have
sufficient equity to buy RTC property. The tax credit, however,
would be of value only to potential buyers with sufficient
taxable income. Accordingly, tax-exempt entities (such as
pension funds and foundations), nonprofit organizations, which
have been important purchasers of multi-family affordable housing
properties, and other potential buyers lacking an adequate tax
base would not value a tax credit. The bill does not even
require that the RTC use the least costly method of disposing of
its property -- a minimum protection for the taxpayer.
In addition to our fundamental objection to the RTC's using
tax credits to stimulate sales of property, S. 1787 also raises
other tax policy and administrative concerns. For example,
although a purchaser of a property would be entitled to a tax
credit equal to as much as 80 percent of the property's purchase
price (as well as its completion and rehabilitation costs), the
purchaser also would be entitled to claim depreciation with
respect to the entire purchase price of the property. This could
result in a purchaser receiving total tax savings that exceed the
property's purchase price.
S. 1787 also provides exemptions for the RTC property
credit from the generally applicable provisions of the
alternative minimum tax and the passive activity loss rules. The
minimum tax and passive loss rules were cornerstones in
implementing a principal goal of the Tax Reform Act of 1986:
elimination of tax shelters and their destructive effect on our
nation's economy. The proposed exceptions in this legislation to
the minimum tax and passive loss rules would not only limit the
scope of these important rules but also would invite their
further future erosion.
-5Finally, this legislation would lead to increased
transaction costs for both the government and purchasers of RTC
property. And the government's costs would not end with its
disposition of the property. The Internal Revenue Service would
be burdened with the cost of monitoring compliance with the
detailed credit provisions for many years following the
property's disposition by the RTC.
Revenue Implications
Over the period 1992-1996, Treasury estimates the revenue
loss of S. 1787 to exceed $1 billion. The cumulative revenue
loss exceeds the $1 billion aggregate cap on tax credits
principally because S. 1787 does not require that basis in credit
property be adjusted for the credit, and therefore would serve to
increase depreciation allowances.
No provision to offset the revenue loss from S. 1787 has
been proposed. As a result of preliminary discussion with OMB,
we believe that this revenue loss is included under paygo
provisions of the 1990 Act. Our preliminary view is also that
this provision is not exempt from paygo under the deposit
insurance provisions of the 1990 Act.
This concludes my prepared remarks.
answer any questions that you may have.
I will be pleased to
TREASURY NEWS
Dellartment of til. Treasurv • Wasilington, D.C•• Telellilone .&&.2041
FOR RELEASE AT 2: 30 P.M.
October 22, 1991
CONTACT:
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $20,800 million, to be issued
October 31, 1991.
This offering will provide about $2,350 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $18,446 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500,
Monday, October 28, 1991,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$ 10,400 million, representing an additional amount of bills
dated August 1, 1991
and to mature
January 30, 1992
(CUSIP No. 912794 XX 7), currently outstanding in the amount
of $ 10,482 million, the additional and original bills to be
freely interchangeable.
182 -day bills for approximately $ 10,400 million, to be
dated
October 31, 1991
and to mature
April 30, 1992
(CUSIP
No. 912794 YL 2 ).
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
October 31, 1991. Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at
the weighted average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to
Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount
of tenders for such accounts exceeds the aggregate amount of
maturing bills held by them. Federal Reserve Banks currently
hold $ 1,189 million as agents for foreign and international
monetary authorities, and $4,648 million for their own account.
Tenders for bills to be maintained on the book-entry records
of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series).
NB-1510
TREASURY'S 13-, 26-, AND 52-WEBK BILL OFFBRINGS, Paqe 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary
markets in Government securities and report daily to the Federal
Reserve Bank of New York their positions in and borrowings on
such securities may submit tenders for account of customers, if
the names of the customers and the amount for each customer are
furnished. others are only permitted to submit tenders for their
own account. Each tender must state the amount of any net long
position in the bills being offered if such position is in excess
of $200 million. This information should reflect positions held
as of one-half hour prior to the closing time for receipt of
tenders on the day of the auction. Such positions would include
bills acquired through "when issued" trading, and futures and
forward transactions as well as holdings of outstanding bills
with the same maturity date as the new offering, e.g., bills
with three months to maturity previously offered as six-month
bills. Dealers, who make primary markets in Government securities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when submitting tenders for customers, must submit a separate tend,er for
each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an
agreement, nor make an agreement to purchase or sell or otherwise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury.
A cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches.
1/91
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection
of their tenders. The Secretary of the Treasury expressly
reserves the right to accept or reject any or all tenders, in
whole or in part, and the Secretary's action shall be final.
Subject to these reservations, noncompetitive tenders for each
issue for $1,000,000 or less without stated yield from anyone
bidder will be accepted in full at the weighted average bank
discount rate (in two decimals) of accepted compet1t1ve n1QS
for the respective issues. The calculation of purchase prices
for accepted bids will be carried to three decimal places on the
basis of price per hundred, e.g., 99.923, and the determinations
of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the
maturing bills accepted in exchange and the issue price of the
new bills.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder quidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of the circulars, quidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.
8/89
TREASURY
NEWS
.e..
artment o. til. T••a.ury • Wa.llinaton, D.C •• Telephone S••. 2041
FOR IMMEDIATE RELEASE
CONTACT:
October 22, 1991
Bob Levine
(202) 566-2041
TAX INFORMATION EXCHANGE AGREEMENT BETWEEN
UNITED STATES AND THE REPUBLIC OF HONDURAS ENTERS INTO FORCE
The Treasury Department announced toda¥ that the United
States and Honduras have exchanged di~lomat1c notes that activate
an agreement to exchange tax informat10n (the "Agreement") that
satisfies the criteria set forth in the Caribbean Basin Economic
Recovery Act of 1983. The Agreement was signed in Washington,
D.C. on September 27, 1990 and is effective October 11, 1991.
with the Agreement in effect, Honduras qualifies as a
jurisdiction in which Puerto Rican financial institutions may
make certain investments of funds derived from U.S. section 936
companies. Such funds may be used to finance investments in
qualifying development projects in Honduras.
Another benefit of the Agreement is that Honduras will now
be considered part of the "North American Area" for pur~oses of
determining whether U.S. taxpayers may deduct expenses 1ncurred
in attending conventions, business meetings, and seminars.
Therefore, convention expenses incurred by U.S. taxpayers for
meetings in Honduras that are otherwise deductible as ordinary
and necessary business expenses will be allowed without regard to
the additional limitations applicable to foreign convention
deductions.
Finally, Honduras will now qualif¥ as a foreign country in
which a foreign sales corporation may 1ncorporate and maintain an
office as provided in the foreign sales corporation provisions of
the Tax Reform Act of 1984.
The united States also has Tax Information Exchange
Agreements in effect with Barbados, Dominica, The Dominican
Republic, Grenada, Jamaica, Trinidad and Tobago, Saint Lucia,
Costa Rica, Mexico, the Marshall Islands and Bermuda. All but
the final three are Caribbean Basin Initiative countries.
A limited number of copies of the Agreement are available
from the Treasury Public Affairs Office, Treasury Department,
Room 2315, Washington, D.C. 20220.
000
NB-1511
TREASURY;,."I\I.E.WS
De•• rtment Of tile T...su.. • W.sllington, D.C. • Tela.llone .88·204 t
EMBARGOED UNTIL GIVEN
icr L~ I 0 L.; ~ "I j 8
EXPECTED AT 10:00 A.M.
-!
OCTOBER 23, 1991
STATEMENT OF THE HONORABLE JOHN E. ROBSON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON CONSUMER AND REGULATORY AFFAIRS
OCTOBER 23, 1991, 10:00 A.M.
538 DIRKSEN SENATE OFFICE BUILDING
Chairman Dixon and members of the Subcommittee, I am pleased
to respond to your request to discuss the Administration's
proposal to restructure the RTC. Accompanying me is Peter
Monroe, President of the OVersight Board.
The Administration's restructuring proposal is contained in
the RTC Refinancing and Restructuring Act of 1991, which
Secretary Brady submitted on behalf of the Administration to the
Speaker of the House and President of the Senate on September 27,
with a request for its prompt consideration. It has been
introduced in the House as H.R. 3435. It has not been introduced
in the Senate.
The RTC Refinancing and Restructuring Act of 1991 would
provide $80 billion in loss funds, which we estimate will be
sufficient to complete the unprecedented jobs of the savings and
loan cleanup and the protection of insured depositors. It would
provide additional working capital by raising the obligation
limitation to $160 billion, and it would extend to September 30,
1993, the Office of Thrift Supervision's authority to transfer
insolvent thrifts to the RTC for closure.
To create the framework for our discussion of restructuring,
I think it important to review the RTC's progress to date - where
it stands in an effort that must, by law, end in 1996.
At
over 18
balance
Because
without
banking
September 30 this year the RTC had saved the accounts of
million depositors in thrifts in 44 states. The average
of those 18 million accounts is just over $9,000.
it has kept depositors' accounts whole and done so
delay RTC has helped avert a crisis of confidence in our
system.
At September 30 the RTC had seized 660 thrifts and had
resolved 563 of them - one every 33 hours. It plans during
fiscal year 1992 to resolve a total of 233 institutions, if it
promptly receives the funds it needs to continue its work.
My point is that the RTC is within sight of completing the
task of closing insolvent institutions and removing them from the
thrift industry.
NB-1512
2
The great task now confronting the RTC is the disposition of
a huge amount of hard-to-sell assets - the investments of
hundreds of defunct S&Ls. Even here there is progress to report.
As of August 31, 1991, the RTC had seized $341 billion of assets.
The net book value of sales and principal collections totaled
$182 billion, leaving $159 billion of assets in inventory.
Recognizing that the RTC has ended the phase during which
its mission has mainly been resolution of institutions, and
entered the phase of its short life during which it must
concentrate on the disposition of assets, the oversight Board in
June began with former FDIC Chairman Seidman a search for a new
full-time Chief Executive Officer to run the RTC.
We were able to recruit a highly qualified individual, and
last Thursday the FDIC, in its capacity under FIRREA as exclusive
manager of the RTC, appointed as RTC CEO a seasoned business
executive with a record of outstanding achievement in managing
complex organizations. I am delighted that Albert v. Casey will
appear here today in this new capacity.
With the appointment of Mr. Casey as CEO and the delegation
to him of sufficient powers to run the RTC effectively, the
Administration believes it has taken the most important single
action necessary to solve the operational problems that have
plagued the RTC's asset disposition efforts.
Some argue, however, that the RTC's problems stem not from
operations or management but from its structure, notably the dual
board structure created by FIRREA. We do not agree, neither does
the Chairman of the RTC National Advisory Board, Philip Searle,
who stated before this Subcommittee on June 19 that the structure
is not the cause of RTC's operational problems.
Simply put, the current structure makes the RTC Board
responsible for operations, and the OVersight Board responsible
for funding, policy, and evaluation. The Administration believes
that the logic of this division of responsibility remains valid
for several reasons:
First is the RTC's control over a tremendous expenditure of
public funds. An operational agency that can spend up to
$160 billion in taxpayer dollars, and borrow as much as $160
billion more, should have independent oversight by the
Administration which is responsible for the national budget.
This need was recognized in the cases of the Chrysler and
Lockheed loan guarantees. In both instances Congress
created an oversight board to monitor the use of public
monies.
3
•
Second is the need to permit the RTC - its CEO and Board to focus wholly on their giant operational task, while
permitting the separate Oversight Board to monitor overall
policy, performance and financial matters.
•
Third is the need for political accountability. To entrust
the cleanup to an independent board dominated by private
sector members would be bad public policy. Retaining a
separate Oversight Board maintains the linkage of the
cleanup to the Administration.
The necessity of an independent oversight entity has been
consistently stated by the General Accounting Office. Before the
House Banking Committee on February 20, the Comptroller General
said:
"I think you need an oversight board to
operation is going ••• I don't think just
auditors coming in [is enough], I think
oversight board with ••• staff monitoring
monitor how the
having GAO and
you need an
that."
Most recently, in letters to Senator Garn and Congressman
Wylie on October 8, the GAO reiterated its views on the structure
of the cleanup. I have attached a copy of this letter and ask
that it be included in the record. It should be useful to the
Subcommittee because it makes three important points that are
directly relevant to today's discussion: first, it calls for a
strong CEO: second, it calls for "strong oversight by an entity
independent of the day-to-day operations of the RTC:" third, it
asks that any restructuring be done in such a manner as to
minimize disruption.
The restructuring contained in the Administration's proposed
RTC Refinancing Act of 1991, in combination with the appointment
of a new Chief Executive Office for the RTC, fulfills each of
these objectives. It creates a strong CEO with statutory powers
to manage the RTC; it provides for independent oversight by
retaining the oversight Board and more sharply defining its
powers to cover essential oversight actions and to keep it out of
operations; and by building on the existing structure and
providing protection for RTC employees, it will not result in
disruption in an effort that is now in mid-course and making
substantial progress.
The proposal is the result of a collaboration between the
Oversight Board and Chairman Seidman. Both believe that it makes
useful changes in the current structure without impeding the
growing mo~entum of the cleanup effort. Mr. Casey is of course
familiar with the current structure and with our proposal and
feels confident he can work within either.
4
Against this background let me now review the main elements
of the proposal.
First, it places political accountability for the cleanup
squarely in the Oversight Board. Mr. Chairman, at the full
Committee's June 11 hearing you expressed frustration with an
apparent lack of accountability when you asked the Comptroller
General "can you not get someone in here we can blame later?" I
would observe that Congress has so far had no trouble blaming the
Administration and the oversight Board. But this proposal makes
it clear that political responsibility for the cleanup rests with
the Board. That is partly because under the proposal the CEO is
hired and fired by the Board.
As Bill Seidman has pointed out, the oversight Board in this
proposal becomes much more like a corporate board with the power
to remove the CEO, and the power to review and modify, but not to
establish, policies for the RTC. This last point is important.
The Oversight Board now has the power to initiate policies for
the RTC. Under our proposal, the Board may only review and
modify RTC policies. And such Board review is after-the-fact.
It does not slow RTC or require advance approval of its policies.
Second, it creates, as I said earlier, a strong CEO giving
him full powers in law to operate the RTC. This, Mr. Chairman
should respond to your bill, S. 1425, requiring appointment of a
strong CEO, and your letter to the Washington Post on August 1 in
which you call for RTC leadership by an experienced CEO. As you
asked, our proposal gives him the authority to make decisions and
make the RTC work.
In addition to the grant of managerial powers, our proposal
gives the CEO more authority than currently by making him
Chairman of the RTC Board. You may well ask why it is necessary
to retain the RTC Board. As Bill Seidman has pointed out, the
structure we propose retains the RTC Board as the body
responsible for management of operations, much like the operating
committees that exist in many corporations. When you consider
the magnitude of the decisions the RTC CEO must regularly make,
you can understand the desirability for a group of experienced
individuals to help with them. This operational role is similar
to that which the RTC Board now plays.
Our proposal does not call for Senate confirmation of the
CEO. We do not believe this is necessary because he reports to
the Oversight Board which consists of five officers confirmed by
the Senate. We do not believe it is desirable because it would
create delay. We now have a fully qualified CEO in place. Under
our proposal he can continue to serve in the new structure
without interruption but with enhanced powers. To require
confirmation would almost certainly have the effect of inhibiting
his decision-making.
5
Third, the proposal improves coordination and communication
between the operating and oversight function by making the CEO a
member of the Oversight Board. In addition the FDIC Chairman is
made a member of the Board in recognition of the fact that the
FDIC will continue to supply personnel and support for the RTC, a
temporary agency.
Fourth, our proposal will free the FDIC from the FIRREAmandated responsibility of exclusive manager of the RTC and
permit it to concentrate on the banking industry.
However, the proposal retains a relationship between FDIC
and RTC in which all RTC personnel are maintained as FDIC
employees. This arrangement avoids the creation of a permanent
RTC bureaucracy and looks forward to the termination of the RTC
in 1996 by providing for the return of non-temporary RTC
employees to the FDIC. Thus the proposal avoids creating a
situation in which FDIC employees currently detailed to the RTC
will want to leave the RTC now.
Fifth, the proposal avoids disruption. It builds on the
current structure. It makes a real improvement in RTC's
operations but avoids creating havoc in an enterprise that is
well under way.
Finally, the proposal retains the oversight function that
the Administration strongly believes must continue to be an
essential component of the cleanup structure.
Mr. Chairman, we believe we have fashioned, in cooperation
with Bill Seidman, a proposal which responds, in the ways I have
outlined above, to the concerns you and other members of Congress
have expressed. It is a proposal that at the same time meets the
criteria we and the General Accounting Office have established.
As Senator Garn and others have acknowledged, it would be
counterproductive to enact a structure neither the Administration
nor RTC want or believe is suitable to the task.
There will be other witnesses today who have had
considerable experience in government organization. So have I,
and with major private sector organizations as well. These
witnesses, based on past statements, may make the point that the
current structure seems clumsy and that our proposal does not go
far enough. I have watched this organization closely since its
inception. certainly there have been problems: not to have
expected problems in an undertaking of this magnitude and
complexity would have been unrealistic. But organizational
structures which perhaps meet academic criteria may not fill the
real needs of an organization in the political context in which
it operates, an organization that is moreover well down the path
toward fulfilling its mission within a relatively short time
6
frame. As the GAO points out in the at~ached letter, "careful
attention must be given to avoiding changes or delays that would
be counterproductive to the progress RTC is making in improving
both its operations and asset disposition strategies."
In conclusion, Mr. Chairman and subcommittee members, I ask
for your support for a restructuring proposal which we believe
improves RTC operations and responds to Congressional concerns.
On behalf of the Administration I express the earnest hope that
the Committee will move quickly to report our refunding request
and with it, our reorganization proposal. I look forward to
responding to your questions.
TREASUR Ii JiC~ ~'h-
V:'/:I\:I~:EWS
leT
Dal lart man t of tile Trea sury • Was hing ton, D.C. •
Tele pho ne 5&& -204 1
~
- .-
J _.'
- ,-
;'
.
-
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;"
FOR IMMEDIATE RELEASE
Octo ber 23, 1991
II
,;
Mont hly Rele ase of u.s. Rese rve Asse ts
The Trea sury Depa rtme nt toda y relea sed u.s. rese rve
asse ts
data for the mont h of Septe mber 1991 .
As indic ated in this tabl e, u.s. rese rve asse ts amou
nted to
$74,7 31 mill ion at the end of septe mber 1991 , up
from
$73,5
14
mill ion in Augu st 1991 .
u.s. Rese rve Asse ts
(in mill ions of doll ars)
End
of
Mont h
Tota l
Rese rve
Asse ts
Gold
Stoc k 1/
73,51 4
11,06 2
10,47 9
43,24 7
8,726
Septe mber 74,73 1
11,06 2
10,72 2
43,85 3
9,094
Spec ial
Draw ing
Righ ts YV
Fore ign
Curr enci es y
Rese rve
posi tion
in IMF Y
1991
Augu st
11
Y
1/
y
Valu ed at $42.2 222 per fine troy ounc e.
Begi nnin g July 1974 , the IMF adop ted a tech niqu
valu ing the
SDR base d on a weig hted aver age of exch ange ratee s for
for
curr enci es of sele cted member coun tries . The u.S. SDRthe
and rese rve posi tion in the IMF also are valu ed on this hold ings
basi s
begi nnin g July 1974 .
Inclu des alloc ation s of SDRs by the IMF plus tran sact
ions in SDRs.
Valu ed at curr ent mark et exch ange rate s.
NB-1 513
BLIC DEBT NEWS
FOR IMMEDIATE RELEASE
Octo ber 23, 1991
CONTACT: Offi ce of Fina ncin g
.. "
I~\ J
~II ') I 202- 219- 3350
Ie I L J ,j I ....
I
I
'-
'-
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
)-:-:-', 2 '.:~ '{
Tend ers for $13,5 04 mill ion of 2:':':ye ar"n>-:-ot'es
Seri es 'AG- 1993 ,
to be issue d Octo ber 31, 1991 and to matu re Octo,ber
31, 1993
were acce pted toda y (CUSIP: 9128 27C7 5).
--
-,.
",'.
- !
v
The inte rest rate on the note s will be 6 %. The rang
e
of acce pted bids and corre spon ding pric es are as
follo ws:
Low
High
Aver age
yield
6.00%
6.01%
6.01%
Pric e
100.0 00
99.98 1
99.98 1
Tend ers at the high yiel d were allo tted 89%.
TENDERS RECEIVED AND ACCEPTED (in thou sand s)
Loca tion
Bost on
New York
Phil adel phia
Clev eland
Richm ond
Atla nta
Chic ago
st. Loui s
Minn eapo lis
Kans as City
Dall as
San Fran cisco
Trea sury
TOTALS
Rece ived
44,06 5
31,3 64,5 25
26,10 0
34,57 5
60,39 5
51,40 5
952,0 30
61,51 0
23,14 0
59,17 5
11,43 5
495,7 30
238,6 15
$33, 422, 700
Acce pted
44,0 65
12,6 06,7 50
26,1 00
34,57 5
59,51 5
40,30 5
176,6 30
50,49 0
23,11 0
59,17 5
11,4 35
133,6 30
238,6 15
$13, 504, 395
The $13,5 04 mill ion of acce pted tend ers inclu
$872
mill ion of nonc omp etitiv e tend ers and $12,6 32 mill des
ion
of
com petit ive tend ers from the publ ic.
In addi tion , $678 mill ion of tend ers was
ded at the
aver age pric e to Fede ral Rese rve Bank s as agenawar
ts
for
fore ign and
inte rnat iona l mone tary auth oriti es. An addi tion al
$1,48
of tend ers was also acce pted at the aver age pric e from 6 mill ion
Fede ral
Rese rve Bank s for thei r own acco unt in exch ange for
matu ring
secu ritie s.
NB-1 514
TREASURI-~::,:{-N';)~'~
t.,
iLl
J
U ,/
II
"'.
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'-
'
WS
J
Dallartmant of tile Treasury. Washington, D.C . • Telephone 5&&-2041
) --.. - i. ~,:
-;
rI ~: i'!
CONTACT:
BOB LEVINE
(202) 566-2041
FOR IMMEDIATE RELEASE
October 24, 1991
UNITED STATES AND CHILE TO DISCUSS AN INCOME TAX TREATY
The Treasury Department announced today that representatives
of the United States and Chile will meet in Washington, January 1317, 1992 to discuss a possible bilateral income tax treaty. There
is no income tax treaty now in effect between the two countries.
The negotiations will take into account the current income tax
laws of the two countries and will be based on the model income tax
treaties published by the organization for Economic Cooperation and
Development, the United Nations, and the U.S. Treasury Department,
as well as recent U.S. tax treaties with other countries.
Income tax treaties provide rules for the taxation. of income
derived in one of the countries (the "source" country) by residents
of the other. They establish when the source country may tax
various classes of income and specify maximum rates of tax at
source on certain items, such as dividends, interest and royalties.
They also provide for administrative cooperation between the tax
authorities of the two countries and guarantee non-discriminatory
taxation., Treaty benefits are limited to residents of the two
countries .'
Persons wishing to offer comments or suggestions on the
negotiations are invited to write to Philip D. Morrison,
International Tax Counsel, Treasury Department, Washington, DC
20220.
000
NB-1515
UBLIC
Department of the Treasury •
FOR IMMEDIATE RELEASE
October 24, 1991
DEBr(;N~WS
Bureau of the Public Debt • Washin!{ton, DC 20'2:)9
/L""-1.
1
J,' ~ : )
vI
oM~~ ~ffice
of Financing
202-219-3350
Tenders for $9,029 million of 5-year notes, Series U-1996,
to be issued October 31, 1991 and to mature October 31, 1996
were accepted today (CUSIP: 912827C83).
The interest rate on the notes will be 6 7/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
yield
6.91%
6.93%
6.92%
Price
99.854
99.771
99.812
$5,000 was accepted at lower yields.
Tenders at the high yield were allotted 13%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
21,334
22,524,215
14,834
20,047
74,764
3-5,716
930,035
32,361
11,434
37,567
7,284
299,684
43,496
$24,052,771
Accepted
21,334
8,342,163
14,834
20,047
31,244
20,684
390,585
25,751
11,434
28,867
7,282
71,124
43,496
$9,028,845
The $9,029 million of accepted tenders includes $432
million of noncompetitive tenders and $8,597 million of
competitive tenders from the public.
In addition, $100 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $200 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-1516
TREASURyi~j
Illartment of tile Treasury •
"EWS
waslll~·"~Oi , 1t:f. ~~ Telelillone 5 •• -200\} ,
CONTACT:
FOR IMMEDIATE RELEASE
CHERYL CRISPEN
202-566-2041
October 24, 1991
STATEMENT BY TREASURY SECRETARY NICHOLAS F. BRADY
Today, an outline was released of a proposed compromise on
banking legislation. The U.S. needs a comprehensive overhaul of
its banking system that will strengthen our economy and allow us
to compete effectively internationally. Today's proposed
"compromise" does the opposite.
It turns back the clock,
restricts competition, and protects special interests.
It will
weaken the banking system and impede the economic recovery.
If enacted, the so-called "compromise" would restrict the flow of
voluntary private capital necessary to create a strong banking
system. A strong banking industry is our best protection against
using taxpayer funds to bailout the banks.
We will strongly oppose this so-called "compromise" on Title IV
of the banking legislation.
###
NB-1517
TREASURY NEWS
For Release Upon Delivery
Expected at 9:30 AM
October 25, 1991
STATEMENT OF THE HONORABLE
JEROME H. POWELL
ASSISTANT SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
BEFORE THE
SUBCOMMITTEE ON
TELECOMMUNICATIONS AND FINANCE
COMMITTEE ON ENERGY AND COMMERCE
UNITED STATES HOUSE OF REPRESENTATIVES
OCTOBER 25, 1991
Mr. Chairman and Members of the Subcommittee:
T am pleased to appear before this Subcommittee to discuss
the regulation of the government securities market in light of
concerns that have arisen over recent developments in that
market.
In my statement today, I will discuss the issues raised in
your letter of invitation concerning regulation of the government
securities market. However, before doing so I would again urge
the Subcommittee to act without further delay to extend the
Treasury's rulemaking authority under the Government Securities
Act of 1986 ("GSA"). On September 4, the Treasury Department,
the Federal Reserve, and the SEC appeared before this
Subcommittee and urged that the Treasury's authority be extended
and that consideration of further reforms be deferred until the
completion of our interagency review in December. The same
institutions also made such a request in testimony before the
Securities Subcommittee of the Senate Banking Committee on
september 11, and the Senate responded by passing a one-year
extension of Treasury's rulemaking authority on September 25.
Unfortunately, this Subcommittee has not acted, and has
instead allowed Treasury's rulemaking authority to lapse on
October 1. As a result, the principal rulemaker in this
marketplace is left without rulemaking authority during this
important period. Already, several important regulatory
initiatives have been put on hold. In addition, Treasury does
not have the authority to issue emergency regulations if market
conditions were to make this necessary. This is an unnecessary
NB-1518
2
and dangerous state of affairs, and I urge the Subcommittee to
correct it by promptly reauthorizing Treasury's rulemaking
authority for an interim period while Congress and the regulators
consider the need for additional reforms.
At the outset, a clear distinction should be made between
primary market and secondary market regulation. The Treasury's
rulemaking authority for the auction of Treasury securities stems
from the public debt statutes, while Treasury's rulemaking
authority for the secondary market is derived from Section 15C of
the Securities Exchange Act of 1934. While Salomon Brothers'
admissions make clear that wrongdoing in the primary market for
Treasury securities can lead to problems in the secondary market,
there are, between the two markets, differences in the legal
frameworks, in the issues raised by wrongdoing, and in the
potential types of solutions for problems.
In my statement, I will first discuss secondary market
regulatory issues, which are ,the main concern of this
Subcommittee, and then make some comments concerning the primary
market.
SecQD4ary Market Regulation
We believe that the regulatory structure of the GSA is
fundamentally sound. The GSA assigns rulemaking authority over
all brokers and dealers in government securities to the Treasury
Department, with the enforcement responsibilities assigned to the
appropriate regulatory agencies -- the Securities and Exchange
commission ("SEC") and the various federal financial institution
regulators.
This balanced approach makes sense because of the importance
of the government securities market for the borrowing
requirements of the u.S. government and for the financial system,
and because of the different types of entities that act as
government securities brokers and dealers. The judgment Congress
made in 1986, which remains valid today, was that the Treasury
Department is best suited to formulate rules that ensure both the
integrity of the secondary market for government securities and
the continuing ability of the government to meet its borrowing
requirements in a cost-effective manner for the taxpayer. In
addition, Congress made the judgment that rules pertaining to
government securities transactions by brokers and dealers should
not favor a particular subset of government securities brokers or
dealers and that the Treasury Department is the appropriate
government agency to ensure the harmonization of regulation among
the otherwise differently regulated entities that are government
securities brokers and dealers.
3
The regulatory structure established by the GSA has worked
well. The regulatory agencies, the General Accounting Office
("GAO"), market participants, and industry representatives all
agree that Treasury has done a good job of rulemaking for the
government securities market. Du~ing the rulemaking process,
Treasury consulted extensively with the other regulatory agencies
~nd self-regulatory organizations, a process that was invaluable
~n formulating appropriate rules for this market.
The actions
taken by Treasury, the federal regulatory agencies, and the selfregulatory organizations in implementing the GSA regulations have
successfully met the objectives established by Congress in
enacting the GSA. The rules have been timely and fairly
implemented and have improved and strengthened investor safety in
the market. At the same time, the rules have not imposed
excessive and overly burdensome requirements, nor have they
impaired the liquidity or efficiency of the government securities
market. No customers have lost any funds or securities in those
instances where government securities brokers or dealers have
failed or discontinued business since the inception of the GSA
regulations.
The underlying basis for our comments concerning the draft
of this Subcommittee's proposed legislative package is our view
that_the Congress made the correct judgment in 1986 concerning
the basic regulatory structure of the secondary market for
government securities. However, we have, since the outset of the
legislative process to extend Treasury's rulemaking authority
under the GSA, taken the position that additional regulatory
authority over this market is needed.
Extension of Treasury's rulemakinq authority. We believe
that Treasury's rulemaking authority under the GSA should be
extended. The GAO, the SEC, the Federal Reserve, and numerous
other regulatory agencies and industry associations concur in
this opinion.
Because the government securities market encompass~s th~
activities of both registered brokers and dealers and f1nanc1al
institutions a single rulemaker must be empowered,to ensure that
appropriate government securities regulations are 1n place for
all market participants.
Treasury is in the best position of any fede:al agency to
oversee the government securities market because 1t has a
comprehensive understanding of the market and~ as t~e largest
issuer is concerned with maintaining market ~ntegr~ty and
,
effici~ncy in order to minimize the cost of government borrow~ng.
In addition, the Treasury as the single rulemaker can as~u:e that
appropriate regulations are in place for all market part1c1pants.
;eve that Treasury's rulemaking authority
Moreover, we bel ~
h' h th S
te
should be made permanent, as it is in S.1247, w 1C
e ena
4
passed on July 30, 1991. The sunset provision contained in the
GSA made sense in 1986, because of its novel and untested
structure. However, we believe that the structure has worked
well.
Finally, we reiterate that Treasury's rulemaking authority,
which lapsed on October 1, should at a minimum be temporarily
extended as soon as possible. The Senate has already passed a
bill, S.1699, which extends Treasury rulemaking authority until
October 1, 1992.
Treasury is unable to act with respect to several regulatory
initiatives to strengthen the market because of the lapse of
Treasury's rulemaking authority. These regulations involve
(1) risk assessment ruies pursuant to the Market Reform Act of
1990 to be proposed for affiliates of government securities
brokers and dealers registered under section lSC of the
securities Exchange Act of 1934, (2) modifications to be proposed
to Treasury capital rules raising certain minimum requirements
and requiring notification for large capital withdrawals, and
(3) final buy-in rules for mortgage-backed securities.
Furthermore, extension of Treasury's rulemaking authority is
necessary so that Treasury can respond to and correct serious
abuses or problems that may arise in the government securities
market. The current lapse of Treasury's rulemaking authority
would preclude Treasury from taking action in response to a
market crisis through the issuance of emergency rules.
Broader recordkeeping and reporting requirements and large
trader reporting. The Treasury believes that the GSA provides
SUbstantial authority in the area of recordkeeping and reporting.
Under the GSA, Treasury could, for example, require large
position reporting of government securities brokers and dealers
for both their accounts and the customer accounts they maintain.
However, we are actively examining this issue and will report to
Congress in early December, as part of our study, our conclusion
as to whether Treasury needs more authority in this area in order
to require reports of non-dealers that maintain government
securities accounts at institutions that are not subject to the
reporting requirements of the GSA.
We do not believe that requiring reporting of large trades
is a cost-effective tool for conducting surveillance of the
government securities markets. Information concerning large
positions in government securities, rather than large
transactions that may offset each other, is more useful for
determining the causes of a market squeeze.
We would oppose the language in the draft bill that the
Subcommittee has provided us concerning this issue. To a large
extent, the authority that would be granted to the SEC in
5
Section 3 of the draft bill overlaps with Treasury authority
under the GSA. This could only cause confusion concerning which
agency is responsible for such rules. Also, we believe that, in
keeping with the proven structure of the GSA, it should be the
Treasury that makes rules for all government securities brokers
and dealers, including financial institutions, not the SEC.
Sales practice rules. Of the three agencies that prepared
the October 1990 report to Congress on the GSA, only the Treasury
supported sales practice rules for all government securities
brokers and dealers. This remained true at the hearings held by
the Subcommittee on Securities of the Senate Banking Committee
last June.
The government securities market is the only regulated
securities market in which not all brokers and dealers are
subject to sales practice rules. Treasury's concern in this area
is not for the large, institutional investors, who should be
expected to have the ability to judge the suitability of
particular securities, but for the smaller, less sophisticated
customers who are attracted to the government securities market
because of their desire for safe and secure investments. Adding
to this concern is the proliferation in the government securities
market of instruments that can pose greater risk of adverse price
movements than traditional Treasury and agency securities. These
instruments, some of which are very complex, include mortgagebacked securities and real estate mortgage investment conduits
(ltREMICS") issued or guaranteed by government agencies or
Government-sponsored enterprises, zero-coupon instruments such as
STRIPS, agency mortgage-backed securities stripped into interestonly ("lOs") and principal-only ("POs") pieces, and over-thecounter options on government securities. Even though many of
these securities are backed by a u.S. government guarantee or are
highly rated by nationally recognized statistical rating
organizations and are attractive due to their apparent higher
returns, unsophisticated investors may not fully understand their
complexity, risks, and speculative nature. In addition, we need
to prevent unscrupulous persons, who may have operated in other
markets, from gravitating to the government securities market.
Treasury supports the regulatory structure for sales
practice rules set out in S.1247, which reflects a balanced and
appropriate role for each of the regulatory agencies. The
primary rulemaking powers pertaining to such rules for financial
institution brokers and dealers and members of registered
securities associations rest with the appropriate federal
financial institution regulator and the National Association of
securities Dealers ("NASO"), respectively. This approach
utilizes the expertise and experience of the bank regulatory
agencies and the NASO in implementing and enforcing sales
practice rules that are in place for other markets.
6
Additionally, the regulatory structure of S.1247 preserves the
SEC's oversight role for self-regulatory organizations.
By permitting sales practice rules to become effective only
if the Treasury has not determined that the rules would
"adversely affect the liquidity and efficiency of the market for
Government securities" or "impose any burden on competition not
necessary or appropriate," this regulatory framework also ensures
that Treasury retains an oversight role, consistent with the
regulatory approach set out in the GSA. This structure is
appropriate given Treasury's interest in minimizing the cost to
the taxpayer of financing the public debt by maintaining the
liquidity, efficiency, and integrity of the government securities
market. A Treasury oversight role would also help to minimize
disparities in sales practice rules for the various types of
brokers and dealers.
Treasury would oppose the provisions in the Subcommittee's
draft bill governing sales practice rules in order "to promote
just and equitable principles of trade" or "to prevent fraudulent
manipulative acts and practices." To some extent, the authority
granted to the SEC in the draft bill overlaps with the authority
the draft bill grants to the bank regulators. Further, it
reduQes Treasury's role to a conSUltative one, with no real
authority in this area. In other words, the draft bill
significantly alters the regulatory structure of the GSA. This
change in the division of responsibilities among the agencies is
not warranted.
Requirement for internal controls. The Treasury believes
that it is appropriate to require that all government securities
brokers and dealers be required to have internal controls
designed to prevent and detect violations of the Securities
Exchange Act and associated regulations. We would point out that
the NASD and the New York Stock Exchange already have rules in
place addressing internal controls. The language in the
Subcommittee's draft bill should be clarified to say that it is
the appropriate regulatory agency that has the responsibility for
examining for the existence and the adequacy of these controls.
Market information. Treasury supports expanded disclosure
of and access to government securities price and volume
information. Expanded information access would serve to enhance
customer protection, since customers would be in a better
position to determine actual or potential prices for securities,
especially for inactively traded issues, and to evaluate the
fairness of trades proposed by a broker or dealer. Moreover,
expanded availability of such information would serve the public
interest because it would ensure that a broad spectrum of market
participants could obtain current, accurate information
concerning market conditions, thus improving the competitiveness,
liquidity, and efficiency of the government securities market.
7
Greater access to price and volume information would also
foster increased competition among dealers. Improvements in the
derivative markets would also likely result due to the
availability of more timely and accurate information on the
underlying securities used for pricing and hedging strategies.
Further, access to more accurate market information would enhance
the ability of regulatory examiners and independent auditors to
carry out their respective responsibilities to ensure that
securities transactions and positions are valued appropriately.
Treasury originally proposed that it be granted rulemaking
authority in this area in order to ensure that private sector
initiatives, such as GOVPX, continue to take further steps in
disseminating government securities price and volume information.
However, Treasury accepts the judgment of the Senate in
passing S.1247 that adequate private sector solutions are likely
to be found without the need for additional federal regulation.
The commencement of operations by GOVPX in July was an important
factor in our decision to support the Senate approach. The
private sector initiatives already underway should be allowed
additional time to develop before any new rulemaking authority is
deemed necessary. Treasury supports S.1247, which calls for a
joint Treasury/SEC/Federal Reserve Board evaluation of private
sector initiatives regarding the dissemination of price and
volume information.
Therefore, Treasury cannot support the provisions in the
draft Subcommittee bill on this matter. Granting rulemaking
authority in this area to the SEC is again contrary to the
carefully balanced and sound regulatory structure of the GSA.
Moreover, the federal rulemaking authority is too broad with
respect to the provisions that would enable the SEC to require
various entities to act jointlY in planning, developing, or
operating facilities for disseminating government securities
price and volume information. No need has been demonstrated for
such authority.
Issuance of GovernmeDt securities (The primary Market)
The Treasury is currently evaluating the efficacy of its
auction technique and auction rules and procedures. We expressed
our concern over auctions that result in a concentration of
awards in a letter to Chairman Markey in July of this year.
Salomon Brother's admissions of wrongdoing in Treasury auctions
are a further cause for concern.
On September 11, Treasury announced the following steps to
ensure the continued integrity of the Treasury auction process:
8
The Treasury Department and the Federal Reserve Bank of
New York are developing a system to require customers
to provide written verification of large, winning bids
prior. to the settlement date and receipt of the
security being purchased.
Data on Treasury's quarterly borrowing needs will be
released two days prior to each quarterly refunding
announcement and prior to the meeting of the Public
Securities Association (PSA) Treasury Borrowing
Advisory committee.
A market surveillance group has been created,
consisting of representatives of the Treasury, SEC, and
the Federal Reserve System, to formalize and expand
information sharing among government regulators.
The Treasury/Federal Reserve working group on auction
automation has strengthened and accelerated its efforts
to automate the auction process in order to improve
efficiency and accuracy and to enhance supervision and
ensure compliance with auction rules. This group has
been expanded to include the SEC. Completion of the
first phase of the automation project is expected in
the first half of 1992.
In addition, the Federal Reserve Bank of New York has begun
spot checking large customer winning bids to ensure their
authenticity. Treasury has also made it a priority to clarify
and make readily available in one place all its auction rules.
We are currently studying alternative auction techniques,
such as so-called "Dutch" auctions, in order to ascertain whether
any benefits would be likely to accrue from alternative selling
techniques.
With respect to Treasury auctions, the Treasury has broad
authority under current law to make necessary changes to rules
and procedures. We do, however, support S.1699, which the Senate
passed on September 25, which would make it unlawful to make
false or misleading statements in writing in connection with a
bid or a purchase of a government security at its original
issuance. This provision also helps address the issue of false
statements made in connection with the issuance of securities by
certain government-sponsored enterprises.
conclusion
As we have stated in recent appearances before this
Subcommittee and other Congressional subcommittee~, we are
withholding judgment concerning whether changes, 1n addition to
9
thos e embo died in S.12 47 and S.16 99, are nece ssary
and
appr opri ate. We have comm itted to repo rt to Cong
ress
in earl y
Dece mber our recom mend ation s conc ernin g addi tion al
legi
ligh t of the ongo ing inve stiga tion s by regu lator y and slati on in
enfo rcem ent auth oriti es into the prim ary and seco ndar law
y mark ets
for gove rnme nt secu ritie s.
In the mean time, it is impo rtant that the
ent laps e in
Trea sury rulem akin g auth ority unde r the GSA not curr
be
cont inue . We urge this Subc omm ittee and the Hous e allow ed to
Repr esen tativ es to act as soon as poss ible to pass of
legi slati on
that woul d exte nd temp orar ily Trea sury rulem akin g auth
ority , as
the Sena te has alrea dy done .
TREASUR~/:N';)J;:'~'"
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Dallartmant of tile Treasury. Washington, D.C. • Telephone 5&&-2041
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FOR IMMEDIATE RELEASE
October 25, 1991
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CONTACT: Anne Kelly Williams
(202) 566-2041
TREASURY MODIFIES AUCTION RULES
The Treasury today announced changes in its auction rules
designed to broaden participation in Treasury auctions.
Bidding for customers
All government securities brokers and dealers that have
registered with the Securities and Exchange Commission will be
eligible to submit bids for customers in Treasury auctions.
Prior to this change, only primary dealers and depository
institutions were permitted to do so.
This change is intended to increase the number of
participants in Treasury auctions. The change will be effective
beginning with the upcoming 3-year Treasury note auction, which
is scheduled for Tuesday, November 5, 1991.
Payment mechanism
The Treasury is establishing a payment mechanism by which
any bidder will be able to bid without making a deposit at a
Federal Reserve Bank or without having an explicit payment
guarantee. Prior to this change, only primary dealers and
depository institutions could bid without a deposit or guarantee.
Treasury, in conjunction with the Federal Reserve, is
developing a standard "autocharge" agreement which will permit
auction participants without a funds account at a Federal Reserve
Bank to pay for securities purchased at auction in a consistent
and equitable manner. An auto charge agreement is a written
arrangement between a bidder and a depository institution. This
agreement, which is approved by a Federal Reserve Bank,
authorizes the Federal Reserve Bank to charge the depository
institution's funds account on the issue date for securities
purchased by the bidder. Autocharge agreements will be available
at Federal Reserve Banks.
The autocharge process will be available, at the option of
the bidder, in addition to other existing payment methods.
NB-1519
2
Maximum awards on noncompetitive tenders
The Treasury will increase to $5 million from $1 million the
maximum award to any single noncompetitive bidder in auctions of
Treasury notes and bonds. Noncompetitive awards will continue to
be at the yield (price) that reflects the average of accepted
competitive tenders. The last change in the noncompetitive
bidding limit for notes and bonds was in November 1976, when the
maximum was increased to $1 million per bidder from $500,000.
This change is designed to encourage bidding by the smaller
investors in the government securities market. The change will
be effective beginning with the upcoming 3-year Treasury note
auction, which is scheduled for Tuesday, November 5, 1991.
The noncompetitive award limit for Treasury bills remains at
$1 million for each bidder.
Information dissemination
The Treasury also announced that the Department has
suggested to the Board of Director of GOVPX, a government
securities market quotation and trading volume information
service, to expand the coverage of its product, to help increase
the liquidity and depth of the market by attracting additional
participants.
Reports of the PSA Advisory committee
The Treasury also announced that the Department will make
the reports of the Public Securities Association Treasury
Borrowing Advisory committee available to the public four weeks
after each meeting of the Committee, instead of waiting until the
end of the year to do so. The Committee will continue to advise
the Treasury before each midquarter Treasury refunding operation.
000
STATEMENT OF DAVID C. MULFORD
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
UNITED STATES TREASURY DEPARTMENT
U.S.-Japan Working Group on Financial Markets
October 17, 1991
Vice Minister Chino and I have just concluded frank and
constructive talks on financial market issues in both our
countries. We do so at a time of great change and tension in the
financial world.
The Yen-Dollar talks have now been going on since 1983, and I
wish to recognize that over that period some important progress
has been made in liberalizing the Japanese market,
internationalizing the yen, and improving access for foreign
firms in Japan.
I have met with members of the press here many times, and you
will recall that sometimes we made progress step by step,
sometimes stride by stride, but more recently, as I said earlier
today, I feel the progress has been inch by inch.
But now, Japan has come to something of a crossroads. Either it
will recognize the need for taking decisive action to address the
many adjustment issues and tensions in Japan's present financial
system, or it will continue to conduct business as usual.
Decisive action is required, particularly in the aftermath of the
recent financial irregularities, because these are symptomatic of
the lack of transparency, anti-competitiveness, and market
segmentation that characterize the Japanese market and put
foreign firms at an unfair disadvantage.
I came here today to hear if the Ministry of Finance has a plan
for reforming the system. And although I can see some beginnings
of efforts by MOF to revise and restructure the system, it does
appear that the same step-by-step, untransparent, and anticompetitive approach will be followed.
We believe that tinkering at the edges of financial reform in
fact perpetuates a system that takes money from the pockets of
Japanese savers and investors.
Among the issues we addressed today, which included the corporate
securities market, new products, pension funds, investment
trusts, foreign exchange controls, interest rate deregulation and
money markets, I would stress that we were particularly concerned
about pension funds and investment trusts business, where
exclusionary practices limit equality of competitive opportunity.
trill ion yen,
For exam ple, in the pens ion fund mark et of some 78 perc
ent of the
one
fore ign firm s acco unt for only one quar ter of
repu tatio n.
acti vity . And thes e are firm s of outs tand ing worl d
ting a
The Min istry of Fina nce must take the lead in crea
l syste m wort hy of
cred ible , tran spar ent and com petit ive fina nciaJapa
n's best
the wor ld's resp ect and conf iden ce. It is in stat es,
but to
inte rest to do so -- not to plea se the unit ed
unity and to allow
brin g Japa n fully into the worl d fina ncia l commin
the mark et.
Japa n to reso lve the many tens ions now visi ble
###
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the P~pryc: pe,qt ,. ~ a~i~i~pn, DC 20239
FOR IMMEDIATE RELEASE
October 28, 1991
CONrACT: Office of Financing
Ld J '- ~, U i t t.. J 0
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $10,429 million of 13-week bills to be issued
October 31, 1991 and to mature January 30, 1992 were
accepted today (CUSIP: 912794XX7).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.96%
4.99%
4.99%
Investment
Rate
5.11%
5.14%
5.14%
Price
98.746
98.739
98.739
$80,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 56%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas city
Dallas
San Francisco
Treasury
TOTALS
Received
29,650
28,583,025
19,060
54,335
58,965
27,790
1,090,460
62,095
12,715
42,030
24,345
1,335,195
498,945
$31,838,610
Accel2ted
29,650
8,852,860
19,060
54,335
54,565
25,910
270,140
22,095
12,715
42,030
24,345
522,195
498,945
$10,428,845
Type
Competitive
Noncompetitive
subtotal, Public
$28,041,580
1.232.525
$29,274,105
$6,631,815
1.232.525
$7,864,340
2,247,600
2,247,600
316,905
$31,838,610
316,905
$10,428,845
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $41,295 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1520
UBLIC DEBT, ,NEWS
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Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
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FOR IMMEDIATE RELEASE
October 28, 1991
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(0)
"'CoNT~dr:, ~fjf~ce of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION'OF· 26-WEEK BILLS
Tenders for $10,414 million of 26-week bills to be issued
October 31, 1991 and to mature April 30, 1992 were
accepted today (CUSIP: 912794YL2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.02%
5.04%
5.04%
Investment
Rate
5.24%
5.26%
5.26%
Price
97.462
97.452
97.452
Tenders at the high discount rate were allotted 97%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas city
Dallas
San Francisco
Treasury
TOTALS
Received
33,215
30,915,915
19,685
34,160
45,960
25,280
1,081,085
44,915
9,230
33,425
15,000
524,550
261,055
$33,043,475
Accepted
33,215
9,599,025
19,685
34,160
35,960
25,280
249,635
24,915
9,230
33,425
15,000
73,800
261,055
$10,414,385
Type
Competitive
Noncompetitive
Subtotal, Public
$29,042,170
786,410
$29,828,580
$6,413,080
786,410
$7,199,490
2,400,000
2,400,000
814,895
$33,043,475
814,895
$10,414,385
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $120,305 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1521
TREASUR~:i,l\;t>£:WS
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Dallartmant of tile Treasury •
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FOR RELEASE AT 3:00 p.m.
OCTOBER 28, 1991
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Telephone 5&&.2041
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CONTACT:
Cheryl Crispen
(202)566-2041
TREASURY ANNOUNCES MARKET BORROWING NEEDS
The Treasury Department today announced that its estimated
net market borrowing needs for the October-December 1991 quarter
are expected to be $75.8 billion, with a $30 billion cash balance
on December 31. The Treasury also announced that its estimated
net market borrowing needs for the January-March 1992 quarter are
expected to be in a range of $95 to $100 billion, with a $20
billion cash balance at the end of March 1992. The borrowing
estimates include allowances for Resolution Trust Corporation
activities.
In the quarterly refunding announcement on July 31, 1991,
Treasury estimated net market borrowing during the OctoberDecember quarter to be in a range of $85 to $90 billion, with a
$30 billion end-of-quarter balance. The reduction in market
borrowing reflects the larger-than-anticipated cash balance at
the end of September.
Actual market borrowing in the quarter ending September 30,
1991 was $103.5 billion, while the end-of-quarter cash balance
was $41.5 billion. On July 31, Treasury had estimated market
borrowing for the July-September quarter to be $107.5" billion,
with a $30 billion cash balance on September 30. Larger receipts
and reduced spending for financial institution resolution and for
Agriculture and Health and Human Services programs, compared with
the July 31 estimates, account for most of the improvement in the
Treasury cash position during this period.
000
NB-1522
REPORT ON
UNITED STATES PORTFOUO INVESTMENT ABROAD
AS OF DECEMBER 31, 1990
as required by the
International Investment and Trade in Services Swvey Act
Public Law 94-472 as Amended
United States Treasury Department
TABLE OF CONTENTS
Page
Executive Summary .................................................
2
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . "
3
Overview of U.S. International Portfolio Investment Holdings ................ "
5
Banks' Own Claims on Foreigners ......................................
7
Domestic and International Bank Claims ................................
15
International Banking Facilities .......................................
18
Bank-Reported Custody Claims and Claims of Nonbank
Enterprises .....................................................
21
U.S. Investments in Foreign Securities ..................................
24
Text Tables
Table
1 U.S. Portfolio Investment Positions Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
2 U.S. Banks' Claims on Foreigners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
3 Geographic Distribution of U.S. Banks' Own Dollar Claims on Foreigners
by Type of Debtor .............................................
4 Bank Claims by Charter and by Primary Ownership .................... "
5 Domestic and Foreign Claims of U.S. Banks ...........................
6 Claims on Foreigners Reported by International Banking
Facilities by Geographical Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
7 Bank Custody Claims and Claims of Nonbank Enterprises. . . . . . . . . . . . . . . ..
8 U.S. Investment in Foreign Bonds and Stocks ..........................
9 U.S. Residents' Purchases and Sales of Foreign
Bonds and Stocks, 1979-1990 ..................................... ,
6
8
11
13
16
19
22
25
26
Text Charts
Chart
1
2
3
4a
4b
5
6
7
U.S. Claims on Foreigners .........................................
Components of Banks' Own Dollar Claims .............................
Net U.S. Inter-bank Dollar Claims ..................................
Foreign and Domestic Claims of U.S.-Chartered Banks. . . . . . . . . . . . . . . . . ..
Foreign and Domestic Claims of U.S.-Located Banks ....................
Foreign Claims of mFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Bank Custody Claims and Claims of Nonbank Enterprises . . . . . . . . . . . . . . . ..
U.S. Holdings of Foreign Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
5
9
14
17
17
20
23
24
Executive Summary
U.S. portfolio investments abroad decelerated sharply in 1990 to a 2.7% increase
from an average increase of 9.8% during the 1980s. Developments in the major categories
were as follows:
Banks' own claims, the largest category of portfolio investments, fell by 3.5% in
1990. This was a sharp break from the experience of the 1980s, when such claims
increased by an annual average of 16.0%. The decline reflected:
- Sharp decreases in claims on foreign official debtors, especially in Latin America,
largely as a result of official U.S. debt-reduction initiatives.
- Reduced inter-bank lending activity, partly growing out of the recession, the Persian
Gulf crisis, and pressures to raise bank capital-asset ratios.
In contrast, two categories of trade-related and other business financing showed
strong growth in 1990, perhaps largely reflecting the strong growth of U.S. exports
of recent years:
- U.S. banks' claims on nonbank businesses and individuals abroad showed an
increase of 10.4% in 1991, after several years of decline or slow growth.
- The total foreign claims of U.S. nonbank businesses and of bank-reported
custody claims (mainly corporate) increased by 16.9% in 1990, as compared to an
average of 6.1 % for the 1980s.
The value of U.S. holdings of foreign long-term securities also increased sharply
(16.9%) in 1990, well above the 12.8% average of the 1980s.
- The value of U.S. holdings of foreign bonds rose by 31.1 %, boosted both by
large net purchases and a 6.9% increase in the dollar prices of the bonds .
• The value of foreign stocks increased by only 1.7%, well below the 20.0%
average of the 1980s, as moderate net purchases were offset by a 7.1 % decline in
foreign stock prices.
IntroductioD
The International Investment and Trade in Services Survey Act requires the President
to compile currently available data on V.S. portfolio investment abroad and to submit a
report and analysis of such data to Congress each year. 1 This requirement has been
delegated to the Department of the Treasury by Executive Order 11961. This report is in
response to this requirement. Much of the information required by the law is regularly
compiled in a number of periodic reports published by various government agencies and
other official bodies. 2 However, this report provides greater detail on the specific data
required in the law (22 V.S.c. 3103(c)(2» than is available in the statistical reports. It also
highlights some of the more significant developments and trends in capital flows since the
previous report. This report is confined mainly to discussion of V.S. portfolio investment
abroad and does not seek to evaluate foreign investment in the V.S.
The data base created by the Treasury International Capital (TIC) Reporting System
is the primary source of information for this survey. The TIC Reporting System follows
balance of payments accounting definitions regarding domicile of holdings, so that U.S.
holdings include holdings of U.S. residents (including some residents who are not U.S.
citizens). as well as holdings reported by U.S. nominees, some of which may be beneficially
owned by non-U.S. residents. While the reporting system does collect data by geographic
region and counay and by broad classes of asset forms, it does not yield detail on the
diversification of holdings by economic sector.
For purposes of preparing international accounts, portfolio investments are
distinguished from direct investments. The latter are those in which the investor has a
controlling interest, which is defined in the Act as 10 percent or more of the voting equity
1 The International InwestmCDl Survey Act of 1976, Public Law 94-412 of October 11, 1976 (90 Stat. 2(59)(22
U.s.C. 3101 et seq.) was amended by Public Law 97-33 of August 7, 1981 (95 Stat. 170) to require an annual
compilatioa and aulysis of currently .vailable data OIl U.s. portfolio DwestmeDl abroad. The amendment
majnt.jnc:d the paraIIleten noted below of the study ouiliDcd iu the 1976 Act. Title m of the Trade and Tariff
Act of October 30, 1984, Pub& Law 98-573 (98 Stat. 3009) cb.nged the tide of the law to the International
Investment and Trade iu Senice& Sun'ey Act.
2 The periodic IOQrCCI iDdude the f~ (1) the Treasury Bu11etiD. published monthJy before December
1982 and quarterly dIereaftcr by the Treuwy Department: the Capital MOYeIIlCDU sectioD CODlains most of the
dircctJy reported dMa available to the U.s. GOYernmeDl coocemiDg the major' c:1aascs of U.s. portfolio iuvestment
abroad (bank c:laima. noabank busincu enterprise c.Iaims, and current purclwca of Ioug-term foreign securities
reported by banb aDd broken iu the United Stalca); (2) the Suryey of Current Business.. published by the
Commerce Department: the lDDual article on the u.s. iDtematioaal iuYCatmeDl position (published in either
June or August) is the primary source for catimatea OYer time of the outst.odjng foreign portfolio holdings of
U.s. residents; (3) the Federal Rcscne Board', federal RcscM Bulletin. pub&hcd moothly, iucludes most data
reported under the Treasury lntemalioDal Capital Reporting System.
3
in an incorporated business enterprise or the equivalent in an unincorporated enterprise.
All other investments are considered portfolio investments. They include financial
instruments such as bank deposits, commercial paper, bonds, and corporate stocks, as well
as trade-related debts and instruments such as bankers' acceptances (insofar as the investor's
holdings comprise less than 10% of the voting equity). While data on direct investment are
maintained and published by the Commerce Department, portfolio investment data are
maintained by the Treasury Department in its TIC data bank.
The TIC data are based on a series of reports which are filed periodically by bank
and nonbank enterprises located in the United States. Data on long-term securities
(henceforth. "securities"), defined as equities and debt instruments with original contractual
maturities of greater than one year, are collected on a transactions basis (i.e., purchases and
sales rather than outstanding amounts). These data are used directly for reporting balance
of payments flows. In order to obtain figures for the current value of outstanding securities
in international portfolios, it is necessary to add the annual transactions figures for years
starting from the previous compilation and then to make adjustment for estimated price
changes. Rough adjustments of this sort based on overall indexes of securities prices are
made by the Commerce Department and published annually in the Survey of Current
Business. usually in the June or August issue.
For portfolio claims and liabilities other than securities, data are collected on the
basis of the value of the amounts outstanding. Annual transactions are calculated for
balance of payments flows by subtracting closing period values from those of the previous
closing period. No adjustments are made for possible changes in market prices. (As these
are mainly short-term items, market price changes generally would be less than for
securities.) Current TIC data are published in the quarterly TreasUIY Bulletin. Except
where otherwise noted, all data in this report come from the TIC database.
The organization of this report basically follows the categories of the TIC database.
The largest category is bank-reported claims, which consists of banks' own claims and
custody claims. Banks' own claims, conceptually distinct from the custody claims, are
discussed from the standpoint of the geographic breakdown of the claims, their size relative
to domestic claims, and the claims of the banking sub-group, the International Banking
Facilities or mFs. Bank-reported custody claims and the foreign clajms of nonbank business
are closely related to trade financing and other direct business finance and are discussed
together as a separate category. U.S. holdings of foreign stocks and bonds comprise a third
major category of the TIC database and the recent behavior of this aggregate makes up the
final section of the report.
4
Overview of U.S. Portfolio Investment Holdings
The major components of U.S. portfolio investments abroad are provided in Chart
1 and Table 1. The total value of portfolio investments grew rapidly in the course of the
1980s, with an average annual increase of 9.8%. In 1990, however, the growth fell sharply,
to 2.7% from 10.4% in 1989. The major factor in this deceleration was an absolute decline
in banks' own claims abroad, which are the largest component in the total (accounting for
almost half). This decline reflected sharp reductions in claims on foreign governments and
a moderate decline in claims on foreign banks. The reduction in claims on foreign
governments was strongly influenced by official U.S. debt-reduction initiatives. The
weakening of claims on foreign banks was part of a general slackening in the growth of
international banking business.
Excluding banks' own claims, the total value of portfolio assets increased by 9.6%,
which was actually above the annual average of the 1980s (5.6%). Government claims
abroad showed only minimal growth (1.2%), as a rise in U.S. official reserves (mainly the
result of increased dollar values of German mark and Japanese yen holdings) was offset by
a decline in other government holdings. Nonbank business claims and the conceptuallyrelated category of bank custody claims showed strong gains, with a 16.9% increase for the
Chart 1. U.S. Claims on Foreigners
BilUons of $
(Year-End Figures)
700 ~-------------------------------------------------,
600
500
............ :
........... .
400
.::
300
...................................... ,..................... j~',' ........... ~;;1:;: .... .. ..... )~; ........... .
............
\
........... ,:;(; .......... .
200
100
o
~~~~CU~~UL~~~~~~~~~~~~~~~~~~
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
Years
c:gj Non-Bank & Custody Claims
rzl
U.S. Goverrrnent Claims
5
• Foreign Securities
[!] Banks' Own Claims
TabI~
1
U.S. Portfolio Investment Positions Abroad
Year-End Figures
(in billions of dollars)
.l.2aa
1989
1990
978.1
1028.7
1135.7
1166.1
229.5
251.0
229.8
252.9
255.9
117.9
139.9
162.4
144.2
168.7
174.7
57.4
87.8
89.6
88.6
85.6
84.2
81.2
245.1
588.4
675.3
727.1
798.9
882.8
910.2
157.0
447.4
507.3
549.5
608.0
661.7
654.3
136.4
417.9
470.9
511.1
560.1
599.6
578.4
Custody Oaims
20.7
29.5
36.4
38.3
47.9
62.1
75.9
Nonbank Business
Oaims
31.3
28.9
36.3
31.0
34.0
31.4
33.5
Foreign Securities
56.8
112.2
131.7
146.7
156.8
189.6
222.4
Bonds
42.0
72.9
81.7
92.0
94.0
98.5
129.1
Corporate Stocks
14.8
39.3
50.0
54.7
62.7
91.7
93.3
1979
~
J.282
445.8
794.1
904.8
200.7
205.7
143.3
Other U.S. Government Assets
Private Assets Abroad
U.S. Assets Abroad,
Total
.ill1
U.S. Government
Assets Abroad
U.S. Official
Reserve Assets
Bank Reported
Claims
Banks' Own Oaims
Source: Department of Commerce, "U.S. Net International Investment Position, 1990,"
Release No. BEA 91-30, July 2, 1991, and TIC data.
6
sum of the two, as compared to only 6.1 % for the annual average during the 1980s, which
may reflect continuing growth in U.S. exports, especially to Latin America. Also showing
a strong gain was U.S. holdings of foreign securities, with a 17.3% 1990 increase as
compared to the 8.9% average during the 1980s. This increase, however, mainly reflected
a very large (31.1 %) increase in U.S. holdings of foreign bonds. The value of foreign stocks
increased only slightly (1.7%), well down from the 20.0% average increase during the 1980s,
as net U.S. purchases of foreign stocks in 1990 ($8.7 billion) were offset by a 7.1% decline
in the imputed price index of those stocks.
Banks' Own Claims on Foreigners
The claims on foreigners by brokers, dealers, and banks and other depository
institutions (hereafter, "banks") located in the U.S. declined in 1990 by 3.5% (Table 2).3
This aggregate grew very rapidly in the early part of the 1980s. While it slowed somewhat
in more recent years, the average for the 1980s was still a very strong average annual rate
of 16.0%. The 1990 decline was the first since the series began to be reported in its current
form in 1978. Very probably the major factors for the decline were a) increased regulatory
pressures for banks to raise capital-to-asset ratios in connection with the implementation of
BIS-agreed standards, b) loan write-offs and reduced lending to official borrowers, partly
resulting from official debt-reduction initiatives, and c) increased concern with borrower
creditworthiness due to the Gulf crisis, recession, and loan losses. The reduced pace of
banking activity was also reflected in the foreign liabilities of U.S. banks, which were
virtually unchanged in 1990 after growing at an average annual rate of 16.8% during the
1980s. The retrenchment in 1990 was part of a general pattern of slackening in
international lending by banks in the BIS-reporting area, particularly inter-bank lending.4
As noted in previous reports, inter-bank lending, especially to affiliated banks abroad,
was a principal growth component during the 1980s, while claims on nonbank sectors were
stagnant or declining (see Chart 2). During the 1980s U.S. banks generally shifted their
international lending away from nonbank borrowers in favor of lending to their own
branches and to unaffiliated banks abroad. But in 1990, inter-bank claims as well as claims
on nonbanks declined, though the latter fell much more than the former (13.6% vs. 1.9%).
Foreign currency claims, which recorded very strong growth in the 1980s, reaching $65.1
3 Besides their own claims, banks report claims held in custody for their customers. As such claims are
conceptually quite different and likely to be driven by different fadors, they are discussed separately below along
with claims reported by nonbanking enterprises.
4 Besides uncertainties introduced by the rapid August rise in crude oil prices, the Gulf Crisis also caused
a freeze-up of banking flows to the Middle East. See the Bank of England, Quarterly Bulletin. Vol. 30, No.2
(May 1991), pp.235-236, and the Bank for International Settlements, Annual Report: 1990/91 (BasIe: Bank for
International Settlements, 1991), pp.119-126, for further discussion of international bank activity in the BISreporting area in 1990.
7
;:-
Table 2
U.S. Banks' Claims on Foreigners
Year-End Figures
(in billions of dollars)
1979
1985
1986
1987
1988
1989
1990
136.4
417.9
470.9
511.1
560.1
599.6
578.4
Dollar Denominated
133.9
401.6
444.7
459.9
491.2
534.5
512.3
of which:
On Foreign Public
Borrowers
15.9
60.5
64.1
64.6
62.7
60.5
41.9
On Unaffiliated
Foreign Banks
40.9
116.7
122.9
127.6
129.4
134.9
119.7
On Own Foreign
Offices
47.4
174.3
211.5
224.7
257.4
296.0
303.1
On All Other
Foreigners
29.6
50.2
46.2
42.9
41.6
43.1
47.6
Foreign Currency
Denominated
2.4
16.3
26.2
51.3
69.0
65.1
66.1
20.7
29.5
36.4
38.3
47.9
62.1
75.9
5.1
38.2
24.2
-19.3
-22.6
-23.4
-35.2
-1.0
-122.3
-145.4
-162.3
-128.9
-110.0
-99.3
Total Banks' Own Claims
Memorandum: Claims By
Banks' Domestic
Customers l
Memorandum: Bank
Claims on Other Banks
Net of Liabilities to Other
Banks 2
Memorandum: Current
Account Balance3
Custody account items reported by banks, borkers, and dealers in the U.S.
Dollar claims and liabilities only netted against foreign affiliates as well as unaffiliated
foreign banks.
3 Flow balances for entire years. Source: Department of Commerce, Survey of Current
Business.
1
2
8
billion in 1989 vs. only $2.4 billion at the end of 1979, also moderated, recording only a
1.5% increase in 1990. These claims are not broken out by borrower, but probably are
overwhelmingly inter-bank.
Within the category of inter-bank lending, dollar claims on affiliated banks abroad
continued to increase, though much less than in previous years (2.4% in 1990, vs. an average
of 11.1% for the decade of the 19805). But claims on nnaffiliated banks abroad fell by $15.2
billion, or 12.3%, as compared to an average growth of 1.3% per annum during the 1980s.
The BIS accords were probably an important factor in curtailing lending to unaffiliated
banks relative to affiliated banks. The capital-asset ratios embodied in those accords, due
to be fully implemented in March 1993 (but with interim targets for year-end 1990), are
based on the consolidated accounts of each bank and hence are not applicable to lending
to affiliated banks. The requirements do, however, apply to lending to other banks. While
the capital-asset ratios required on inter-bank lending are generally lower than on some
other types of lending, the profit margins are also very low. In addition to the pressures to
boost capitalization, inter-bank lending activity was affected by substantially increased
concerns on counter-party risks, especially toward the end of the year. These concerns
reflected, besides the uncertainties regarding the Persian Gulf crisis and the decline in stock
markets, the continuing loan quality problems of many banks.s
Chart 2. Components of Banks' Own Dollar Claims
(Year-End Figures)
Billiona 01 $
~~---------------------------------------------------.
300
............................................................................................................................................. .
250 ............................................................................................................................................................. .
200 .....................................................................................................................................
150 .................................................................................... - ..........•............•......
l00~""""""""""""""""""-"""""-~" ••.••.. -~ ....•.
~ •.•••...... ~.
5O~·~~·············I. .·········~' .. ~··~U~···.~~~~:}··~~··
o ...-....;a....I. . .
1~
1~
1~
1~
1~
1~
1~
1~
1~
1~
1~
1~
Yean
•
Own For. . . 0ftIcea
C l.InaftIIDd s.1ka
mFor... PubIc ~ 0
AI 0Ihen
For further discuasioa, see the Bank (or lutcnwioaal SettlemCDta, Anngal Report; 1990/91 (Basle: Bank
for Intcmatioaal ScttJemCDta, 1991). pp.122-123.
S
9
It is imponant to note in connection with inter-bank lending that it can involve a
multiple of the amount of lending to final borrowers. An increase in the amount of
international inter-bank claims by U.S. banks is likely to reflect in part a general increase
in the mobility of capital among banks, which probably will result in an increase in liabilities
as well. For that reason changes in claims on other banks or bank offices should not
automatically be taken as a measure of the amount of indirect lending to nonbank
borrowers. A better measure of the extent to which the U.S. (or any other country) is
providing funds to support "final borrowing" is its ~ lending or borrowing in inter-bank
markets. A net borrower position for U.S. banks in international inter-bank markets would
indicate net lending vis-a-vis nonbank markets (of which some portion may be cross-border).
As noted in the reports of prior years, the U.S. has in fact increasingly moved to a
net borrowing position on its inter-bank dollar claims/liabilities (see memorandum. item in
Table 2). The extent of this negative swing amounted to almost $115 billion from end-1982
through end-1990. From a balance of payments standpoint this swing represents a large net
capital inflow. It emerged simultaneously with the larger U.S. current account deficit and
accounted for about 12.5% of the financing of the deficit during that period. In 1988 and
1989 the decline in the net inter-bank position was relatively minor, but more substantial
($11.9 billion) in 1990.6
U.S. bank claims on nonbank borrowers are broken down between public and "other"
(mainly corporate) borrowers. Trends for these two components diverged substantially in
1990. Oaims on foreign public borrowers, which peaked in 1987 and then fell modestly in
1988 and 1989, were down a sharp 30.3% in 1990. This brought the level back down below
that of 1982 at the oulset of the LDC debt crisis. Oaims on other nonbank borrowers, on
the other hand, showed the strongest growth since the early 19805.
The reduction in claims on public borrowers was concentrated in Latin America
($18.8 billion; see Table 3), while claims on foreign public borrowers in all other areas
actually increased slightly. The sharp 1990 decline in claims on public borrowers mainly
reflects write-downs and debt conversions into securities. (As securities are not covered in
the TIC bank claims data, such conversions result in a reduction in reported claims.) A large
portion of the 1990 write-down is attributable to the Brady Initiative accords with Mexico,
where claims fell by $7.5 billion. Oaims on Brazil also declined sharply ($3.7 billion).
Besides the write-downs, there may also have been some re-booking of such loans to the
6 The data cited arc for bub' dollar claims and liabiJitiea only. Data arc DOt available 00 inter-bank
foreign currency poIiboaa. Howew:r, the act foreign currcocy poIition via-a-Yia both baob and ooobanb abroad
showed a oegative swing of about SS billion, wbicb mainly occurred from 19M through 1988. Because most
foreign curreacy daima and Iiabilitiea arc held by IBFs (discuaaed further below), it is likely that this was mainly
a swing 00 inter-bank po&itionL
10
T~Ql~
J
Geographic Distribution U.S. Banks' Own Dollar Claims
on Foreigners by Type of Debtor
Year-End FJgW'cs
(in billions of dollars)
1979
WESTERN EUROPE, Total
UK
Other
by borrower:
Foreign Public
Borrowers
Unaffiliated Foreign Banks
Own Foreign Offices
All Other Foreigners
1985
.!.2S2
J.m
~
m2
1990
28.4
13.8
14.6
106.4
62.6
43.8
107.8
58.3
495
102.3
50.8
515
116.9
65.7
51.2
119.0
655
535
113.7
65.3
48.4
2.2
5.4
4.3
4.0
4.0
35
2.5
13.6
9.0
3.6
52.0
42.3
6.8
56.7
39.0
7.8
56.8
36.3
5.3
50.4
56.3
6.2
48.7
61.0
5.8
425
60.2
8.6
LATIN AMERICA, Total
Banking Centers 1
Other
by borrower:
Foreign Public
Borrowers
Unaffiliated Foreign Banks
Own Foreign Offices
All Other Foreigners
68.0
35.0
33.0
202.7
105.1
97.6
208.8
1121
96.7
214.8
120.4
94.4
214.3
126.7
81.6
230.4
150.3
80.1
230.0
173.0
57.0
11.3
48.3
52.2
52.2
51.4
47.4
28.6
13.3
30.1
13.3
37.3
89.3
27.8
35.1
95.6
25.9
34.7
103.8
24.1
34.4
108.2
20.2
32.1
131.2
19.7
22.8
154.4
24.2
ASlA,Total
Japan
Other
by borrower:
Foreign Public
Borrowers
Unaffiliated Foreign Banks
Own Foreign Offices
All Other Foreigners
30.7
16.9
13.8
66.2
31.2
35.0
96.1
59.1
365
106.1
68.7
37.4
130.9
90.1
40.7
1575
111.3
46.1
140.2
92.0
46.1
1.3
4.2
35
3.6
3.2
4.0
4.5
12.2
7.0
10.2
18.9
33.1
9.4
23.6
62.4
6.1
29.0
66.2
1.3
36.1
81.1
9.9
47.6
955
10.4
485
80.2
7.0
CANADA, Total
by borrower:
Foreign Public
Borrowers
Unaffiliated Foreip Bub
Own Foreip Officca
All Other Foreipen
4.1
16.5
21.0
25.4
18.9
15.5
16.1
0.7
0.4
0.2
0.4
0.3
0.4
0.2
1.1
1.0
1.3
5.0
8.2
2.9
4.3
13.1
3.4
3.9
17.0
4.1
4.7
10.7
3.2
3.2
7.2
4.7
3.0
1.4
5.6
TOTAL, Above Areas
131.3
391.8
433.8
448.6
481.0
522.4
500.1
TOTAL, All Areas
133.9
401.6
444.7
459.9
491.2
534.5
5U.3
1
Includes Bahamas, British West Indies, Netherlands Antilles, and Panama.
11
offshore branches. Federal Reserve Board data covering the consolidated positions of U.S.chanered banks (Le., including foreign branches and subsidiaries, but excluding units of
foreign banks located in the U.S. and covered in TIC data) also show a decline in claims
on foreign public borrowers (Table 4), but substantially less than the TIC data.
The TIC data broken down by primary ownership indicate that the reductions in
claims on public borrowers were much more concentrated in U.S.-owned banks. Banks with
primary U.S. ownership showed a reduction of claims of $14.0 billion as compared to $4.6
billion for banks with primary foreign ownership. While this may partly reflect re-booking
patterns, the traditionally strong orientation of U.S.-owned banks toward Latin America and
the fact that much of the expansion of foreign-owned banks in the U.S. occurred after the
emergence of the LDC debt crisis are probably the major factors explaining this divergence.
In contrast to the sharp decline in banks' claims on foreign public borrowers, claims
on "other" nonbank borrowers, primarily corporate business, showed a considerable increase
in 1990. Such claims rose sharply in the first half of the 198Os, hitting a peak in 1983, then
declined steadily through 1988. A 3.5% rise in 1989 was followed by a more substantial
10.4% increase in 1990, though this still left the level over 25% below the 1983 peak. The
1990 increase was particularly strong vis-a-vis Latin America (Table 3). The improved
business climate in Mexico and elsewhere in Latin America very probably was important in
this expansion. Such claims on Europe also increased, but the levels in this case were
relatively minor.
Another notable feature of the geographical distribution of banks' claims was the
increased concentration in banking centet'S. As discussed in previous reports, the strong
trend during the second half of the 1980s away from direct lending to nonbank borrowers
in favor of inter-bank lending naturally led to a disproportional increase in claims on
bankjng centers. This tendency was most marked in the case of Latin America, where the
percentage of total dollar claims accounted for by claims on the four offshore banking
centers (Bahamas, British West Indies, Netherlands Antilles, and Panama) rose from 51.5%
at end-1979 to 65.2% at end-t:J89. The year 1990 saw another increase in this
concentration, to 75.2% of all dollar claims on Latin America. This was partly the result
of the sharp decline in claims on public borrowers (which are almost totally outside the
banking centers), but also the result of a substantial further rise in claims on banks' own
foreign offices. which are themselves heavily concentrated in the banking centers.
A similar but less extreme shift occurred in the case of claims on Europe, where the
predominance of London as a banking center meant an increasing share of banks' claims
on the UK. Such claims represented 48.6% of total claimc on Europe at the end of 1979
and rose steadily to a share of 55.1 % at the end of 1989. In 1990 total claims on Europe
fell considerably (4.4%) in absolute terms, but those against the UK were almost constant,
resulting in another increase in the UK share, to 57.4%.
12
Table 4
Bank Claims by Charter and by Primary Ownership
Year-End Figures
(in billions of dollars)
1979
1985
1986
1987
1988
1989
1990
246.2
136.1
42.6
67.5
294.5
137.6
76.6
80.3
275.6
130.2
78.6
66.9
267.3
129.5
76.4
61.5
235.3
112.7
69.3
53.3
216.3
100.7
60.2
55.4
189.3
81.7
53.3
54.2
67.0
106.6
117.0
136.4
128.9
137.7
140.2
B. Banks Located in U.S. 2
133.9
401.6
444.7
459.9
491.2
534.5
512.3
Primary U.S. Ownership
Total
Affiliated Banks
Unaffiliated Banks
Public Borrowers
Other
70.2
24.3
23.4
4.8
17.8
214.7
95.2
57.0
31.5
31.0
215.2
96.7
55.2
34.8
28.4
209.6
101.8
47.5
36.0
24.2
228.8
121.9
46.6
35.8
24.5
245.6
140.4
44.8
34.8
25.5
227.1
140.7
36.4
20.8
29.2
Primary Foreign Ownership3
Total
Affiliated Banks
Unaffiliated Banks
Public Borrowers
Other
63.7
23.1
17.5
11.2
11.9
186.9
79.0
59.6
29.1
19.2
229.6
114.8
67.7
29.3
17.7
250.3
123.0
80.1
28.6
18.7
262.4
135.6
82.8
26.8
17.1
288.9
155.6
90.1
25.7
17.6
285.2
162.4
83.3
21.1
18.4
A U.S.-Chartered Banks,
Consolidatedl
Total
Banks
Public Borrowers
Other
Memorandum:
Local Currency
Claims of Foreign
Branches
U.S.-chartered banks consolidated: cross-border claims and claims denominated in a
currency other than that of the borrower. Source: U.S. Board of Governors of the Federal
Reserve Syste~ Counta E~osure Lending Survey, E.16 (126).
2 TIC Data and categories. Dollar claims only.
3 Includes some banks with U.S. charters.
1
13
Also interesting was the status of net U.S. bank claims against Japan. During the
decade of the 1980s banks' liabilities against Japan grew rapidly ($57.2 billion), but claims
even more ($94.4 billion), so that the net claims position against Japan actually increased
in the course of the decade. This increase in net claims was more than accounted for by
inter-bank claims (net claims against nonbank entities fell slightly) and was in sharp contrast
to the major decline in the net position against other countries (Chart 3). As indicated in
previous reports, to a large extent this net bank flow of funds to Japan apparently
represented the counterpart to a large net Japanese purchase of U.S. nonbank financial
instruments: nonbank sectors in Japan often found it more attractive to purchase offshore
financial instruments rather than depositing funds domestically. This meant that Japanese
banks became net takers of funds in some markets abroad, including the U.S. Thus, foreign
capital markets were serving as an intermediary in the flow of funds between Japanese
banks and nonbanks.
In 1990, however, this process went into reverse. Monetary conditions in Japan
substantially tightened, partly due to the concerns of the Japanese authorities with perceived
inflationary pressures, but also because of capital-adequacy pressures on many Japanese
banks in the aftermath of the stock market decline and in preparation for the 1993 BIS
capital-asset requirements. Consequently, Japanese banks restrained their banking activities
Chart 3. Net U.S. Inter-bank Dollar Claims
(End of Quarter Figures)
Billions of $
1~~----------------------------------------------------~
100
~
.............................. .
........ .
,-'
.6:':~·_
- - - - ... , - - - - ... ~ - - - - - --
o~~~----------------------------~--~~-------------,
'
(50)
.
. ;•.....•........
. .
...........................................................................................................................................
...-. ".
.
(1 00) L...J.........I__L-..l.-.....L---L_L..-..J........J.........l..--L_.L...-.J.....-'---L..-..L--J...-~-J,...---L.--":-""'---':-'
8204
8304
&104
~
8eQ4
Years
Vs. All Countries Vs. Japan Vs. All ~~~ ~ounbies
14
domestically and abroad. Reduced funding in U.S. banking markets meant that claims of
U.S. banks vis-a-vis Japan fell by 15.1% in 1990. liabilities, however, were virtually
unchanged, resulting in a $18.8 billion decline in net U.S. bank claims against Japan.
Other than the fact, noted above, that the write-downs on foreign public borrowers
were heavily concentrated on banks with primary U.S. ownership, the credit trends for U.S.owned and foreign-owned banks were similar in 1990 (Table 4). During the early part of
the 1980s both categories of banks showed very rapid growth. But after 1983 claims in most
credit groups for banks with primary U.S.-ownership stabilized (with an average annual rate
of increase in claims of 1.0% from end-1983 through end-1989) while banks with foreign
ownership continued to grow rapidly (8.6% for the same time period). In 1990, however,
the pressures for strengthening capital requirements and increased monetary stringency in
Japan and elsewhere appear to have restrained claims growth among the foreign-owned
banks. Excluding the claims on foreign public bodies, claims both of foreign-owned and
U.S.-owned entities were almost unchanged in 1990 from 1989. For both categories, claims
on unaffiliated banks declined while other claims showed modest increases. 7
Domestic and International Bank Claims
The decline in foreign claims of U.S. banks has greatly reduced their international
exposure relative to domestic exposure. This is confirmed on the basis of two different
measures. One of the~ using Federal Reserve figures, is based on the consolidated
accounts of U.S. -chartered banks, including subsidiaries of U.S. banks abroad. On this basis,
the total assets, domestic and foreign, of U.S. banks increased by an average of 6.6% during
the 1980s. Foreign assets, including local lending abroad in foreign currencies, increased
sharply from 1980 through 1982, then fell through most of the rest of the decade (Chart 4a
and Table 5). The divergence was particularly marked in 1990, when total bank assets were
almost unchanged from end-1989 (down 0.3%). while foreign assets fell by a sharp 6.9%.
As a result, the share of foreign claims in the total fell from 35.3% at end-1981 to 20% at
the end of 1989 and to only 18.7% at the end of 1990.
The nc data, based on a geographical definition of U.S. banks, including U.S. units
of foreign-owned banks and excluding foreign units of U.S.-owned banks, also indicate a
declining share of foreign claims (Chart 4b and Table 5). Excluding inter-bank lending and
all claims of brokers and dealers, foreign claiJ'D$ of U.S. banks increased rapidly from end1979 to end-1983, then declined continuously, with the largest decline coming in 1990 (due
to the precipitous fall in claims on public borrowers). On the other hand, domestic loans
(also excluding inter-bank lending), grew rapidly almost throughout the 1980s (9.4% average
u.s.-
7 The 1990 retrenchment iD JcndiDg particularly affected
and Japaocse-owned banks. International
lending by EuropeaD baDb, particularly to DODbank borrowers within the BIS-rcportiug area. showed
considerable streagth during the year. See the Bank for InlernatioDal Settlements., Annual R~port: 1990/91.
pp.lU126.
15
Table 5
Domestic and Foreign Claims of U.S. Banks
Year-End Figures
(in billions of dollars)
U.S. Banks' Domestic
Loans l
U.S. Banks' Foreign
Claims2
U.S. Banks' Foreign
Claims as % of Total
Lending
1979
1985
1986
1987
1988
1989
817.7
1451.9
1616.2
1708.3
1867.2
2002.7 2089.6
43.7
108.8
104.4
102.5
96.7
92.0
74.7
5.1
7.0
6.1
5.7
4.9
4.4
3.5
26.2
24.3
24.7
21.8
20.0
18.7
Memorandum: Foreign Assets
as % of Total Assets of
U.S.-Chartered
33.4
Banking System3
1990
Figures exclude inter-bank lending. Source: Board of Governors of the Federal Reserve
System, Federal Reserve Bulletin. Table 1.23 and Table 1.25.
2 Banks' own dollar claims; excludes claims of securities brokers and dealers.
3 Figures based on data contained in Board of Governors of the Federal Reserve System,
Country Exposure LendinK Survey (E.16).
1
annual growth rate). In 1990 growth was down substantially from that average but still
substantial (4.3%). The result was that the relative share of foreign claims, after rising from
1980 through 1983, declined sharply in the succeeding years to only 3.5% at end-1990.
However, the exclusion of inter-bank lending results in an understatement of
international exposure. As noted earlier, to an increasing degree in recent years the focus
of international lending has been in fact inter-bank, rather than to final borrowers. While
inter-bank lending is generally less risky than nonbank lending, a measure of international
exposure inclusive of inter-bank lending certainly would be desirable. However, ml:.ch of
the inter-bank lending internationally is carried out through International Banking Facilities
(mFs, see below). While TIC data do cover this international lending, comparison data for
domestic mF lending, which is entirely inter-bank, are no longer gathered. Data available
through 1989 (Federal Reserve Board G.14 release), covering about 60% of the mFs,
suggest that the inclusion of inter-bank lending would increase the share of international
claims to about double that of the figures excluding inter-bank (i.e., to perhaps 7-8% at end1990). Again, however, this share decreased sharply in the course of the 1980s.8
8 As disc:ussed earlier, the TIC data do not include foreign sec:urities. but domestic securities figures are also
excluded from the data used for comparison. As u.s. banks concentrate their holdings in Treasury securities
(well over half of the total), the omission of securities probably results in an overstatement of the share of
international exposure.
16
Chart 4a. Foreign and Domestic Claims of U.S. Banks
(Banks Chartered in U.S.)
Billions 01 $
~~~-------------------------------------------------,
1,500
1.000 t-·················· .. ······r
500
o
1978
1983
1Q81
lQ80
1985
1Q87
1984
1Q82
198Q
1Q88
v....
V:4M
1988
199o
CJoaa-border CIaima
Chart 4b. Foreign and Domestic Claims of U.S. Banks
(Banks Located in U.S.)
BiIIiona of $
~500~------------------------------------------------~
~ooo
1.500
f- .......................................................................................................................................................~ ..... .
1.000 ....................................
~
500
.
~'-'~f
M
~
~
X'.>< ..
~ ". >0<
XS«
X'>c"
:>l:
:>c:>c«
><>< ~
><
...
;>C ••
~
XS«
~ -N'
;>c
>0<
~
><XS< ...
><K><
>c;>c
)<
,..
~ x
>
>< < ;.. > c
>< ...
>< ><
.~
..
.. ><><
>< ><
~
,,><x<
)<"'X9'-"
X9'>< ><
XS«
r
;>c
1Q80
1~
1Q82
1983
1984
1985
Years
•
Foreign
17
1Q88
~ 00mMtic
X
.. .
xx
''11X"
x)<)<
X" ... ><X<
.'
X9'- X9'X9<<<
><
~ ~
~
.. ..--.. ..
.. ~_~~~
o~--~--~--~--~--~
~
~~~~
1~
~
~
.. ~ '. ~ ...
;>c
><
;>c)<
.. ..
~
~
..
~)< )<
~ ~
"X"><
><
~
~
"'r"'l'"'~
...,
1~
~
1988
1~
~
~
199o
International Banking Facilities
International Banking Facilities (ffiFs) are segregated asset and liability accounts
within existing U.S. bank offices (including branches and agencies of foreign-chartered
banks) which are subject to special rules and provisions. They were authorized by the
Federal Reserve Board at the end of 1981 in order to improve the competitiveness of U.S.
banks by allowing them to carry on international banking without many of the regulations
that apply to domestic operations. Thus the mFs are not subject to reserve requirements,
FDIC deposit insurance, and other restraints that would raise costs relative to international
banks in offshore markets. However, fairly stringent limitations are placed on the activities
of the mFs in order to confine their activities to the international market and to prevent
their impingement on domestic monetary conditions. Specifically, the mFs may not make
loans to, or take funds from, domestic entities other than the founding bank and other mFs,
may not issue CDs (since these might be purchased by domestic entities) and may not
accept deposits with maturities of less than two days from nonbanks. 9
The advantages of mF operations were such that most major banks quickly
established mFs. This was particularly true of foreign banks. Federal regulations enacted
prior to authorization of the mFs increased the regulatory requirements on foreign banks
to bring them more in line with those on U.S. banks. Since a large portion of the business
of foreign banks was internatio~ the establishment of mFs essentially provided a means
of maintaining "offshore" status for the foreign agencies and branches operating in the U.S.
This was particularly important for Japanese banks, which at the time of the introduction
of the mFs were heavily restricted from establishing shell branches (though subsequent
measures allowed the establishment of a Japanese counterpart to the mFs, namely the
"Japanese Offshore Markets" or JOM).
The consequence was a rapid increase in the claims of the newly-formed mFs.
Already by the end of 1982 mF foreign claims amQunted to $144.6 billion, or almost 40%
of the total foreign claims, much of which represented the re-booking of existing assets to
the newly-created mFs. Partly because of the restrictions on mF funding, mF lending has
generally been oriented largely to inter-bank business. However, since this was precisely the
area in which U.S. banking became heavily focussed in the last half of the 1980s, the growth
of mF dollar clajms on affiliated and unaffiliated banks abroad was particularly rapid,
averaging 15.4~ annually from end-1982 through end-1989 (Table 6 and Chart 5). Also
showing very rapid growth were mF foreign currenq claims, which went from only S3.9
billion at end-l982 to 5592 billion at end-1988 before declining to S53.1 billion at end-1989.
(These foreign currency claims are not broken down by type of borrower, but because the
9 For a detailed description 01. the cstablishmeDt and operatioo 01. mFs, see Sidney J. Key and Henry S.
Terrell. "IDtemational Banking Facilities; International rmance Discussion Papel' #333 (Board of Governors
of the Federal Reserve System. 1988); and U.s. DepartmeDt of the Treasury, Report on Foreign Portfolio
Investment in the United States as of December 31. 1984. (Washington, D.C.: 1989). pp.79-8S.
18
Table 6
Claims on Foreigners Reported by International Banking Facilities
by Geographical Area
Year-End F'lSUfe&
(in billions of dollars)
1m
~
1985
1987
1988
1989
1990
Total Claims
Europe
Latin America
Asia
Other
63.4
13.8
40.7
4.8
4.1
207.4
56.8
105.2
29.5
15.9
241.5
60.6
109.2
553
16.4
280.9
68.8
116.5
78.8
16.9
320.1
76.9
109.9
117.0
16.2
343.2
78.9
119.1
1.29.2
16.0
302.9
79.1
94.8
114.5
14.6
Total Dollar Claims
Europe
Latin America
62.2
133
403
4.7
3.9
198.4
52.7
103.5
27.4
14.8
223.2
523
105.7
50.2
15.0
239.9
58.0
110.0
56.9
15.0
260.9
65.9
103.2
290.1
66.8
111.6
97.0
14.7
2513
16.1
2.2
U.7
0.4
0.8
45.0
3.6
37.9
2.2
13
47.6
3.0
41.8
1.9
0.9
47.5
2.7
41.2
2.4
1.2
47.8
2.1
41.6
2.4
1.7
43.6
1.8
37.1
3.2
28.1
1.5
21.8
3.6
13
21.9
7.9
11.7
1.1
13
72.5
33.6
26.7
6.7
5.4
76.9
36.5
25.5
10.0
4.9
88.5
40.2
26.1
17.4
4.8
89.0
33.9
25.1
24.7
53
96.6
33.9
23.5
35.4
3.9
86.8
30.5
15.1
37.9
33
8.2
13
4.4
13.9
11.0
20.4
36.9
5.6
78.6
13.1
24.8
35.6
5.0
102.2
27.2
21.7
49.0
43
128.2
28.4
37.7
573
4.8
117.7
26.1
40.0
47.6
4.0
21.9
2.7
14.8
1.1
33
21.6
2.7
133
4.5
18.7
3.0
9.2
1.6
5.0
59.2
11.1
6.7
39.9
1.5
53.1
121
7.5
32.2
13
51.6
18.0
8.6
23.9
1.0
Asia
Other
On Foreign Public
Borrowers
Europe
Latin America
Asia
Other
On Unaffiliated
Foreign Banks
Europe
Latin America
Asia
Other
On Own Foreign
Offices
Europe
Latin America
Asia
2.5
Other
0.1
54.0
12.9
19.4
16.8
4.9
15.9
2.0
11.4
0.8
1.7
26.9
2.6
19.5
1.7
3.2
24.9
1.9
1.4
3.6
253
2.0
17.8
1.4
4.1
1.2
0.5
0.4
0.1
0.2
9.0
4.1
1.7
2.1
1.1
183
8.2
3.5
5.1
1.4
41.0
10.8
6.5
21.9
1.9
On All Other
Foreigners
Europe
Latin America
Asia
Other
Total Foreign
Currency Claims
Europe
Latin America
Asia
Other
18.0
19
n.l
14.7
1.1
61.1
86.2
90.6
13.5
1.5
Chart 5. Foreign Claims of IBFs
(Year-End Figures)
Silfions 01$
400~-----------------------------------------------.
300
200 ............................................... .
100
o
I- ..... ;UJI
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Years
•
EISOpe
0 Latin America
mAsia 0
Other
mFs are heavily oriented toward "wholesale" business, it seems very likely that the claims
are predominantly against foreign banks.) The percentage share of the mFs in total foreign
claims of U.S. banks reached 57.2% byend-1989.
In 1990, however, the reduction of bank claims was particularly marked in the case
of the mFs. Total mF claims were down 11.7%, as compared to the 3.5% decline in the
foreign claims of all U.S. banks. The declines were spread over all four of the major
borrower categories, but the largest decline ($155 billion) was on foreign public borrowers.
The mF accounts thus bore the major part of the total decline in banks' claims on foreign
public borrowers in 1990. But there were also substantial declines in mF claims on other
banks, both affiliated and unaffiliated. The pressures to improve capital asset ratios and the
more restrained monetary climate in Japan again were probably important factors. Thus,
mF claims on Asia showed a sharp decline of 11.4%, after growing at an average rate of
38.2% from 1982 through 1989.
The decline in claims on foreign public borrowers has had a major impact on the
geographical distribution of mF claims. Dollar claims on Latin America, which were well
over half of the total in the years 1981-1983, fell sharply in subsequent years (see Chart 5).
By end-1990 they were down to less than a third of the total. Much of the decline in the
Latin American share was taken up by Asia, especially during the three-year period 198620
1988. Because claims on Asia also declined sharply in 1990, the share of claims on Europe
advanced moderately in 1990.
Foreign-owned banks were particularly aggressive in establishing mFs and expanding
the assets of those mFs during the 1980s. As offshore business comprises a major share of
the business of agencies and branches (of foreign banks), the provisions exempting mF
deposits from reserve requirements are of particular importance. In addition, the mFs were
a particular focus of Japanese banks, which were generally expanding rapidly their
international business during the 1980s.
As a result, the share of foreign-owned mFs in total IDF claims has grown
substantially. Already comprising 58.7% of total dollar claims at year-end 1984, the share
of agencies and branches increased to 68.5% at year-end 1989. In 1990, U.S.-owned IBFs
showed substantial reductions in dollar claims in all major categories, whereas foreignowned mFs reported slight increases in claims on their own offices abroad and to the
"other" category of lending (mainly non-financial corporate). As a result, the share of
foreign-owned mFs increased yet further, to 74.9% at year-end 1990. The share of the
foreign-owned mFs in the much smaller category of foreign currency claims is even more
predominant, at over 90% in both 1988 and 1989, though it declined slightly to just below
88% in 1990.
Bank.Reported Custody Claims and Claims of Nonbank Enterprises
Foreign portfolio investments of nonbank enterprises and individuals are reported
both directly and indirectly. Many such investments are held in custody accounts with banks,
which are required to provide data on such accv~.mts to the TIC. The assets covered are
confined to short-term instruments, such as deposits in foreign banks, trade bills and foreign
CDs. While including some accounts of individuals and public bodies, the bulk of these
custody accounts are held for non-fmancial enterprises, especially those involved in
international trade.
In addition, enterprises and other nonbanking entities holding assets abroad directly,
rather than through custody accounts, are required to report those assets (if they exceed
certain exemption levels) to TIC. Reportable assets are broken down into commercial and
financial claims. Commercial claims are defined as those arising directly from the purchase
and sale of goods and services as part of normal business operation and consist mainly of
trade receivables. (Inter-company accounts are considered as part of direct investment and
are not included in the TIC data.) Financial claims are those arising from investment and
borrowing activities, such as foreign bank deposits and commercial paper.
As indicated in Chart 6 and Table 7, the total of the bank custody and nonbank
claims, excluding special trust transactions (see note to Table 7), showed considerable yearly
variation but little net increase from 1980 through 1988. Claims growth on Latin America
was generally weak, particularly so in 1984, 1985 and 1987, while claims on Europe and
21
Table 7
Bank Custody Claims and Claims of Nonbank Enterprises
Year-End Figures
(in billions of dollars)
1979
1985
1986
1987
1988
1989
1990
Bank Custody Claims
by Region:
Europe
Latin America
Asia
20.7
29.5
36.4
38.3
47.9
62.1
75.9
12.2
2.2
2.1
19.0
3.5
3.0
25.0
3.2
3.8
25.8
2.7
5.2
27.1
4.1
11.6
30.6
9.0
16.0
36.0
14.0
20.9
Claims by Nonbanks
by Type:
Financial
Commercial
31.3
28.9
36.3
31.0
34.0
31.4
33.5
18.4
12.9
18.9
10.0
26.3
10.0
20.4
10.6
21.9
12.2
17.7
13.7
18.1
15.4
by Region:
Europe
Latin America
Asia
11.1
9.2
4.1
10.5
9.6
3.7
14.5
11.1
4.1
13.7
8.9
3.8
15.5
10.4
3.8
13.2
9.8
4.4
15.1
8.1
5.3
Total Claims
by Region:
Europe
Latin America
Asia
52.0
23.3
11.4
6.2
58.3
29.5
13.1
6.7
72.7
39.5
14.3
7.9
69.3
39.5
11.6
9.0
81.9
42.5
14.5
15.4
93.5
43.8
18.8
20.4
109.4
51.2
22.1
26.1
Memorandum: Total
Claims excluding
special Trust
Transactions l
52.0
58.3
72.7
69.3
75.4
85.1
101.0
1
Beginning in 1988 special trusts were established to repay U.S. Defense Department loans
to several Asian countries (the largest were for Israel). These Trusts issued bonds and lent
the receipts to the debtor countries for the loan repayments. The trusts maintain accounts
with reporting banks and their country claims are reported as custody claims. Essentially,
the Defense Department loans were converted into loans held in custody accounts. The
amounts so converted came to S6.5 billion in 1988 and S1.9 billion in 1989, but less than
SO. 1 billion in 1990.
22
Chart 6. Bank Custody Claims and Nonbank Claims
(Year-End Figures)
Billions 01$
1~r-------------------------------------------------------'
100
1-.... -- .. -... -- .. -.. ---.--- .... -
80
60
40
~
o
1979
1980
1981
1982
1983
1984
1985
1966
1987
1968
1989
1990
Vears
•
Bank Custody Ctaima
sa Nonbank Claims
Note: Incorporated data exclude special1rust 1ransactions.
Asia were more robust. It seems likely that the debt crisis and the slide in the economies
of many Latin American countries were major factors, as commercial claims were especially
weak.
In 1989 and 1990, however, total bank custody and nonbank claims showed
substantial increases (12.9% and 18.6% respectively), reaching levels well above those of
previous years. The increases in claims on Europe, Latin America and Asia all showed
large increases (claims on Asia almost doubled from two years earlier). Very probably the
strong growth in U.S. exports in 1989 and 1990 was an important factor. It is noteworthy
in this respect that, while financial claims on Latin America fell slightly over the two-year
period, commercial claims were up by 26.5% and custody claims (which include trade
receivables as an important category), more than tripled. U.S. exports of goods and services
to Latin America increased by 55.2% from 1987 to 1990, with particularly large increases
to Mexico.
23
U.S. Investments in Foreign Securities
U.S. holdings of foreign securitlC;) (Chan 7 and Table 8) enjoyed a rapid growth
during the 19805, increasing at an annual rate of 12.8%. Holdings of foreign stocks were
panicularly strong, averaging 20.0% growth per year, while the value of foreign bond
portfolios increased by 8.9% per year. In the case of bonds, most of the annual increase was
due to actual purchases, which averaged $53 billion per year on a net basis. While there
were capital gains on these bonds, panicularly during periods of dollar weakness such as
1985-1987, the average imputed price increase was only 1.1%. For stocks, however, capital
gains were much more important, with imputed stock prices going up a hefty 10.5% per year
on average. The years 1985, 1986, and 1989 showed panicularly large increases of over 20%
in each.
In 1990, however, these patterns changed sharply. Net purchases of foreign bonds
were strong at $223 billion, but net purchases of foreign stocks fell to $8.7 billion, compared
to $13.1 billion in 1989. Besides the continuing press of diversification, the net purchases
of foreign bonds may have been spurred by the weakness of the dollar during much of the
year. The considerable increase in the imputed prices of foreign bonds (6.9%) was probably
also heavily influenced by the weak dollar. The decline in net purchases of foreign stocks,
Chart 7. U.S. Holdings of Foreign Securities
(Year-End Figures)
Simons of $
1~ ~---------------------------------------------------.
120
~
........................... .
100
........................................................................................................................ .
80
60
................. .
~
......................... .
~
20
o
1~
1~
1~
1~
1~
1~
1~
1~
1~
Years
o Bonda
.Stoea
24
1~
1~
1~
Table 8
U.S. Investment in Foreign Bonds and Stocks
(in billions of dollars)
1979
.l2aQ
1985
1987
1988
1989
1990
U.S. Holdings of Foreign
Securitiesl
Bonds
Stocks
56.8
42.0
14.8
112.2
72.9
39.3
131.7
81.7
50.0
146.7
92.0
54.7
156.8
94.0
62.7
190.2
98.5
91.7
222.4
129.1
93.3
Annual Change in the
Value of U.S. Holdings l
Bonds
Stocks
3.5
-0.1
3.6
23.3
11.0
12.3
19.5
8.8
10.7
15.0
10.3
4.7
10.1
2.0
8.0
33.4
4.5
29.0
32.2
30.6
1.6
Net Outflows of Capital
for the Purchase of
Foreign Securities2
Bonds
Stocks
4.8
4.0
0.8
7.9
4.0
3.9
5.5
3.7
1.9
6.9
7.9
-1.1
9.4
7.4
2.0
19.1
5.9
13.1
31.0
22.3
8.7
Memorandum.:
Imputed Price Change
on Securities
Bonds
Stocks
-2.2
-8.9
23.3
15.9
10.6
27.0
11.9
6.7
21.5
5.9
2.6
11.8
0.4
-5.4
10.6
8.1
-1.4
21.0
0.5
6.9
-7.1
Based on year-end figures. Source: Department of Commerce,
Business. Incorporates estimates of security price changes.
2 Treasury basis: as reported under the TIC reporting system.
1
Syrv~
Qf Current
on the other hand, was probably a function of the Gulf crisis in the second half of the year
and the ensuing weakness in world stock markets. Imputed prices of foreign stocks fell by
7.1% in 1990.
The data in Table 9 illustrate the very rapid increases in trading activity in foreign
bonds and stocks that have occurred in recent years. Total volume of trades in foreign
stocks in 1989 was over 23 times, and for foreign bonds over 16 times, as large as that of
10 years earlier, representing average annual rates of increase of 36.9% and 32.1%
respectively. In 1990 the increase in trading in foreign bonds was again quite large (37.1 %).
Trading in foreign stocks, however, slowed substantially, to 9.1 %. Ag~ the Gulf Crisis and
25
r
ed volume of stock
the decline in world stock prices were probably factors in the reduc
was down both on
1990
of
trading, as monthly data indicate that trading in the second half
trends of earlie r years,
the first half and on the second half of 1989. On the basis of the
in the growth of equity
however, the 1990 level is likely to repres ent only a temporary pause
trading volumes.
Table 9
U.S. Residents' Purchases and Sales of
Foreign Bonds and Stocks, 1979-1990
(in billions of dollars)
Total Foreig n Securities
Foreign Stocks
Foreign Bonds
Purchases
Purchases
Years
Purchases
1979
16.7
12.7
4.0
5.4
4.6
0.8
22.1
17.3
4.8
1980
18.1
17.1
1.0
10.0
7.9
2.1
28.1
25.0
3.1
1981
23.0
17.6
5.5
9.6
9.3
0.2
32.6
26.9
5.7
1m
12.8l
33.8
272
6.6
8.5
7.2
1.3
42.3
34.3
8.0
39.6
36.3
32
17.0
13.3
3.8
56.6
49.6
7.0
~
59.9
56.0
3.9
15.9
14.8
1.1
75.9
70.8
5.0
~
85.2
812
4.0
24.8
ZO.9
3.9
110.0
102.1
7.9
J.2a2
170.7
167.0
3.7
51.0
49.1
1.9
221.7
216.1
5.5
1987
207.0
199.1
7.9
94.4
95.5
-1.1
301.4
294.5
6.9
l2.88
226.0
218.5
7.4
77.3
75.4
2.0
303.3
293.9
9.4
1989
240.3
234.3
5.9
122.9
109.8
13.1
363.2
344.1
19.1
l22Q
336.5
3142
22.3
131.3
122.5
8.7
467.8
436.8
31.0
Sales
Net
'"'.~
Sales
."~'
26
Net
Sales
Net
TREASUR
V:'/:I\;I~:E:WS
ICTJiJi
~ ~'~
.
Dallartmant of tile Treasury. washington, D.C . • Telephone 5&&-2041
"
_.-
J _.'
FOR IMMEDIATE RELEASE
October 29, 1991
,-
r,
!. l..):
_
;"
~.
! I
-
.'
CONTACT: Desiree Tucker-Sorini
(202)566-8191
Statement of Secretary Brady on GNP
Third quarter growth in GNP is encouraging.
Although the
economic recovery remains sluggish, consumer spending, residential
construction and capital spending are up, and inflation is down.
These results are good news, but we should do more. Congress
should act on the President's growth package, particularly the
highway bill, which will create jobs immediately, and true reform
of the banking industry, which will strengthen the economy and spur
investment.
000
NB-1523
TREASURY NEWS
Dellartment Of the T.ea.ury • Wa.hlngton, D.C . • Telellhone 5&&-20 ~
Contact:
Cheryl Crispen
Kimberly Gibson
(202) 566-2041
(202) 395-3080
FOR IMMEDIATE RELEASE
October 29, 1991
JOINT STATEMENT OF
NICHOLAS F. BRADY,
SECRETARY OF THE TREASURY,
AND
RICHARD G. DARMAN,
DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET
ON
BUDGET RESULTS FOR FISCAL YEAR 1991
SUMMARY
The Administration today released the September Monthly Treasury
Statement of Receipts and Outlays of the United States Government.
The statement shows the actual financial totals for the fiscal year
that ended on September 30, 1991, as follows:
total receipts of $1,054.3 billion;
total outlays of $1,323.0 billion; and
a deficit of $268.7 billion.
Table 1.
TOTAL RECEIPTS, OUTLAYS, AND DEFICITS
(in bill.ions of dollars)
Receipts
Outlays
Deficits
1,031.3
1,251.8
-220.5
February Budget Estimate . . . . . . . . . . . . . . 1,091.4
1,409.6
-318.1
July Mid-Session Review Estimate ..... 1,068.7
1,350.9
-282.2
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,054.3
1,323.0
-268.7
1990 Actual. . . . . . . . . . . .
o
•••••••••••••••
1991:
DEFICIT
The actual FY 1991 deficit, $268.7 billion, is slightly above the
OMB estimate associated with the 1990 Budget Summit Agreement. It
is, however, $49.4 billion less than the Administration's February
estimate, and $13.5 billion less than the deficit estimated in the
July Mid-Session Review (MSR).
The change from the MSR deficit
estimate reflects the impact of:
a $17.1 billion decrease in deposit insurance outlays and
a $10.8 billion decrease in other outlays,
partially offset by a $14.4 billion decrease in receipts.
RECEIPTS
Actual receipts were $1,054.3 billion, $14.4 billion lower than
July's MSR estimate.
Estimated payments of liability by
individuals and withholding on wages and salaries were both lower
than anticipated, and accounted for most of the difference from the
estimate.
2
Changes in Receipts According to Source
Individual Income Taxes were $467.8 billion, $14.1 billion
lower than July's estimate of $481.9 billion. withheld taxes
and estimated payments of 1991 tax liabilities by individuals
accounted for $7.6 billion and $6.8 billion, respectively, of
the shortfall in individual income tax receipts.
These
shortfalls were partially offset by lower-than-anticipated tax
refunds of $0.4 billion.
Corporation Income Taxes were $98.1 billion, $0.4 billion
lower than the $98.5 billion estimated in July.
Corporation
estimated payments of 1991 tax liability were $1.2 billion
lower than anticipated, but were partially offset by lowerthan-estimated refunds of $0.7 billion.
Social Insurance Taxes and Contributions were $1.0 billion
higher than the MSR estimate of $395.1 billion. This increase
was the net effect of higher-than-estimated employment tax
collections and contributions of $1.2 billion, partially
offset by lower-than-estimated collections of unemployment
insurance taxes and other retirement contributions.
customs Duties were $15.9 billion, $1.1 billion below the July
estimate. This shortfall apparently reflects lower levels of
imports.
other Receipts, which include excise taxes, estate and gift
taxes, and miscellaneous receipts, totalled $76.4 billion,
$0.2 billion above the MSR estimate.
OUTLAYS
Total outlays were $1,323.0 billion, $27.9 billion lower than the
outlays estimated in the July MSR.
The major reason for the
difference from July is the decline of $17.1 billion in deposit
insurance outlays, but spending also decreased by $4.2 billion in
the Department of Health and Human Services, $1.7 billion in the
Department of Agriculture, $1.1 billion in the Department of
Energy, and smaller amounts in several other departments. Outlays
of the Department of Defense, which include those for Desert
Shield/Desert Storm, were only $0.3 billion lower than those
estimated in the July MSR.
The major outlay changes since July are described below. Table 3
displays actual outlays and estimates from the February Budget and
July MSR by agency and major program.
3
Deposit Insurance. Total outlays for deposit insurance were $66.4
billion, $17.1 billion below the forecast in the July MSR.
Bank Insurance Fund (BIF).
outlays for the Bank
Insurance Fund were $4.7 billion lower than the July MSR.
The difference is attributable to the timing of the
resolution of banks in financial difficulty.
FSLIC Resolution Fund (FRF).
outlays of the FSLIC
Resolution Fund were $0.6 billion below the MSR.
The
difference is attributable to a decrease of $0.2 billion
in assistance agreement payments and an increase of $0.5
billion in asset recoveries.
Resolution Trust Corporation (RTC). outlays for the RTC
were $11. 5 billion lower than the July MSR estimate.
About $8.0 billion of this lower spending resulted from
a reduction in the number of problem thrifts resolved
during the year.
Receipts from sales of failed thrift
assets were about $3.0 billion higher than estimated.
other Deposit Insurance Related Agencies.
Net outlays
for other deposit insurance related agencies, primarily
the National Credit Union Administration (NCUA), account
for $0.2 billion of the total change.
other outlay Changes
Department of Agriculture.
Actual outlays of the Department of
Agriculture were $54.1 billion, $1.7 billion below the July MSR
estimate.
Outlays for the Commodity Credit Corporation (CCC)
accounted for the largest portion of this decrease, $0.5 billion
below the MSR estimate.
CCC outlays were reduced as a result of
higher than anticipated prices for program crops.
Outlays of the
Foreign Assistance--P.L. 480 program were $0.3 billion below the
July MSR estimate mostly because the Title III foreign food aid
program was initiated late in FY 1991.
A $0.3 billion decrease
from the MSR estimate in Rural Electrif ication Administration
outlays was the result of lower-than-expected demand for loans.
Department of Defense-Military.
Net outlays of the Department of
Defense were $261.9 billion, $0.3 billion lower than the MSR
estimate of $262.2 billion. The change is the net result of lowerthan-expected outlays for Desert Shield costs, offset by slower
payment by allies of Desert Shield contributions, and increased
outlays for procurement.
~D~e:..tp~a~r:....t.!::.m!!.!..::::e:..!..n!...!t=--..:::o~f,--=E~d>...::u,,-,c::..:a::..t:""--7i-::o,-,-!-n .
Ac t ua 1 out lays 0 f the Depa rtmen t 0 f
Education were $0.7 billion higher than the MSR estimate of $24.6
billion.
The largest single factor in the increase was higherthan-expected default claims in the Guaranteed Student Loan
program.
4
Department of Energy. Actual outlays of the Department of Energy
were $1.1 billion below the MSR estimate. The largest portion of
the difference was in atomic energy defense acti vi ties, where
spending was $0.5 billion under the MSR estimate. The change was
due to slower-than-anticipated spending for nuclear materials and
nuclear weapons production.
The Department of Energy reported
outlays for the strategic Petroleum Reserve Petroleum account were
$0.3 billion below the MSR estimate because of higher receipts.
Department of Health and Human Services.
Actual outlays of the
Department of Health and Human Services were $484.4 billion, $4.2
billion below the MSR estimate of $488.6 billion.
The major
components of this decrease are in Medicaid, Family Support
Payments to states, the Public Health Service, and Supplemental
Security Income programs. Actual FY 1991 outlays for Medicaid were
$1.3 billion less than estimated in the MSR.
Most of the
difference is attributable to unexpected revenue shortfalls in many
states during the last few months of FY 1991, which prevented
states from having the necessary funds needed to draw Federal
matching payments. It is expected that the decline will be made up
in FY 1992 and later years.
Outlays in the Public Health Service were $1.0 billion below the
MSR estimate.
In part, this decrease reflects slower than
anticipated grantee drawdowns of appropriations, which increased by
more than 12 percent annually during FY 1990 and FY 1991. Health
Resources and Services Administration (HRSA) spending was $0.4
billion below the MSR estimate, in part because vaccine claims
adjudication was slower than expected. Indian Health Service (IHS)
outlays were $0.2 billion lower as a result of delays on several
large construction projects. Outlays by the National Institutes of
Health and the centers for Disease Control were also slightly below
the MSR estimate.
The July MSR estimates assumed that $1.3 billion in Supplemental
Security Income (SSI) benefits would be paid for retroactive
payments resulting from the Supreme Court's decision in Zebley v.
Sullivan.
Because of District Court delays, these payments will
not begin until FY 1992. Overall, SSI outlays were down from the
MSR estimate by $1.0 billion.
Department of Housing and Urban Development.
Outlays of the
Department of Housing and Urban Development (HUD) were $0.8 billion
below the MSR estimate.
Spending for Hous ing Payments accounts
fell from the MSR estimate as a result of lower-than-anticipated
low-income rental subsidy payments. Government National Mortgage
Association (GNMA) outlays were lower due to lower expenses in its
mortgage-backed securities program.
Outlays were above the MSR
estimate in the Federal Housing Administration Fund (FHA) due to
higher than expected multifamily insurance claims.
5
Department of Labor. The Department of Labor's actual outlays were
$0.6 billion below the MSR estimate.
Almost all the shortfall
occurred in the Department's benefits programs. The largest single
difference from the MSR was $0.2 billion in decreased spending for
the Pension Benefit Guaranty Corporation (PBGC). The Corporation
did not take over the number of plans anticipated at MSR and did
not payout as much in benefits as expected. Outlays for the Black
Lung program were $0.1 billion below the MSR estimate due to a
combination of lower benefit payments and fewer advances.
Department of the Treasury. Outlays for the Department of Treasury
were $276.9 billion, $1.2 billion higher than the MSR estimate.
Outlays for interest on the public debt were $286.0 billion, $1.3
billion higher than the MSR estimate. This difference is mainly in
the interest paid on the holdings of Government accounts, where a
combination of higher balances and slightly higher interest rates
resulted in higher interest payments than estimated in the MSR.
Export-Import Bank.
Export-Import Bank outlays were $0.6 billion
lower than the MSR estimate. This was primarily because interest
repayments on direct loans were $0.3 billion above projections. In
addition, new direct loan disbursements were $0.2 billion below
projections because of delays in the projects for which loans had
been approved.
Federal Emerqency Management Agency.
Outlays for the Federal
Emergency Management Agency were $0.8 billion below the MSR
estimate.
This is primarily because outlays from the disaster
relief fund were $0.5 billion below the MSR estimate. Nearly $0.2
billion of this amount is attributable to a 1991 supplemental
request that Congress did not enact, and $0.3 billion results from
slower-than-expected drawdowns by grantees for disaster assistance.
Funds Appropriated to the President. Outlays of Funds Appropriated
to the President were $11.7 billion, $0.4 billion lower than the
$12.1 billion estimated in the MSR.
Actual outlays for military
sales programs, which include principally the Foreign Military
Sales and Kuwait Civil Reconstruction Trust Funds, were $1.1
billion below the July MSR estimate.
This change is primarily
attributable to increased receipts from foreign governments for
arms sales and reconstruction activity resulting from the events in
the Persian Gulf.
This decrease was partially offset by a $0.6
billion increase in International security Assistance.
Postal Service.
Postal Service outlays were $1.3 billion higher
than the MSR estimate.
The difference is the result of the
establishment in FY 1991 of a 29-cent stamp rather than a 30-cent
stamp.
Employer Share, Employee Retirement Fund. The Federal Government's
contributions to its Employee Retirement Fund were $0.9 billion
higher than the MSR estimate. Most of the change occurred in the
6
Military Retirement Fund because of the increased numbers of
military personnel activated for operations in the Persian Gulf.
7
Tabla 4. Racalpea of the U.S. Government (I mllllone)
Thla Month
ewrent FI_I VIMr to Date
Groaa Reoelp18
Recelp18
Groll Reoelpll
Recelpl8
Miscellaneous f8C8ipl3:
All other ........................................... ..
should be ...................................... ..
382
382
810
810
3.270
3,698
3.261
3,689
Total--MisC8l1aneousreoelpts .......... ..
should be ........................................ .
2.019
2.447
2,018
2,44e
22,429
22,857
22,419
22,847
Total-ReC8ipta. ................................. .
should be ........................................ .
111.9QO
112.418
108,917
109,345
1,151,470
1,151,897
1,053,832
1,054,260
Total~n-budgel .............................. .
85,n6
86,204
82,703
83,131
856,915
857,343
759,94(1
Gross Outlays
Outlays
Gross Outlays
Outlays
page 11
Sooal Security Admlnlstranon:
Supplemental secumy Income program
should be ............................ ..
172
600
172
600
15,498
15,926
15,491'
15,926
Total"Soclai SecUrity Admmlstranon.
should be ........................................ .
242
670
242
670
22,320
22,748
22,320
22,748
18,002
16.978
229,757
217,54~
18,430
17,406
230,185
217,969
130,841
131.269
115,748
116,174
1,542,110
1,542,538
1,322,561
1,322,989
102,473
102,901
91.089
91,517
1,255,723
1,256,150
1,080,874
1,081,302
page 6
should be ........................................ .
760,375
Tabla 5. Outlaya of tt. U.S. Govarnmant (I mllilona)
Thla month
CLnWnt FI_I Year to Date
page 12
Total--Departrnent of Health and Human Services Except SocIal Security ............ ..
should be ...................................... ..
page 19
Total·-Outlays ...
should be .........
Total·-On-budgel ............................. .
should be ....................................... ..
Tabla II. Summary of Racalpt. by Sourca, and Outlaya byFunctlon of the U.S. Government ($ mlilione)
Fiscal Year
page 29
RECEIPTS:
Miscellaneous .................................. .
.. .............. ..
should be ............
Total ...................... ..
should be
ThiS month
to Date
2.018
2.448
22,419
22,847
108,917
109.345
1.053,832
1.054,260
11.761
12.189
171,190
171,618
115,748
116,174
1,322,561
1,322,989
NET OUTLAYS:
Income security .......
.. .................. ..
should be .................... .
Total .................. .
should be ........ .
NOIe: Changes noted In the above tables are also reflected in Tabje 7, pages 26 & 27: and In Table 8, page 28.
ERRATA
Final Monthly Treasury Statement
of Receipts and Outlays
of the United States Government
For Fiscal Year 1991 Through September 30,1991, and Other Periods
Attention is called to the following corrections on the pages and columns indicated:
Tabla 1. Summary of Receipt., Outlaya, and the DeflcltlSurph.. ofthe U.S.Government (S million.)
Recelpll
Outlay.
page 2
FY 1991
September ........................................ .
should be ......................................... .
108,917
109,345
115,746
116,174
Year·to-Date ..................................... .
should be ......................................... .
1,053,832
1,054,260
1,322,561
1,322,989
Table 2. Summary of Budget and Off·Budget Reaulta and Financing of the U.S. Government (S million.)
Thll month
Current Fiscal
Year to Date
page 3
Total on-budget and off-budget relulll:
Total recaipll .................................... .
should be ......................................... .
108,917
109,345
1,053,832
1,054.260
On-budget recaipll ............................
should be ......................................... .
82,703
83,131
759,948
760,375
Total ou~ays ...................................... .
should be ......................................... .
115,746
116,174
1,322,561
1,322,989
On-budget ou~ays ............................. .
should be ......................................... .
91,089
91,517
1,080,874
1,081,302
Table 3. Summary of R_lpte.nd Outlaya dtha U.S. Oovammant (S mllitona)
This month
Fiacal Year
to Date
page 5
Budget Receipll:
Mi scellaneous recaipll ...................... .
should be ........................................ ..
2,018
2,446
22,419
22,847
Total Recaipll .................................. ..
should be ........................................ ..
108,917
109,345
1,053,832
1,054,260
(On-budget) ...................................... ..
should be .............. _......................... ..
82,703
83,131
759,948
760,376
16,978
17,406
217,541
217,969
Total OU~ay ...................................... .
should be ........................................ ..
115,746
116,174
1,322,561
1,322,989
(On-budget) ....................................... .
should be .............................. ············
91,089
91,517
1.080,874
1,081,302
Budget Outlays:
Department of Health and Human ServlC8l,
except Social Security ........................ ..
should be ........................................ ..
Table 3.--1991 BUDGET OUTLAYS BY AGENCY
(fiscal years, in millions of dollars)
1991
1990
Actual
TOTAL, outlays ........................................................... .
1,251,777
On-budget ............................................................ . (+1,026,711)
Off-budget. .......................................................... .
(+225,066)
Deficit (-) ................................................................... .
On-budget ............................................................ .
Off-budget ........................................................... .
-220,470
(-277,059)
(+56,590)
Estimate
February
~~--.----
1,409,563
(+1,171,658)
(+237,905)
Actual less
Ju!Y...lli
MY
Actu<;!]
1,350,891
(+1,111,103)
(+239,788)
1,322,988
(+1,081,302)
(+241,686)
-27,903
(-29,801)
(-1,898)
-268,728
(-320,926)
(+52,198)
13,485
(+14,462)
(-977)
-318,122
(-378,505)
(+60,382)
-282,213
(-335,388) \2
(+53,175) \2
NOTE: Detail may not add to totals due to rounding.
\ 1 A placeholder for FY 1991 Desert Shield contributions and incremental costs was included in Allowances.
\2 Reflects a change in the accounting treatment for the quinquennial transfers to the
general fund for adjustments for military service credits. Under the revised treatment,
outlays for Social Security and Medicare are increased by $2,889 million and $1,100 million
respectively. This change is fully offset by a decrease an outlays in other HHS of $3,989
million.
Table 3.--1991 BUDGET OUTLAYS BY AGENCY
(fiscal years, in millions of dollars)
1991
1990
Actual
Estimate
February
----------
Actual less
_._-
July
Actual
Ju~
2,183
1,397
1,640
870
-770
490
1,626
4,477
46,547
-312
6,021
511
59
4,313
84,578
54
6,753
511
59
4,444
62,249
54
6,765
511
1,317
4,358
50,751
-22
6,240
0
1,258
-86
-11,498
-76
-525
Subtotal, other Independent agencies ...........................
73,666
125,708
98,197
80,456
-17,741
Allowances ..................................................................
Undistributed offsetting receipts:
Employer share, employee retirement (on-budget) ...
Employer share, employee retirement (off-budget) ...
Interest received by on-budget trust funds ...............
Interest received by off-budget trust funds ..............
Rents and royalties on the OCS lands .....................
0
8,200
0
0
0
-28,044
-5,567
-46,416
-15,991
-3,004
-29,537
-5,827
-50,179
-20,164
-3,729
-29,539
-5,805
-50,179
-20,663
-3,629
-30,402
-5,804
-50,977
-20,222
-3,150
-863
1
-798
441
479
Subtotal, undistributed offsetting receipts ......................
-99,025
-109,436
-109,815
-110,555
-740
Federal Emergency Management Agency .....................
Postal Service:
On-budget .........................................................
Off-budget .........................................................
Railroad Retirement Board .....................................
Resolution Trust Corporation ..................................
Tennessee Valley Authority .....................................
Other (net) .............................................................
---
---
~---
Table 3.--1991 BUDGET OUTLAYS BY AGENCY
(fiscal years, in millions of dollars)
1991
1990
Actual
Estimate
February
July
Actual
Actual less
July Est.
Treasury:
Exchange stabilization fund ....................................
Interest on the Public Debt. .....................................
Offsetting receipts ..................................................
Other .....................................................................
-2,947
264,853
-22,716
16,074
-1,800
286,290
-26,868
19,425
-1,800
284,697
-26,618
19,434
-2,206
286,022
-26,567
19,645
----
---
Subtotal, Treasury ................ '" ....................................
255,264
277,047
275,713
276,894
1,181
Department of Veterans Affairs .....................................
Environmental Protection Agency .................................
General Services Administration ..................................
National Aeronautics and Space Administration .............
Office of Personnal Management.. ................................
Small Business Administration ......................................
Other independent agencies:
District of Columbia ................................................
Export-Import Bank ...............................................
Federal Deposit Insurance Corporation:
Bank insurance fund .........................................
FSLlC resolution fund .......................................
Other FDiC .......................................................
28,998
5,108
-123
12,429
31,949
692
31,338
5,776
756
13,499
35,161
529
31,614
5,776
756
13,499
35,161
544
31,214
5,770
487
13,878
34,808
613
-400
-6
-269
379
-353
69
548
357
540
542
644
542
636
-88
-8
-630
6,429
5,213
87
15,881
11,067
13
12,111
9,165
13
7,363
8,556
-36
-4,748
-609
-49
Subtotal, Federal Deposit Insurance Corporation ...........
11,729
26,961
21,289
15,883
-5,406
-406
1,325
51
211
Table 3.--1991 BUDGET OUTLAYS BY AGENCY
(fiscal years, in millions of dollars)
1991
1990
Actual
Housing and Urban Development:
Housing payments ..................................................
Federal Housing Administration fund .......................
Government National Mortgage Association .............
Community development grants ..............................
Other .....................................................................
Estimate
February
July
Actual
15,895
1,533
-145
3,073
3,145
Actual less
July Est.
13,875
988
-468
2,770
3,002
15,912
1,533
-145
3,073
3,100
---
15,159
1,892
-280
2,941
3,039
--_.-
Subtotal, HUD .............................................................
20,167
23,473
23,501
22,751
-750
. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .
Interior .............
Justice ......................................................................
Labor:
Training and employment services .........................
Unemployment trust fund ........................................
Other .....................................................................
5,794
6,507
6,386
8,689
6,407
8,697
6,094
8,244
-313
-453
3,837
20,250
1,230
3,897
28,400
2,206
3,897
28,504
2,203
3,808
28,434
1,807
-89
-70
-396
Subtotal, Labor. ...........................................................
25,317
34,503
34,604
34,049
-555
State ...........................................................................
Transportation:
Federal Highway Administration ..............................
Urban Mass Transportation Administration ...............
Federal Aviation Administration ...............................
Other .....................................................................
3,979
4,306
4,461
4,252
-209
14,293
3,770
6,391
4,183
14,436
4,048
7,419
4,865
14,436
4,048
7,419
4,898
14,539
3,857
7,241
4,866
103
-191
-178
-32
Subtotal, Transportation ...............................................
28,637
30,768
30,801
---
---
-736
359
-135
-132
-106
----
----
----
----
30,503
-298
Table 3.--1991 BUDGET OUTLAYS BY AGENCY
(fiscal years, in millions ot dollars)
1991
1990
Actual
Estimate
February
4!!!Y
Actual
Actual less
July Est.
Defense-Military:
Contributions .........................................................
Other. ....................................................................
0
289,755
287,451
48,214
310,402
43,618
305,543
-4,596
-4,859
Subtotal, Defense-Military ...........................................
289,755
287,451
262,188
261,925
-263
Defense-CiviL ....................................................... ,.....
Education ............... , ....................................................
Energy ........................................................................
Health and Human Services - except Social Security:
Medicare ...................... ,........................................
Medicaid ................................................................
Public Health Service .............................................
Family Support Payments to States ........................
Supplemental Security Income ................................
Other. ....................................................................
24,975
23,109
12,028
26,415
24,839
13,539
26,415
24,638
13,539
26,538
25,339
12,459
123
701
-1,080
109,709
41,103
14,007
12,246
12,568
4,046
116,267
51,555
16,288
14,110
16,881
7,334
118,036 \2
53,798
16,303
14,110
16,881
3,228 \2
117,763
52,533
15,348
13,520
15,925
2,880
-273
-1,265
-955
-590
-956
-348
Subtotal, HHS - except Social Security .........................
193,679
222,435
222,356
217,969
-4,387
Health and Human Services - Social Security ...............
244,998
263,837
266,197 \2
266,395
198
Subtotal, Health and Human Services ...........................
438,677
486,272
488,553
484,364
-4,189
o
\1
---
Table 3.--1991 BUDGET OUTLAYS BY AGENCY
(fiscal years, in millions ot dollars)
1991
1990
Actual
Estimate
February
July
Actual
Actual less
July Est.
Outlays by Major Agency
Legislative branch and the Judiciary .............................
Executive Office of the President. .................................
Funds Appropriated to the President:
International Security Assistance:
Military assistance ..............................................
Economic Support Fund ......................................
Other ............................. , ...................................
International development assistance ......................
International monetary programs .............................
Military sales programs ...........................................
Other .....................................................................
3,885
157
4,604
258
4,611
258
4,284
193
-327
-65
5,030
3,769
-447
3,528
-738
-1,116
60
5,357
3,263
-531
3,487
5
-343
16
5,357
4,113
-531
3,510
5
-343
16
5,643
4,321
-433
3,444
179
-1,43d
8
286
208
98
-66
174
-1,095
-8
Subtotal, Funds Appropriated to the President ...............
10,086
11,254
12,127
11,724
-403
Agriculture:
Commodity Credit Corporation ................................
Foreign assistance - P.L. 480 .................................
Federal Crop Insurance Corporation ........................
Rural Electrification Administration ..........................
Farmers Home Administration .................................
Food and Nutrition Service ......................................
Forest Service ........................................................
Other .....................................................................
6,380
978
979
278
6,713
23,620
2,934
4,130
10,844
1,120
884
405
6,412
27,865
3,236
4,666
10,591
1,120
884
405
6,412
28,486
3,236
4,721
10,069
820
769
100
6,629
28,065
3,001
4,666
-522
--300
-115
-305
217
-421
-235
-55
Subtotal, Agriculture ....................................................
46,012
55,432
55,855
54,119
-1,736
Commerce ..................................................................
3,734
2,796
2,791
2,585
-206
---
Table 2.--1991 BUDGET RECEIPTS BY SOURCE
(fiscal years, in millions of dollars)
1991
1990
Actual
Estimate
February
.July
Actual
Actual less
July Est .
Receipts by Source
Individual income taxes ................................................
Corporation income taxes ............................................
Social insurance taxes and contributions:
Employment taxes and contributions .......................
On-budget. ......................................................
Off-budget. ......................................................
Unemployment insurance .......................................
Other retirement contributions .................................
466,884
93,507
492,635
95,866
481,901
98,508
467,827
98,086
-14,074
-422
353,891
(72,235)
(281,656)
21,635
4,522
376,175
(77,888)
(298,287)
21 ,194
4,586
369,354
(76,391 )
(292,963)
21,112
4,586
370,526
(76,641 )
(293,885)
20,922
4,563
1,172
250
922
-190
-23
Subtotal, Social insurance taxes and contributions .........
380,048
401,955
395,052
396,011
959
Excise taxes ................................................................
Estate and gift taxes ....................................................
Customs duties ............................................................
Miscellaneous receipts .................................................
35,345
11,500
16,707
27,316
44,810
12,241
17,698
26,236
42,333
11,493
16,999
22,392
42,430
11,138
15,921
22,847
97
-355
-1,078
455
Total, Receipts ...................................................
On-budget. ....................................................
Off-budget. ....................................................
1,031,307
(749,652)
(281,656)
1,091,441
(793,153)
(298,287)
1,068,678
(775,715)
(292,963)
1,054,260
(760,376)
(293,885)
-14,418
-15,339
922
NOTE: Detail may not add to totals due to rounding.
---
----
TREASUR~/:N':)J;:··"
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Dallartmant of tile Treasury • Washington, D.C. • Telephone 5&&-2041
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FOR RELEASE AT 2:30 P.M.
October 29, 1991
1 ( ; "-
CONTACT:
Office of Financing
202-219-3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 20,800 million, to be issued November 7, 1991.
This offering will provide about $ 1,725 million of new cash for
tbe Treasury, as the maturing bills are outstanding in the amount
of $ 19,078 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500, Monday, November 4, 1991,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Standard
time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$ 10,400 million, representing an additional amount of bills
dated Augus t 8, 1991
and to mature February 6, 1992
(CUSIP No. 912794XY 5), currently outstanding in the amount
of $ 10,455 million, the additional and original bills to be
freely interchangeable.
182-day bills (to maturity date) for approximately
$ 10,400 million, representing an additional amount of bills
dated
May 9, 1991
and to mature
May 7, 1992
(CUSIP No. 912794 YM 0), currently outstanding in the amount
of $ 11,854 million, the additional and original bills to be
freely interchangeable.
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of S10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing November 7, 1991.
Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at
the weighted average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to
Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount
of tenders for such accounts exceeds the aggregate amount of
maturing bills held by them. Federal Reserve Banks currently
hold $ 955
million as agents for foreign and international
monetary authorities, and $ 5,141 million for their own account.
Tenders for bills to be maintained on the book-entry records
of the Department of the Treasury should be submitted on Form
PO 5176-1 (for 13-week series) or Form PO 5176-2 (for 26-week
series) •
NB-152S
TREASURY'S 13-, 26-, AND 52-WBEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for
which must be a minimum of $10,000. Tenders over $10 000 m~st
be in multiples of $5,000. Competitive tenders must ~lso show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary
markets in Government securities and report daily to the Federal
Reserve Bank of New York their positions in and borrowings on
-such securities may submit tenders for account of customers, if
the names of the customers and the amount for each customer are
furnished. Others are only permitted to submit tenders for their
own account. Each tender must state the amount of any net long
position in the bills being offered if such position is in excess
of $200 million. This information should reflect positions held
as of one-half hour prior to the closing time for receipt of
tenders on the day of the auction. Such positions would include
bills acquired through "when issued" trading, and futures and
forward transactions as well as holdings of outstanding bills
with the same maturity date as the new offering, e.g., bills
with three months to maturity previously offered as six-month
bills. Dealers, who make primary markets in Government securities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities', when submitting tenders for customers, must submit a separate tender for
each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an
agreement, nor make an agreement to purchase or sell or otherwise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury.
A cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches.
1/91
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection
of their tenders. The Secretary of the Treasury expressly
reserves the right to accept or reject any or all tenders, in
whole or in part, and the Secretary's action shall be final.
Subject to these reservations, noncompetitive tenders for each
issue for $1,000,000 or less without stated yield from anyone
bidder will be acceDted in full at the weiahted averaae b~~k
discount rate (in two decimals) of accepted competitive bids
for the respective issues. The calculation of purchase prices
for accepted bids will be carried to three decimal places on the
basis. of price per hundred, e.g., 99.923, and the determinations
of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the
maturing bills accepted in exchange and the issue price of the
new bills.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.
8/89
"""NJ;WS
TREASURI
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Dallartmant of tile Treasury • washington, D.C. • Telephone 5&&-2041
........... Q4':;1VCU.
t(e~ease
IJUI...l..L
October 30, 1991
9:00 am
The Honorable John B. Robson
Deputy Secretary ot the Treasury
Betore the committee on Small Business
united States Senate
October 30, 1991
Mr. Chairman, members of the Committee, I am pleased to
appear before you today to address issues relating to the
availability of bank credit.
Today, I would like to describe the steps the Administration
has taken, with the collaboration and cooperation of the bank and
thrift regulatory agencies -- the Federal Reserve Board, the
FDIC, the Comptroller of the Currency and the Office of Thrift
Supervision, to address the regulatory aspects of this credit
crunch. Also, I would like to discuss how the passage of the
President's growth initiatives and comprehensive banking reform
could contribute to a healthier economy and stronger, more
competitive banks which can better handle future periods of tight
credit.
Factors contributing to the Credit Crunch
During the last year there l~s been considerable discussion
about the so-called "credit crunch" and its impact on the
economy.
-"
Let me say fIrst, that despite some assertions in the media
that the credit crunch is illusory, we believe that a real credit
crunch exists for certain types of borrowers and in certain
regions of the country and that it is having a negative effect on
the economic recovery.
By "credit crunch" I mean that loans
which could reasonably and responsibly be made are not ~vailable.
These are loans that in normal times would be made -- not go-go
credits -- and loans which could be extended under traditional
standards. A banker in a recent meeting we had put it succinctly
when he said, "We are not making loans that we could make". So
we do not concur in the thesis that the current credit situation
is simply a matter of weak demand for loans. This problem has a
supply side.
The credit crunch has multiple causes which I will discuss
in more detail, but which I will enumerate on here to indicate
its complexity. These causes include:
NB-1526
The recession, which has sapped consumer, business and
banker confidence:
Lender caution induced by the savings and loan
catastrophe:
Lenders' effort to build capital to meet international
standards and satisfy stock market and credit agency
concern about financial institution capital levels:
Severe overbuilding in the real estate sector,
especially commercial real estate:
Reduced lending and tougher collateral requirements
caused by the perception that borrowers have easier
access to bankruptcy protection:
Bank management uncertainty about what future structure
and laws will govern the industry:
Increased risk aversity, due to greater exposure to
liability on the part of bank directors and officers
and various professionals such as appraisers and
accountants: and
The influence of bank regulatory policy and examiner
overreaction.
Let me also add that we are, as is the Committee, aware of
the severe consequences a credit crunch has on small and medium
businesses which do not have access to the capital markets and
must rely primarily -on bank credit for growth, expansion, and in
some cases, survival.
RecessioD
From roughly July of 1990 until mid-year 1991, our country
experienced a recession -- a recession somewhat less severe than
average, but a very real one nevertheless. This declining level
of economic activity, combined with the uncertainty resulting
from fighting in the Persian Gulf War, negatively impacted
consumer and business confidence. During recessions, people buy
less, so demands for credit soften. Likewise, real estate
markets have experienced increasing vacancy rates and falling
rents. Commercial banks have seen a rise in non-performing
assets and the need for greater loan loss reserves -- while at
the same time they are working to raise capital.
Recognizing these trends, the Federal Reserve Board lowered
short-term interest rates and reduced the reserves that banks are
required to maintain on deposit at the Federal Reserve. While
2
these steps were helpful, it is my view that the Federal Reserve
actions came too slowly. Money supply, as measured by M2, is
still growing well below the rate set by the Federal Reserve's
own target ranges.
The Commerce Department reported yesterday that real GNP
rose at an annual rate of 2.4 percent in the third quarter, so
that while not robust, the economy has moved out of recession.
These are macroeconomic statistics and we realize that there are
regions and economic sectors which are struggling.
Regulation's Impact on the Supply ot Credit
Many businesses and borrowers have reported a significantly
more stringent bank regulatory approach. It must be said first
that this approach was in substantial measure due to the banking
agencies I application of prudent regulation in more severe
economic conditions, where the creditworthiness of borrowers and
the values of collateral had in fact deteriorated, necessitating
larger loan loss reserves. Praise, not criticism, should be
given to the bank regulators for vigilance in difficult economic
conditions. No one wants to return to the dangerous regulatory
laxity that marked the savings and loan collapse.
However, it is this same savings and loan collapse that many
has generated an overcorrection -- or some would call
overzea10usness -- in the application of regulatory policy.
Nearly every day, an examiner can turn on CSPAN or read in the
local newspaper about a Congressional Committee attacking a
regulator for being too lax -- rarely, if ever, for being too
strict. ThUS, the nearly 7,000 examiners in the field are
subjected to a "mixed message." This mixed message makes the job
of achieving our goal -- balanced, common sense regulation -especially difficult. This hearing is an important step in
examining how to achieve a more direct and balanced message from
both the legislative and the executive branches of government.
~elieve
Likewise, prompt confirmation of Bob Clarke and Alan
Greenspan, as well as the President's nominees to the Board of
Governors of the Federal Reserve, would reduce uncertainty about
the direction of regulatory policy.
There are banks, borrowers, and economic sectors
experiencing temporary 'difficulties which need flexibility to
work through their problems, and, regulatory judgment should and
can be quite responsibly exercised in these situations.
In these areas of appropriate regulatory judgment the
perception has been created among banks and businesses that
examiners are inflexible and overly harsh. This perception has
contributed to create an atmosphere of risk-aversity,
3
apprehension and hesitation among lenders, and has resulted in
the constraint of bank credit even to sound borrowers.
Lender's Contribution to the Credit Crunch
Bankers too have become more cautious. This is due in part
to the perceived increase in regulatory scrutiny. But, bankers
have on their own, tightened loan standards in response to their
bad experiences with the loan loss lessons of the last decade:
farm credit, third world debt, real estate, and highly leveraged
transactions. These previous difficulties have increased the
risk aversity of many loan officers.
It is also reported to us that bank directors, concerned
about increased personal liability due to the provisions
contained in FIRREA and the 1990 Crime Control Act, have
instructed officers to be ultra-conservative in their lending.
Wall Street stock analysts consider real estate "high risk
lending" and thus, publicly traded banking companies are
attempting to please analysts and boost their stock prices by
rapidly reducing their real estate exposure. Banks hurt by loan
losses in real estate may limit new lending to even credit worthy
small businesses, as they attempt to shrink loan portfolios in
order to build capital reserves.
The result is a banking system that is not functioning
properly and that has retreated from its role as a taker of
reasonable risks to fuel the establishment of new enterprises and
the expansion of economic activity. It is my opinion that it is
a poorer America where the old fashioned character loan is no
longer available.
The Credit Crunch and Small Business
The impact of this credit crunch on small business, like the
rest of the country, has not been uniform. New England continues
to report more problems than elsewhere.
The National Federation of Independent Business (NFIB)
quarterly publishes a survey of 2,000 small businesses. In both
the March and July 1991 surveys, those small businesses who
regularly borrow did not cite a material difficulty in obtaining
credit. The study did note that there was a weak demand for
short-term loans, particularly in light of earnings performance.
Credit availability for small business in the second quarter
was unchanged from what it has been over the last year. However,
borr~wing frequency held at comparatively low levels and we
cont~nue to hear anecdotal evidence of small business not getting
credit. One percent of those polled by the NFIB reported credit
4
easier to obtain in the last three months compared to the prior
three; 12 percent reported it harder to get. These numbers
indicated that credit has been more difficult to obtain in the
last quarter than it has been historically, but not more so than
in the three prior recessions.
One area we have followed closely is residential housing.
Many single family home builders have pointed to a dramatic
decrease in credit available for new construction -- even in
areas where there is identifiable demand for new starts.
These borrowers could be victims of both overly cautious bankers
and regulators, and also of a failure to distinguish properly
among credit requests for commercial real estate in overbuilt
markets and needed residential real estate credit. Another area
of difficulty are those small businesses attempting to borrow and
operate in regions of the country where there have been a large
number of local banks in financial difficulty, such as New
England or here in the Washington, D.C. metropolitan area.
Improving the Climate for Lending
since the summer of 1990, President Bush and otner
Administration officials have been meeting with bankers,
businesses, and the regulators to identify specific steps that
could be taken to improve the climate for lending. These
meetings led to regulatory policy changes and clarifications that
were released in March, July, and October of 1991. Each of these
steps is aimed at achieving balance and common sense in the
application of regulatory policy, and raising the level of
confidence in the lending environment. These changes are
permanent changes to improve bank regulation. They are not
simply quick-fix changes which will be abandoned when the credit
crunch is over.
Some of these policy changes provided specific guidelines
for the handling of troubled real estate loans, methods for
working with troubled borrowers and improving the banker-examiner
relationship. Specific changes and clarifications include:
Directives that bankers should work constructively with
borrowers experiencing temporary difficulties and
facilitate the orderly restructuring of credits;
Prudent refinancing of economically sound commercial
real estate loans;
Improved verification by regulatory supervisors that
recent policy changes and clarifications are
appropriately applied in each examination;
Enhancements in the process for appeals of alleged
5
misapplication of regulatory standards;
Harmonization of the treatment of preferred stock in
u.s. capital standards with other signatory countries
under the Basle capital accord;
Appropriate application of valuation standards
especially in real estate credits so as to avoid a
liquidation approach to valuation;
Improved guidance in the appraisal process and steps to
reduce excessive appraisal costs for lenders; and
Legislative action t~ make permanent a recent EPA
proposed regulation to limit lender liability for
environmental cleanup of loan collateral properties,
and to address related issues.
Long-Term Solutions to Future Credit Crunches
Addressing the credit crunch is a battle which must be waged
in the short term to accelerate and sustain the economic
recovery. To encourage long term economic growth, Congress
should act immediately to pass the President's initiatives for
economic growth which were submitted in our 1992 budget request
but on which Congress had yet to act. Our program would:
Reduce the capital gains tax rate to promote jobs and
business formation;
Enhance personal savings through an expanded Individual
Retirement Account (IRA) and the Family Savings
Account;
Make ~anent the Research and Experimentation tax
credit;
Increase federal investment in science, technology and
infrastructure;
And keep the pay-as-you-go system in the budget process
to ensure that any new spending must be offset by
decreased spending elsewhere in the budget. This
restraint on federal spending must be kept in place to
contain the deficit.
Next, in order to ensure that our country has a competitive
and strong financial services industry, the Congress should pass
the President's comprehensive banking reform measures. As
Treasury secretary Brady said on March 18, 1991, "the state of
banking in the U.S. leaves taxpayers overexposed, consumers and
6
business underserved, and the industry increasingly
uncompetitive.
Comprehensive reform is essential because strong banks and
financial service firms are a key to the economic health of our
country. strong banks will keep credit available in good times
and bad, fueling economic growth and new jobs. Competitive, well
capitalized financial institutions are a sure way to avoid future
credit crunches.
If you want stronger banks, banks that will
return to the business of lending money to sound customers for
sound projects, work with your colleagues to pass this package.
Conclusion
Mr. Chairman, in the past, I have served as the head of a
federal regulatory agency and as the chief executive officer of a
company operating in a regulated industry. Thus, I believe that
I can speak with some perspective on the dynamics of the
regulatory process and what it takes to achieve the desired
result.
It takes constant and consistent communication of the
policies and procedures that one wants followed in order to
achieve balanced and consistent regulation. Regulation should be
consistent in boom times as well as times of economic hardship.
We need the help of you and you~ colleagues, Mr. Chairman, to
accomplish our mutual goal of safe and sound banks and available
credit for America's entrepreneurs and businesses.
I would now be pleased to respond to the Committee's
questions.
7
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Citation Information
Document Type: Transcript
Number of Pages Removed: 4
Author(s):
Title:
CNN's Moneyline, Guest: Treasury Secretary Nicholas Brady
Date:
1991-10-29
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
TREASURY NEWS
Dallartmant of tile Treasury • Washington, D.C. • Telephone 5&&-2041
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
October 30, 1991
CONTACT: Office of Financing
202/219-3350
TREASURY NOVEMBER QUARTERLY FINANCING
The Treasury will raise about $17,800 million of new cash
and refund $20,189 million of securities maturing November 15,
1991, by issuing $14,000 million of 3-year notes, $12,000 million
of 10-year notes, and $12,000 million of 30-year bonds. The
$20,189 million of maturing securities are those held by the
public, including $1,447 million held, as of today, by Federal
Reserve Banks as agents for foreign and international monetary
authorities.
The three issues totaling $38,000 million are being offered
to the public, and any amounts tendered by Federal Reserve Banks
as agents for foreign and international monetary authorities
will be added to that amount. Tenders for such accounts will be
accepted at the average prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks
hold $2,585 million of the maturing securities for their own
accounts, which may be refunded by issuing additional amounts of
the new securities at the average prices of accepted competitive
tenders.
The 10-year note and 30-year bond being offered today will
be eligible for the STRIPS program.
Details about each of the new securities are given in the
attached highlights of the offering and in the official offering
circulars.
000
Attachment
NB-1527
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
NOVEMBER 1991 QUARTERLY FINANCING
October 30, 1991
Amount Offered to the Public
$12,000 mill ion
$12,000 million
November 15, 1991
'November 15, 1994
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
May 15 and November 15
$5,000
Not applicable
10-year notes
Series 0-2001
(CUSIP No. 912827 02 5)
Listed in Attachment A
of offering circular
November 15, 1991
November 15, 2001
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
May 15 and November 15
$1,000
To be determined after auction
30-year bonds
Bonds of November 2021
(CUSIP No. 912810 EL 8)
Listed in Attachment A
of offering circular
November 15, 1991
November 15, 2021
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
May 15 and November 15
$1,000
To be determined after auction
Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10X
Accepted in full at the average
price up to $5,000,000
Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10X
Accepted in full at the average
price up to $5,000,000
Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10X
Accepted in full at the average
price up to $5,000,000
None
None
None
Tuesday, November 5, 1991
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Yednesday, November 6, 1991
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Thursday, November 7, 1991
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Friday. November 15, 1991
Wednesday. November 13. 1991
Friday, November 15, 1991
Wednesday, November 13, 1991
Friday, November 15, 1991
Wednesday, NOVember 13, 1991
• . • . $14,000 million
Description of Security:
Term and type of security
Series and CUSIP designation
CUSIP Nos. for STRIPS Components
Issue date
Maturity date
Interest rate
Investment yield
Premium or discount
Interest payment dates
Minimum denomination available
Amount required for STRIPS
3-year notes
Series U-1994
(CUSIP No. 912827 C9 1)
Not applicable
Terms of Sale:
Method of sale
Competitive tenders
Noncompetitive tenders
Accrued interest
payable by investor
Key Dates:
Receipt of tenders
a) noncompetitive
b) competitive
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury
b) readily-collectible check
TREASURY NEWS
Dallartmant of tile Treasury. Washington, D.C. • Telephone 5&&-2041
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
October 30, 1991
CONTACT: Office of Financing
202/219-3350
TREASURY NOVEMBER QUARTERLY FINANCING
The Treasury will raise about $17,800 million of new cash
and refund $20,189 million of securities maturing November 15,
1991, by issuing $14,000 million of 3-year notes, $12,000 million
of 10-year notes, and $12,000 million of 30-year bonds. The
$20,189 million of maturing securities are those held by the
public, including $1,447 million held, as of today, by Federal
Reserve Banks as agents for foreign and international monetary
authorities.
The three issues totaling $38,000 million are being offered
to the public, and any amounts tendered by Federal Reserve Banks
as agents for foreign and international monetary authorities
will be added to that amount. Tenders for such accounts will be
accepted at the average prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks
hold $2,585 million of the maturing securities for their own
accounts, which may be refunded by issuing additional amounts of
the new securities at the average prices of accepted competitive
tenders.
The 10-year note and 30-year bond being offered today will
be eligible for the STRIPS program.
Details about each of the new securities are given in the
attached highlights of the offering and in the official offering
circulars.
000
Attachment
NB-1527
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
NOVEMBER 1991 QUARTERLY FINANCING
October 30, 1991
Amount Offered to the Public
512,000 million
512,000 mi II ion
November 15, 1991
November 15, 1994
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
May 15 and November 15
55,000
Not applicable
10-year notes
Series 0-2001
(CUSIP No. 912827 02 5)
Listed in Attachment A
of offering circular
November 15, 1991
November 15, 2001
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
May 15 and Mov~r 15
51,000
/
To be determined after auction
30-year bonds
Bonds of November 2021
(CUSIP No. 912810 EL 8)
Listed in Attachment A
of offering circular
November 15, 1991
November 15, 2021
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
May 15 and November 15
51,000
To be determined after auction
Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10X
Accepted in full at the average
price up to 55,000,000
Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10X
Accepted in full at the average
price up to 55,000,000
Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10X
Accepted in full at the average
price up to 55,000,000
None
None
None
Tuesday, November 5, 1991
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
loIednesday, November 6, 1991
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Thursday, November 7, 1991
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Friday, November 15, 1991
Wednesday, November 13, 1991
Friday, November 15, 1991
Wednesday, November 13, 1991
Friday, November 15, 1991
Wednesday, November 13, 1991
• • • • $14,000 million
Description of Security:
Term and type of security
Series and CUSIP designation
CUSIP Nos. for STRIPS Components
Issue date
Maturi ty date
Interest rate •
Investment yield
Premium or discount •
Interest payment dates
Minimum denomination available
Amount required for STRIPS
3-year notes
Series U-1994
(CUSIP No. 912827 C9 1)
Not applicable
Terms of Sale:
Method of sale
Competitive tenders.
Noncompetitive tenders
Accrued interest
payable by investor
Key Dates:
Receipt of tenders
a) noncompetitive.
b) competitive ••
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury
b) readily-collectible check
TALKING POINTS
FOR THE
FINANCING PRESS CONFERENCE
October 30, 1991
Today, we are announcing the terms of Treasury's regular
November midquarter refunding. I will also discuss the Treasury's
financing requirements for the balance of the current calendar
quarter and our estimated cash needs for the January-March 1992
quarter.
1.
We are offering $38.0 billion of notes and bonds to
refund $20.2 billion of privately-held notes maturing on
\ '\
November 15 and to raise approximately $17.8 billion of cash.
The three securities are:
First, a 3-year note in the amount of $14.0 billion,
maturing on November 15, 1994.
This note is scheduled
to be auctioned on a yield basis on Tuesday, November 5.
The minimum denomination will be $5,000.
Purchases may
be made in any higher multiples of $5,000.
Second, a 10-year note in the amount of $12.0 billion,
maturing on November 15, 2001.
This note is scheduled
to be auctioned on a yield basis on Wednesday,
November 6.
The minimum denomination will be $1,000.
Third, a 30-year bond in the amount of $12.0 billion,
maturing November 15, 2021.
This bond is scheduled to
be auctioned on a yield basis on Thursday, November 7.
The minimum denomination will be $1000.
-2-
2.
We will accept noncompetitive tenders up to $5,000,000
for each of the note and bond auctions.
This represents an
increase in the maximum noncompetitive award from the $1,000,000
level that has been in place for notes and bonds since November
1976.
The $1,000,000 noncompetitive award in Treasury bill
auctions is
3.
~~changed.
As announced on October 28, 1991, we estimate a net
market borrowing need of $75.8 billion for the October-December
quarter including an allowance for Resolution Trust Corporation
operations.
The estimate assumes a $30 billion cash balance at
the end of December.
We may want to have a higher balance,
depending upon our assessment of cash needs at the time.
Including this refunding we will have raised $58.0
billion of the $75.8 billion in net market borrowing needed this
October-December quarter.
This net borrowing was accomplished as
follows:
$4.5 billion of cash from the 7-year note that settled
October 15;
$3.5 billion of cash from the 2-year notes which
settled October 31;
$9.1 billion of cash from the 5-year notes which
settled October 31;
$20.2 billion of cash from the sale of the regular
-3-
weekly bills, including the bills announced yesterday;
$2.9 billion of cash in 52-week bills;
$17.8 billion of cash from the refunding issues
announced today.
The $17.8 billion to be raised in the rest of the
October-December quarter could be accomplished through sales of
regular 13-,
-~6-,
and 52-week bills, and 2-year and 5-year notes
at the end of November and December.
4.
We estimate Treasury net market borrowing needs to be
in the range of $95 to $100 billion for the January-March 1992
quarter, assuming a $20 billion cash balance on March 31.
The
Treasury's January-March borrowing estimate includes an allowance
for Resolution Trust Corporation operations.
5.
The 10-year notes and 30-year bonds being announced
today are eligible for conversion to STRIPS (Separate Trading of
Registered Interest and Principal of Securities) and,
accordingly, may be divided into separate interest and principal
components.
6.
The February midquarter refunding announcement will be
on February 5, 1992.
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
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Citation Information
Document Type: Transcript
Number of Pages Removed: 5
Author(s):
Title:
Treasury Department Quarterly Financing Briefing
Date:
1991-10-30
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
TREASURY FINANCING REQUIREMENTS
July-September 1991
$Bil.
--~,$Bil.
'-r"
189 1/4
Uses
Sources
I
160
160
Coupon
• Refunding
State and Local
•
120 r-
3
Savings Bonds
..
V2
•
~~120
-
2%
Foreign
Nonmarketables
80
-,80
Net Market ..
Borrowing .,
i
Decrease
in Cash
Balance
40 l-
•
2%
0-'- - '
Deldr!fTH~"l \.)1 lr1e ~rt>,~
OllIC!?
o! .".1aO,,'! F-
r'c~'
40
TREASURY FINANCING REQUIREMENTS
October-December 1991
$Bii.
Uses
150
..
11/4
75
--.---
Foreign
Nonmarketables
Sources
157112
--'1---
150
125
Savings Bonds
.-
.. -
100
2112
1112
State and Local
50
Decrease
in Cash
25
....-
Balance~
.
Department 01 lh(' Trp.1'>l,'"
Ottl(P 1)1 M(Jfkpl Flnanr ,~
75
.r'-'r
Net Ma,rket .. 753f4
Borrowl ng .,.
50
o
.$Bil.
.. Coupon
.,. Refunding
125-100
1
,
25
--..1'0
1) Includes budget deficit. changes in accured interest and checks outstanding
and minor miscellaneous debt transactions,
21 Issued or announced through October 25, 1991.
;Jj Assumes a $30 billion cash balance December 31, 1991.
Oc.obe, 28 199124
TREASURY OPERATING CASH BALANCE
$Bil.,
Semi-Monthly
60
..
Total Operating
Balance
Tax and Loan "
Accounts
Balance
f.
40
+- Without New ...
Borrowing 11
!
:~:.
I\;1\ ,_, y/\,.
20
'.;'.'1', .':". V
:.' .,'"';'''''''''~
. .• i
"1'"
":"t,t
11"1;'''''''
.••.. .,.
1"'; ""Uh•. :. ",,,
.'1
~
' • .,,.,
.': " '., ~.,
",It.
":. ....
-;:.'
oI
~
", ............. ~
".....
'i;
~
.''".,.:.... .
,,'I" , '.,.~,.,.........
~",
",
.'
.....
."
" ... nt'Hlli'il",,,"ujnt~B""
",""'.;,.
I~,
••••
••• •••
•• ••
••• •••
•• ••
••• •••
•
••
••
••
••
••
••
••
••
•
:"!,•••-~
Federal Reserve Account
••
••
••
••
••
••
•
••
•••
••
• ••
-20
-.;
.
Oct
Nov
1990
Dec
,
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1991
j;. Assumes refunding of maturing issues.
Department of the Treasury
Office 01 Market Finance
Oclober 28. 199119
TREASURY NET MARKET BORROWINGv
$Bil.i'- - - - - - - - - - - - - - - - - - - - - - - - - - - - - Coupons
1)1 Over 10 yrs.
~ 2-10 yrs.
Bills
100
90
100
90
84.1
•
80
70
$Bil.
103.5
80
r-I-170
I
I
I
I
1 1-160
60
To Be
Done,
50
50
40
30
20
10
0
-10
-10
-20
- 30 I
.
II
III
1987
IV "',
II
III
1988
IV
II
III IV
1989
II
III
IV
1990
II
-----.J
III IV
-30
1991
..!1 Excludes Federal Reserve and Government Account Transactions.
Department 01 the Treasury
Office of Markel Finance
October 28, 1991-6
$ o00 'Sl
CHANGES IN SIZES OF MAXIMUM NONCOMPETITIVE AWARDS
//
II
1/
II
1/
(Left
Scale)
1,000·-
-
day bills
N0 t es
~ Bonds
~:
r···:··
: .
.
•
..: :
Maximum award applied to both:
182 day bills and 91 day bills
:
::
::
:
•
••
i
a)
•:
·:
o
,.,.,.,
f\.
~
":5
""
Department of the Treasury
Oltlce 01 Market Finance
~'
. 2.3
2.0 -j.7
"
~
~
"~
".
J5>
~
<0
/
:::.
"~
12.4
r~1
5.6
6.0
U
~
~
1'8.nJ '.8 I ~
",C)
'"
2.0
~~0.61.0~
"
~;j
{It {It
;j;j~;j~
",
"
: -10""
"
'v.s:?c;\i
1"\',
"'~
~
q;j
p)
,3.0
r-L
",<"0
cif
2.0
~
62
.
~ /
III
~
5
1.0
2.8
p:aRl
",r>J ",r>J ",r>J
I
·
n
~.4,
~
10
6.2
•
30 •
,, ; '
. . rk
•
:
~ 20
12.0
••
•••
:
••
r----r' ;-----.
(
•
•
,
r'j -i 15
.i•••• ,
.·• '..
••••
..
I ·
~
.
•
300 .-
200 I
Ii
1
I.
21.2
:
..
1
~~
to both notes and bonds ••
•••••
1.3
Offerings
12.0
:
S'lze
I
' of
$ B'I
(~
• •• , ••••
•
400·-
100·-
/1
(38.0
1m 91
•••
500, -
II
(Right
Scale)
••••. zo:I
~
II
Ii
II
~
C:V"
<t)"
~
"f);
.,
~
" 0)"
0)
to
q;j"
o
~
c;\i
.s:?
Issue Dates
OClobe' 28 19915
NET STRIPS AS A PERCENT OF PRIVATELY HELD
STRIPPABLE SECURITIES
$Bil.l
120
Held in Strippable Form
Percent
-
(Left Scale)
(Right Scale)
•••
c=J30 Year
ID;WWJ20 Year
~10 Year
1%
30 Year
20 Year
70
••• 10 Year
60
100
50
80
40
60
••••••••
I
,.
II
II"
.
•••••••••••••••••••••••••
I
II
I I
II
·················i·i········ ooro
30
I
40
'I
I
20
I!
!
I
r",f..- .
I
'-v: "
,I
oI m m rna VA m
.
va
VLt! r«4 r«4 ff<.i '"CI rIM F«A! rTLf rna
.
M
J
J
A
SON
-~10
iUtj fj(L(l
D J
rTL1 ,..,.,,, if:«! M«1! gq MI'ii
F M A M J
1990
Department of the Treasury
Ott ice of Market Finance
J
rr.« rcA 10
A S
0*
1991
*Through October 18, 1991.
Note: Reconstitution began May 1, 1987
Oclober 2B. 1991·"
TREASURY NET BORROWING FROM NONMARKETABLE ISSUES
$Bil.
$Bil.
1:<'1 Savings Bonds
15
15
~ Domestic Series
12.5
~ State & Local Series
10.6
. . Foreign Nonmarketables
10
10
5
o
1 - ' 1_
o
.....
-1.1
-.7
-5
-5
II
III
1987
IV
II
III
1988
IV
II
III
1989
IV
II
III
1990
IV
II
III
Ive
1991
e estimate
Department of the Treasury
Office of Market Finance
October 28 199121
STATE & LOCAL GOVERNMENT SERIES
$Bil.
$Bil.
- Gross Issues
••• Redemptions
10
..'.
...
,..........
.._
...........a •••:o(.",
....
10
••M-
,
...... ...
O,:::~::~::::::::~::::::::::::::::::~---L--~--L-~
__-l__-L__l-~
L
$Bil.c-------:-----==~~==~~:::=====::::::
5
• .,.......
............
5
'0
A
10
-Net SLGS
J$Bil.
10
5
5
oI
-5'
""
I
II
III
1987
Department of the Treasury
Office of Market Finance
IV
II
III
1988
-\Jj$d--\.:
-
IV
II
III
1989
IV
II
...
>I
III
1990
IV
~~·o
II
111
1
-
5
1991
October 28. 199122
$ B i I. ,--------11l-
STATE AND LOCAL MATURITIES 1991 -
1993
]$Bil.
11
----------
10.5
10 ~--
10
9,-
9
81.-
8
~
7
I,
6r
6
5>
5
,
4~-
4
3~
3
I
2, -
~2
1·-
1
0
r:'
1
·············f
IV
1991
De~J,lr Illlt'll\
Olll(t'
L,j
,f \ ~"
M,;rf",\
Tf.
F-,Ild
III
II
1992
IV
III
II
0
IV
1993
t
) \(,t't-"
2M
lyYl'~
QUARTERLY CHANGES IN FOREIGN AND INTERNATIONAL
HOLDINGS OF PUBLIC DEBT SECURITIES
SBii. "'--,---~---=-=-=-=-=-=--=-=-=---------~------I $Bil.
Nonmarketable
35
35
D
32.9
30
25.8
25
Marketable
~ Add-ons.Y
_ Other Transactions
30
25
20
20
15
15
10
10
5
5
0
-5
-5
-10
-10
-15
.
-15
,
1
-20
II
III
IV
II
III
1988
1987
IV
II
III
1989
IV
II
III
1990
II
IllY
-20
1991
.'.J F.R.B.
Departmenl of the Treasury
Office of Market Finance
purchases of marketable issues as agents for foreign and international
monetary authorities which are added to the announced amount of the issue.
11 Preliminary.
IV
Oclobe,28 199120
FOREIGN ADD-ONS IN TREASURY BILL AND NOTE AUCTIONS
$Bil. ~---------------------"$BiI.
16
I
16.3
16
Notes
iJ.flt15 years and over
14
~ 2-4 years 11
14
12
-
12
Bills
10
10
8
8
6
6
4
4
2
0
--~
2
I
II
III
IV
1989
Quarterly Totals
0'
Department
the Treasury
Office of Markel Finance
11 4 year notes not issued after December 31, 1990.
2/ Through October 24, 1991.
IV
II
III
IV£!
0
1991
Oclober 28. 19914
SHORT TERM INTEREST RATES
Quarterly Averages
%~i------------------------------------------------------~
%
20
20
18 ,,-
18
16
V ..,,\
- •••••••
1 ....
16
\
\
,..........
.
.-. .'f
14,·~
...
.:
.:
•
12
14
Prime Rate
. .,.
.:-
~~r:.
flO
• • ••
. ~~.
.·
\l
··.
·••.,
j12
!. 10
Thmugh
October 23
~
~
:
:
:
10
:
:
..
.....Commercial
.:
"')"'~
• II",:•
•••••
~
8
.-
•
•_
Paper
•••
............
6
4'
...
".~.
••••
1981' 19'82, . 19'83' 19'84 19'85 19'86 19'87 19'88 ;9'89
Oepar!menl 01 the Treasury
Office of Markel Finance
1
1
~"""
•••••••••
-..
.........
3 Month
Treasury Bill
~
L..:
I
8
e.
~9' 90
••• ,
•••~""""'"
.....•••....-:-i 6
~ ~9~ '4
October 28 '9912 c,
SHORT TERM INTEREST RATES
Weekly Averages
%1
,%
Through
October 23
...
9
Prime Rate
-"9
!
8
8
• Federal Funds
7
6
7
...
Commercial Paper
••
•••••••
••••••• •••••
••••
6
• •• •••
..-.
.......
---3 Month Treasury Bill
•• T ••
5 r-I
II
Jan
i
•••••••••••••••
.... .... ...... . ........
" ... 11"""""
', "
•••
"""
.......... "
• ••••••
5
!
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
1991
Department of the Treasury
Office of Market Finance
October 28. 1991·15
LONG TERM MARKET RATES
Quarterly Averages
0/0
I
%
I
16
16
15
15
14
#...
# ...
-
I
# ..
_#
''
1"'- '
~"'\
.,. .:.•• ...........
..
......
•••
10
•
9[-
13
'......
12
..\
,,
,
,\
,"
..,....,'
,#-~-\,~ ~.-~..
.'~'
..
8r••••••
I
7
6
r-
I I I
1981
I I I
1982
Department of the Treasury
Office 01 Market Finance
---~
\a_......... ,.. ~~ -..,
30·Year
Municipal Bonds
I
...
Through
October 23 ~
New Aa Corporates
,
III
II
I
'
.....
LJ--L
II
1988
1989
11
!, 10
' ....
~ .............~ 9
8
•••••••••••• ..,17
6
1990
1991
Uf_l0ber28199126
INTERMEDIATE AND LONG TERM TREASURY RATES
Weekly Averages
a/or.--------------------------------------------------
..
8.50
:-.. M
• ••••
.
.-.
..·.........
.. .
Treasury 30·Year
800!-
~
7.75 ....
•••••
.....
• •
• ••
•••
•
•
•••
7.50
..• •..
~.
•
10/0
Through
October 23
~ ~ ~
•••
••••• • ......... "".•Treasury 10·Year•\
.•••......
.•••
..
•
~~---~--
..
.
....
•••••••••••
..
••
••
•••••• ••• ••••••
•••
Treasury S·Year
!
.•••.
• ••••
••
• •••
•
7.00
6.7511111
Jan
Department of the Treasury
OffIce of Market Finance
III
Feb
1IIIIIIIIIIL~_III_J111
Mar
Apr
May
..
7.75
,-~
•••
7.25
Jun
1991
Jul
8.25
8.00
•• •
••
•
~• • •
\
8.50
IIII_J
Aug
I
•
••
••
••
7.50
7.25
•••
••
•• ••••
••••
7.00
1111111116.75
Sep
Oct
October 28 199116
MARKET YIELDS ON GOVERNMENTS
Bid Yields
------- --- -
0/0
-
.
J
I
I
•
~,.~~~~~~~~--~--~------ B.O
;~
uly 29, 1991
8.0
7.5
1'10
.
,
!I
:
1
.
;;
m
//
7.5
7.0
7.0
October 25, 1991
//
6.5
6.0
~ __ -------------------~. 8.5
/;
I
,
' --r
sl
~
I
5.51
7.5
1
.2,
-
3
4
_.-
6.0
-TO
sol
5.00--
6.5
10
--
12
5
14
16
18
6
.-::-::----=~ --:::--,-----:::,--
20
22
7
24
26
8
28
5.5
7 .5
30
105 .0
9
Years to Maturity
::e;'cI'trnt'nr
.... 11
>' .)!
I Ih .... T't'dSlJ
~1arh-'!
F ,","''''' ,e
, '
,'~
,')':!'
PRIVATE HOLDINGS OF TREASURY
MARKETABLE DEBT BY MATURITY
$Bil.
September 30, 1991
2113.8
t
COUPONS
2000
CJ Over 10 years
358.2
!
CJ 2·10
years
~ 1·2 years
~ 1 year & under
BILLS
1800
..
1600
1400
r
725.3
1200
1t
1000
I
316.5
t
800r
t
600~
-
~.8
r--
400
436.0i
200
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
As of December 31
Department 01 the Tred"dl',
011 Ice 01 Market I=lrlJrl~e
o
l()t'I~',:1::\
,r~91
2
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
Percent Distribution by Maturity
Coupons DOver 10 years ~ 1·2 years
2·10 years
~ 1 year & under
•
o
Bills
100%
90
80
70
60
50
40
30
20
10
o
1980
1981· '1982
1983
1984
1985
1986
1987
1988
1989
1990 Sep '91
As of December 31
Department 01 Ihp T'f'.l<.,u
Ollice of MarkpI F Il1d rl ' •
(j, j'"r,pr
2H
19913
AVERAGE LENGTH OF THE MARKETABLE DEBT
Privately Held
years------
----
.--
-----
----
----------
-
-----
--j
~June
1947
10 Years
5 Months
10
Mo~nths
76
Septe~b~r 30~91
6 Years
l
74
9
72~
70~
8
6sl1 1 L 1 1 1.
J
F M A M J
L 1_
LJ
J A SON D
7
6
5
December 1975
2 Years
5 Months
4
1
3H
21 1 I
I I I
194547 49
Department of the Treasury
Office of Markel Finance
I I I
51
i LU
53' '55
j
57 59 61
j
L1JU I I
63 65 67 69 71
I I
I
uJ
73 75 77 79
I
LLL
81
d
.
UlU
83 85 87 89 91
o( I()bpf
28
19911
MATURING COUPON ISSUES
November 1991 - March 1992
(in millions of dollars)
September 30, 1991
Held by
Maturing Coupons
Total
141/4%
8 1/2%
6 1/2%
73/4%
8 1/4%
75/8%
11 5/8%
8 1/8%
14 5/8%
65/8%
9 1/8%
7 1/2%
8 1/2%
77/8%
8 1/2%
11/15/91
11/15/91
11/15/91
11/30/91
12/31/91
12/31/91
1/15/92
1/31/92
2/15/92
2/15/92
2/15/92
2/15/922/
2/29/92
3/31/92
3/31/92
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Bond
Note
Note
Note
Federal Reserve
& Government
Accounts
Private
Investors
Foreign~
Investor
2,886
11,542
8,346
12,583
8,083
12,002
5.759
11,311
2,813
8,537
11 ,512
1,814
11,841
8,140
12,626
635
1,721
229
1,272
1,091
1,200
450
539
215
454
1,011
891
912
762
1,750
2,251
9,821
8,117
11,311
6,992
10,802
5,309
10,772
2,598
8,083
10,501
923
10,929
7,378
10,876
30
505
441
844
294
715
813
659
40
314
1,130
3
1,782
740
1,320
129,795
13,132
116,663
9,630
-;<, •
Totals
------
J.J
Y
F. R. B. custody accounts for foreign official Institutions; Included In Private Investors.
Treasury announced on October 9,1991 that the 71/2°0 Treasury Bond of 1988-93 will
be called for redemption at par on February 15, 1992
Department of the Treasury
Office of Market Finance
October 28, 1991·7
TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills
'----
$8i1
~~
22 1
~6
~
~
,',
'
I
10 8110 9
4. '
~
10
53
b
l-l ;" i
1
1
I:' '
~
Hl3
18
16
i
1992
27 5 '1.
~ 55:
!,
I=t:
11 6
18
16,
14
133
12
10
8
6
4
[I
240
21 1
1
125
130[
244
14
1;)
i
70
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71
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,I
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r~1
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65
87
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121
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10
:l30 1
;
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1995
21
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83 I
r':
·
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92
16
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12
10
67
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125
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,
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.Securities issued prior to 1989 : ' : New issues calendar year 1990
~ New issues calendar year 1989
Oe~drtrT1ent ,d ltlt:' T"',l~U
('lfllet' \)1 Markt'l Fin""",
L::J Issued or announced through October 25, 1991
()( lIJb('1
28 '99113
TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills
"'it
2002
1
~ 2°1°3 ii I
~ 2°1°4 ~ I
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1.7
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I 9.0 I
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f-f--
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--
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10.0
~
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-
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_ _ __
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-
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80
NO
Securities issued prior to 1989 ~ New issues calendar year 1990
~ New issues calendar year 1989 Hi
Department 01 the Treasury
Office 01 Markel Finance
1
II
I
I 1 Ill!
.
I Issued
or announced through October 25, 1991
October 28. 199114
SCHEDULE OF ISSUES TO BE ANNOUNCED
AND AUCTIONED IN NOVEMBER 1991 Y
Monday
4
Tuesday
5
12
Auction
10 yearY
13
Holiday
18
19
7
6
Auction
3 year£!
11
Thursday
Wednesday
Announce
2 year
5 year
Auction
30 yearY
14
26
27
Announce
52 week
15
Auction
52 wee~
Auction
2 year V
25
8
21
20
Friday
22
Auction
5 yearil
28
29
Holiday
-
----
jJ Does not include weekly bills
Y For settlement November 15
.;y For settlement November 21
..11 For settlement December 2
Department of the Treasury
Olllce of Markel Finance
October 28. 19918
SCHEDULE OF ISSUES TO BE ANNOUNCED
AND AUCTIONED IN DECEMBER 1991.1/
Monday
I
2
Tuesday
I
3
Thursday
Wednesday
I
5
4
Friday
6
Announce
52 week
9
10
12
11
Announce
2 year
5 year
16
17
Auction
52 week.0'
19
18
Auction
2 year:lJ
23
24
13
Auction
5 year.}j
26
25
20
27
Holiday
30
31
Announce
7 year.1l
JJ
.y
.y
~
Department of the Treasury
Office of Market Finance
Does not include weekly bills
For settlement December 19
For settlement December 31
For auction January 8 and
settlement January 15
October 28, 1991-9
SCHEDULE OF ISSUES TO BE ANNOUNCED
AND AUCTIONED IN JANUARY 1992!J
Monday
Tuesday
Wednesday
1
Friday
Thursday
2
3
Announce
52 week
Holiday
6
7
Auction
7 year2!
13
14
15
20
21
22
27
28
:,
29
16
17
23
24
Auction
5 year])
30
31
'
J./
Y
Oepdrtment 01 the Treasury
Office of Market Flndnce
Announce
2 year
5 year
Auction
52 week;ij
Auction
2 yearAJ
Holiday
10
9
8
II
.11
Does not Include weekly bills
For settlement January 15
For settlement January 16
For settlement January 31
Octc,t;cr 2H
1991 10
TREASURY NEWS
'e.,artment of the Treasury • Washington, D.C. • Telephone 5 •• -204
FOR IMMEDIATE RELEASE
CONTACT: BOB LEVINE
(202)566-2041
Oct 0 15 e r 31, 1--gCZ1
UNITED STATES AND DENMARK TO RENEGOTIATE INCOME TAX TREATY
The Treasury Department announced today that representatives
of the united States and Denmark will meet in Copenhagen during the
week of November 18, 1991 to renegotiate the proposed income tax
treaty. The proposed treaty, which was signed in 1980 and amended
by a protocol in 1983, has not been approved for ratification by
the u.S. Senate, due to certain objections.
The negotiations in November will draw on the proposed treaty
and protocol as appropriate, but will also take into account subsequent changes in the income tax laws of the two countries and
their recent treaties with other courtries.
Income tax treaties provide rules for the taxation of income
derived in one of the countries (the "source" country) by residents
of the other.
They establish when the source country may tax
various classes of income and specify maximum rates of tax at
source on certain items, such as dividends, interest and royalties.
They also provide for administrative cooperation between the tax
authorities of the two countries and guarantee non-discriminatory
taxation.
Treaty benefits are limited to residents of the two
countries.
Persons wishing to offer comments or suggestions on the
Morrison,
negotiations are invited to write to Philip D.
International Tax Counsel, Treasury Department, Washington, D.C.
20220.
000
NB-1528
TREASURY NEWS
.lIartment of the TreaSUry • wasllington, D.C. • Telepllone 5&&-204'
STATEMENT 01'
SECRETARY 01' THE TREASURY
THE HONORABLE NICHOLAS P. BRADY
(PRESENTED BY DEPUTY ASSISTANT SECRETARY GEORGE A. POLSOM)
AT THE MEETING 01' THE DEVELOPMENT COMMITTEE
01' THE WORLD BANK AND THE INTERNATIONAL MONETARYPUND
BANGKOK, THAILAND
OCTOBER 14, 1991
Mr. Chairman, fellow Governors and distinguished guests.
First, I enthusiastically thank our Thai hosts for making us feel
so warmly welcome in this dynamic city. The decade ahead
promises to be both exciting and challenging for developing
countries, and our gathering in Bangkok is a proper backdrop for
our deliberations.
In the years ahead, a country's progress will depend primarily on
the quality of its economic management and its ability to use
resources effectively. The international community also shares
in the responsibility to promote polices which contribute to a
supportive external economic environment.
The development priorities of the 1990s set out in the Bank's
excellent background paper underscore the interdependence of a
functioning and vigorous private sector, poverty reduction, and
protection of the environment.
It is essential, then, for the
Bank to bring its organizational resources to bear in assisting
member countries develop purposeful strategies and proper
policies.
Such sound policies require good implementation capacity in an
environment of good governance.
Experience has shown that human
resource and institutional weaknesses can be major barriers to
both policy and project implementation. Good governance in such
areas as financial accountability and transparency, apd
predictable legal frameworks must be strongly encouraged. We
agree that the problem of human resource development must be
accorded the highest priority. Not only is this a key issue for
established member countries, but also it emerges again as
historic reforms and economic growth are pursued in countries
transitioning from sociali3t to market economies.
- 2 -
The sharp focus on the clear and important role of women in
development is particularly welcome. We cannot and should not
undervalue this important human resource.
To remain on the cutting edge, however, the Bank will have to
actively seek out opportunities to strengthen its effectiveness.
In too many cases countries are losing ground and per capita
incomes are declining.
Frank policy and strategy dialogue with
member governments improves country performance, and must be the
centerpiece of Bank assistance. It will also entail close
co~aboration with the IMF, the donor community, and-nongovernmental organizations.
We also believe more attention will have to be placed on
improving lending effectiveness, especially in areas where
experience shows that previous approaches are falling below
expectations. Project evaluation needs greater attention. The
IFC capital increase and associated World Bank policy reforms on
private sector development will place the Bank Group in a strong
position to support the increasing market orientation of its
borrowing member countries.
Collaborative efforts are needed to ensure a healthy global
economy and to enhance the development prospects for the 1990s.
In this regard, industrial and developing countries will continue
to be well served by more open trade policies. The conclusion of
a successful Uruguay Round must remain a common priority. We
also welcome the continued progress in dealing with the debt
problems of both low- and middle-income countries, and urge
continued collaborative support for those debtors pursuing
appropriate policies.
We are regularly reminded of the importance of efficient energy
use in the development process. The Bank should make special
efforts to assist countries in developing sound policies, market
pricing, good management, and a comprehensive approach to energy
efficiency, both on the supply and demand side. I hope we can
see tangible progress in this area evidenced by policy
development, technical assistance, and lending programs.
We are confident that the collaborative spirit so evident in this
Committee can help drive a dynamic and innovative development
process as we face the challenges of the 1990s. We commend the
work of the World Bank Group and the IMF to date, an~ we fully
expect these institutions to be at the forefront of economic and
social advances in the years ahead.
Barber Conable left us a strong and vital Bank, and I know I can
count on the new President, Lew Preston, to pursue the
development priorities we are discussing today in a strong and
purposeful way.
UBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washing-ton. DC 20239
FOR IMMEDIATE RELEASE
November 4, 1991
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $10,444 million of 13-week bills to be issued
November 7, 1991 and to mature February 6, 1992 were
accepted today (CUSIP: 912794XY5).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.73%
4.75%
4.74%
Investment
Rate
4.87%
4.89%
4.88%
Price
98.804
98.799
98.802
Tenders at the high discount rate were allotted 17%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New Yo"rk
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
37,230
27,722,175
15,745
47,260
153,535
27,915
1,061,575
52,965
10,270
33,345
20,755
781,885
912,080
$30,876,735
Accepted
37,230
8,973,185
15,745
47,260
53,735
25,935
160,385
14,665
10,270
32,100
20,755
140,735
912,080
$10,444,080
Type
Competitive
Noncompetitive
Subtotal, Public
$26,430,950
1. 628,895
$28,059,?45
$5,998,295
1. 628,895
$7,627,190
2,682,315
2,682,315
134,575
$30,876,735
134,575
$10,444,080
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $135,325 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1529
UBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washington, DC 202:39
FOR IMMEDIATE RELEASE
November 4, 1991
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,474 million of 26-week bills to be issued
November 7, 1991 and to mature May 7, 1992 were
accepted today (CUSIP: 912794YMO).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.78%
4.80%
4.80%
Investment
Rate4.98%
5.00%
5.00%
Price
97.583
97.573
97.573
Tenders at the high discount rate were allotted 61%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas city
Dallas
San Francisco
Treasury
TOTALS
Received
28,105
27,834,720
15,355
38,505
57,515
30,540
978,765
10,255
6,325
38,155
18,860
426,040
691,710
$30,174,850
Accepted
28,105
9,227,650
15,355
38,505
48,615
29,540
187,505
10,255
6,325
37,420
18,860
134,040
691. 710
$10,473,885
Type
Competitive
Noncompetitive
Subtotal, Public
$26,067,555
1. 203,570
$27,271,125
$6,366,590
1.203,570
$7,570,160
2,500,000
2,500,000
403,725
$30,174,850
403,725
$10,473,885
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $415,375 thousand of bills will be
issued to foreign official institutions for new cash.
NB-j530
~
federal financing
WASHINGTON, D.C.
20220
bonkNE
FOR IMMEDIATE RELEASE
'<t
S
November 4, 1991
FEDERAL FINANCING BANK ACTIVITY
Charles D: Haworth, Secretary, Federal Financing Bank,
announced the following activity for the month of September 1991.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $194.2 billion on September 30,
1991, posting an increase of $5.3 billion from the level on
August 31, 1991. This net change was the result of an increase
in holdings of agency debt of $6,075.1 million, and decreases in
holdings of agency assets of $440.5 million and in holdings of
agency-guaranteed loans of $321.0 million.
FFB made 26
disbursements during September.
During fiscal year 1991, FFB holdings of obligations issued,
sold or guaranteed by other Federal agencies posted a net
increase of $20,915.3 million from the level on September 30,
1990 . . This change was the result of an increase in holdings of
agency debt of $28,6~0.6 million, and decreases in holdings of
agency assets of $1,115.8 million and in holdings of agencyguaranteed loans of $6,639.6 million.
The Appropriations Act for 1989 authorized FFB borrowers
with Rural Electrification Administration guarantees to prepay at
par up to $500 million of loans. Pursuant to this Act, FFB
received prepayments of $203.8 million in FY 1991. FFB suffered
an associated loss of $62.1 million.
The Continuing Appropriations Resolution for 1988 authorized
FFB borrowers with foreign military sales guarantees to prepay at
par their debt with interest rates of 10 percent or higher. The
Foreign Operations Appropriations Act of 1990 amended this
Resolution to lower the interest rate threshold to 8 percent.
Pursuant to the Resolution, FFB received prepayments of $490.5
million in FY 1991. FFB suffered an associated loss of $78.4
million. The authority allowing par prepayments of foreign
military sales loans expired on September 30th.
During fiscal year 1991, the FFB began lending to the
Federal Deposit Insurance Corporation. On September 30, 1991,
FFB holdings of FDIC obligations totaled $8,296.0 million.
FFB holdings on September 30, 1991 were the highest in the
bank's history.
Attached to this release are tables presenting FFB September
loan activity and FFB holdings as of September 30, 1991.
NB-y5TI
0
N
CD
CD
l[)
(/)
(/)
~
(L
<Xl
CD
'<t
N
CD
CD
l[)
CD
LL
LL
Page 2 of 4
FEDERAL FINANCING BANK
SEPl'EMBER 1991 Acrrvr:I:'i
a::>ROCWER
AMJUNl'
OF ADVANCE
DATE
FINAL
MA'ruRl'IY
INl'EREST
INI'ERESI'
RATE
RATE
(semi-
(other than
semi-annual)
annual)
AGENey ASSET'S
RURAL E:LErI'RIFICATION MMINISTRATION
certificates of Beneficial o.mershig
CBJ #34
CBJ #35
65,000,000.00
135,000,000.00
3/31/92
9/30/21
5.489%
7.951%
134,000,000.00
10,400,000.00
973,000,000.00
12/1/00
9/4/07
3/2/92
7.382%
7.990%
5.725%
650,000,000.00
10/1/91
5.469%
9/20
9/23
9/27
9/27
9/27
5,000,000.00
8,000,000.00
1,580,000.00
13,000,000.00
5,000,000.00
11/8/91
11/8/91
12/26/91
11/26/91
12/26/91
5.481%
5.469%
5.408%
5.408%
5.408%
9/16
4,100,000,000.00
10/1/91
5.437%
450,000,000.00
450,000,000.00
450,000,000.00
450,000,000.00
9/30/21
10/1/01
9/30/98
9/30/93
8.183%
7.933%
7.786%
6.470%
9/30
9/30
$
AGENCY OEm'
EXPORI'-IMroRI' BANK
Note #101
Note #102
Note #103
9/3
9/3
9/3
FEDrnAL DEPOSIT lllSURANCE (l)RroRATION
Note No. FDIC 0002
lIdvance #6
9/23
NATIONAL rnEDIT UNION ArMrNISTRATION
Central Liauidity Facili£[
+Note #574
+Note #575
+Note #576
+Note #577
+Note #578
RESOIlJITON TRUST (l)RroRATION
Note No. 0010
lIdvance #5
UNITED STATES POSTAL SERVICE
Note 135
Note #36
Note #37
Note #38
+roUover
9/5
9/5
9/5
9/5
7.315% qtr.
8.150% ann.
Page 3 of 4
FEDrnAL FINANCING BANK
SEPl'EMBER 1991 AcrrvrrY.
AM:XJNl'
OF ADVANCE
8O~
FINAL
MA'ruRI'IY
Im'Em:ST
RATE
(semiamrual)
Im'Em:ST
RATE
(other than
semi-annual)
GOVERNMENl' - GUAAANl'EED lOANS
DEPARIMENl' OF DEFENSE
Foreign Military Sales
Kenya 12
Kenya 12
7,654,284.00
520,237.78
7/25/96
7/25/96
6.609%
7.018%
9/12
9/20
1,018,833.20
Q,307,932.00
12/11/95
12/11/95
7.187%
7.069%
9/5
1,416,205.75
11/15/91
5.618%
9/4
9/30
9/30
9/30
2,036,000.00
54,208,284.31
2,817,528.96
518,305.76
9/30/93
1/3/17
12/31/19
12/31/19
6.469%
7.733%
7.781%
7.781%
9/30
656,742,717.20
12/31/91
5.416%
9/13
9/30
$
GmrnAL SERVICES AI:MINISTRATION
Foley Square Courthruse
Foley Square Office Building
U. S. Trust Company of New York
Advance #18
RURAL ELEX:TRIFICATION ArMINISI'RATION
Allegheny Electric #255A
*Cqlethorpe Power #246A
*Cqlethorpe Power #320
*Cqlethorpe Power #320
TENNESSEE
~
AurnoRlTY
seven states Energy Corooration
Note A-91-11
*maturity extension
6.418%
7.660%
7.707%
7.707%
qtr.
qtr.
qtr.
qtr.
Page 4 of 4
FEDERAL FINANCING BANK
(in millions)
Program
September 30, 1991
Agency Debt:
Export-Import Bank
Feaeral Deposit Insurance Corporation
NCUA-Central Liquidity Fund
Resolution Truse Corporation
Tennessee Valley Authority
u.S. Postal Service
sUb-total*
Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural Electrification Admin.-CBO
Small Business Administration
sUb-total*
Government-Guaranteed Loans:
DOD-Foreign Military Sal~s
DEd.-Student Loan Market1ng Assn.
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes +
General Services Administration +
DOl-Guam Power Authority
DOl-Virgin Islands
NASA-Space Commu~ications Co. +
DON-Sh1P Lease F1nanc1ng
Rural Electrification Administration
SBA-Small Bus1ness Investment Cos.
SBA-State/Local Development Cos.
TVA-SeVen States Energy Corp.
QOT-Section 511
DoT-WMATA
sub-total*
grand total*
~f1gures
~oes
may not total due to round1ng
not include capitalized interest
$
11,261.0
8,296.0
113.6
62,882.4
11,875.0
8,200.6
August 31. 1991
$
11,238.0
7,646.0
113.5
58,782.4
12,373.0
6,400.6
102,628.5
--------96,553.4
50,694.0
61.2
75.8
4,663.9
6.2
Net chan1e
9/1/91-9/30 91
$
23.0
650.0
0.1
4,100.0
-498.0
1,800.0
FY '91 Net Change
10/1/90-9/30/91
$
-78.8
8,296.0
57.0
21,400.7
-2,507.0
1,502.8
6,075.1
28,670.6
51,334.0
61.2
76.1
4,463.9
6.4
-640.0
-0-0.3
200.0
-0.2
-1,355.0
-8.3
-6.9
256.7
-2.2
55,501.1
55,941.6
-440.5
-1,115.8
4,600.0
4,850.0
204.5
1,903.4
660.6
28.4
24.5
32.7
1,624.4
18,596.9
245.Q
688.3
2,447.1
21.3
177.0
4,680.0
4,850.0
208.1
1,903.4
655.8
29.1
24.5
32.7
1,624.4
18,846.4
265.5
693.0
2,413.8
21.4
177.0
-80.1
-0-3.5
-04.7
-0.7
-0-0-0-249.5
-20.4
-4.7
33.2
-0.1
-0-
-5,155.6
-30.0
-39.4
-47.4
293.3
-1.3
-0.7
-1,063.2
-47.9
-445.3
-137.5
-53.3
91.0
-2.0
-0-
36,104.1
=========
$ 194,233.8
36,425.2
=========
$ 188,920.2
-321.0
$
========
5,313.'6
-6,639.6
========
$ 20,915.3
TREASURY NEWS -~.
lepartment of the Treasury • Washington, D.C . • Telephone 566-204
November 4, 1991
contact:
Desiree Tucker-Sorini
202-566-8191
STATEMENT BY SECRETARY BRADY
The House of Representatives has rejected the amended
version of H.R. 6, the banking legislation. This action
indicates that the House will not replenish the Bank Insurance
Fund without true, comprehensive reform.
The House must now craft new comprehensive legislation to
address the real problems of the banking system. The minimum
elements of such a package are clear -- the House floor votes
showed consensus on nearly every part of comprehensive
legislation other than Title IV, including a positive compromise
on interstate branching. We believe there can be an equally
positive approach to Title IV, including an appropriate balancing
of interests between the insurance, securities and banking
industries. As we have indicated to the House leadership, we
stand ready to work to achieve this goal.
We will also continue to work for genuine comprehensive
reform in the Senate, which begins action this week on a banking
bill.
Before Congress adjourns they need to pass true reform; a
narrow recapitalization of the Bank Insurance Fund will only
delay the day of reckoning.
NB-1532
BRADY/BAKER PLAN
For Third World Debt Plan
TREASURY NEWS
Dellartment of the T •••• ury • Washington, D.C . • Telephone S88.2C
Text As Prepared
For Release Upon Delivery
Expected At 12:30 p.m. P.D.T.
Remarks By
Secretary of the Treasury
Nicholas F. Brady
Before The
International Monetary Conference
San Francisco, California
June 4, 1990
Thank you.
Last year you were kind enough to invite me to
address your annual meeting in Madrid.
I had the impression that
my visit was not necessarily the high point of the week.
At any rate, it is always an honor to address the
International Monetary Conference, and particularly so when asked
to return for a second straight year. As Mae west often said,
"Too much of a good thing is wonderful."
This brings to mind the debt strategy.
Last year at this
time, we were preoccupied with fleshing out the debt strategy.
uncertainty abounded. We had disagreements which I hope you will
agree were ones of viewpoint, not end goals. And we shared the
goal that true economic reform was the fundamental necessity for
debtor countries. We also shared the objective of a strong world
banking system.
A fair appraisal of what has transpired since that time
would say that "business is being done," that there is movement
in a process that not long ago was stalled, and that a sense of
order prevails over uncertainty. At the same time, dramatic
changes throughout the world pose new challenges.
Who would have predicted even a year ago that fundamental
political changes and economic reform would sweep so quickly
through Eastern Europe and the Soviet Union? Who would have
predicted that these countries would be looking to the West for
advice in developing free market institutions? By the same
token, who would have anticipated the quiet revolution that is
taking place in Latin America, where democratic governments are
discarding statist economic models?
NB-834
Seemingly unconnected events, thousands of miles apart in
countries with separate political heritages and different
languages, are linked by a powerful force.
Striking political
changes are being driven not only by a desire for political
freedom, but also by the evidence that free-market economies are
the way societies function best and most fairly. In addition,
there is a growing realization that in a world short of
resources, countries with market-based systems are most likely to
attract the capital that is essential to their growth and
prosperity.
In Poland, a Communist government that could not offer a
plausible plan for economic revival was ousted in favor of a
government committed to sweeping political and market reform.
In Czechoslovakia, people took peacefully to the streets to
win back their political and economic independence.
The East Germans voted overwhelmingly, first with their feet
and then with their ballots, to scrap their entire system and
quite literally join the market-based system that has brought
prosperity to West Germans.
Deep-seated economic problems in the Soviet union have
triggered a searching reassessment of the political structure
that fostered them.
In meetings with President Bush last week,
President Gorbachev reemphasized that market reforms are
necessary if the Soviet union is to overcome its deepening
economic crisis.
These are all developments of the highest importance, full
of promise for the future, and richly deserving the attention the
world has given them.
And yet, we should also pause to consider the other
revolution, less noticed, but no less dramatic, that is underway
in Latin America. Here, too, economic forces are driving a basic
shift in political leadership.
Democratic elections in many Latin American nations have
produced a new generation of leaders committed to market-based
economic reforms. The new faces of Salinas of Mexico, Callejas
of Honduras, Collor of Brazil, LaCalle of Uruguay and Aylwine of
Chile personify the dynamism that has taken hold. other leaders
such as Perez of Venezuela and Manley of Jamaica have assembled
new economic teams that are implementing reforms.
3
But what are the essential elements in the march to free
markets driving political changes on two different continents?
The establishment of competitive prices to allocate
resources;
The elimination of fiscal deficits and rampant
inflation;
The reduction of excessive government interference
which stifles private initiative;
The allocation of credit by market forces rather than
by political objectives;
And, the creation of a more receptive environment for
private investment, both domestic and foreign.
If you look for the root cause of change, both in Eastern
Europe and in Latin America, there is a common theme -- a theme
expressed by President Bush in his inaugural address when he
said, "Freedom Works." Free people and free markets liberate the
energy and vitality that produce a rising standard of living.
This energy and vitality -- extra effort, if you will -- is an
essential part of democratic capitalism's secret of success. At
the same time, it is also extraordinarily hard to communicate to
societies making the change from command economies. With no
frame of reference, they find it hard to believe and hard to
visualize.
With this in mind, the developed countries must stand with
Eastern Europe ~~d Latin America at this historic juncture. Our
challenge in the developed countries is to encourage and nurture
these impulses for economic freedom, so that their transformation
can be completed and economic progress sustained. We are
committed to providing maximum possible support for marketoriented reforms in both regions. But let's face it, the world
is short of capital, and governments are shorter still.
In the
united states, a recent poll confirmed eight out of ten Americans
favor cuts in foreign aid.
Fortunately, foreign aid, though
necessary, itself is not sufficient to the resolution of this
problem.
So what is our response in a resource-short world?
we help at a time of urgent need?
How can
The U.S. helps in two ways. One is our direct bilateral
support -- both financial and technical. The other is our large
and continuing commitment to the family of international
financial institutions which have served us all so effectively
for more than 40 years.
4
In Poland and Hungary, for example, the U.S. has committed
nearly $1 billion over three years for multiple uses, including
enterprise funds for private sector development.
In December,
the U.S. led an international effort to provide a $1 billion
stabilization fund to launch Poland's new economic program and to
support its move to a convertible currency. And the President
recently signalled the attention he attaches to the western
Hemisphere by signing legislation providing almost $800 million
to Panama and Nicaragua for economic reconstruction.
However, our largest commitments, and those of our major
allies, take the form of regular contributions of capital to the
IMF, World Bank, Inter-American Development Bank, Asian
Development Bank and African Development Bank.
In addition, the
U.S. will be the largest shareholder in the new European Bank for
Reconstruction and Development, whose charter was signed in Paris
last week and whose lending capacity over the next five years
will be $12 billion for Eastern Europe, of which at least $7
billion must be for the development of the private sector. These
institutions provide perhaps the most essential ingredient beyond
finance, and that is the economic policy advice so necessary to
reform.
The U.S. continues to provide the largest share of the World
Bank's $75 billion capital increase and, together with other
members of the IMF, we have just approved a $70 billion quota
increase, of which approximately $12 billion will come from the
U.S.
These resources are important in both Eastern Europe and
Latin America and, of course, one of the most important uses of
these funds is to support the debt strategy.
since your annual meeting last year, agreements have been
reached with several debtor countries, including Mexico,
Venezuela, Costa Rica, Morocco, the Philippines and Chile. In
developing these arrangements, you have demonstrated that
different perspectives and diverse interests have not stopped the
search for common ground, both among yourselves and with the
debtors.
Building on experience has allowed us to go beyond the
original agreement with Mexico to more varied and innovative
options, tailored to the circumstances of each transaction.
Despite the difficulties along the way, genuine progress has been
made.
The spirit of cooperation that is so vital to enduring
success has been preserved.
In a number of countries the
manifestation of this progress is there for all to see. A year
ago, how many of you would have thought that Mexico would be
privatizing its banking system?
I would like to address the question of arrears to
commercial banks which I know is a matter of concern. We do not
support or condone the accumulation of arrears by debtor
countries. When countries follow this course, to close financing
5
gaps or to gain leverage over the banks, the result will be to
exacerbate their own economic problems and undermine progress in
negotiations with commercial banks.
At the same time, we must face the fact that when countries
embark on the difficult path of economic reform, timely IMF and
World Bank support is critical to the reform effort.
So is an
early agreement with the commercial banks on medium-term
financing arrangements.
Thus, as countries seek to carry out their economic reforms
and to secure medium-term financing, we believe an element of
case-by-case judgement is essential. The genesis of most arrears
problems pre-date the strengthened debt strategy.
Such arrears
have not been caused by early IMF and World Bank disbursements.
Indeed, under a case-by-case approach there may be instances
where strong reform programs exist side by side with temporary
arrears, especially if protracted negotiations with the banks
delay the completion of medium-term bank programs.
Difficult cases demand our special efforts.
Commercial
banks have shown imagination in dealing with arrears as a part of
larger financing packages. Most countries also recognize that
arrears are inconsistent with the contractual arrangements
entered into with creditors.
As important as debt reduction and new money may be, no
amount of creative financial engineering can sUbstitute for
credible economic reform that commands the confidence of all
sources of finance, including new money, direct investment, and
returning flight capital.
The incentive for the developing countries to move ahead
vigorously with reform efforts has taken on additional urgency
since the emergence of Eastern Europe.
In the aggressive
worldwide competition for foreign investment, countries which
fail to create an attractive investment environment run a real
risk of lost opportunities and falling behind. The countries
that move forcefully to privatize state-owned operations, to open
trading and investment regimes and to withdraw the government
from the marketplace will be the ones that attract the capital to
fuel growth.
In a resource-short world, there is no other
answer.
Mexico, Chile and Venezuela have demonstrated their
determination to face this challenge squarely. A number of other
countries are also moving in this direction.
But much more
remains to be done. Many years of statist, inward-looking
policies have left these countries saddled with protectionist
trade and investment regimes and excessive public sectors.
Reform efforts are still in their infancy in many cases.
6
Priv atiz atio n and dere gula tion will need to becom
e more than just
the watc hwor ds of a few sele ct lead ers.
They must beco me the
orde r of the day.
As more coun tries embr ace the prin cipl es of econ
omic
freed om, cred itors will need to stan d read y to
lend thei r
supp ort.
You in this room cann ot simp ly be byst ande rs to
this
proc ess.
The worl d's comm ercia l bank s are dail y part icip
ants
in
the finan cing of worl d trad e and comm erce.
The glob aliza tion of
our econo my poin ts to cont inue d invo lvem ent in
cros s-bo rder
finan ce.
Fina lly, the deve lope d coun tries , in addi tion
to prov iding
supp ort for the debt strat egy throu gh the inte
rnat iona l finan cial
inst ituti ons and dire ct aid to the new dem ocra
cies in East ern
Euro pe and the deve lopin g coun tries in Lati n Ame
rica, also have a
resp onsi bilit y to fost er an econ omic envi ronm ent
in whic h all
natio ns can grow and pros per. We must main tain
stea dy, noninfla tion ary grow th, resi st prot ectio nism , open
mark ets furth er,
and redu ce both fisc al and exte rnal imba lance s
in our own
econ omie s.
This is why the u.s. cont inue s to take the lead
in prom oting
the G7 poli cy coor dina tion proc ess.
In rece nt year s, this
proc ess has cont ribu ted impo rtant ly to the stren
gth and
dura bilit y of the glob al econ omic expa nsio n, now
into its eigh th
cons ecut ive year , and to its resi lien ce in the
face of perio dic
fina ncia l mark et inst abil ity.
It also has prov ided the basi s for
coor dina ting our effo rts on a wide rang e of rela
ted poli cy issue s
such as our resp onse to East ern Euro pe and the
inte
rnat iona l debt
strat egy.
Let me conc lude wher e we bega n: We are in a worl
d of
dyna mic chan ge -- a worl d that is trans form ing
natio ns with out
war, and draw ing its ener gy from a posi tive view
of huma n natu re.
Ther e is much to be acco mpli shed in indi vidu al
coun tries .
Ther e is also much to be acco mpli shed betw een coun
tries
. We must
bend our effo rts to this task and use our reso urce
s
effe
ctiv ely.
I reco gniz e that the inte rnat iona l bank ing comm
unity will alwa ys
have a vita l role to play in this proc ess. Toge
ther we can make
a diffe renc e.
Than k you very much .
000
TREASURY NEWS
:l Ieliartment of tile Treasury • Wasilington, D.C. •
Tele.hone see.20.
STATEMENT OF
SECRETARY OF THE 'l'REAStJRY
NICHOLAS F. BRADY
AT THE MORNING SESSION
OF THE DEVELOPMENT COMMITTEE
OF THE WORLD BANK AND
THE INTERNATIONAL MONETARY FOND
WASHINGTON, D.C.
MAY 8, 1990
This morninq, I want to review three topics:
1)
proqress under the strenqthened debt strateqy, including
the importance of foreiqn investment and the return of
fliqht capital;
2)
the role of the private sector in development: and
3)
the treatment of environmental issues within the World
Bank.
The Strengthened pebt Strategy
I welcome the proqress that has been made under the
strenqthened debt strateqy. six heavily-indebted countries
have reached aqreements with the commercial banks. The
international institutions, creditor qovernments and
commercial banks have all contributed to support debtor
reform efforts under the new approach.
Debtor countries, are already qaining benefits. Debt
burdens have been reduced, flight capital is returning and
investor confidence is growinq. However, to ensure that
these benefits are lastinq, reform efforts must be
sustained. Policies for promotinq foreiqn investment and
capital repatriation, privatizinq public enterprises, and
developinq competitive economies are an essential part of
these reforms.
NB-796
2
Debtors need to liberalize regulations relating to
investment and create efficient domestic capital markets in
order to develop competitive economies and attract foreign
capital. The international financial institutions should
complement those efforts and assume a more active role in
the reform of investment regimes. They should, for example,
develop investment sector loans and incorporate measures to
liberalize direct investment policies in both structural and
sectoral adjustment loans. Debt/equity swap programs can
also be an important element of adjustment programs while
also contributing to overall debt reduction.
The Role of the Private Sector
A related and broader issue is the importance of
enhancing the contribution of the private sector to
development. Developing countries have begun to recognize
that a dynamic private sector is the key to sustainable
development and economic well-being. The united States
welcomes this change and is working through many channels to
support and encourage it.
The World Bank Group is well positioned to promote
private sector growth in its borrowing members. The Bank,
should pay greater attention to the role of the private
sector in the development process.
Since the World Bank is a key source of adjustment
lending, it is able to help developing countries implement
needed macroeconomic, structural and institutional changes.
The Bank should give higher priority to private sector
development and institutionalize this priority across the
entire range of Bank operations. Failure to stimulate
private sector growth and mobilize private capital could
undermine sustainable growth.
We will be discussing this issue this afternoon.
However, given its critical importance, and the presence of
other issues on the afternoon agenda, I suggest that the
Committee revisit the issue of private sector development,
including the mobilization of private capital, as a primary
topic of discussion at the next meeting in September.
3
The Environment
I would like to conclude with a few remarks on the
environment. This is an issue of great importance to the
United states. At last September's annual meeting of the
World Bank, President Bush called for more emphasis on the
environment in national policy making, especially in
promoting energy efficiency and conservation and greater
protection of tropical forests. With respect to the World
Bank, the United states has sought to promote the
integration of environmental considerations into its lending
programs and has encouraged the use of environmental impact
assessments and environmental action plans.
The United states has supported the use of debt-fornature swaps to help preserve forests and wetlands. In the
recent past, such swaps have been signed in a number of
countries. While the dollar amounts involved in these swaps
have been small, an important principle has been
established. We believe this mechanism can be used more
innovatively and encourage the World Bank to play a more
active role in facilitating swaps. For example, a portion
of either project or sector loans could be used by the Bank
to help finance debt-for-nature swaps.
An environmental report has been prepared by the Bank
for our meeting today. However, it focuses on the proposed
Green Fund and does not address a number of important issues
relating to the Bank's existing environmental programs as was
requested at the meeting of this committee last September.
Significant progress has been made by the Bank in the
environmental area, but a great deal more needs to be done.
We suggest that the information requested last Fall be
provided to the committee for our next meeting in September
so that the Bank's progress can be reviewed, and further
progress encouraged.
TRt::ASURY NEWS
, ••• rtm.nt o. tile , ....u" •••• lIlnaCon, D.C•
• ' . . . .IIon.I ••. 20.t
TEXT AS PREPARED
FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M.
MARCH 21, 1990
Statement of the Honorable
David C. Mulford
Under Secretary of the Treasury for International Affairs
before the Subcommittee on
International Finance and Monetary Policy
of the
Committee on Banking, Housing, and Urban Affairs
U.S. Senate
Last spring Secretary Brady launched the Administration's
initiative to strengthen the international debt strategy. In the
past year, these concepts have been forged into far-reaching
country reform programs, concrete actions by the IMP, World Bank
and creditor governments, and financing packages between debtor
countries and their creditor banks which include substantial
reduction of debt and debt service burdens.
The watershed agreement between Mexico and its commercial
banks was formally completed last month with the signing ceremony
in Mexico City. Costa Rica and its creditors have reached an
agreement in principle on a comprehensive debt and debt service
reduction package. Chile's buyback of commercial bank debt in
November was financed by resources made available under the
strengthened debt strategy.. Last month, the Philippines completed
its new financinq packaqe with commercial banks, which i:'ncluded a
highly succe•• tul direct buyback of commercial bank debt. Earlier
this week Venezuela and its creditor banks announced an agreement
in principle on a tinancing package which includes a broad range
of options tor debt and debt service reduction.
I am thU8 pleased to inform the Subcommittee that the
strengthened debt strategy is very much alive and well. My
progress report today will reiterate the objectives of the
strategy, outline creditor government actions, detail the reform
efforts in some of the debtor countries, and focus on the design
and benefits ot the financing agreements in Mexico, Costa Rica,
and the Philippines. I will also summarize the elements of the
recent Venezuelan package, as we understand them, and touch on the
prospects for Argentina and Brazil.
NB-723
2
Objectives of the Debt strategy
The major tenet of the debt strategy can be summarized in
one sentence: Highly indebted countries must successfully
implement market-oriented macroeconomic and structural policy
reforms in order to achieve sustained growth and ultimately
resolve their debt servicing problems.
In advancing the strengthened debt strategy, our key objectives are to:
o
Reinvigorate the policy reform efforts in the highly indebted
countries. While a number of the major debtors initiated
vital macroeconomic and structural reform programs, by the
end of 1988 efforts to sustain these programs in several
countries were stalled by debtor fatigue and pessimism. The
strengthened debt strategy, by offering the prospect of
significant debt and debt service reduction by the commercial
banks, has provided important incentives for many debtor
countries to maintain difficult but essential reform efforts.
The strategy reaffirms the role of the IMF and the World Bank
in encouraging strong debtor reforms, in particular measures
to encourage repatriation of flight capital and investment.
o
To mobilize financial resources from the private sector more
effectively in support of debtor reforms.
By the end of
1988, new lending from commercial banks had virtually dried
up, banks were disposing of their LDC exposure in the
secondary market, and low investment and continued capital
flight hobbled economic growth in debtor countries. The
strengthened debt strategy is designed to harness commercial
bank willingness to engage in debt and debt service reduction
for the benefit of debtor countries, as a complement to new
lending by a smaller group of banks, and to develop measures
to promote new investment and capital repatriation.
o
To redirect IMF and World Bank resources to back debt and
debt service reduction for commercial banks.
In order to
strengthen the capacity of the IMF and World Bank" to promote
meaningful reform programs in debtor countries, the strengthened debt strategy permits debtor countries to use resources
from the international financial institutions (IFIs) to back
the reduction of debt and debt service by commercial banks.
IFI resources can be used to finance cash buybacks of bank
debt, to purchase collateral for debt and debt service
reduction instruments, and to provide limited interest
support for such instruments.
o
To provide continued creditor government support. Creditor
governments continue to play an important role under the
strengthened debt strategy through their contributions to
the international financial institutions, rescheduling of
official debt in the Paris Club, ongoing export finance, and
efforts to reduce (where appropriate) impediments to debt
3
and debt service reduction stemming from tax, regulatory,
and accounting regimes.
The strengthened debt strategy has been broadly endorsed by
the international community. Last May, the IMF and the World
Bank moved expeditiously to adopt guidelines governing their
support for debt and debt service reduction. Several debtor
countries have subsequently adopted medium-term, market-oriented
economic reform programs, with greater recognition of the importance
of measures to promote investment and capital repatriation. This
is the first essential step in the process.
The second step for most countries has been the negotiation
of multiyear rescheduling agreements with official creditors in
the Paris Club. The final step -- negotiations with commercial
bank creditors -- has now been completed for four countries -Mexico, the Philippines, Costa Rica, and now Venezuela. Morocco is
now actively negotiating with its banks. other countries are
moving to avail themselves of similar support within the next year
as they adopt strong medium-term economic reform programs with the
IMF and World Bank. These countries include Bolivia, Nigeria,
Ecuador, and Uruguay. The new president of Brazil is putting
together his program after his inauguration last week.
Role of Creditor Governments
Creditor governments have moved rapidly to support the
strengthened debt strategy. At their urging, the IMF and the
World Bank developed and put into place guidelines for IFI
support for debt and debt service reduction. A number of creditor
countries have pledged financial support to enhance specific
financing packages. The Government of Japan is in the process of
providing $10 billion to support the strengthened debt strategy
with specific commitments so far for Mexico, the Philippines,
costa Rica, and Venezuela. The United States, through USAID, has
provided concessional resOurces to both the Philippine~ and Costa
Rica to back debt and debt service reduction. In addition,
official export credit agencies continue to provide critical trade
finance to many of the major debtor countries.
Creditor governments have also made substantial contributions
through Paris Club reschedulings. Reflecting the medium-term
horizon of the debt strategy, the focus of the Paris Club is now
on multi-year rescheduling agreements (MYRAs) for the debtor
countries. Since in many cases creditor governments have been
willing to reschedule interest as well as principal on official
loans, the official reschedulings have continued to provide "new
money" and therefore more relief than bank reschedulings.
Official relief continues to be available only for countries with
an IMF adjustment program.
4
The U.S. Government and other official creditors are also
providing special treatment ("Toronto terms") to the least
developed countries which are pursuing sound economic reform
programs. In addition, the U.S. government has announced a
willingness to forgive up to $1 billion in economic assistance
loans to Sub-Saharan African countries pursuing economic reform
programs. Congress has provided for this purpose in an appropriations act, nine countries have signed agreements, and four more
countries have been declared eligible for the program.
Creditor governments have also initiated efforts to identify
and, where appropriate, remove any impediments to debt and debt
service reduction in their tax, regulatory, and accounting
regimes. In the United states, the Securities and Exchange
Commission has clarified the accounting treatment for the debt
reduction bonds and debt service reduction bonds held by banks as
a result of the Mexican financing package. In addition, the
Department of the Treasury has clarified the tax treatment of the
new bonds, in particular the determination of the amount of the
tax loss. Neither the SEC clarification nor the Treasury
clarifications break new ground, but instead rely on longstanding
standards and rules to remove uncertainties as to how these
financial instruments would be treated.
I would now like to touch on specific developments in
individual debtor countries.
Mexico
Mexico has maintained a strong record of implementing
macroeconomic and structural reforms in its efforts to resolve
its debt problem. Mexico's past adjustment performance -exchange rate reform, tax reform, liberalization of its trade
regime, industrial diversification, and measures to reduce the
fiscal deficit and curb inflation -- has provided the backdrop
for economic recovery. However, the fall in oil price~ in 1986,
following on the 1985 earthquake, disrupted Mexico's economic
progress. While the Mexican economy has been recovering from
these shocks, growth has been sluggish, key debt ratios have
remained high, and substantial financing gaps have persisted even
after significant adjustment in the trade balance.
The Administration of President Salinas has pressed forward
with reform efforts, including efforts to reduce the size and
scope of the public sector. Recently, Mexico has taken measures
to privatize the state airline, its major copper mine, and the
state telephone company (one of the five largest companies in
Mexico). Deregulation has been pressed in the trucking industry
and the financial sector. New regulations have significantly
liberalized Mexico's foreign investment regime. These regulations
streamline and expedite registration requirements, increase the
transparency of Mexico's foreign investment laws, reduce performance
5
requirements, and open up areas formerly excluded from foreign
participation.
Mexico's agreements with its key creditor groups incorporate
all elements of the strengthened debt strategy:
o
o
o
o
o
o
o
o
o
o
strong macroeconomic and structural reforms as conditions
for drawing IMF and World Bank resources;
Meaningful debt reduction:
Substantial debt service reduction;
New money;
Bank waivers to permit subsequent debt buybacks;
Full participation by commercial banks;
IMF and World Bank enhancements in support of debt and
debt service reduction;
Substantial debt/equity swaps:
Capital repatriation; and
Multiyear Paris Club rescheduling.
Mexico and its creditor banks completed negotiations on a
comprehensive medium-term financing package in July 1989.
Signature of the final agreement started last month, with the
actual exchange of debt instruments expected by the end of March.
The financing package provided commercial banks with a choice of
vehicles to participate:
o
Debt Reduction Bonds that replace existing medium-term
debt at a discount of 35% with full repayment occurring
in 30 years.
o
Debt Service Reduction Bonds that carry a fixed interest
rate of 6.25% with full repayment occurring in 30 years.
o
New financing during 1989-92 equal to a total of 25% of
existing exposure that has not been converted into debt
and debt service reduction instruments.
The debt reduction and debt service reduction bonds are
supported by enhancements totaling $7.1 billion from the IMF,
World Bank, Japan, and Mexico's own resources. The principal of
both bonds will be fully secured by collateral in the form of 30year zero coupon bonds.
Interest payments will be enhanced by 18
months of rolling interest support.
The United States Department of the Treasury will sell
Mexico sufficient non-marketable 30-year zero-coupon Treasury
bonds to be used as collateral for these transactions.
Pricing
zero-coupon bonds is complicated by a number of factors. At the
time of the pricing Treasury had only issued non-marketable zero
coupon bonds on two other occasions -- the Morgan/Mexican debt
reduction deal in 1987-88 and the initial issue of zeros to
REFCORP in October, 1989. Furthermore, Treasury has not itself
6
issued zero coupon bonds directly in the public market. The
Treasury STRIPS market, a derivative market resulting from the
stripping of Treasury coupon instruments by market participants,
remains smaller than the coupon market and somewhat volatile. As
a result, there were few pricing precedents and no easy or
obvious market guidance since a number of possible pricing
benchmarks exist.
The Treasury pricing decision for the zero-coupon bond for
Mexico was based on principles reflecting both the size of the
Mexican transaction and the precedent of the 1987-88 Mexican
purchase of zeros. The earlier Mexican deal was priced off the
coupon rate because the STRIPS market was deemed to lack sufficient
depth and the size of the transaction was large relative to the
then outstanding STRIPS market. The current transaction size of
approximately $35 billion face amount is even larger relative to
the STRIPS market today. Treasury judged that the STRIPS quotation
would again be inappropriate for pricing a transaction of this
size and scope. The existing STRIPS yields would be severely
affected if a transaction the size of the $35 billion face amount
of Treasuries for Mexico were issued in the public market. It is
likely that the STRIPS yields would be driven toward the coupon
yields.
The specific pricing formula for the Mexican transaction
involved the average 30-year u.S. Treasury coupon borrowing rate
for the 3-day period ending January 5, 1990 of 8.05%. A fee was
charged by Treasury in the form of an adjustment of the annual
yield by 1/8%, which is identical to the fees charged for Treasury
special issues over many years. The Treasury's final borrowing
rate from Mexico was 7.925%.
Benefits to Mexico of its Agreement with Commercial Banks:
The commercial bank package will generate substantial debt and
·debt service reduction benefits for Mexico:
o
Over 85% of Mexico's bank debt will undergo substantial
cuts in interest or principal.
o
Mexico's debt obligations to commercial banks will be
slashed significantly:
The debt reduction bonds cut bank debt immediately
by about $7 billion.
The debt service reduction bonds are the economic
equivalent of a further implicit reduction in the
stock of debt of $7.75 billion.
Up to an additional $3.5 billion of debt will be
retired in the debt/equity swap program by 1992.
7
o
Debt service savings total over $12 billion during the
1989-92 period.
Annual interest payments to commercial banks will
be cut by $1.5 billion (nearly one-third) .
Principal amortization payments will be reduced by
$6.7 billion over this period.
o
Of even greater importance, the burden of principal
payments on $42 billion of Mexico's bank debt are
lifted from the shoulders of the Mexican people; this
is because Treasury 30-year zero-coupon bonds provided
as collateral up front will assure full repayment of
the remaining principal amounts of both the debt and
debt-service reduction instruments in 2019.
o
Overall, the Mexican Government estimates that the net
effect is that Mexico's total external debt will
decline from $95 billion at the end of 1989 to the
equivalent of $80 billion in March 1990. Furthermore,
external net transfers will be reduced by more than $4
billion annually, which is equivalent to 4% of GOP.
However, these positive results do not convey the full
importance of the Mexican Agreement. To complete the assessment,
it is necessary to compare these positive results with the
results that would have flowed from the type of all new money
solution that characterized the previous debt strategy:
o
Mexico's total debt in 1992 would have been some $24
billion higher than will now be the case, if we include
the implicit effect of debt service reduction.
o
Rather than perpetually rescheduling principal, the new
agreement's defeasance arrangement removes from Mexicans
the burden of future principal payments on $42 billion
of Mexico's bank debt.
.
o
The medium-term time horizon of this package (four
years) increases the stability of Mexico's economic and
investment climate, as compared to the traditional 12-18
month financing pact, which we found could take most of
that time to put together. Furthermore, the annual
benefits of reduced interest payments, debt reduction,
and defeasance extend well beyond the 1989-92 period of
the package.
o
The new agreement frees up sUbstantial Mexican resources
for productive investment (about 4% of GOP), which
otherwise would be used to service ever-growing debt.
8
o
The fact that virtually all of Mexico's commercial
banks participated in this package contrasts sharply
with the growing free rider problem under the old
strategy. Finally, there is no doubt that if the old
strategy of concerted new lending had been tried for
Mexico, the equivalent of $7.5 billion in new money
would not have been forthcoming. It was clear by the
end of 1988 that most banks had decided to withdraw
from providing fresh money to debtor countries. This
was one of the key reasons for changing the old debt
strategy.
The final and perhaps most notable benefit of the agreement
is the growing confidence in Mexico's economy. Since the agreement
was announced last summer, domestic interest rates have fallen,
resulting in savings on servicing the government's domestic debt
and a reduced fiscal deficit equivalent to 4-5% of GOP. In
addition, net private capital inflows in 1989 totalled about $3
billion, indicating increased investor confidence. These positive
developments, combined with Mexican reform efforts, have contributed
to an expansion in the Mexican economy. Growth has increased from
1.1% in 1988 to an anticipated 2.5% in 1989. The economy is
expanding at a fairly rapid pace, with substantially lower
inflation.
These early indicators bode well for Mexico's capacity to
achieve sustainable growth in the future. Current projections
are that these benefits will help produce growth of 5-6 percent
by 1994 and will halve Mexico's debt service and interest service
ratios. For these benefits to crystallize, it will be vital for
Mexico to sustain its reform efforts.
other Financing Packages
The strengthened debt strategy is designed to be flexible
and responsive to individual debtor country needs. As. a result
of the case-by-case approach, the financing packages which
emerged from debtor/bank negotiations in the Philippines, Costa
Rica and Venezuela differ markedly from the Mexican package.
The aqreement between the Philippines and its commercial
banks places qreater emphasis on new money and direct cash
buybacks because Philippine conditions are materially different
from those in Mexico. The Philippine economy has realized steady
growth for a number of years and its debt burden is not as heavy
as Mexico's. The Philippines also is the beneficiary of substantial
foreign assistance commitments for the period ahead. The impact
of debt and debt service reduction would have been small relative
to Philippine financinq needs because medium-term bank debt only
accounts for about 25% of total Philippine indebtedness.
9
These factors are reflected in the agreement reached between
the Philippines and its commercial banks. New lending was
necessary to fill projected financing gaps, while direct cash
buybacks were an efficient means of enlisting the support of
banks prepared to exit the Philippines at a steep discount. The
elements of this agreement include the following:
o
The Philippines completed a direct buyback of $1.3
billion in early January at a 50% discount. This is
equivalent to a 20\ reduction in its stock of mediumterm commercial bank debt. The buyback was funded by
IMF, World Bank, Philippine and official support
totaling $667 million (including $95 million from the
u.s. Agency for International Development).
o
Banks rescheduled remaining outstanding debt.
o
Voluntary new lending from commercial banks amounted to
about $700 million.
o
Commercial banks have rescheduled the rema~n~ng debt
and have granted waivers to permit the Philippines to
launch additional debt and debt service reduction
arrangements.
This agreement offers SUbstantial benefits to the Philippines.
It fills the projected financing gaps for 1989-90 while achieving
net debt reduction. After taking into account the SUbstantial new
lending contemplated, we estimate that the net debt reduction and
the net debt service reduction on bank debt will still amount to
10%. Because the net debt reduction is permanent, these benefits
will extend well beyond 1990. Further reduction of commercial
bank debt is contemplated since the Philippines has committed to
reopen its debt/equity swap program and expects additional debt
and debt service reduction operations as a result of broad
commercial bank waivers. These longer-term benefits should help
to stabilize the medium-term economic and investment climate in
the Philippines, provided of course that the Philippine government
successfully implements needed reforms in its investment policies.
The debt strategy is not only flexible enough to accommodate
different debtor profiles, but is also designed to apply to
smaller debtor countries such as Costa Rica. Costa Rica has a
heavy debt burden and has significant projected financing gaps
for several years.
Negotiations with commercial banks were also
complicated by Costa Rica's arrears problem, accounting for $325
million of $1.8 billion owed commercial banks.
In October 1989, Costa Rica reached agreement with its Bank
Advisory Committee on a package we expect will be completed by
spring 1990. The financing agreement deals effectively and
stringently with the arrears problem, while realistically
10
recognizing the limits on Costa Rica's capability to service its
bank debt. Elements of the agreement include:
o
A projected cash buyback of outstanding debt, including
arrears, at an 80% discount.
o
An exchange of the remaining principal for a par bond
with a reduced interest rate of 6.25%.
o
Substantially less favorable treatment for the remaining
arrears, which requires a 20% downpayment on the
outstanding balance by Costa Rica, rescheduling of the
balance for 15 years in a mortgage-style bond, and a
market rate of interest.
o
IMF, World Bank and official support to fund the
buyback and provide interest support for the par bond.
o
Principal is not collateralized in this transaction.
Given the depth of Costa Rica's discount, the direct benefits
of the financing package to Costa Rica are very substantial. We
estimate that the arrangement, when implemented, would retire
about 60% of Costa Rica's bank debt and reduce interest payments
by about 60% annually. The agreement will put the troublesome
arrears problem behind Costa Rica, and reduce Costa Rica's debt
service burden to a level which reflects more realistically its
ability to pay.
Venezuela and its creditor banks reached an agreement in
principle earlier this week on a comprehensive financing agreement
which included both a significant new money feature as well as
several debt and debt service reduction options. During the past
year, the Government of Venezuela has been implementing the most
comprehensive economic adjustment program in its history. The
purpose of the program is to eliminate distortions in the Venezuelan
economy and to open the economy for international trade and
investment. The bank financing package provides financial
support for this adjustment effort. Elements of the agreement
include:
o
A cash buyback program at a price to be set by Venezuela,
taking into account the secondary market price of
Venezuelan debt.
o
Principal reduction bonds at a discount of 30% and
interest reduction bonds at an interest rate of 6.75%.
Both of these options would be in the form of 30-year
bonds, with principal collateralized by zero-coupon
bonds and 14 months of interest support. Warrants would
be included with each bond giving the holder the right
to value recovery payments after 6 years if Venezuelan
11
crude oil prices exceed a specified price, up to a
ceiling specified in the warrants.
o
Temporary interest reduction. Under this option, banks
would exchange their debt for a 17-year bond with
reduced interest rates of 5% for the first two years, 6%
for the third and fourth years, 7% for the fifth year,
and a market rate thereafter.
o
New financing during the period 1990-92. Banks would
exchange existing debt obligations and provide new money
in the form of bearer bonds, resulting in a 20% increase
in exposure for those banks selecting this option.
It is too early to assess the specific benefits of this
financing package to Venezuela because we can not at this time
estimate the likely bank response to the options available under
this package. I would note, however, that this financing package
contains the broadest range of options yet offered under the debt
strategy.
The new debt strategy was also used by Chile to implement
its direct cash buyback in November. Chile chose not to enter
into broad debt reduction negotiations with commercial banks
because it is close to recovering voluntary access to financial
markets and its earlier debt conversion programs were very
successful in reducing its commercial bank debt. Instead, Chile
completed a limited direct buyback, using resources from the
international financial institutions to purchase $140 million in
commercial bank debt at a discount of 41%. The buyback should be
viewed as the latest stage of the Chilean debt reduction program.
since 1985, Chilean debt/equity swap and buyback programs have
retired $7.8 billion in debt, equivalent to over half of its
medium- and long-term commercial bank debt at end-1985. In many
ways, Chile could be viewed as the laboratory for the strengthened
debt strategy. The Chilean experiment indicates that ~ strong
commitment to reform combined with reduction in bank debt can
result in normalization of debt service and sustainable growth.
Prospects tor Argentina and Brazil
Among the major debtor nations, Brazil and Argentina are the
largest countries that have yet to make significant progress
under the strengthened debt strategy. This lack of progress does
not reflect adversely on the debt strategy, but instead stems from
protracted delays by both countries in implementing appropriate
economic adjustment policies.
The IMF will need to play a crucial central role in providing
a framework for economic adjustment in both these countries.
Resources from the World Bank and the Inter-American Development
Bank will also help promote structural and sectoral adjustment.
12
Argentina and Brazil remain candidates for the strengthened debt
strategy, once they have established credible domestic economic
policies with the help of an IMF-supported adjustment program. A
full range of options for debt and debt-service reduction could
then be exercised for both nations.
Argentina. The government of Argentina has been preoccupied
for the last eight months with stabilizing the nation's economy,
a process that remains elusive. While the government has held
preliminary discussions with its commercial bank creditors, it
cannot focus on serious negotiations as long as the domestic
situation remains unstable. Negotiations with the commercial
banks, once they begin, will also be complicated by the existence
of some $6 billion in arrears to banks since April 1988. We do
not expect progress in negotiations with commercial banks until
Argentina can show progress in implementing far-reaching economic
reforms.
Brazil. Since falling out of compliance with its IMF
standby arrangement in late 1988, Brazil's economy and its
relations with the international financial community have
deteriorated. In February 1990, inflation reached a monthly
record of 73% and the 1989 budget deficit stood at about 7% of
GOP. Brazil's inability to revive its standby led to the
withholding of a $600 million new money tranche from creditor
banks and to a halt in policy-based lending from the World Bank.
Most bilateral credits have also been frozen.
The Brazilian government imposed a de facto moratorium on
interest payments to creditor banks last September to conserve
liquid reserves prior to the Presidential election. Interest
arrears to creditor banks now exceed $5 billion.
Last week the President of Brazil launched a new program for
economic reform. We are now studying this program and look
forward to discussing it with the Brazilian authoritie~. We also
understand that they are developing a number of ideas for handling
their debt situation. Any financing package would need to
address as a matter of priority Brazil's interest arrears. In our
view, Brazil will need a comprehensive, medium-term financing
package, including a wide-ranging menu of options for debt and
debt-service reduction. The first priority, however, is the
successful implementation of Brazil's economic program.
Assessment of the Debt Strategy
The financing agreements to date feature the new mechanisms
for commercial bank support anticipated by the strengthened debt
strategy and furnish new incentives for sustaining sound policies
in debtor economies. The Mexican, Costa Rican, and Venezuelan
packages assured comprehensive support by the full banking
community, while the Philippine and Chilean arrangements focus on
13
selective debt reduction. Good performance deserves such support
by the commercial banking community. Debtor nations cannot
resolve their external debt problems through their own efforts
alone.
Practical implementation of the strategy has required an
adjustment of expectations by both the debtor nations and commercial
banks. Initial debtor country expectations of debt relief were
high, while the extent of acceptable debt reduction varied from
bank-to-bank.
My own sense is that many debtor countries and commercial
banks have been coming to terms with the new reality. Debtor
countries are recognizing that debt relief alone is not a panacea
for their economic problems. Sound policies are the essential
prerequisite for success. In the agreements negotiated thus far,
commercial banks have acknowledged that their diversified interests
can only be reconciled through diversified options, that innovative
forms of new lending are still possible, and that debt and debt
service reduction for performing countries can support adjustment
and improve the quality of their remaining claims.
Looking ahead, I would offer a note of caution to debtor
nations and commercial banks alike:
o
Debtor nations can not afford to relax their adjustment
programs simply because they may be able to obtain a
measure of debt relief. If the reform process is not
sustained, these countries will have squandered their
best opportunity to put their debt problems behind.
o
The strong reserve position of commercial banks, which
we commend as financially prudent and conducive to debt
reduction, should not be used as a screen for failing
to negotiate solutions with the debtor countries.
Perpetual reschedulings, with minimal debt reduction,
debt service reduction or new lending, can only contribute
to future arrears and undermine the reforms needed for
sustained growth.
o
Both debtor nations and commercial banks must avoid the
temptation of funding medium-term gaps through arrears.
Such a temporary and illusory solution can only undermine
the reform effort, dissipate market and investor
confidence, and replace cooperation with confrontation.
o
Finally, no matter how overpowering the debt problem
appears in its totality, we must continue to focus our
efforts on a case-by-case basis on those elements of
the problem which can be solved and then expand on our
successes. We must continue to recognize that there
are no easy, all encompassing global solutions.
14
Conclusion
The international community has made significant progress in
transforming the strengthened debt strategy from general concepts
to practical results in the financing packages that have emerged
thus far. While it is still too early to assess the strategy
fully, a number of important developments have already occurred:
o
The strengthened debt strategy has already renewed
resolve in a number of debtor countries to complete the
adjustment process. These countries are making
significant strides in reforming their economies.
o
The strategy is flexible. It can respond to specific
country circumstances, whether the debtor is large or
small, or close to returning to voluntary lending. It
can offer commercial banks a wide range of options to
suit their particular needs.
o
The agreements in Mexico, the Philippines, and Venezuela
indicate that new bank lending and debt reduction can
coexist in the same financing packages.
o
The reduction in domestic interest rates and capital
reflows in Mexico resulting from the bank package are
evidence that an important contribution of the strategy
may be the restoration of confidence in the debtor
country's economy.
o
The strategy has the potential to extract debtor
countries from the spiral of constantly escalating
debt. This not only frees up resources for productive
investment, but also boosts optimism in the debtor
countries that sustained economic development and
improved living standards are still achievable targets
not just etherial goals.
o
Finally, by combining fundamental economic reform in
the debtor countries with substantial debt and debt
service reduction by commercial banks, there is now a
realistic hope that flows of capital in the form of
repatriated flight capital and direct investment will
be provided as the "new finance" needed by debtor
countries to sustain their recovery. Such a result
offers a far more credible solution for long-term
growth than a perpetual dependence on new rounds of
concerted lending by unwilling commercial banks.
TREASURY NEWS
D...artm.nt of tile ' •••• urr
DS~ABGO!O
Exp.c~.d
•
W•• II'nlton, D.C •• ' .... IIon. 1 ••• 2C
UNTIL CELIYQX
at 1:45 p ••• EST
Friday, March 10, 1989
The
• ..aro by
of the Treasury
Nicholas F. Irady
to the
Brockinqs Institution ~nd
The Bretton Woods Co. .ittee
Conterence On Third World Dect
Secre~ary
More than 40 years aqo, the representatives of 44 nations
met at Iretton Woods, Nev Hampaaire to build a nev international
economic and financial syate.. The le••on. learnad from a
devastatinq world d.pre •• ion and qlobal contlict quided th.ir
.ttort.. At th. concludinq •••• ion, the Pr•• id.nt of the
conterenc., Trea.ury S.cretary H.nry MOr;.nthau, de.cribed this
l ••• on in the follovinq aann.r:
We have co.e to recoqniz. that the viaeat and .o.t eftective
way to protect our national interests i. throuqh internationa:
cooperation -- this i. to .ay, throuqh united effort for the
attainment ot common qoal.. Thi. baa been the qreat lesson
ot contemporary lite -- that the people. of the earth are
inseparably linked to one anoth.r by a de.p, underlyinq
community of purpo.e.
The .ndurin; leqacy provided by the Ir.tton Woods in.titutions
i. la.tinq t ••t . .ent to the succ ••• of their ettorts. This
community ot purpo.e .till re.1d•• in the.e inat1tut10ns today.
We muat once a,ain drav on this .pecial .en.e of purpo.e a. we
ren.v ou% eftorta to create and fo.t.r world qrovtb.
The.e past .even y.ar. we bav. taced a aajor challenqe in the
international debt probl... Thi• • ituation i., in tact, a complex
aCCWIulation of • a)'1:'iad of interwoven probl.... It contain.
economic, political and .ocial el ...nts. Taken toc;ether, they
repre.ent a truly international probl .. , for whieb no one .et ot
actions or circua.tance. i. re.pon.ible. And for which no one
nation can provide the .olution. Ulttaately, re.olution depends
on a qr.at cooperative effort by the international co_unity. It
require. the .cbllization ot the world'. re.ourc•• and the
dedication ot its ,oodvill.
NB-169
- 2 -
Sine . 1982 the worl d community has .nd. avor
to co.e to
term s with int.r nati onal debt . In 1985 w. paus .d.dand
took stock
of our proq r.ss in addr .s.in q the prob l.m.
Aa a r •• ult ot that
revie w, toqe th.r w. brou qht torth a n.w
t.qy , c.nt .r.d on
econ omic qrow th. Thi. stil l mak ••• • ns...traHow
.v.r, it is
appr opri ate that now, almo .t tour year . lat. r, we
n take
stoc k. Thu. in r.ce nt mont h. w. have und. rtak .n toaqai
look
atres h
at the int.r nati onal debt .itua tion . Th. purp o •• was
to
disco
ver
what proq re •• has b•• n mad. : to ••• wh.r . w. a. a comm
unity
of
natio ns have succ eed. d and wher e v. bave not. And, wher
e our
succ ess has not m.t our .xp. ctat ion. , to und.
r.tan
d
why
we
not achi .ved our qoal s. W. have .tud i.d in d.pt h, w. have have
~j~sulted wide ly -- ••• kinq and takin
q into acco unt the vi.w s of
d~~tor natio ns, mul tilat .ral in.t itut
ion. , comm ercia l bank s and
leqi slat ur.. . We have also con. ult.d clo••
Japa n and
othe r indu stria l coun tri •• in ord. r to b.qi nlytowith
lay
basi s for
a common appr oach to the d.bt prob lem by the cr.d itorthecoun
tries .
Let m. shar e with you the r •• ult. of our r.a •••• ••• nt as
part ot the onqo inq proc e •• ot inte rnat iona
coll abor atio n. I
would hope that the idea . and .uqq estio n. I l put
forth here will
prov ide a ba.i . tor a conc .rted etto rt by the inte
iona l
community to rein viqo rate • proc e •• th.t h •• b.comrnat
e
d.btHow ev.r, we must .tren qthe n the proc e •• with out .top pinq wear y.
we move ahea d with the. e ide •• in th. week s ahe. d, it is it. As
impo rtant
to cont inue work inq on indi vidu .l debt prob l ....
R.ce nt Prog ress
Our revie w conf irme d th.t we h.ve acco mpli .h.d much, but
much rema ins to b. don••
The expe rienc e ot the p•• t tour ye.r d••on.t r.te . that
the
tund amen tal prin cipl e. ot th. ~rent .tr.t. egy
r.ma in soun d:
o
Growth is ••••nti. l to th. re.o lutio n of debt
prob l ... ,
o
Debt or n.tio ns vill not achi eve sutf ici.n t
l.ve ls of grow th vith out r.to ra,
o
Debt or nati on. have a cont inuin q n.ed tor
.xte rnal reso urc•• ,
o
Solu tions must be unde rtak. n on a ca•• -by- ca•• ba.i •.
In rece nt y•• r., w. h.ve se.n po.i tiv. 9rov tb occu r in
.any
debt or natio ns. ~st 1~sr .ix aajo r d.bt
or
nati
on.
real
iz.d
more
than tour perc ent posi tive qrov tb. Thi. i. pri.. rily due
to
the
d.bt ors' own etto rt.. The poli tica l lead ersh ip ot . .ny
ot th.s .
-
3 -
nations has demonstrated their commitment to implement vital
macroeconomic and structural reforms. In many countries this has
been reflected in the privatization of nationalized industries.
In some countries there has also been a move towards opening
their shores to greater foreign trade and investment. CUrrent
account deficits have been sharply reduced, and the portion of
export earnings going to pay interest on external debt has
declined. These are significant achievements. All the more so,
since in parallel proqress, a number of debtor nations have
advanced towards more democratic regimes. This has required
great courage and persistence. The people of these countries
have made substanti~l sacri!i~2s t~r. which ~heytve earned our
admiration. We must work together to transform these sacrifices
into tangible and lasting benefits.
In another positive development, we have avoided a major
disruption to the global payments system. Commercial banks have
strengthened their capital and built reserves, placing them in a
stronger position to contribute to a more rapid resolution of
debt problems. The "menu" approach of the current strategy has
helped to sustain new financial support while also encouraging
debt reduction efforts. The banks have provided loans in support
of debtor country economic proqr.... The stock of debt in the
major debtor countries has been reduced by some $24 billion in
the past two years through various voluntary debt reduction
technique •.
However, de.pite the accomplishments to date, we must
acknowledge that serious probl . .s and impediments to a successful
resolution of the debt crisis remain. Clearly, in many of the
major debtor nations, growth has not been sufficient. Nor has
the level of economic policy reform been adequate. Capital
flight has drained resources from debtor nations' economies.
Meanwhile, neither investment nor domestic saving. has shown much
improvement. In many cases, inflation has not been brought under
control. Commercial bank lending has not always been timely.
The force of these circumstances has over.hadowed the progress
achieved. Despite progre.s, prosperity remains, but for many,
out of reach.
other pressures also exist. The .ultilateral institutions
and the 'aris Club have .ade up a portion of the shortfall in
finance. Commercial bank exposure to the .ajor debtors since
19S5 has declined slightly, While the exposure of the international
institutions has increased sharply. If this trend vere to
continue, it could lead to • situation in which the debt problem
would be transferred largely to the international institutions,
weakening their financial position.
- 4 -
These are r.aliti.s that w. cannot d.ny. Th.y are problems
w. must addr.ss if w. are to r.n.w proqr.ss on the int.rnational
debt crisis.
Let m. reiterate that w. b.li.v. that the tundam.ntal
principl.s of the curr.nt strat.qy r.main valid. How.v.r, w.
believe that the tim. has com. for all ••mb.rs of the int.rnational
community to consid.r n.w ways that th.y may contribut. to the
common .ffort.
In considering n.xt st.ps, a t.w k.y points should b. kept
in mind:
o
First, obviously financial r.sourc.s are scarce. Can
th.y be used more .ff.ctiv.ly?
o
S.cond, we must r.cogniz. that r.v.rsing capital flight
off.rs a major opportunity, sinc. in many cas.s flight
capital is larger than outstanding d.bt.
o
Third, th.r. is no substitute tor sound polici.s.
o
Fourth, w. must maintain the important roll of the
int.rnational financial institutions and pr.s.rv. their
financial int.grity.
o
Fifth, w. should .ncourag. d.bt and debt s.rvice
r.duction on a voluntary basis, while r.coqnizing the
importanc. of continu.d n.w l.nding. This should
provide an important st.p back to the tr•• markets,
wh.r. funds abound and transactions are .nact.d in
days ~ot months.
o
Finally, w. must draw tog.th.r th.s • • l.m.nts to provide
d.btor countri.s with gr.at.r hop. for the tutur••
Strength.ning the current Strategy
Any n.w approach must continu. to .mphasiz. the importance
of strong.r growth in d.btor nations, as w.ll as the n••d for
d.btor r.forms and ad.quat. financial support to achi.v. that
growth. w. will have succ.ss only if our .ttorts are truly
coop.rativ.. And, to succ ••d v. must have the comaita.nt and
involvem.nt ot all parti.s.
First and for'most, d.btor nations aust focus particular
attention on the adoption of polici.s which can bett.r .ncourage
new inv@stment ~low~, st~."~·~en domestic s3vings, and pr~m~te
the r.turn of flight capital. This r.quir.s sound growth policies
- 5 -
which foster confidence in both domestic and foreiqn inve.tors.
These are essential inqredients for reducinq the future stock of
debt and sustaininq .tronq qrovth. Specific policy .easures in
these areas .hould be part of any new IMF and World Bank proqrams.
It is worth notinq that total capital fliqht for most major
debtors is rouqhly comparable to their total debt.
Second, the creditor community -- the commercial banks,
international financial institutions, and creditor qovernments
should provide ~~~. effective and timely financial support. A
number of step. are needed in this area.
Commercial banks need to work with debtor nations to provide
a broader ranqe of alternatives for financial support, including
qreater efforts to achieve both debt and debt .ervice reduction
and to provide new lendinq. The approach to this problem must be
realistic. The path towards qreater creditworthine.s and a
return to the .arket. for many debtor countries need. to involve
debt reduction. Diversified forms of financial support need to
flourish and constraints should be relaxed. To be specitic, the
sharinq and neqative pledqe clauses included in existinq loan
aqree.ents are a substantial barrier to debt reduction. In
addition, the bankinq community's interests bave become more
diverse in recent years. This needs to be recognized by both
banks and debtors to take advantaqe ot various preference•.
A key element of this approach, theretore, would be the
neqotiation ot a qeneral waiver of the sharinq and neqative
pledqe clause. tor each performinq debtor, to permit an orderly
process whereby banks which wish to do so, neqotiate debt or debt
service reduction transactions. Such waivers miqht have a 'three
year life, to stimulate activity within a short but .easurable
timeframe.
We expect these waivers to accelerate .harply the
pace of debt reduction and pas. the benetits directly to the
debtor nations. We would expect debtor nations also to maintain
viable debt/equity swap programs for the duration ot this endeavor,
and would encouraqe them to permit domestic national. to enqaqe
in .uch tran.actions.
Of cour.e, banks will re.ain interested in providinq new
money, especially if creditworthiness improves over the three
year period. They .hould be encouraqed to do so, tor new
financinq will still be required. In this connection,
consideration could be qiven in so.e ca.e. to ways ot
differentiatinq new trom old debt.
The international financial institutions vill need to continue
to play central role •• ~be heart of their .ffor~ would be to
promote sound policies in the debtor countries throuqh advice
and financial support. With steady performance under IMF and
- 6 -
Worl~ Bank programs, these institutions can catalyze new financinq,
In a~~ition, to support ana encourage debtor and commercial bank
efforts to reduce debt and debt service buraen., the IMF ana
Bank coula proviae funding, as part of their policy-base~
lenaing proqrams, for debt or debt .ervice reduction purpo.es.
This financial support woula be available to countries which
elect to unaertake a debt reauction proqram. A portion of their
policy basea loans could be u.ea to finance specific debt re~uction
plan.. The.e funa. could support collateralized debt for bon~
exchange. involving a .iqnificant di.count on outstanding aebt.
They could al.o be u.ea to repleni.h re.erve. following a cash
buyback.
Worl~
Moreover, both in.titution. could offer new, additional
financial support to collateralize a portion of interest payments
for debt or debt .ervice reauction tran.action•• By offering
direct financial support for debt and debt .ervice operations,
the IMF ana the World Bank could provide new incentive., which
woul~ act .imultaneou.ly to .trenqthen pro.pect. for greater
creaitworthiness and to restore voluntary private financing in
the future. This could lead to con.iderable improvem.nt. in the
cash flow position. of the debtor countrie••
While the IMF and World Bank will want to •• t quid.lines on
how their 'fund. are usea, the negotiation of tran.action. will
remain in the market place -- encourag.d and support.d but not
managea by the international in.titution••
It will b. important that the Fund and the Bank both be in a
strong financial po.ition to fulfill .ff.ctiv.ly th.ir roles in
the .trengthened .trategy. Th. Bretton Woods Committe. has
providea an important public •• rvic. in aobilizing capital'
resources for th•• e in.titution.. Th. capital of the World Bank
has recently b••n repl.ni.hed with the iapl ...ntation of the
recent g.n.ral capital incr.a .. providing approximat.ly $75
billion in n.w r •• ourc •• to the Bank. With r •• pect to the Fund,
the impl.m.ntation of these n.w .ffort. to .trenqth.n the debt
.trat.gy could h.lp lay the ba.is for an inc rea •• in IMF quotas.
Th.r. ar., of cour.e, oth.r important i ••ue. that have to b.
addr ••••d in the quota r.vi.w, including the IMF arr.ar. problem
ana a n.ed for clear vi.ion ot the IMF'. role 1n the 1990's. It
i. our hop. that a cons.nsus can b. r.ached on the quota que.tion
b.fore the end ot the y.ar.
er.ditor gov.rnm.nts should continu. to r.sch.dul. or
re.tructure th.ir own .xpo.ur. through the Paris Club, and to
maintain .xport cr.dit.cov.r for countri.s with sound r.form
programs. In addition, cr.ditor countri.s which are in a position
to provide additional financinq in .upp~rt of this effort ~~y
wish to con.ider doing so. Thi. could contribute signiticantly
- 7 -
to the overall success of this effort. We b.li.v. that creditor
governments should also consider how to r.duce requlatory,
accountinq, or tax impediments to d.bt reduction, wh.re these
exist.
The third key .l.ment of our thinkinq involves more timely and
flexible financial support. Th. curr.nt mann.r in which "financial
qaps" are estimated and filled is cumb.rsoae and rigid. We
should s.ek to chang. this mentality and .ak. the process work
bett.r. At the same tim., w• •ust maintain the clo.e association
between .conomic p.rformance and external financial support.
While wa believe the IHZ should continua to estimate debtor
financinq needs, we question wh.th.r the international financial
institutions shoul~ delay their initial di.bur.ements until fi~,
detailed commitments have been provid.d by all other creditors to
fill the financing "gap." In many in.tances, this has served to
provide a fal.e .ense of .ecurity rather than .eaningful financial
support. Th. bank. will th.m.elve. n••d to provide diverse,
active, and timely .upport in ord.r to tacilitate .ervicing of the
commercial debt remaining after debt r.duction. Debtor nations
should s.t goals for both new inv.stm.nt and the r.patriation of
flight capital, and to adopt policy •• a.ur•• designed to achieve
those targets. Oebtor nations and comm.rcial banks .hould
determine through negotiations the portion of financing needs to
be met via concert.d or voluntary l.nding, and the contribution
to be mad. by voluntary debt or debt s.rvic. r.duction.
Finally, sound policies and op.n, growing mark.ts .within the
industrial nations will continue to be an .s.ential foundation
for efforts to make progr.ss on the d.bt probl.m.
We cannot
reasonably .xpect the d.btor nation. to increa.. th.ir .xports
and strength.n their .conomi •• without acc ••• to industrial
country mark.ts. Th. Uruguay Round of trade negotiat~ons provides
an important opportunity to adyanc. an op.n trading .yst.m. We
mu.t all .triv. to mak. this a .ucc••••
Conclusion
Tak.n tog.th.r, the id.a. I have di.cuss.d today r.present a
basis on which we can work to r.vitaliz. the current d.bt
strat.qy. We believe that through our efforts we can provide
substantial ben.tits tor d.btor nations in the form ot aor.
manag.abl. debt service obligations, smaller and mora r.alistic
financing n••ds, strong.r .conomic growth, and high.r standards
ot living tor their people.
- a -
If we work toqether, we can make important proqre •• towards
our key objectives:
o
to a.sure that benefits are available to any debtor
nation which demonstrate. a commitment to .ound policies;
o
to minimize the cost or continqent shift in risk to
creditor qovernments and taxpayer.:
o
to provide maximum opportunities for voluntary, marketba.ed transactions rather than .andatory centralization
ot debt restructurinq.:
o
and to better tap the potential for alternative .ources
of private capital.
In the final analy.i., our objective is to rekindle the hope
of the people and leaders of debtor nations that their sacrifices
will lead to qreater prosperity in the pre.ent and the prospect
of a tuture unclouded by the burden of debt.
- a It we work toqether, we can make important proqre.s towards
our key objectives:
o
to assure that benetits are available to any debtor
nation which demonstrates a commitment to .ound policies;
o
to minimize the cost or continqent shitt in risk to
creditor qovernments and taxpayer.:
o
to provide maximum opportunities for voluntary, marketba.ed transactions rather than mandatory centralization
of debt restructurings:
o
and to better tap the potential for alternative sources
ot private capital.
In the tinal analysi., our objective i. to rekindle the hope
of the people and leaders of debtor nation. that their sacrifices
will lead to greater prosperity in the pre.ent and the prospect
of a future unclouded by the burden of debt.
TREASURY NEWS
D_..artmant of the Tr.aSUIY • washington, D.C •• Tale.hone 588·2041
Por ••1•••• ~pon Deliyery
Exp.ct.d at 1:00 A.M.
'l'hur.d.y, March 1', 1111
.tat_ent by tlse BonorBl. Dayid C. bltoJ:d
Aa.1.tant Secr.tary of ttle
ft'eaauzy
for Int.rnational Aftairs
before ttle
lubec_itt•• Oft Int.nl.t10nal P1Aance and IIonetary Policy
United .tata luau
V.,.
Mr. Cha1r11an and . . . .r. ot til. leeo_itt•• :
% v.leo•• ~i. opportunity to di.cu. •• th. tvo r.port.
that h.v. b•• n tran••itted to your full Co..itt.e, the
Admini.tration'. review of tile int.rnational dabt atrate9Y, and
our .u99•• tion. tor .trentthenint international .ttorts to
all~vi.te the ftbt burden in deYelopin, COWl"i...
%n ald-Dec.aber, than tse.ldent-elect lU.h called tor a
thorough r •••••••••nt of current public pollcy on tIli. i ••ue.
At tha~ tae, tIM S're••U'Y OepartMftt va. 1ft tile aiclat ot
pr.parlnt I"eporta, .. l'eq\llrecl ~y lav, that !la"e !lad a direct
b.ar1n, Oft tile policy ~eco...1'HSationa tbat ve ba"e • ..,eloped.
Therefore, % vill open ., I'e..rka vitb • •u.aa~ and concluaion.
of tile l'epoZ"U. .
'fUJ'ftin9 to the npon - tile aetftlatloft of &ft %atematlonal
Debt wana,e.ent Authority, tile ~zea~ Departaent baa reviewed
IWtY iftternational dut facl11ty pl'opoaala. IIOft.f tIle.e
propo•• l. Aave .eyeral co..on .1...nta, 1ncl~4tn9 • aitnlficant,
up-front tnje~ioft of capltal and tile a.au.ptioft of full ~l.t
on ,1'1nc1pal and tntel'.at •
. .111
- 2 -
r.quir.d by th. l.gi.l.tion, th. r.port •••••••• the
u •• of IM7 90ld .tock and World Bank unco. .ittad liquid •••• t.
to •• tabliah an ~uthority. With regard to uae of %M7 901d
.tock, the r.po~ not •• that .obilization of 9014 for the
Authority could only b• • ccompli.h.d througb tb. . .1. of gold,
with proc•• d••• d••vailabl. to th• • uthority. 8ucb •• 1 ••
would r.duce the IM7'. ba.ic r ••• rv •• , whieb ..rve .a ~ackin9
for creditor cl.taa on the IM7. ~ey could bave an .dv.r••
impact on ,old price. .nd international ,old re •• rv.. of the
0.5. and other countri... Sine. only •••all .eqaent of IKF
••mb.r.hip would ben.fit directly from thi. u •• of 90ld .tocks,
it would ~e .xtremely difficult to obtain the 15 perc.nt
majority vote n.ce •• ary to .uthoria. IMF 901d ..1 •• for the
authority.
Aa
Th. u •• of World lank r •• ourc •• to ••tabli.h .ucb an
authority would .1.0 b. con.train.d by financial and 1.gal
ob.tacl... Th. Bank'. liquid •••• t • • r • •araark.d to fund
contractual l.nding commitm.nt.. Th••••••• t • • fford the Bank
a margin of f1.xibi1ity in rai.ing funda in the int.rna~ional
capital .arket.. Pl.d,in9 Bank •••• t. to • debt .uthority
could .ff.ct the lank'. cr.ditworthin ••••nd incr•••• it. cost
of funding. On the l.gal .id., the Bank'. Articl •• of Agreement
do not cov.r the pl.d;ing of liquid •••• t.. Mor.ov.r, pl.dqinq
of the lank' ••••• t. could r.i •• qu •• tion. cone. min, n.gative
pl.dg. cl.u... in .'r•••• nt. und.r which the Bank i. the
borrow.r. E.ch .uch cl.u•• typic.lly provid•• th.t the Bank
cannot pl.d,. it•••••t. to ••cur. ita obli,.tion. un1 ••• the
b.n.fit. of the pl.d,• •r • •h.r.d .qually by the land.r. which
ar. part i •• to tb. a,r._ant.
oar ........nt conclud.d tb.t n.,oti.tion of an Authority
could aat.ri.lly incr.a •• the lik.lihood of paya.nt int.rruptions
and • f\l.rth.r d.clin. in •• condary ...k.t pric... v. beli.ve
th.t the .u;g•• ted, .arket-ori.nt.d .ppro.ch outlin.d by
S.cretary Br.dy on Marcil 10 .delr..... Contr••• ional cone. rna
with 1 ••• rlat to taxp.yara.
Volunt.ry debt r.duction t.chniqu •• bay. bean d.v.loped by
the co_.rci.l banlta .nd del>tor countria. 1ft r ••pona. to ~oth
the banka' .tr.t.,i.. and ,0.1., and del>tor nationa' .ppeti t.
for capturin, the dl.count on tlleir debt. All of th. 15
h.avily ind.bt.d .1441. 1nco•• countri •• , with the .xc.ption of
Colombia, Ivory Co•• t and Morocco, have particip.ted in
voluntary, aark.t-driven d.bt r.duction operation. tota1in, $21
billion .ince 1,.5.
- 1 -
w.
have revi.wed nua.rou. debt facility propo.al. in
pr'paring the report at band and, % would .tre•• , not with
jaundiced eye. ~ut wlth • fre.h vlew. %n the final analy.i.,
bow.v.r, we b.ve r.affira.4 • aark.t-orient.d .pproach that
would enco.pa •• ~th voluntary r.duction in d.bt and acce •• to
private capltal, Vbi1• •iniailin; the expena. and riaJt to the
pul:)lic ••ctor.
%hI I.port on 'p.eial PurgCI. Allocation Of 'pl.
Pur.uant to the 1'1' Trad. Act, we bav••tudied th.
f.a.ibility of • •peclal purpo••• lloc.tion ~y the IM7 of
sp.cial Drawing aiqht. (SD~) to the poor•• t countri •• for ua.
in r.payinq th.ir debt to for.iqn 90vernaenta .nd international
financial in.titution•• Tb. r.port conclude. th.t the us. ~f SDRs
would und.raine adju.ta.nt inc.ntive., contribut. to inflationary
pr•• aur•• , w.ak.n the liquldity of the IDR .nd ita u•• fuln •••
•• • aon.tary ••••t, .nd und.rain. th. ability of th. Unit.d
Stat•• to .obili •• it. IDR boldinq••
The r.port d.t.r.ain.d that th. %Mr'. Enh.nc.d Itructural
Adjuata.nt Pacility (liAr) i • • pr.f.rred .It.rn.tiv. 101' belpin 9
th. poor•• t countri... %t auqq •• t. that th. Admini.tration'.
r.qu •• t for·. '150 aillion contribution to th. !SAP repr •••nt.
a aor•• ff.ctiv •••an. of providin9 u.s ••upport for .ffort. t~
d.al vi th the balanc. of p.yaent. and debt probl... of tb.
poor•• t countri...
%he I'POrt on \b. yorld link"
Strategy in Qlb\ar Cpun\ri.1
% would 11k. to tak• • •o.ant to I'rii_ th. conclu.ion. Of
the r.port tr.n••itt.d y.at.rd.y to your colle.vuea 1n th. Houa.
of a.pr •••nt.tiv... a.-r'quired by ••••• "5, w. b••• car.fully
r.vi.v~ tb. World lank'. rol. 1ft debtor countri...
In our
judCJllent, em. of tll. World ·Bank' . . .at vital functiofta 1n th•••
c~tri.. 1. to proaot. .oun4 .cono.ie r.for.. prorr". throu9h
it. adjuat8ent progr... and to cataly•• additional financial
aupport.
%n .bort, .ft.r careful .hdy, we bav. COIle to conelu.ion•
• o••what par.l1.1 to th. intant of levial.tora •• expr•• aed 1n
B.R.
addition.l financial relourc•• -~~ an ••• in; of
d.bt .erviee burdena can .tren;tban and au.tain debtor nationa'
co_i taent to .conoaie adjuauant progr_. ft. I'epol"t
.uaaarile. our id.a. on poa.i~l. initiativ•• for voluntary,
•• rket-baaed d.bt reduction throu9b u•• of lank r.aourc... %
would under.cor., at thi. junctur., that .\lob fund. would be
aval1a~1. only for tho..countri.. undertakln9 .dju.ta.nt
pEWt•• ' e ••~ indlvidu.l traft •• e~« "...
"'5. .
a._u.
A
L._
- 4 -
Strengthening the Debt Strategy
Th. debt difficulti •• of d.v.loping countri •• r ..ain •
•• riou. global probl .. which r.quir.s cooper.tiv• • fforts on the
p.rt ot .11 partl... rollowin~. thorough r.vi.w of the curr.nt
appro.ch by the Administr.tion, S.cr.t.ry ara~y ba. r.c.ntly
outlin.d sugg •• tions for str.nqth.ning the int.mation.l dabt
str.t.gy.
OUr su99 •• t.d approach build. upon the basic
principl.s thAt have quid.d int.rn.tion.l .fforts 1n r.c.nt
y.ar.. It r.cogniz •• th. continu.d vit.l importanc. of stronq.r
growth, d.btor r.toraa, .xt.rn.l fin.nci.l .upport, and • ca •• by-ca ••• pproach to individual nations' probl ....
OUr sU99•• tion. woul~ .aintain a c.ntral roll for the IMF
World Bank within the ~.bt str.t.;y in .ncouraging debtor
policy r.toras and catalyzing fin.nci.l .upport, and r.cognize
the continuing n•• d for n.w l.nding fro. coma.rcial banka.
How.v.r, v. would also pl.c. strong.r empha.is on n.v inv •• tm.nt
flow ••nd the r.patri.tion of flight c.pit.l a. alt.rn.tiv.
sourc •• of priv.t. c'pital. To this .nd, v. vould .ncour.g. the
IHF .nd World Bank to vork with d.btor n.tions to focus on
.p.cific •••• ur •• to improve the inv •• ta.nt climat. and .ncouraqe
th,' r.turn ot flight c.pit.l .s p.rt of th.ir policy-b••• 4 loan
progr••• , in .ddition to vital •• crOlcono.ic and .tructural
r.forms.
an~
In .ddition, w. would focus int.m.tion.1 .ffort. on
.chi.ving mort r.pid and broadly bas.d, voluntary debt r.duction
during th. n.xt three y •• rs ln ord.r to •••• d.bt burd.n. .nd
improve pro.pects for strong.r 9rovtb. On. of the k.y f.ctor.
at pl.y. in d.t.rainin9 th. .xt.nt of voluntary d.bt r.duction
activity 18 th. leq.l CDn.tr.ints withln .xistin9 co... rci.l bank
.gr ••••nts, which .ust be w.iv.d by .ost or all co... rci.l b.nk
participants tor •• ch individual debt reduction tran.action.
Debt/.quity .vap. and •• l.s in th• • •~ondary aark.t are
.xc.ptiona, but th.r. i. a .trong lnt.r.at within debtor nation.
in obt.inin9 aor. dir.ct ben.fit. fro. co... rcial banka'
villingn.s. to r.duc. th.ir own .xposur. -- aa can be obtain.~
through d.bt/bond .xchan9'. or casb buybacka.
A w.iv.r of auch provi.ion. a. ab.r1ng and neq.tiv. pl.dq.
clau •• s 1n .xiatinq coma.rcl~l ~ 10.n .9l·••••nt. could go far
to fr •• up .ark.t activity in thi. ar.a, and to acc.l.rat. the
pac. of d.bt and d.bt s.rvic. reduction with dir.ct ben.tit. to
d.btor nations. Such w.iv.rs .i9ht bav. a limit.d lif. of
p.rhap. thr•• y.ara, to .tiau1at. activity within a ahort but
•• asurabl. tia. fr....
- 5 -
In addition, an lnteqral part of the approach would be for
debtor nation. engaged in d~t reduction to .aintain viable
debt/equity Rap pr09rau, Which have helped to .\1!).tantially
reduce the .tock of debt in .ev.r.l countri... Provi.ion.
which perait do••• tic national. to eng.ge in .uch transactions
can al.o contribut. to the repatriation of t1i9ht capital, as
w. have •••n in the case of Chi1••
Aa debtor nation. n.goti.te poliey-ba.ed loan program. with
the IKF and the World Bank, a portion of th.s. loan. would be
set a.ide to tinance de~t reduction tran.actions negotiated
betw.en the d.btor and the b.nka. Such -.et-a.ide" aount.
would be u.ed to collateralize discounted debt/bond .xchanqe
tran.action. or to repleni.h debtor re.erve. following ca.h
buybacu.
Por debtor nation. which have n.goti.t.d .9r••••nt. to
reduce the .tock of debt, the IMF and World lank could also a.ke
.v.il.ble .upport for int.r•• t payaent. on a rolling ba.i. for
a 11ait.d period. Such aupport could be availabl. tor
tran.action. which involve .ith.r a aub.tantial di.count of
principal or a aajor r.duction in intere.t rate••
Whil. the IMF and World lank would .et quideline. on how
th.ir tund. ar. u ••d, the negotiation of tran.action. would
r.main in the .arket place -- .ncourag.d and .upported but not
.anag.d by the int.rnational institutions.
Such tran.action. could lead to con.iderable taprov ••ent.
in the ca.h flow po.ition. of the dabtor countrie., reducing
th.ir n.ed tor .xternal fin.~cial .upport to .ore aan.g.abl.
1.vel.. Neverth.l ••• , new lendin9 would .till be needed -- in
addition to eftort. to ~epatriat. fli9ht capital and attract
new inve.taent. luch new tinancin, could include a rang. ot
.pecia1 purpo•• loan. .ucb a. trad. cr.dits and project loan.,
a. vell a. club loan. by a troUP ot banta or continued conc.rt.d
l.ndin, 1n 1ndividua1 ca••••
a. part of thi. approach, creditor ,overna.nt••hou1d alao
continue to re.chedu1. or re.tructure tbeir own .xpoaure through
the Pari. Clu, and t.o .aintain export credit cover for countri ••
vith sound retont proc;r_. In addition, creditor countri ••
which are in a po.ition to provide additional flnanctng 1ft
aupport of thi • • ffort .ay wi.tt to conaider doint
fti. could
contribute ai9ftiflcantly to the overall .ucc.a. of thi• • ffort.
We b.llev. that GreQltor lovernaent. abould a1ao revl.v th.ir
regulatory, accountln" and tax r.gia•• with a view to r ••oving
imp.dt.ent. to debt reduction, ~her. the •••xiat.
.0.
Iroa~ int.rnational .upport i. critical to .trenqth.ninq the
curr.nt .trat.qy. It vill r.quir. cooperative effort. by
cr.~itor and debtor fov.rna.nt., the co... rcial bankinq
community, and the int.rnational financial in.titution.. W. hive
con.ult.~ clo •• 1y vith th ••• qroup. and bav• •ought .uqq •• tions
from Mamb.r. of Conqr••• prior to d.v.loping the id.a. introd~ced
l~.t w•• k by S.cr.tary Brady.
Th. Japan ••• bav. expr•••• d
their .tronq .upport, includinq a villin;n••• to provide
.upportiv. financinq, and a nuab.r of oth.r creditor and d.btor
nation. bav. aa~. favorable r •• pons.. to th. ,.neral approach
ve have outlin.~.
Conclu.ion
Tak.n toq.th.r, the id.a. I bave di.cu ••• d today r.pr ••• nt
a ba.i. on which ve can vork togeth.r to r.vitaliz. th. current
debt .trat.qy. W. au.t ad~re •• key probl ... -- the r •• toration
of private financial flov., the r.turn flight capital, the n.ed
for .u.tain.~ .conomic r.form. in aany countrie., and pre.ervation of the financial .oun4n••• of the aultilat.ral in.titutions
-- if v. are to renew proqre.. in addre •• ing int.rnational debt
probl ....
We b.li.v. that through the .ugqe.tion. ve bave outlined,
including efforts to .timulat. broader voluntary debt and debt
.ervice reduction, .ub.tantial b.nefit. can be provid.d for
debtor nation. in the fora of ao~e .anageable debt .ervice
obliqation~- ••aller and .ore r.ali.tic financin9 n•• d., .tronqer
economic growth, and high.r .tandarda of livin9 for th.ir people.
I look forward to con.ultation. vlth ••abera of Con9r••• in
the ~eeka and aon~ ahead, and a.k you for your .upport a. ve
develop vi thin th. lnt.rnational co..unity a aor••pacific
ag.nda for furth.r action. Thank you.
TREASURY NEWS
D_..artmant of the Tr.aSUIY • washington, D.C •• Tale.hone 588·2041
POI' . .1....
Upon Deli••ry
Expecte4 .t 11130 A.X •
. .~ 1', 1 •••
• tatDent by til. BoaorUl. Da.ld C. Ib&1ford
&a.i.tant ••c:ntuy of til. v••• fteaauzy
for IDt.rnatioD&1 &ffa~
.fon til.
8Ucoaa1ttee OD IIltUftational DeY.lopunt P1M.nce,
V... .ou.M of . .,ruutati...
ft'ad. ud .on.tuy
1Ir. ChalZ'a&Jl a.ftd . . . .r.
~11G7
of til. lul>cnalttH:
% ••1co•• thl. opportunity to di.w•• ~. thz'.e r.porte
th.t vera tran••itt" to rour full Co..itte., ~e Ada1ni.tration'. review of "e internation.l debt .tr.tegy, and ~
.u'f•• tion. for atreDgthenin; int.rnational effo~ ~
allevi.'e til. deb' ~aft 1D d.velop~ oountri...
1ft aid-Dec....r, t.bu fl-e.l._t ..l~ IuaIa called for •
thorouth r ......aaent 01 ~t pub110 polie.r Oft ~1. 18aue.
At t.bat tiM, uae ft••ft17 Departaent ... in til• •1dat of
pr.p.rlftt r.po~. •• N4'llncl Ity 1••, tIl.t bay. bad a dinct
"ar~ Oft til. ,oliar nCOD.neS.tiona Ulat •• "ye· dn.loped.
nerefon, I v111 opea rtI raaru vitia ......Z'Y and ooftclulon.
of til.
ft.
npo~.
"Mrs 'D
SIl' 'efl' MM"
'S"SIft in DDS,f c;mmsri••
a. nt'I1nd _ •••••••• , .. Iaa•• oareMlr rwlewd til.
'orld aaak'. 1'01. la debtoz- OCNDU1... III ~ ,udpeat, • •
.,,.\d "1\_' .....
of t.b•
t "lg1 hnRlou 1a th••• CO\&ftul.. 1.
to ~CI.ot. a0un4 ectOn_io r.ton ,~... uu-ou,b lU ad,u.bent
,",faa ud to cataly.a additional fauolal nppoft. Varlou
BaM protr... d •• llfted to acbi... til••• ala ,oal. an outlined
1A tbe I'e,o"-
Whil. w. call upon the Bank to incr•••• ito. .ffort. to
r.turn borrow.r.,to the vrovth p.th, w. r.cogniz. th.t .u.t.ined
qrovth in .any countri •• h•• be.n .luaiv., .9greg.t. d.t. for 11
b.avily ind.bt.d h.tion. ar. includ.d in th. report whieb .upport
th... ftn4ing.. Thi. i. not to •• y that th. -Baker Plan· b••
be.n • failur. -- t.r trca it. Th. r.vi.w of th. d.bt .tr.t.gy
baa reaffira.d the .ff.ctiven••• of • ca •• -by-ca •• approach which
emph •• ize. growth and debtor country refon. Bi9h1ight.d in the
r.port .r. achi.vem.nt. of th. p•• t tour y.ar., including
improv.d .xport pertora.nc., .u.tain.d adju.taent .ffort. of
••v.ral aajor debtor., includin9 Chile, Coloabi., M.xico,
Morocco .nd the Pbilippine., and declin•• in th• •tock of d.bt
through vol unt.ry, aark.t-ba.ed techniqu•••
Bow.v.r, furth.r proqr••• on adju.ta.nt pro;raaa will
r.quir. the r.l •••• of additional financi.l r ••ourc•• a. w.l1 ••
an ••• in9 of debt •• rvic. burdens in ord.r brin9 about .u.t.ined
9rowth. It i. r.cognized th.t the debt .tr.te;y need. to b•
• tr.nqth.n.d ••p.cially in this are.. In addition to n.w
l.ndinq, n.goti.t.d r.duction. in debt and debt .ervic. burd.n.
can provide import.nt ext.rnal financial .upport. oth.r nondebt cr.ating •• thod., which w. continu. to .trongly advocate,
ar. dir.ct and portfolio inv•• ta.nt, d.bt/.quity .vap.,. and,
importantly, the r.turn of fl19ht capital.
w.
.tron91y believe that th. internation.l financial
in.titution••bould·r.tain central rol •• in the debt work-out
proc.... Thi. vill b.lp win the'confid.nce of th. creditor
couunity, and nurture a aarltat-plac. Wh.r. both debt r.duction
and Dew .oney caD be ftefotiated in parall.l.
lut v • .uat al.o
pr•••rv. the financial intep"ity of th••• 1natitutiou, and
.in1ai•• r1.k to creditor 9ov.rnaenta and taxpayara •
., diacu •• ing .ev.ral of our ftev id... for facilit.tin9 d.bt
r.ductlon, th. r.port directly .ddr••••• Congr••• ional int.r•• t
1n .xpandi", th. World Bank'. rol. 1ft debt reduction. ~e r.port
.\maariz •• our Id.a. on po•• ~le inltiatlv.. 1a thi. ar... I
would and.ncon, at thi. junctun, u.&t 8\ICIl f1mda would be
availabl. ODly for tho•• COWltri.. und.rtaJtl.ft9 adjuataant
prOCJr... , and 1ndl"fldual trauact1on.a would be De90ti.ted
between duton aNI oo... rc:i.al creciiton.
In .bort, .ft.r careful an.ly.i. and review, w. b.ve coa.
to conclu.iona .o••what par.ll.l to tb. intent of levi.l.tor•••
• xpr •••• d in ••••
Addition.l financi.l r ••ourc•• and an
••• 1n9 of d.bt .ervic. burd.n. can .tr.ngth.n .nd .u.ta1n
d.btor nationa' coaait••nt to econo.ic adJU.tliftt ,~orr"'.
"'5.
- 3 -
%hI I'p0rt 9 n Splcial
PulPo •• Allpcatipn 9f
Ipl.
Pur.uant to th. 19 •• Trad. Act, v. have .tudi.d th.
f.a.ibility of a 'pecial purpo•• allocation by th. IM7 of
Special Drawin; JU.;ht. (SDb) to th. poor•• t countri •• for u.e
1n r,p4¥lng th.i. debt to for.iqn ,ov.ma.nt. and int.rnational
financial in.titution.. ~. r.port oonclud•• that the us. of
SDRa would und.rain. adju.ta.nt inc.ntiv•• , oontribut. to
inflationary pr•••ur•• , v.ak.n th. liquidity of th. IDR and it.
u•• fuln ••••• a .on.tary ••••t, and and.rain. the ability of
~. Unit.d Itat•• to .obili •• it. IDR bolding••
Th. r.port d.t.rain.d that the IMP'. Enhanc.d Structural
Adju.t..nt 'acility (ESAr) i • • pr.f.rr.d .It.rnativ. for h.lping
the poor•• t countri... It .U;9•• t. that th. Admini.tration'.
r.qu •• t for a '150 .lllion oontribution to the ZSAl r.pr••• nts
a aor• •ff.ctiv •••an. of providin, U••••upport for .ffort. to
d.al vith the balanc. of paya.nta and debt probl_ of th.
poor••t oountri•••
In~'rn.~ion.1
Authpri:x
Ri.ey •• !pn. pn .n Intlm.tipn.1 Qlbt Man.g.m.nt
Tumin; to the r.port on the n'90tiatioft of an Int.rnational
Debt Manaq•••nt Authority a. r.quir.d by the 1.1. tr.d.
l.;i.lation, the Tr.a.ury Departa.nt b•• revi.w.d aany int.rnational d.bt facility propo.al.. Mo.t of th ••• propo.al. bay •
••v.ral coaaon .l...nt., inoludin, a .i;nificant, up-front
inj.ction of capital and the •••uaptlon of full ri.k on
principal and lnt.r..t.
Aa r'q\aire4 "y l.v, we tully u . .1Jl.d po•• ~l. u •• of na
901d .t~k8 or World Bank liquid ••••t., but d.t.rain.d that
.uch ••••ur•• would fac• • i;nificant ob.tacl... I r.f.r you to
'th. d.tail.d analy.i. at t.b. end of th. nport.
.......ent conoluded ~t negotiation of an Authority
at thi. point could aat.rially lftor.... til. 11k.l1bood of paya.nt
int.rruptions and • furth.r d.ol1ne la • .conder, aark.t pric•••
•• beli.v. that t.b• •U99••tecl, aark.t-ori.nted 'PPI'Oac:b
outlined by ••or.tary Brady on R&rOb 10 .ddr..... COngr••• ional
cone.rna vItll 1••• ~i.k w taxpayen.
~
Voluntuy dot &-eduction tecMicau.. bav• •lnady Meft
dev.loped "y the oo.a.rcial banlta and debtor OO\Ift~ri•• in
zo••pons. to both the Mnka' .tratttie. and 9oal., and d.btor
n~tion. • appet! to. for captulnt the di.count on their debt.
volunt.ry, .ark.~-driv.n dot r.duction operationa .inc. 1"5
nov add up to .n ••ti..ttd 121 billion.
Str.ngth.ning the Qlbt Strat.gy
Th. debt dif·fic:ulti •• of d.v.lop~q countri•• reaain a
•• rioua ,lobal probl •• which r.quir•• cooperative .ffort. on
the part of .11 parti... Pollowin9' thol'OUC)b revi.w of the
curr.nt appro.ch by the Adaini.tration, ••cr.tary Irady baa
r.c.ntly outlin.d .U99•• tion. for .trentthen!nq the int.rn.tional
d.bt .trat.qy.
our .u99•• t.d .pproach builda upon the ~a.ic
principl •• that bav. quid.d int.rnation.l .ffort. in r.c.nt
y.ar.. It r.co;niz •• th. continu.d vit.l taportanc. of .trong.r
vrovth, dtbtor r.toma, ext.rnal financi.l aupport,· and • ca •• by-ca •••pproach to individual n.tiona' 'robl....
OUr .uqq•• tion. would aaintain a central rol. for the tMr
.nd World Bank within the d.bt .tr.tegy in encour'9inq debtor
policy r.foraa .nd c.talyzin9 tin.nci.l 8Upport, and r.co;niz.
the continuinq n•• d tor n.w 1.ndin9 fro. co...rei.l ~.
Bow.v.r, v. would .1.0 plac••tron9.r ..ph•• i. on n.w inv •• ta.nt
tlow. and the r'patriation of fli9ht capital a • • It.rnativ•
• ourc •• of private capit.l. To thi. end, v. vould encourage the
XM7 and World Bank to work with d.btor n.tion. to focu. on
.p.cific •••• ur •• to iaprov. the inv •• ta.nt clt.&t. .nd .ncouraq.
the r.turn of tli9ht capit.l •• part ot th.ir policy-ba •• d loan
prQ9r... , in .ddi tion to vi tal a.croeconoaic and .truct\lral
r.toraa.
In .ddition, v. vould focu. int.rnational .ftort. on
.chi.vin9 aor. rapid .nd broadly ba••d, voluntary debt r.duction
durin9 the n.xt thr.. y.ar. in ord.r to •••• d.bt burd.n. .nd
improve pro.pecta for .tron9.r 9rovtb. ~. of the k.y factor.
at pl.y in d.t.raining the extent of Yoluntary debt reduction
.ctivity i. the 119.1 con.tr.int. vitbift exi.tint co... rcial b.nk
.9r....nt., vlUcIl au.t be vaived by ao.t or all co... rcial bank
participant. for ••ch individu.l debt reduction tran.action.
Dtl)t/'quity nap. and ••1•• 1ft the ••cond.ry ..rut an
exceptiona, but th.r. 1• • •trent 1ftt.rut vith1ft debtor nation.
in obt.ln1Dt .or. direct MDefit. fna oo...rclal ~,
vl111D;ne•• to reduct th.lr own expoaure - .. caD be obtain.d
thrOQ9h debt/bOnd exchanc;'. or cae aNybaau.
A vaiv.r of .ucll prOY1.i~~ a. _b.ring and ~.gatiy. pl.d;.
cl.u... 1ft exl.tln; co... rel.1 bank loan .;r....nt. could
far
to fr •• up a.rk.t .ctivlty in thi ••re., and to .cc.l.rat. th.
pac. ot debt and debt •• rvlce reduction vitb dlr.ct ben.fit. to
d.btor n.tlona. 'ucll walv.r. a19ht bav. a l1altad I1f. ot
perhap. thr•• y•• ra, to .t1.aulat••ctivl~ vltliIi a .liori'~ut
,0
__ ..",..."',_ .4._ fJ,..."
- 5 -
In .ddi tion, an intafir_l part of the .pproach would be for
debtor n.tion. enqaged in debt reduction to aaintain viable
debt/.quity .vap proqraaa, which have helped to .ub.tantially
r.duc. th• •tock of debt in ••v.ral countrie.. Provi.ion.
wbich pend. t do.ertic national. to .ng_g_ in .uch tran.action.
can al.o·contribut. to the repatriation of flight capital, a.
w. bv. ~en in th. ca.e of Chil ••
Aa debtor nation. n.gotiat. policy-ba.ad loan progr... with
the DIP and tIla World Banlt, • portion of the.. loan. would be
.et •• ide to finance debt r.duction tranaaction. negotiated
between the debtor and the banlca. .uch - •• t-a.id.- uount.
vould b. u.ed to collateralize di.counted dabt/bOnd exchange
tran•• ction. or to r.pleni.h debtor r ••• rv.. following ca.h
~uybacu.
For debtor nation. which have neqotiat.eS .;r....nta to
r.duc. th. .teek of dabt, th. IM7 and World lank could .1.0 .ak.
available .upport for int.r••t paya.nt. on a rolling ~a.i. for
a liai t.d period. Such .uppert could 1M available for
tran.action. which involve eith.r ••••tential di.count of
principal or • aajor reduction in int.r••t r.te••
While the IM7 and World Bank would ••t lUieS.line. on bow
ttl.ir tund• •r • • •d, the negotiation of tran.action. vould
r ••• 1ft 1a tb,_ ..rk.~ pl.ce -- encoura,ed and .upport.d but not
.ana,ad br tba iDt.r.national 1natitutioDa.
luch tranaactlon. could l ..d to conald.rabl. taprov...nt.
ln th. ca.h flow po.itlon. of the dutor countrie., r.ducing
th.ir n.ed for ext.rnal ftnancial .upport to aore aanag.able
l.vela. .evertbele•• , aev lending would ~ill ~ need.d -- in
addition to .ttozt. to ~patriate fli,bt capital and .ttract
nev iIw••taem. hch aew financiftCJ could include a ran,. of
.peeial purpo.e loans .uch a. trade cr.dit. and pro'ect leana,
a. vell •• club loana by • poup of beMa or continued cone.rt.d
lend1NJ iJl indivldual ca....
Aa part of thl. approach, creditor ,oyemaena ahould .1.0
continue to r ••Cb.dule or r ••trueture their own expo.ure through
th• •ari. Club, and to aaintaift export credit cover for countrie.
with ~ound·r.!~~ ~~~••• , In .~~(tlo~, c~e41tor eountrles
¥bieb are 1a a poeltlon to provide additional f1ftane1ft9 in
aupport of t.hia effort uy wi.b to con.lder doiftt ao. lfIli. could
contrtbut•• 1vnificantly to the ov.rall aueee•• of tbl. effort.
w. believe that cr.d1tor ,ov.rna.nt. ahould 81ao review th.ir
regulatory, .eeountlnt, .nd tax r.,1.e. with. view to re.ovin,
1_p.dla.nt8 to debt reduction, vh.r.
exlat.
th...
-, Broad international .upport i. critical to .trenqtheninq the
current .trateqy. It vill require cooperative .ffort. by
cr.ditor and debtor 9overnaent., the co..ercial bankinq
co..unity, and the international financial tn8titution.. We have
coftaulted clo•• ly vith the •• qroup. and bav. aouqbt .uqqe.tionl
froa M.&bar. of COnqr... prior to d.v.loping th. id.a. introduced
la.t v •• k by S.cr.tary Brady. Th. Japane •• bave .xpr•••• ~
their .tronq .upport, includinq a villinqn••• to provide
.upportiv. financinq, and a nuaber of other creditor and debtor
nation. have ..de favorable re.ponae. to the veneral approach
v. bav. outlin.d.
Conelu,i;n
Taken togeth.r, the id.a. I have di.cu•• ed today repr •• ent
a ba.i. on vhich v. can vork tog.ther to revitalile the current
debt .trateqy. .e .u.t addre •• k.y probl ... -- the r •• toration
of private financial flow., the return fli,ht capital, the n.ed
for .u.ta1ned econoaic refor.. in ..ny countrie., and pr•• ervat10n of th. financial .oun4n••• of the .ultilat.ral in.titutionl
-- if v. are to renew progr... in addre•• inq international debt
pro):)l ....
We believe that through the 8U9,e.tion. ve bave outlined,
includinq effort. to .tiaulate broader voluntary debt and debt
•• rvice reduction, .ub.tantial benefit. can be provided for
d.):)tor nation. in th. fora of aore aana,eabl. debt •• rvic.
o):)li,ation., ••• ller and .or. reali.tie financin, need., .tronqer
.cono.ie grovtb, and ~i9her .tendard. of liv1n9 for their peopl •.
I look fozvard to conaultatlona with ..aben of Conqre•• in
the vealta and _nth. &bud, and a.k yO\1 for your .upport a. ve
d.velop vithin the international ooaaunity a .or• •pacific
a,enda for furtller action. !'hank you.
TREASURY NEWS
D_..artmant of the Tr.aSUIY • washington, D.C •• Tale.hone 588·2041
CONtAct:
FOI IMMEDIATE I!LEASE
lia reb 21.
I, 89
lob Le.ine
202/.566-2041
ADDllSS It DI. D.VID C. KaLrOID
tIMPOIAI! ALtllNAtl GOYIINOI rOI til V.ItID StAtlS or AMEIICA
At til tlIID 'L!MAI! 111110.
I.tla-AMIIICA' D!VILO.KI.t .A.K
1. &xIT!IDA"
,.0,1.
v.
1 vanc co thank ~ CoYe~nt of ch. R.che~landa aft4 Cb.
ot
Ita. :.rcS&a lor che •• ry vana .. leo••
ba". rec.ived 1ft au. b.auctM cd
h1atorie el~. 1 alao wanc to ofleI' 8Y cona~aculacioaa co Co•• rDor au4tnl
on hi. eleccion .. Ch&Lr.aan of cha .Ioard of Covemor•• f OU~ 1aDk.
_a
L&cUe. aDd ,.ncl..en. CheZ'. 1. a va". of chan.e ."..p1nl aero.a
tAein AIIer1ea. lei ,e."lea "1 ba difficulc co d1acam .. we CODti.Due eo
vr.ttl. w1ttl cbo debe ,robl... '"e. 1e 1. clear tbac ell. . .0 Mel
of
t.cin ~.~tc& who are DOW La r."on.lbl. ,011c, ,o'ieioa. a~o 1DcrOGuc1n1
aev pol1cio. &ad cho.e ,011cl •• aro chanlln, cb.lr couacrl...
D.be re.. lna & cIoai.une u,ua 11\ Laeta· Mort.. COCIay.
I,
,1'.oel:",,1.. Head, ot Scac.. r1MftC. !Uft1.ear.. CenC'fal. JaU CO'ftmor•.
b~1ft •• a•• D. banka~,. tho ucli., and eta. ,o,ulaeloft s.a ..u~al.
~ cIobt
,rob',. 1••1.0 • ~•• c cballiftio co eIlo "ftiu. 'cac., b••auo we are ,o~
f~i.ftd. II vill al ~ lar,o,e ~a.lftl·,arcner.
tac'a ~ri •• ', .caadAr4
~l 11vtnC. 1o~ eomalCIOfte co daaoc~acy. and your ulc1a&c. r •• ol~~iOft of
ene 4.bt p~oble. ar. all kith ,r1orlc1., to~ Cbo UDlc•• Scae... sa .hare
• dl." co_on inceralc. And ch.~.f.r. ie £. h£p17 de,unl. we chi
Inear·Alle:lean Dov.lop..ftc .... •• 0\&&" luk -- uke Ita ,a.rtlCNlar
co"tr1~uelon Co rl •• lv1Da Lacta ~rl!a"
..be ,~"1
....
't"h1. . . . v• .,. of ..... hu nov reach.. tho Inc.r-Allerlc_
al'·alopmene .... iu.lf. A ,..~ alo. ae ou •• elnl SA c.zacu. I
oncoura,.' 'r•• ldane tll.,l., co b.,ln bulld!ftl • aaw C.ftI.~ ~e could
.u"orc In e.,.~. IDa, oB&bllDl it co bl . . . . . . .~o t.p.~cafte ,layer 1D
pro.oe1na .ucaluble arovch 1D t.&cln AIIorica. tocla,. Sa Aluc.~..... %
off.r bLa ~ COftlraeYlaelona &Dd a"roclac'...
'1'.
Alter , ••~. of di,cu,loft and •••• cI.1fflcule _'.ei.e1 .... we
.sr....ne ,",ell och.r ..Jor .urebolders _ ~ ••,_e1al
.l ... nc. ot • rl,lo"i.b •• ftC which would c~anafo~ cbe IDI. If t.,or~e
r ...1n1nl i • .ua, caft be r ••olve., tho laak'. re.~c•• would incZ'.... by
o~er '16 b11110n. lu fo~ ,e.r leftdlnl prolr.. would r ••cb $22.5 billion,
&nG pollcy-b... 4 landinl vo"ld boco•• & r ••11er. !h. r •• l.e!a~ftc. onc.
now clo •• co
NI-la5
• 2 •
sec:led, ..,o~ld be s1p\ifican: ftot only for ~e tAt!n Aaarican and t~.
C.1r1bbe4n borrower. of the lank but al,o fol' the Unitecl Seae... O",r
parc;'cip.1cion 1n chi. .1n,1. r.plani.haant would MOunt to nearly $9
hillion, raisins the total financial contribution of the Unitacl State. to
the lank :0 ov.r $2' bLllion. Thi. 1. a ..... ur. of tha lIIporunc. that
the new Admini.tration attach •• to the lank and to It. ai •• lon.
W. ara all now 100k1.nl forvard vith consid.rabl. hop. ana
eqectac1.on to tha lank takinl up ehe eftallen,e.
The r.plecJ..hmenc,
co~pl.d with 1nst1tycional and oparat1n, refor.s v1ll ,o.1t10n ~e IDa to
al.u=a broader responsibiliti.s. It vl11 have the oppor:un1ey CO aak. a
more .1~ificant contribution to the lnhab1 ~ant. of ou h.aL.ph.r.. It
will b. eloin, so in a worlel .cono.ie .nv1rona.nt aark.d by aacy po.ic!v.
feature •.
Global Economic C.v.lop.. nt. and Pro.pact.
Kainta1n1n& a .upportiv• .aero.eono.1e env1ronaene In the 1ndUltr1al
count:1 •• ha. b.en a corn.r.ton. of our coll.c~1v• • ffor~.
A balanced a ••••••• ne of chi ,erfo~ce of the 1nduJ~~lal DAtion.
would concluda that our aacro.conoaic p.rfo~e ln r.e.~t rear. ha. b•• n
i.pre •• iv.. \ll\11e ofte could perhAps upa chac chL • • ~ chat .l... nt of
the picC\&r. ha. ftOC been f\&lly l .. e1.fac~ol"Y, the po.1tl. . . .pece. ara
cl.at = econo.i.e expanaion 1n chI 1n~~rlal cOUfttr1 •• 1. nov ln~o it•
• even~h con•• c~clve yeAr: infl.ti.onary pr ••• ure. ha~e b'l~ kepe 1n ch.ck:
and vorld trade flow. have .xpandad robuacly.
l.J. .hould not Lenorl thl crl.e"doua r •• lllaftce chac our ,oo11oaies
,ho·",.4 1n ena vake of the flnancLa1 aarket c:urb"leftCe In lac. 19'7.
Con~r.ry :0 w1cla.prcad ..p.ct.1tloftl ac the t1aa, lftdultrlal councry Irovth
picked "P .tronlly laiC ,IU. pul11nl vOl'ld ~.,. Irovch up .l»ou~ 9
p.rcent.
au t&.&k now s.. to COftC1INI to bulleS em the t1m fO\lftcS&~10ft we hava
l.aicl. 'th. Il.ac fa" , •• rl vl11 l"rl1y bl challeftlln,. a. chI put fav
year. have been. SUlcalnln, ,rovth. ra.t.t1nl lft1lat1oft. and bol.earin,
trade .u.t r ... ln the principal obj.ctlve. for Ch. lndultrlal eouncrt ..
and the 1J)C• •, v.ll. % .. confident that" vl11 ... t th••• challeqt •.
na Unitld Stat •• hal playe' a canual, rol. 1ft conatn&Ccln, ebb
fo~ndat1on and vl11 continu. to pla, aft ~orcant part tD furCher efforts.
Our t~SIr.I a~1 I.v.ral.
rt. t.t. VI neld to na.ataln I:ovth, l.J. anticipate
r.al Irovch 1n the 3.0 p.rclnt r~nl' thl'OUP 1990. whlch wouleS bl the
ei,hth con•• cutlva yeAr ot .xpanalon. Second. v. nead to ka.p the l1d 0"
inflaclon.
So.. r.c.nt Itacl,tlc. 1n :be U.S. polnt Co loa. prlel
firminl. but the lenlral econoalc elata ua alaed vlth DO claar aneS
co~pal11n5 .vld.nc. that inflationary force. ar. r~.'..
• 3 •
:a.de a clear cOllUlicllenc to .. et the dtficit tars.:. laid out by the
Cr&mD·R~an p~oce •• and ne,oeLacLon. are in p~olra •• at th1. cime.
tinillly. .e ne.d CO continue ~.duc1nl U. S. trade and currenc .c:co~nt
Labalance.. Laat yeAr, 1988, w. . .de .~.ean:1al p~olre •• and v. look for
mol" pro,~ ••• ~1. y.ar.
Strenlthen1n, che Dabt
St~ac.1Y
In chI vorld enyironaenc. .. t • • n fro. ~C1D Merica. che dabt
problell cu Ca Lc. lonl .hadow . .tr the langcapt. JUDdal· I .poka of
Sec~et.ry Brady' I
r.ctfU~ pro,o •• l. tor .creDlcbtn1n, tht lntema~1c~a 1
dlbe seracIIY. Althouln ImportAnt prolrl •• hal bien . .de ln recent year •.
the B~h AGminiscrac10n recognize. that chI debt dlfflculc11' ftc in,
~.velop1n& n.ac1on.s of dl. V.lclrn Heai.ph.rl rluin a •• rIoUol ,lobal
probleG.
Our ,u"I.tld approach bu11. upon the ba.lc prIDc!ple. wt have
~idld 1nt.r.nAtional efforca 1n r.c.nc year..
It rlcoanll •• the ce~tral
1.,or:anc. of Irron,.r Iro~th ••conoaic pollcy retoraa. I.t.mal flnanc1.1
.~pporc. and a c .... by.c... approach eo indIvidUAl aatlon.' ,~obl....
O"r pro,0.a1. would .. 1n~Ain a c.ncr.l 1"011 for eIlI DO' .nd Vorld
lank v1thLn chI clabc aCI'aC8SY 1ft .ftcour.,iftl dabtor ,ollc7 ~.tom.. and
~&~.lyz1nl financial aupport.
This 1. bec.ua. the blar~ ot che problem
i • • c111 the r.for. of Icono.1c pollc1 •• to ,roduce key leruc~ral chan, ••
and .ustain.d econoaic per£oraance. Vbill ve I'e~0lftll' th. aODt1auin, nl.d
for n.v lendlDI fro. co. .ercial banks, VI nee. co ,lace acroD,.r .~h&Sl.
on It.v lnve,caeDc flow" and che repatriatLn ot nlpC capital ..
alt.rnative. to O¥el'-rlllana. 1n recene ye.r. Oft privaca b.nk loacs. To
ch1a end, ve would .ftcourase chI IJIF and 1l0rld aank to woek rith d.tbto'1"
nacion. co foc\U Oft .,eclf1c .uure. eo 1afro.e the 1IrYe,calnt cli.ute
and eo Incoura,1 cha racum of nilht capt."l 1ft &cIcUtlcm co prollOcin&
vical ..cro.conoeic and ..- .truc~.l I"afo~ •
.
Tha lD1cLaelve for Itructural r.fo~ and a .o~d i~I'C8lnt cllmace
INle co.. ' f~o. vithLIl each debeor UCiOD. thl. 1, a d1fficult la.ul for
II&ny nat10a l.a taeln AIIerLca .. el.e.ere. aue .",erLlftC. .how. that
whlre refor.. are . .de, Iconoaic re."lta balp r •• olv. DOn-.conomic
proble... In ury ca.l, che proble.. chae aLae ba facld '" orur co
&cco.,11.h ~.tor. '~I not a. difficult .. choea ~t rel"lt froa
.calft.elon and dacline.
In d••• 1op1nl ~r nev propo•• l. v. have bo~ ift aind parcicularly
tho.a cOWla1•• whLch hay. . .d. la,ortant retona . . . well .. thoaa thec
are v1111nl to coale ch.Lr ,ollcie. pd IDlrlY to . .jor retom efforcs.
In .hort. there naees. eo be 111t1c AC chI enc! of dla t:\IIIUl.
Ve ballev. 1t u
n.c ••••ry to pl.ce I~.at.r e.pM.l. on
international .fforcs to achieva aorl r.p14 and bro.dly baaecl voluncary
d.be reducclon aftd debc:: •• rvici reduccion. Thl. wlll '-ProvI pro.pactl
for .cronl.r &rowch •• p.clally wher. c:o"ntr1 •• have alr.edy ude i.~ortAnt
-" .
reforms in theLr eeonollhl and scand pol •• d
.acrifice •.
~o
b.n.tit fro. ch.ir past
Thl tJ. S. proposal. vl,\UU,ze rtd1reeclftl &Dd Incr.u1na .v.ilable
IMF and \lorlC! aank r.lourc.. .. - fro. th.ir C\l1'r.nt cap 1ul .tock - - to
support debt anc! dabc •• rvic. r.duction tr~&C~lonl 'cr •• el in the .. rkat
by d.bcor ~t1ons and co• • rclal bana.
thls. conc.pt involv.. an
importanc Ihlft in foc~ avay fro. chI pr ••• nc praccic. of u.ln& official
rl,ou.re.. in WAY' eha~, 1ft .ft.cc", 1tu:r.... a debtor natio",.' .tock of
dlbc and ulttmately It. debt •• rvlc. burden.
Oebtor ~tion.s which vllh to enlace in a dabt reduction prolr..
Ihould d.vIlop po11cy rt!of1l procrul vlth the DU' .M Vorld law . . . &
condition for acel" ~o financlal lupport for dabt reduc~lon. At the ....
time, commerc1al banka anc! elebcors Ihould n.,ot1&ca· ,.nar.l .aivlr.
cov.rlns such .rtu •• chI sharin, ed ftt,.tlva plld,1 prov1.10na 1n
.xi.t1n, comm.rcl.l bank .'r •••• nc..
Tha.a valvar., whl~ v. hav.
IUSS.,c.d ai&ht have a 11f. of thr.a y ••rl. could co. . 1nco aff.ce vhlU
IKF and Yorlel lank cll.bu:s.m.ntl b.co•• Availabla, chua aakin, it ,o •• lble
for ~l tipl. trans.ctlona b.ev•• n A debcor and tha banlu to r.clw:. d.be
and el.be •• rvle •.
One. a ,.!Wr.l valvar ba. b•• n .,r.ed u,on. a portion of W
financtn, ancl \lorld lank poU,cy-bas.el loaM coulel ba uda available to
support 4abt E'lducclon opeE'&~lon.. 'fb • • at-a.ida "\mc. could O1».r&tI ..
• tandby crlelLcs co c:ollac.rali.z. elllco\lftc.d c1abt/1>oNS .'r•••• nu or to
r.pl.nllk d.beor r"'r7•• follovlna c:a.h buyback. durina chi 'Ir1od of the
valv.r.
.
For dabcor natioa.a whlch. have n.sotlated aar ••• nt. to richaci the
I cock of d.bc. the DU' .and \lorlcS lank could al.o uka ."allabl. .~port
for. lnttr.le para.nt. OIl • rollinl but. for • 11alt.d period. Such
.upport could b. ."al1abl. for elebt r •• truccurilil' or ,xc:h.a.ncl. vh1cb
Lnvolve .teh.r a .~.t&D~lal cSl.counc of prlnci,al or a .. jor raductlon in
lnc.rl.e rae ••.
til acl41tlo" co cha ....,,1' •• ~o f.ctlitata raduccloft of co• • rcia1
b.nk dabt, chI 'arl. C1Yb .hould continua p~ovidlnc 8Upparc tbrCNlh
resche4ullnl ba•• el Oft debtoE' p.rto~ane,. vlch .'r•••• nt contin,.nt upon
an IKF .eandby pro&ra or .xt,ftel,el !1nanclna proar- (In'). lay crtcUcor
cou.ncrl.s al,hc al.o ••• k to a •• url conelm.a.ad accl •• to official .xport
crldit .upporc foE' dabcor nAtlons &eloptl", Puftd and Var1d lank 'roar....
W, would .ncoura,t cr.ellcor natl.... CO review r.su1at0I'Y,
&cco\ll\:1n,. and ~ provi.lo"s vieh .a viav to 1'.d~ln, or .11ll1.nae1c,
1=~.eli •• nc.
to dabc 'Iduction. wh.t. tho.e axlst, vbI1a of cour ••
lI&inc.1nln, the •• f.cy .nc1 .0uflc1ness of ch. n,na"clal .y.eaa. Creditor
countr1 •• th.e ar. in • pOlition co elo .0 .hould provida flnancial .upport
to this .fforc.
.5·
~e art not propo.inS the.. l.d.eas a. 1.ediate alternative. to the
C1.1rrenc proce.s of direct na,ot1at1on. beeween debtors aftG cr.cU.tor •.
Llth.r, v. ara .ulle.cinl chac new approach.. and emphasi. .bould be
ph:a.ad Lnto on&oin, dhc"".ioN betw.en tha.e partie. 1.1\ o~dat to avoid
any 1nc.rrupc1ona 1n chair ordarly ralationa.
11\. proce.. .1lhe work 1n tha follow'''1 vay.
Each clabcor nacion
vo"ld vork O\olt vtth its c08eT'Cial itank cracSleor. & tUlS' ot ct.bc and clabe
•• rv1ce r.duceion 1n.e~ne. a. a cantral al ...ftt of ••• tiftl che 4abtor'.
financln& needa.
Dabtor. and thelr cr.dlcor. could choo.. any ~.r of dabt
:.d",c c10n •• chan!su.
nebt r.duction tran.taccion., for .u.pl., .1gh:
incl"de: the offer of .pecif1c 1nstruaenc. (.uch a. debt/boDd ezehan,•• )
co all commerclal ba~; ca~h buyback. up to a aaxiaua ..aunt; and/or Cbe
nesoelaelon of .pecific debt/aqw.ty or ftOft-col1at.raU.z.d 1ft:.re.:
red~c=1on lnacruaene. vlch individual ~ana..
An Lntesral p.rc of the a,proach vould be for debtor aaelo~ .n.ased
in el.bt reductIon to aaintaln viable dabt/equ1ey .vap pro".... whlch can
.. Ice a ,ub,eantial contribution to dabe recluceioB
1n ••veral laportMt cOUDerle..
Irovl.lou
nac10n.l. co ."sas. 1ft .uch craMaccioM could
~.pacr1&cton of nllhc cap1tal, u
v. have •••n
Chile.
and elready hal daD. '0
,end,e dne.cic
alao cone~lbuce co che
already 1ft the ca•• of
vh1c:.h
D.b~ rt4\lctl<'ft frlnllC'tl('1"'c • ..,.~ ,",Po "wtM'4'!I!Act Co cov.r all chI
financLna needs of debtor countri... Addletoeal ftav fLnanc1n& co.aicaent.
vll1 al.o lie .,.• • 4 _. 1ft the fora ot cone.reect l.ndin" .1~ lOaM by &
srou, of banka. ot' • ranaa ot aad.. t.av•• c.eat,· or oWl' crecU.c. fros
individual b~. tn
c ••••• &hi, .1,hc invol.e a d!tferenelac1oB of
nev loan. f~_ 014 clUe.
bpacriac1n of nipe ",lul and new
tnve,ta.nc arl ocher ,ocefttla1- ,.ure" of f1nance. Ie 1.1 hoped wc the
combination of che •• r •• ouree, ¥ill enable dabto~ naclofta to f1nanca chalr
n.ed. and eo ... c chaf.r oblLsationa Oft a e18ely bul.. tha na .hould
concinu. eo ..nlcor ,rosr•••• aftd each councT7 .hould ra,orc Oft a rasular
b•• L, to dl. W' &Acl ch. "orld aaDk Oft prolre •• t.a lea _loelaeloN ri1:h
co... rcial banka.
.0..
v.
Takan co.achar, cha •• pro,o.al, raprllenc & ba.LI Oft which
can
work tOlethar CO r • .,f.e&lUa cha curraDc clabt .cracll7. 1hl.J rill requir.
broad lacamacloft&l "'pporc and coo,eracloft b.evaan cre"cor and dabeor
,ovemaanc., th. cO.lrc1&1 'wi.ns co~~. aM a.. 1.ftcara.aclonal
£lnanclal we' Ncloa. Jape ha, already .xp~a •• ac& Qel~ IcrOftI .upporc.
lnc1u41nl a v1111alftA •• to
.upporclve flaanctel, aDd • auab.r of
oth.r cradlcor aDd debtor natlona ~v. r ••,oa'" ,.,.rab17 to th. ,ener.l
,COy,"
.ppro.~h vhL~
v. hav.
~tl1nacl.
ch...
ela look forvard eo ell.cu•• ina
pro,o.al. 1n th. COllins veak.
AnQ •• pecJ.al1y at cha .prins •• ecln,. ~f the IKF &Del Wo~ld lank.
We
~elL.v. the propoaal.
1\&".. oueU.ned. lnclwl1n& etfort. to .c1~lat.
v.
·6.
broader '"oluneary debe and debe .Irvice rlclw:~lon, prov1d.a .\Lb.tanei.1l
benefits for ciebtor natioru 1n che form of aore aana,eabl. 4abc •• rv1.,.
obli5~t1ons, ssaller and aor. reali.tic fin.nc1n, n•• d., .c~ouler .cono=ie
,rowch, an~ h1shQr .tan44r~ of 11v1na for eh.ir , •• pl •.
Thl Inclr·Aa.r1can Dlv.lop.lnc I.nk
turning one. a,aln co the l~a, Pr •• ident I,1 •• 1a. has already b'r~
to cr •• e. a Icronler lMc1.tuc10n which Call &dclre.. Ch. v.ry .er1ou.a
proc le.. 0 f 0\&: wein Aaer1can and. C.r1~b.an _ab.r cO\lntI'1...
HLa
.ffort~ to chart • cour •• for the laNe hay. b •• n 1apr••• ~ve an4 hi vell
deserv.. our praise for the leader.hip h. baa eUaplay.d ancl for nil
perslv,r.net.
He .lao ne.cla the a"'ppon of our loverna.nea and t~1a
includ •• aore th.n the pro v 1a10n of caplcal.
\I, .us: help define Uie lank' • • 1•• 1012 mcS .h.rp.n lta focu..
th.
rec.nc ta.k foree rlport •. prlpared at the 're.ident'. lnitl.civ., ad~rl"
key orsaniZo1t1onal and operational ua\&e..
V. aCl'ol\ll), eDCwzas. .ll
.eaber. co work cooplratively and enth~laGtically vlth chi Pr.,1dlnt aDd
vith Kana,e.ent to t..pl ..ent the chanc., chat vill II. nee ••••ry to
tro1Mfor"ll chi lank. Thi . . .y b. a cU.ffi~le , ...ce •• b.c.u.. there an
.o.e dltf~rcnce. ~o~een ...be~ eouncrte.. However. I . . c.r~ift ChAt .,
w111 fine! con.tNCC1.V. way. to d.eal vith CNr • • rioua polnc, of nlw.
Inde.d. v. e.ue do
it v. vane co h.lp Lacin • • :le& an4 the
Caribbean ... and
~c do ao. if v. vant a .cr.ftl tOI.
v.
'0
Thl lank neecl.l co be 1n • p •• 1tlon to .neO\lI"&" it. borrow.rs co
acSoJ)e pollci.. chat 1ap:ov. econo.i.e parfon.anc.. .tUNlacl new for.iF"
1nv.'CDen~. incre ••• clo.e.tlc .avin,•• and .nc.~.ie th. r.patr·iatlon of
fl1cht cap1~l. Privac •••ctor initiativ•••12e! Ch. "v.lop.acc of a&rkee
cll.ignld
bo1.ed Iconoai.. .hould be e.,ha.lz.cl. Specific poltcy ••••
to help ach1ev. ch••••~j.cC1v.i .ho~lcl b. aD tee.sral p.rc of che I&nk'.
lan41nl operation•.
ur..
Er\v 1 ronaent
1.,,,,••
the IDI'. trla:..nt of environaental
~t t.pr09'.
thl, 1s
an ar •• of ,lobal Lapor~nc. of concern to ua .11. the laDk'. a ••••••• nt
of ch. env1roNlental 1IIpact of proj.ct. &Del ,I"osr'" th&c lt h.lp. to
t1Mnce 1. critlcal. 0.... chi pa.t y.a~. cbe . . . . "'. . II&d.A oonclZNad
pro,r ••• 1ft provleSiDS tl'&lD1nl Co le, p.raanenc .c.ff Oft (he ~0rc&nC1 of
env1:onaeneal u.ue.. S•• 1nar. bav. b •• n held Oft I."ua, auch u r ••• rvolr
.11eins, .hor.llc. con..rvatlon, and b10dtv.rJley 1•• ua. tD Latin AD.:lca.
Th. lank L. eapha.1z1nl .nvlronaeneal1y-b.neflclal ,roject. and provicl1ns
t.chnic.l ••• 1.eane. alueS .c 1aprov••enu 1n •• c.r.h • • •ana,lsent IncS
rivlrine .yate.. in EC\l.&clor and Coloabla. V. a"lawi ch... an4 ocher
1n1 t1aciv•• the lank haa taken to proact• • nvi"oM.n~l t..uaa.
Kora neaet. to b. .ccompll.h.eI. bovewl', em orlanllacional and
.caCftn, chan,e. to prod~ce eflectlv. eftYiron.ent41
c ,~.c.~~r ••
Thl Sank n •• d. a .enLor .nvlro~enc.L 11n. Yn1t wl~ a cleal" . .ncl&te~ Ind
.,t ••••••
• 7 •
vlch the .~ona, eon.l.~.nc lupporc fro. Pre.ident II1 •• la. to participate
f~lly 1n project telanettieacion, prlparation and .,prai..al.
I ."on,ly
rteo. .end that the Pre.ident'. Co.-ltta. on the Envlron.ent e&ke the laad
in a v alUAt1n& and d1.crlbuc1nl lnforaAcion on tha anviroa.encal ........
of chi lank'. projlca meS prolr ....
nc
Conc1\&.1 10n
AneS f1a&1.1y, Kr. Cb&lraan. a elo.ina Mea:
the exc.naive and
proerae:ac1 ",sotiacioD. co "epleft1.b the lank'. rl.ource. COftc1.mla to b.
Dear ~0a,1It10n. V. need co •• ttl. ch. la.c "e. .1DiD, i ••ua. &I .oon ••
"J~1ble.
Tht l&rJc. n"f;;~~ :0 re:OVtr I.e. .o~'ntWi aDd to adj~t 1t~
p:1or1:11.. Th. fir.e priority .uely 8\1.1: ~a Co .ov. ahead .,lth an
.x~ar:rl~= aank :hat c.&Il aeSdra"
Laclft Aaerica' . . . . t \alane challe"I'"
Thank YOu very IlU.Ch.
TREASURY NEWS
D_..artmant of the Tr.asuIY • Washington, D.C •• Tale.hone 588·2041
FOR IMMEDIATE RELEASE
July 23, 1989
STATEMENT BY SECRETARY
BRA~'i
Treasury Secretary Nicholas F. Brady today welcomed the
announcement by Mexico and its major creditor banks that aqreement had been reached on a multi-year financial packaqe to
support Mexico's economic reform proqram:
"The aqreement between Mexico and its creditor banks will
provide siqnificant debt and debt-service reduction for Mexico,
••. w.ul., a,a n.,,!.~money, to support Mexico' s economic growth. It
represents a mafor ·seep forward in the implementation of the
strenqthened debt strateqy. In recoqnition and support of this
proqress, and Mexico's continued sound economic policies, the
united States Treasury and the Federal Reserve will work with
other monetary authorities to develop a short-term bridqe loan of
up to $2 billion. This interim financinq would provide Mexico
with added liquidity pendinq disbursements from the IHF, World
Bank and commercial banks."
NB-387
E~BARGOED
Expected
FOR RELEASE UNTIL DELIVERY
9:00 a.m., D.S.T.
~t
July 19, 1989
Testimony of
the Secretary of the Treasury
Nicholas F. Brady
Before the Joint Economic Committee
on the Paris Economic Summit
on
July 19, 1989
Thank you, Mr. Chairman. It is a pleasure to testify today
before the Joint Economic Committee on the Paris Economic Summit.
Certainly we can reqard the Paris Summit as a success. Two
days of productive discussions with our counterparts from the
other six largest industrial countries produced endorsement of
U.S. objectives on eight key issues.
In particular, the strenqthened debt strateqy was discussed
in detail and firmly endorsed, with a call for the banks to move
ahead with appropriate financial packaqes. The Summit leaders
reaffirmed their commitment to continued economic growth with low
inflation and externaL adjustment, and to the policy coordination
process that is key to achieving these goals. It was also agreed
that more progress is needed on structural reforms to improve
economic performance in the Summit countries.
On trade, we
agreed to push ahead toward successful conclusion of the Uruquay
Round and reiterated our commitment to an open multilateral
trading system.
Environmental issue. were given particular emphasis at this
Summit, and in this connection we succeeded in obtaining a clear
Signal of support for greater integration of environmental
considerations in the activities of the multi"lateral development
banks. On the drug proble., we took a major step forward by
creating a task force to i_prove our ability to combat the
laundering of drug money. Finally, we agreed to a cooperative
approach to encouraging economic and political reform in Eastern
Europe.
Let me now review each of the key economic is.ues of the
Paris Su_it.
Debt Stcateqy
We ace particularly pleased that the Su_it affirmed full
f~~ ~he strengthened debt str~tegy.
N~w that the key
element. of this strategy are in place, all participants must
focus on the actual implementation of the plan. The IMF and world
Bank have agreed to pr~vide resources in support of debt and debt
service reduction. Japan has added to the funds available to
support the strengthened strategy, and we weleo.e this step.
~~pport
NEI-J7!
-2-
Debtor countries are implementing the kind of fundamental
policy reforms necessary to achieve long-term economic growth. As
you know, lerious negotiations are continuing between the banks
and debtors.
The Summit concluded that adequate resources are now
available and urged the banks to pursue realistic and constructive
approaches in their negotiations and to move promptly to conclude
agreements on financial packages including debt and debt service
reduction and new money.
Summit discussion focussed in particular on the intensive
negotiations now underway between Mexico and its commercial
creditors. Both parties have put forward proposals tha~
incorporate the key elements of the strengthened debt strategy,
including voluntary debt reduction, and are now working together
to reach an agreement. Considerable progress has been made toward
reaching a final agreement, and discussions continue to resolve
remaining issues.
~acroeconomic
Policy
A main economic policy objective at the Paris Summit was to
consider how we can sustain and improve the industrial country
economic expansion, now into its seventh year. We expect growth
to continue at a sustainable pace at least through 1990, and
earlier inflation concerns have receded somewhat in recent months.
Progress has been made in reducing large trade and current
account imbalances, especially' in the United States. The latest
trade figures confirm continued progress in reducing the U.S.
deficit. But progress elsewhere has not been as substantial as
would have been hoped, and it is important to guard against a
slowdown in the adjustment process.
We were therefore pleased with the Summit participants' firm
commitment to ensuring growth with low inflation and further
progress in reducing external imbalances.
Reducing large global current account imbalances is
necessarily a multilateral responsibility. The United States has
made a substantial contribution already and will continue to do so
in the future by maintaining growth and reducing the federal
deficit. OUr Suaait partners recognize that they need to do their
part as well. The major surplus countries, including Japan and
Germany, co. . itted them.elves to pursuing appropriate
macroeconomic policies and structural reforms to encourage
non-inflationary growth of domestic demand and contribute to
sustaining global expansion. This will facilitate external
adjustment and provide favorable conditions for imports.
Both Japan and Germany had strong growth laat year, and both
enjoyed very strong first quarter growth of this ye~r. Our trade
deficits with ~oth countries fell last year and continued to
-3-
improve in the first quarter. But it is vital that both also be
ready to consider additional macroeconomic measures if domestic
demand growth falters. In this connection, further structural
reforms are needed to ensure that the surplus countries can expand
their growth potential, thereby allowing more rapid demand growth
without risk_of inflation.
Economic Policy Coordination
The progress made in promoting sustained growth with low
inflation and reducing external imbalances, particularly in 1988,
is testimony to the international economic policy coordination
process that has evolved over the past years. We were very
pleased by the Summit's strong reaffirmation of support for the
G-7 coordination process and the impot~~nt contribution it has
made in improving the functioning of the international monetary
system.
This process has provided a cooperative framework for
policy-makers in the major countries to assess macroeconomic
developments and trends, identify emerging problems and
develop mutually agreed policy approaches. The consensus on
macroeconomic policy priorities described above, and the
commitments it reflects, is the product of this process.
But despite the broad agreement that exists, and the
considerable success.s achieved in recent years, challenges
remain. On exchange rates, although the dollar is now not too far
above levels prevailing at the time of the April 2 meeting of G-7
Finance Ministers, we must continue to monitor this situation
closely and cooperate on exchange markets. The position taken by
the G-7 Finance Ministers in April remains our view: that a rise
of the dollar which undermined adjustment efforts, or an excessive
decline, would be counterproductive.
More broadly, the United States and the other G-7 remain
firmly committed to the coordination process. This commitment
was reaffirmed at the high.st level at the Su. . it. In addition,
the Summit leaders instructed their Finance Ministers to keep
under review possible steps to improve the coordination process
and cooperation in exchange markets.
Structural aeform
As I indicated earlier, we believe that structural adjustment
measures to i_prove the efficiency of the industrial economies
would .be particularly helpful to reduce large current account
surpluses abroad. And these measures have other benefits as well:
higher real output, more employment, and better functioning of
markets.
-4-
Trade Issues
On trade issues, the Summit gave a strong endorsement to the
successful and on-time completion of the Uruguay Round. The
communique notes the importance of agricultural reform and
stresses the importance of a constructive contribution by all
developing countries to a world-wide reduction of trade barriers.
Both are points on which we have pushed hard at every opportunity.
We also pressed hard for -- an obtained -- a strengthened
Summit statement on limiting the competitive use of trade and aid
distorting export credit subsidies, a matter of considerable
concern to us. The Summit leaders directed the OECD actively to
pursue efforts to strengthen multilateral discipline on practices
of this kind, with a view to making further improvements at the
earliest possible date.
Environment
This year's Summit was remarkable in its emphasis on decisive
action to protect the environment. This il an area where
international cooperation il particularly vital, indeed essential,
to ensure that serious challenges are addres.ed and the full·
benefits of environmental protection steps are realized. The
final Summit communique covers an unprecedented range of issues
and outlines specific objectives and actions on particular areas
of concern.
Many of the issues discussed in tne communique fall outside
the traditional purview of the Treasury Department. Nevertheless,
we had some basic Summit objectives on several points, and they
were achieved.
In particular, the Summit leaders encouraged the World Bank
and the regional d,velopment banks to integrate environmental
considerations into their lending activitie.. Thi. has been an
explicit u.s. objective for some time. We believe that the 'ari.
Summit represent • • ubstantial progress and provides further
impetus for the development banks to implement fully the kind of
changes necessary to achieve this objective.
Additionally, the Summit leaders recognized that in special
cases, debt-for-nature swaps could playa useful role for
environmental protection in the less developed countries. These
swaps provide an avenue for achieving both debt reduction and
environmental objectives.
Drug Issues
The Summit leaders were strong in their commitment to use the
Summit to give a new emphasis to the need for decisive action to
combat the growir~ drug pr~hl~m. It was resolved to increase
support for bilateral and multilateral initiatives, including a
prompt implementation of the Vienna Convention on illicit traffic
in narcotic drugs and measures to identify, trace, seize and
forfeit drug crime proce~ds.
-5-
It was agreed that the laundering of drug money is a
particularly serious aspect of the broader drug problem, and one
where greater international cooperation is both needed and
potentially extremely effective in striking at one of the pillars
of the drug trade.
A financial action task force was created and instructed to
assess the results of international cooperation already undertaken
in order to prevent the use of the banking system and financial
institutions for the purpose of money laundering. In addition,
the task force is instructed to consider additional preventive
measures, including legal and regulatory changes.
We are confident that this new task force will be a valuable
tool in our efforts to combat money laundering, and we look
forward to reviewing the report it has been instructed to provide.
East-West Issues
The remarkable political events in Eastern Europe that we
have witnessed in recent months and the initiatives announced by
the Pre.ident during his recent visit to Poland and Hungary were
the focus of considerable attention at the Summit. The Sumait
leaders welcomed the process of reform underway in Poland and
Hungary, and announced that they were prepared to support this
process.
Clearly there are no short-run solutions or quick fixes for
the serious economic challenges faced by Poland. But it is
equally clear that a supportive po.ition by the Summit countries
is important at this time. We hope that our actions can help
encourage and extend the very positive movement toward
market-oriented economic reforms and political pluralism that are
now underway.
Conclusion
In conclusion, Mr. Chairman, the 'aria Economic Summit
was an important opportunity to review not only the international
economic challenge. that confront us, but also other challenges
such a. the evolvinq la.t-We.t relationship, environmental
protection, and attacking the scourge of drug ••
I beli.ve that we made significant progress towards improving
our coll.ctiv. appreCiation of these challenges and developing
appropriate policy re.pon.... Our task now is to work together to
continue this progr ••••
TREASURY NEWS
D_..artmant of the Tr.aSuIY • washington, D.C •• Tale.hone 588·2041
Ramarks by
Secretary ot the Treasury
Nicholas F. Brady
betore the
International Monetary conterence
Hadrid, Spain
June 5, 1989
Good morning. In March the United state. proposed a .ajor
change in the approach to the proble.. ot the heavily indebted
developing countries. The international community reacted
constructively to these proposal. and now, le•• than thr.e months
later, has transtormed these ideas into an operational tramework.
This has qiven us a tresh opportunity to address the debt
problems ot developing nations -- problem. tHat contront allot
us. Neither the Atlantic Ocean nor the Pacific provide. a
buffer for our economies aqainst the impact of .low qrowth and
high debt in these countries. Everyone here shares a common
interest in their quest to sustain economic growth, expand export
markets, reduce debt burden., and toster democracy.
Ceveloping nations hold a large .hare ot the world's
economic potential. And the major debtor countries represent a
significant portion of this group. Their large populations and
abundant resources make them natural centers of hope for the
future. But to unlock their potential and to enable them to take
their proper place in the world economy, debtor countries must
retorm their economies and reduce their burden ot external debt.
Their ettorts are worthy of our active support.
But I do not intend to qive a civics lecture to thia
distinquiahed audience. We are all practical people who share an
interest in solvinq thi. q10bal probl... And certainly the
Un~ted State. cannot brinq about a re.olution ot debt problems by
itself. Tbe rea.on. are obvious: the u.s. accounta tor le •• than
20 percent ot the capital and votinq power in both the IMF and
the World Bank. u.s. banks hold only about 25 percent ot the
comaercial bank debt of the .. jor debtor countrie.. European,
Japane.e, and Canadian banks al.o bave large exposure. No
nation's commercial banks are protected i.land.. The overnight
i~~~~"'!:3nk settlement .y~tt!~ !'r"", ... d •• 9r"phic ."/4~.nc4l! of the
link. bindin9 our financial aarkets toqether. The.e .hared ri.ks
imply common le.der.hip re.ponsibi1itie••
2
Recognizing this, our proposals to strenqthen the debt
strategy incorporated the ideas of many others in the
international community and reflected the need for a cooperative
approach among nations and institutions. Some were critical of
the initiative, first because of its lack of specifics; and
second because it was said that it raised expectations and
created new uncertainties. It i. true that our proposals were
based on general concepts, but concepts that reflected a
consensus that existed in world opinion. We also recoqnized the
complexities of the process and wished to provide an opportunity
tor additional contributions and retinement. by others.
However, we were clear on the tundamental point: that
reducing the debt burden of debtor countries is essential to the
ultimate resolution of this problem. It is a simple truth that
the cure for too much debt is not the addition of .ore debt.
The meaning of the proposals was immediately clear. There
was a sense that we must face reality. No doubt expectations
rose, and these will have to be tempered by the realities ot
negotiation. But most importantly, a proce.s that was weary and
moribund has been revitalized. Hope and momentum are tar better
allies for tackling a difficult task than inertia and tatigue.
As to the creation ot uncertainties, this is the temporary price
of progress.
Now debate has given way to action, and concepts have been
turned into solutions. Let me be specific:
o
First, the IMF and the World Bank have put into place
the resources and .echanis.. for .upporting debt and
debt service reduction transactions between debtor
countries and the commercial banks. The G-10 creditor
countries on Friday .trongly endor.ed the.e measures .
.
o
Second, Mexico, the Philippine. and Costa Rica have
already received IMF Board approval for .trong economic
program. which provide support for debt reduction.
These countries have also initiated di.cu•• ion. with
the commercial banking community.
o
Third, during the past two weeks, the Pari. Club has
agreed to reschedule outstandin9 loan. a. well as
interest obligation. of the.e countrie••
o
And fourth, Japan has agreed to provide an additional
$4.5 billion in support of the .trenqthen~d debt
strategy, and specific commit.ent. are now under
discussion for Mexico and the Philippine ••
3
Th. key .l.ments ot otticial support for debt and debt
service reduction are on the table. Now it is time tor the
commercial banks and the debtor nations to seize the opportunity
that has been provided.
Funda•• ntally, w. are fac.d with two alt.rnativ.s. Move
torward with the n.w strat.qy which r.cogniz •• pr••ent r.alities
or fall back on the old approach.
Th. old approach did provide important proqre.s for a
number of y.ars. But countries found it aor. and .or. difficult
to sustain the nece.sary .conomic r.form. in the fac. of
continu.d growth in debt and debt a.rvic. burdens. Commercial
banks were increasingly r.luctant to make new .oney commitments.
Poor economic performance and uncertainty about external
financial aupport undermined inve.tor confid.nce and stimulated
capital flight. Thia approach, it continued, atands to produce
losses of r.v.nue and capital for all bank. that go well b.yond
anything impli.d in our propoaal.
The n.w atrat.qy, on the oth.r hand, •• rvea the banks'
long-term interest.. It allowa for div.raity -- debt reduction,
debt aervice r.duction or n.w .on.y. Bank. that participate in
debt reduction will hold new claim. that are aiqnificantly
.nhanced. In addition, the quality of all outatanding claims
will be improved by the debt r.duction proc.... Furth.rmore,
d.bt reduction will occur only within the cont.xt of .ound
.conomic programs which will improve the capacity to repay.
Thes. proqram., .upported by the IMP and tha World Bank, will
also .mphasiz • •ea.ures to .ncourag. n.w foreign inve.tment,
flight capital r.patriation, and debt/.quity awap.. In aum, bank
claim. will be somewhat lower, but they will b. batter claim. -and they will ~e bett.r •• rviced. Thi. i. in .tark contraat with
the a1 terna ti:v••
,
I have .pent most of .y lite, a. have you, .s • •ember of
the financial co_unity. And in .y vi.w the approach to
d.v.loping nation dabt that w. have put forward i. qovernaent
policy that aak•• good bu.in•••••n•••
It ia to your bu.in••• judg•••nt that I app.al today in
asking that you .ov. ah.ad. I a.k you to compar. the ri.ka of
inaction with the ben.fit. of concluding tran.actiona that ••et
the teat. of r.ali •• and r.a.onabl.n••••
Th. debt.v4,· cU,,"l&;:.,,-l • • ~':~l need tu .... :.~ the a_.
calculation. -- that i., to be realiatic in their expectationa as
to the aize and tera. of d.bt reduction tran.actions and to
recognize that reasonabl.nesa requir.. ..aningful compromi.. by
both parti •••
To b. sure, the new atrateqy will involve touqh decisions by
debtor countries and commercial ba~. But it i . important that
we distinquiah b.tween real and p.rc.ived danq.rs. I am reminded
ot a amall piece ot American trontier history which illu.trates
.y point.
In 1869, Major John Wesley Pow.ll led the first .xpedition
down the Colorado River, which flow. through the Grand Canyon.
At one point on the riv.r -- now call.d Separation Rapid. -- the
party reached a .o.ent of critical d.ci.ion. Th.y had faced many
days of difficult rapids, and thre. of hi. cr.w had doubts ~bout
continuing, preferrinq instead to climb out of the canyon. Kajor
Powell'. diary ot Auqust 28, 1869, r.ad a. follow.:
W. come to a plac. which ..... wor•• than any y.t: to
run it would b• •ure d.struction. Aft.r .upp.r Captain
Howland asked to talk with .e. B., hi. broth.r, and
William Dunn have det.rmined to 90 no furth.r. All
night I pace up and down. I. it wi.e to 90 on? At
last daylight comes: breakfa.t i • • ol.mn •• a funeral.
Two ritl •• and a shotgun are giv.n to the •• n who are
going out •••• So.e tear. are shed: each party thinks
the oth.r is takinq the dang.rous cour.e. The three
•• n vatch us ott. w. are .careely a minute in running
the rapid.. W. have pas.ed .any place. that were
vor.e.
The next day, Auqust 29th, Major Powell and hi. remaining
crew rowed sately out ot the Canyon into quiet wat.r.. The other
three men met a dift.rent fate, which i. now r.corded on a plaque
at Separation Rapids. It read.:
H.re on Augu.t 28, 1869, Seneca Rowland, O.G. Rowland
and Willi . . R. Dunn ••parated fro. the original Powell
party, cliabed to ,the North Ri., and were killed by the
Indiana.
All courageous .en, facing difficult Choice.. Shootinq the
treacherous rapids, or scaling the canyon wall. This story tells
us so.ething about danqer, real and perc.ived. It sU99•• ts to us
that the be.t cour.e is to tackle our probl ... head on. I
believe our new approach does just that. Reali.tic expectations
and international cooperation are required. The world ba. asked
for decisive action. We aust provide it.
Thank you.
TREASURY NEWS
D_..artmant o. the Tr.aSuIY • Washington, D.C•• Tale.hone 588.2041
TUESDAY, OCTOBER 8, 1985
STATEMENT OF THE HONORABLE JAMES A. BAKER, III
SECRETARY OF THE TREASURY
OF THE UNITED STATES
BEFORE THE
JOINT ANNUAL MEETING OF
ThE INTERNATIONAL MONETARY FUND AND THE WORLD BANK
OCTOBER 8, 1985
SEOUL, KOREA
Chairman TOure, Managing Direct~r de Larosiere, President
Clausen, fellow Governors, and distinguished guests:
It is a pleasure to be here for the 40th annual meeting of
the International Monetary Fund and the World Bank. Strong,
effective international financial institutions are as essential
to our economic well being today as they were 40 years ago.
Our host country, Korea, is a nation whose economic success
is surpassed only by its warm hospitality. Korea's
market-oriented approach and strong emphasis on private
initiative are a lesson for us all.
Foundation for Growth.
I would like to tocus my comments today on policies for
growth within the context of the internatonal debt strategy.
Sound policies and sustained, low-inflation growth in the
industrial countries must provide the essential foundation for a
successful debt strategy, and are a prerequisite for stronger
growth 1n the debtor countries.
The major industrial countries have already made considerable
progress in this direction. TWo weeks ago in New York the finance
ministers and central bank governors of the Group of Five
industrial nations underscored the progress which had been
achieved, particularly with regard to the convergence of economic
performance toward sustained, low-inflation growth. They also
announced a set of policy intentions that will help to
consolidate and extend that progress and to improve and sustain
growth for the longer term.
We emphasized, for our own countries, the central importance
of reducing ~tructural rigidities, strengthening incentives for
the private sector, reducing the size of government, and imroving
the investment environment. We also rededicated our governments
to resisting protection~st pressures that threaten our own
prosperity and the opportunities for others. We must jointly
ass ssss •• ~ efforts to launch a new round of trade
2
These industrial nations agreed that the significant progress
already achieved in promoting a better convergence of their
economic performance had not been fully reflected in exchange
markets and that some further orderly appreciation of the main
non-dollar currencies, against the dollar was desirable. We
expressed our willingness to cooperate more closely to encourage
this when to do so would be helpful.
This pacAage of measures had an immediate, significant impact
on exchange markets which continues to be positive, and reflects
the importance of the commitments made.
I am convinced that if each of the major industrial nations
fulfills its policy intentions and maintains or improves access
to its markets, we will have taken a major step toward balanced
and sustainable growth, while providing a solid framework for
improving the debt situation in the developing world.
Strengthening the Debt Strategy
Fellow Governors, it is essential that we beging the process
of strengthening our international debt strategy.
Three years ago the international financial community
developed a flexible, cooperative case-by-case .strategy to
address the debt problem and lay the basis for growth in the
debtor nations. In three years:
Aggregate current account deficits in developing countries
have been sharply reduced from $104 billion in 1982 to $44
billion this year.
Growth in developing countries has been restored to about
4 percent, compared to less than 2 percent in 1982.
This growth has been fueled by sharp increases in
developing nations' exports, including a 21 percent
increase in their exports to the United States last year.
These developments reflect improved growth and sharply lower
interest rates in the industrial nations, as well as adoption of
improved policies within most debtor countries. These policies
have been given important support by reschedulings and rollovers
amounting to approximately $210 billion, and by net new
commercial bank lending.
The internatinal financial institutions have also played an
important role in the progress that has been achieved. The IMF in
particular has very capably played a leadership role, providing
guidance on policies and ,temporary balance of payments financing,
both of which have catalyzed commercial bank flows.
iDSSPite
tbi~pr09ress,
some serious problems have developed.
3
setbacks in their efforts to improve their economic situations,
particularly with regard to inflation and fiscal imbalances,
undercutting prospects for sustained growth. Bank lending to
debtor nations has been declining, with very little net new
lending anticipated. this year. The sense of increasing reluctance
among banks to participate in new money and debt rescheduling
packages has introduced serious uncertainties for borrowers, in
some case~ making it more dificult for them to pursue economic
reforms.
These problems need to be addressed, promptly and
effectively, by building upon the international debt strategy in
order to improve the prospects for growth in the debtor
countries. This is an enterprise which will require, above all,
that we work together and that we each strengthen our commitment
to progress.
If the debt problem is to be solved, there must be a ·Program
for .Sustained Growth-, incorporating three essential and mutually
reinforcing elements:
*
First and foremost, the adoption by principal debtor
countries of comprehensive macroeconomic and structural
policies, suppor~d by the international financial
institutions, to promote growth and balance of payments
adjustment, and to reduce inflation.
* Second, a continued central role for the IMF, in
conjunction with increased and more effective structural
adjustment lending by the multilateral development banks
(MBDS), both in support of the adoption by principal
debtors of market-oriented policies for growth.
*
Third, increased lending by the private banks in support
of oomprehensive economic adjustment programs.
I want to emphasize that the United States does not support a
departure from the case-by-case debt strategy we adopted three
years ago. This approach has served us welll we should continue
to follow it. It recognizes the inescapable fact that the
particular circumstances of each country are different. Its main
components, fundamental adjustment measures within the debtor
nations and conditionality in conjunction with lending, remain
essential to the restoration of external balance and longer-term
growth.
We need to build upon the current strategy to strengthen its
ability to foster growth. There must be greater emphasis on both
market-oriented economic policies to foster growth and adequate
financing to support it.
In essence, what I am suggesting is that adequate financing
~vailable through a combination of private creditors
lnstitutions workina eooDerativelv. but onlv
4
where there ace reasonable prospects that growth will occur. This
will depend upon the adoption of proper economic policies by the
developing countries. Financing can only be prudently made
available when and as effective policies to promote economic
efficiency, competitiveness and productivity -- the true
foundations of growth -~are put in place. We cannot afford to
repeat the mistakes of the past. Adjustment must continue.
Adjustment pr6~rams must be agreed before additional funds are
made available, and should be implemented as those funds are
disbursed.
These efforts should be mutually reinforcing. Sound policies
in the principal debtor countries will not only promote growth,
but will also stimulate the needed private bank lending. And it
will be important that these policies be supported by the IMF,
complemented by the MOBs. These institutions can help encourage
and catalyze both needed policies and financing.
In today's highly interdependent world economy, efforts at
economic isolationism are doomed to failure. Countries which are
not prepared to undertake basic adjustments and work within the
framework of the case-by-case debt strategy, cooperating with the
international financial institutions, cannot expect to benefit
from this three-point program. Additional lending will not occur.
Efforts by any country to "go it alone" are likely to seriously
damage its prospects for future growth.
I would like to elaborate on the actions that will be
required by each participant in this three-point program.
Structural Change in the Principal Debtors
The essence of the need for structural change in the
principal debtQrs is captured in two quotations I would like to
share with you.
First:
"The only way to overcome our economic crisis is to tackle
at their root the structural problems of our economy to
make it more efficient and productive." 11
And second:
"Economic growth will have solid foundations only if we
reestablish trust and stimulate private enterprise, which
must be the flagship of our economic development • • • We
will promote authentic institutional change in the
economic sector." 11
These are not the words of the U. S. Secretary of the
T~ ••• ')'. lI"ail,""" statements made in July of this year by the
_.AA~~~ ~- M.Y;~ and Brazil. I believe they reflect a growing
5
It is essential that the heavily indebted, middle income
developing countries do their part to implement and maintain
sound policies. Indeed, without such policies, needed financing
cannot be expected to materialize. Policy and financing are not
substitutes but essential complements.
For those countr'ies which have inmplemented measures to
address thl; imbalances in their economies, a more comprehensive
set of pol:cies can now be put in place, which promises longer
term benefits from stronger growth, higher standards of living,
lower inflation, and more flexible and productive economies.
These must not only include macroeconomic policies, but also
other medium and longer-term supply-side policies to promote
growth.
We believe that such institutional and structural policies
should include:
increased reliance on the private sector, and less
reliance on government, to help increase employment,
production and efficiency:
supply-side actions to mobilize domestic savings and
facilitate efficient investment, both domestic and
foreign, by means of tax reform, labor market reform and
development of financial markets; and
market-opening'measures to encourage foreign direct
investment and ~apital inflows, as well as to liberalize
trade, including the reduction of export subsidies.
This broader approach does not mean that policy areas that
have been the focus of efforts to date -- in particular fiscal,
monetary, and exchange rate policies -- can receive less
attention. "Indeed, macroeconomic policies have been central to
efforts to date and must be strengthened to achieve greater
progress. These policies should consist of:
market-oriented exchange rate, interest rate, wage and
pricing policies to promote greater economic efficiency
and responsiveness to growth and employment opportunities:
and
sound monetary and fiscal policies focused n reducing
domestic imbalances and inflation and on freeing up
resources for the private sector.
The cornerstone of sustained growth must be greater domestic
savings, and investment. of those savings at home. Macroeconomic
and structural policies which improve economic efficiency,
mobilize domestic resources, and provide incentives to work, save
and Ln~ domestically will create the favorable economic
6
As a practical matter, it is unrealistic to call upon the
support of voluntary lending from abroad, whether public or
private, when domestic funds are moving in the other direction.
Capital flight must be reversed if there is to be any real
prospect of additional funding, whether debt or equity. If a
country's own citizens have no confidence in its economic system,
how can others?
There 6re essentially two kinds of capital inflows: loans and
equity investments. Foreign borrowings have to be repaid -- with
interest. Equity investment, on the other hand, has a degree of
permanence and is not debt-creating. Moreover, it can have a
compounding effect on growth, bring innovation and technology,
and help to keep capital at home.
We believe that the debtor nations must be willing to commit
themselves to these poliCies for growth in order that the other
elements of a strengthened debt strategy can come into place.
Enhancp.d Effectiveness of the International Financial
Institutions
The international financial institutions must also play an
important role in strengthening the debt strategy to promote
growth. However, we must recognize that the international
financial institutions cannot have sufficient resources to meet
the debtor nations' financing needs all by themselves. An
approach which assumes that the IMF and the World Bank are the
sole answer to the d~bt problems is simply a non-starter. For
most developing countries other sources must playa more
important role. These include private sector borrowing,
increasing export earnings, foreign equity investment, and
repatriation of capital which has fled abroad. All these routes
should be pursued.
Among the international financial institutions, the IMF has
played a major role in advising member nations on the development
of policies necessary to promote adjustment and growth. There has
been a particular focus on monetary, fiscal and exchange rate
policies, although increasing attention is being paid to other
areas such as trade liberalization, pricing policies, and the
efficiency of government-owned enterprises.
Emphasizing growth does not mean deemphasizing the IMF.
Through both its policy advice and balance of payments financing,
the Fund has played a critical role in encouraging needed policy
changes and catalyzing capital flows. It must continue to do so.
But it must also develop new techniques for catalyzing financing
in support of further progress. "Enhanced surveillance," for
example, can sometimes' provide an effective means of continued
IMF involvement.
.
...
~
.hould give higher priority to tax reform.
7
rigidities, and to opening economies to foreign trade and
investment. This will help assure that Fund-supported programs
are growth-oriented. It will be particularly important for the
Fund to work closely with the World Bank in this effort.
I would now like to turn more directly to the role of the
MOBs, which need to be brought into the debt strategy in a
stronger way, without diminishing the role still to be played by
the IMF.
The World Bank, and indeed all MOBs, have considerable scope
to build O~l current programs and resources, and to provide
additional 'assistance to debtor nations which is disbursed more
quickly and targeted more effectively to provide the needed
stimulus to growth.
There is ample room to expand the World Bank's fastdisbursing lending to support growth oriented policies, and
institutional and sectoral reform. An increase in such lending
can serve as a catalyst for commercial bank lending.
A serious effort to develop the programs of the World Bank
and the Inrter-American Development Bank (lOB) could increase
their disbursements to principal debtors by roughly SO percent
from the current annual level of nearly $6 billion.
Increased disbursements would require greater borrowing by
the MDBs in world capital markets. ~heir ability to borrow at low
rates is a precious asset which must be preserved. Therefore,
their lending must be in support of sound economic programs that
enhance and implement such assistance programs. This will
expedite the actual d;sbursement of funds.
The value and role of an indigenous, competetive private
sector needs to be recognized and developed more fully than it
has in the past. The Bank, for its part, should actively promcte
the development of the private sector and, where appropriate,
provide direct assistance to this sector. In addition, the Bank
should seek to assist, both in a technical and financial
capacity, those countries which .wish to ·privatize· their stateowned enterprises, which in too many cases aggravate already
serious budget deficit problems.
Given the importance of increasing commercial bank flows to
the principal debtors, there is also an urgent need for efforts
to expand the Bank's co-financing operations. These efforts
should be pursued vigorously to increase the effectiveness of the
Bank in helping its borrowers to attract private finance, and
should have substantial potential in the context of this threepoint program.
The enhanced program of the International FinanCe
Corporation, with an expanded capital base, and the recently
negotiated Multilateral,Investment Guarantee Agency (MIGA) are
8
t~o important Bank Group initiatives in support of developing
countries. Both organizations can do much to assist their members
in attracting non-debt capital flows as well as critical
technological and managerial resources. We urge all Bank members
and particularly the principal debtors to give their full support
to establishment of the MIGA.
If developing countries implement growth-oriented reform: if
commercial banks provide adequate increases in net new lending to
good perf~rmers; and if increased demand for quality IBRD lending
demonstrta'tes the need for increased capital resources, we would
be prepared to look seriously at the timing and scope of a
general capital increase.
We believe the World Bank's efforts can be supplemented
actively by the regional development banks. Since some of the
most serious debt problems are found in Latin America, special
emphasis should be placed on stengthening the lOB's policies to
enable it to be a more effective partner in support of growthoriented structural reform.
In the case of an lOB capital increase, it will be critical
to assess the extent to which the institution strengthens its
lending policies. There must be well-defined economic and country
strategies tailo;ed to enhance economic reforms which encourage
growth. Given a firm commitment by the lOB to move in this
direction, we believe that it should be permitted to introduce a
major program of well targeted non-project lending. In the
meantime, such lending could be associated with World Bank
programs until the lOB has implemented the necessary refrorms.
Increasing Lending by the International Banking Community
The international banking community has played an important
role during the past three years. I am, however, concerned about
the decline in net bank lending to debtor nations over the past
year and a -half, particularly those nations which are making
progress. All of us can appreciate the commercial banks'
concerns, but we believe these concerns would dissipate if the
banks were confident that the new lending is in support of
policies for growth in the developing nations.
If creditor governments, in an age of budget austerity, are
to be called upon to support increases in mUltilateral
development bank lending to the debtor nations, and if the
recipient nations are asked to adopt sound economic poliCies for
growth to avoid wasting that financing, then there must also be a
commitment by the banking community -- a commitment to help the
global community make the necessary transition to stronger
growth.
our assessment of the commitment required by the banks to the
entire group of heavily indebted, middle income developing
countries would be net new lending in the range of $20 billion
9
for the nex~ three years. In addition, it would be necessary that
countries now receiving adequate financing from banks on a
voluntary basis continue to do so, provided they maintain sound
policies.
I would like to see our banking community make a pledge to
provide these amounts of new lending and make it publicly,.
provided the debtor countries also make similiar growth-oriented
policy comli~.:tments as their part of the cooperative effort. Such
financing c~uld be used to meet both short-term financing and
longer-term investment needs in the developing countries, and
would be available, provided debtors took action and multilateral
institutions also did their part.
We would welcome suggestions from the banking community about
arrangements which could be developed in order to ensure that
adequate financing to support growth is available.
The Poorest Countries
Before concluding my statement, I would like to focus briefly
on the problems of another set of debtor countries, the lowincome debtors with protracted balance of payments problems.
Special efforts are being made to assist these countries, but
more can and should be done to improve their longer-term
prospects.
The United States believes that the resources provided by the
Trust Fund reflows provide a unique opportunity to help address
the economic p~blems 'of the poorest countries with protracted
balance of payments difficulties. Recent experience demonstrates
that successful resolution of the economic problems of these
countries requires a comprehensive approach, including
fundamental structural policy changes, as well as sound
macroeconomic policies.
The $2.7-billion in Trust Fund reflows present us with an
opporunity to utili%e IMF resources, possibly supplemented by
funds from other sources, in support of such comprehensive
economic programs. The effectiveness of such programs would be
enhanced by close cooperation between the Fund and Bank. In some
cases, this could best be accomplished by a joint approach by the
two institutions in support of comprehensive programs.
The United States is also prepared to consider a bolder
approach, involving more intensive IMF and World Bank
collaboration. We believe that this approach would help ensure
that the institutions provide sound, mutually consistent advice
on the full range of policies to promote growth.
The United States, w~ich supported African countries with
$1.7 billion in bilateral aid in 1985. would be prepared to
consider ~eeking resources in support of such a far-reaching
approach 1f other donors were prepared to make equitable
10
contributions.
We recognize that some may have reservations about such an
approach, viewing it as complicated and difficult to implement.
can understand some of those concerns, and believe they suggest
the need for further reflection on certain aspects if this
proposal. But, we cannot let parochial resistance or unfounded
suspicions block an ldea that can significantly help the poorest
countries and strengtnen ties between the Fund and the Bank. I
urge you to give this approach further consideration during the
months ahead
Conclusion
In conclusion, much has been accomplished in the past few
years in addressing the pressing economic problems of the early
1980s and preparing the foundation for future global growth. We
must now join together to consolidate our progress in building
stronger economies for the future.
Sound policies and growth in the industrial world can provide
a solid foundation for strengthening and adapting the current
international debt strategy. Let us not lose the present
opportunity. I have proposed a three-point ·Program for Sustained
Growth" to provide renewed impetus for resolving the debt
problem. We must not deceive ourselves. There are no easy
solutions, and none of us can escape our responsibilities.
The principal debtor nations must take the hard policy
decisions to restructure their economies. The commercial banks
must provide adequate resources to support these efforts. The
MDBs must increase the ~fficiency and volume of their lending.
Moving from proposal to implementation will be a demanding
exercise and cannot be accomplished overnight. As we adapt our
strategy, we must continue to look to the IMF as the catalyst for
new financial flows. And with these new flows will come new hope.
We will be building on the efforts of the past. The needs are
clearly recognized by borrowers and creditors alike.
Fundamentally, there is no disparity of interest among our
nations. We have a common interest in growth -- sustained growth
that rests on productivity, innovation and investment. Let us
begin our efforts now.
1/ president de la Madrid at Mexican Bankers Association Annual
Meeting, July 22, 1985.
2/ president Sarney in a televised address to the nation, July
23, 1985.
TREASURY NEWS
D_..artmant of the Tr.asuIY • Washington, D.C •• Tale.hone 588-2041
POR RELEASE
MARCH 1 2, 1987
Statement by the Bonorable David C. Mulford
Assistant Secretary of the O.S. Treasury
for International Affairs
before the
luromoney Debt/Equity Swaps Conference
The Plaza Botel
New York City, New York
March 12, 1987
Mana;in g the Debt Problem:
The Role for Debt Equity Swaps in the Cebt Strategy
I appreciate the opportunity to .ddress this distinquished
audience on the subject of debt/equity .wap. -- one of a number
of emerqinq market instrument. desiqned to .ecuritize outstanding
debt.
.
The Tre.sury is firmly on record in supportinq the development of debt/equity·swaps. Secretary Baker .nd other officials
have made a number of .tronq calls for incre.sed equity investment
and debt/equity .waps in the debtor nation. in order both to limit
total debt burdens and to boost potential growth. We believe
that debt/equity conversions c.n play an increaSingly important
role in supplem.nting the debtor reforms and new financing which
are •••• nti.l elem.nt. of our international debt strategy.
I would like to 4ivi4e Sf remarks this morning into two
basic parts: I would like to begin by making a brief
assess•• nt of progress under the ·Program for Sustained Growth-.
Then I will discus. the potential role of debt/equity swaps
within the ov.rall d.bt strat.91.
The Debt Strategy: Progress .nd prognosis
There is little n.ed to outline for this audience the key
elements of the strengthened debt strategy. The heart of the
strategy focuses on the fundamental need for stronger, sustained
growth in the debtor nations as a prerequisite to solving their
debt problems. That objective has universal support amonq
debtors and creditors. alike.
8-901
- 2 -
The development and implementation of g~owth-o~iented policy
by the debto~ nations themselves, including both mac~o
economic and st~uctu~al elements, are essential to achieving that
objective. So are supportive international capital flows: new
lending f~om the IMF, the World Bank, and the private commercial
banks: new foreign di.rect and po~tfolio investment flows: and
the repat~iation of flight capital.
refo~ms
At the 'present time, we are in a period of rather intensive
questioning ,about whether or not the debt stategy is working.
We have hes~d these concerns before, usually, as is the case now,
when there is a concentration of debtor country financing activity
which seems to underline the enormity of the global problem.
Given the fact that the debt strategy provides a dynamic
framework for policy reforms, assembling resources, and resolving
country p~oblems on a case-by-case basis, I believe this focus
of attention is essentially healthy. By constant review within
the case-by-case framework, new ideas and refinements can be
developed and implemented. Indeed, this is what has been
happening over the past 18 months.
The important point here is that the framework itself
continues to provide the most widely accepted app~oach to the
debt p~oblem by both debtors and creditors. No workable and
widely accepted alternative has been put on the table, and it
is the~efore on the basis of present reality that we must
assess our progress.
Perhaps the most important change during the past year and
a half has been in deb~or attitudes. The debtor nations are
increasingly focusing on the impo~tance of market-led growth,
and adopting the reforms necessary to achieve it. These include
steps to increase savings and investment, improve economic
efficiency, privatize public enterprises, liberalize trade and
investment regimes, and reform tax and financial systems. A
great deal lIo-re ne.ds to be done, but there is general lIovement
in the right direction in many debtor countries.
The real growth rate for the 15 major debtors as a group
is expected to average approximately 3.5 percent this year, the
highest since 1980, and a significant improvement over 1983,
when the major debtors experienced negative growth of 3.5
percent. Import vol~es are also projected to increase by more
than 3 percent this year, the best performance in 6 years,
while export vol~es should grow by about 3 percent, the best
in 3 years.
Descite recent oil and other commodity price declines, GNP
growth in lIost of the lIajor debtors has kept pace with or
exceeded the growth in total debt. The ratio of interest payments
- 3 -
to debt, which is key because it measures the capacity to service
debt, has also improved substantially, with a projected ratio of
2S percent for the 1S major debtors this year, compared to 31
percent in 1982.
The IMP and World Bank have provided strong support for the
debtors' efforts since October 1985 by committing nearly $12
billion in new loans to the 15 major debtors. In this same
period, official c~editors have also reSCheduled $14.5 billion
in outstanding loans to these countries through the Paris Club,
providin~ important debt relief and opening new sources of
financing from ereditor countries.
Progress on the third leg of the strategy -- commercial bank
lending -- has been slower to develop and by the end of 1986
was clearly inadequate. To some extent, this is due to the
process involved: under concerted lending procedures, commercial
bank loans only come into play after debtor reform programs have
been developed and have in most cases received IMP and World Bank
support. This takes time, and should not have been expeeted to
produce a large inerease in bank lending within the first few
months of 1986. NOr would one expect net flows to be distributed
evenly over time, since sizeable new loans are linked to policy
negotiations. In addition, some major debtors such as Brazil
and Venezuela did not need new loans in 1986.
In terms of overall financial flows linked to policy reforms
in debtor countries, there have been a number of important developments in the past 18 months. These include supportive financing
or speeific Paris Club and commercial bank debt relief for all
of the lS major debtors, with the exception of Peru, since
October 1985. Resc~edulings by commercial banks, over and above
the $14.5 billion of Paris Club reschedulings, have provided
longer maturities at lower rates and spreads on an additional
$70 billion of outstanding debt.
Nevertheless, in recent months the area of greatest difficulty
in a •• uri~g aew financial flows has been on the commercial bank
side. Chile and Venezuela only recently reached agreement with
the co. .ercial banks after protracted negotiations, and the
Mexican package, although now 97 percent subscribed, still has
not been finalized.
In the past few weeks, the banks have begun to move ahead
on the backlog of new financing packages. In addition to Mexico,
Chile has reached agreement on a package which includes retiming
and repricing arrangements. Venezuela and the banks have agreed
on a rescheduling of prinCipal payments due on previously
rescheduled debt at lower spreads. The Philippines negotiations
resumed in early March and agreement now appears to be very near.
Progress in these discussions will help to dispel coneerns of ~
new debt crisis, which is in the interest of debtors and creditors
- 4 -
alike. These agreements, together with others for Argentina
and we hope Brazil, will also assure substantial net new
commercial bank lending to the major debtor nations in 1987.
Need for Creative Thinking
I believe this is a picture which represents significant
progress. No one e.er said that the negotiations, whether
for policy ehange, new money, or rescheduling, would be easy.
There will, continue to be difficult problems and periods of
significant risk, but we have built an important experience
base where cooperation between debtors and creditors has been
the rule.
What can we learn from this recent experience? Is there more
that commercial banks can or should be doing to facilitate the
completion of new money packages? I think there is.
One of the key problems has been the reluctance of a n~ber
of banks, especially those with small exposures, to provide new
loans. Many different reasons have been offered for their
reluctance to participate. A number of banks have reduced their
exposure in individual debtor countries, either via swaps Or
sales of debt paper on secondary markets. In the Mexican case,
dissatisfaction with the Mexican program and criticisms of
communication and coordination within the bank group have also
played a role in their refusal to participate, which for a time
appeared to jeopardize the prospects for successful agreement with
the rest of the banks. The broader implications of ·free riderbanks which receive debt service payments due in part to the new
loans provid~ by other banks still need to be addressed and
resolved. I believe 'this must be done by the banks themselves.
In particular, I would urge the commercial banks to develop
a ·menu· of options for supporting debtor reforms as a means of
maintaining broad bank participation in new finanCing packages.
The banks .hould be able to provide a range of options which could
be offered to participating banks in the syndicate. Or they might
simultaneously pursue several different approaches, where permitted
under their own regulatory systems, provided the liquidity value
of the total transactions to the debtor nations is equivalent
to the banks' new money obligation.
Obviously, this kind of approach could have significant
implications for future base 'exposure numbers and for the relative
risk positions of individual banks. The difficulties in devising
mechanisms for fairly allocating new money shares with a broad
diversity of types of flows Shouldn't be underestimated. Bowever,
we must face the fact that greater flexibility in devising new
money packages may, in effect, be essential to future bank syndications. Indeed, a case by case approach demands a willingness
to develop and try new .techniques as well as adjusting them
- 5 -
to recognize performance. Instead of merely complaining that
there is no leeway in current procedures, or that the IMF simply
imposes new money requirements on the banks, the commercial
banks have much to gain from taking the lead themselves to
develop the kinds of ideas that help assure the concerted
lending process works.
We may also find that both debtor governments and commercial
banks -- with a common interest in limiting total debt burdens -will increasingly be moving toward repricing, retiming, or
reschedu~'ing agreements in the future as an alternative to new
loans. The benefits of such approaches may be substantial and
may, in the right circumstances, be easier to achieve than new
money packages. For debtors with substantial financing needs,
however, new lending will still be necessary and should be
expedited by debtors and commercial banks alike.
The External Environment
Before moving on to debt/equity swaps, I would like to
touch on overall international developments that are also helping
to buttress the debtors' reform efforts. Interest rates have been
reduced by nearly 5 percentage points since 1984, saving the major
debtors over $14 billion in interest payments annually. Efforts
continue to achieve stronger growth among the industrial nations,
to improve economic policy coordination, and to open global markets
through the new multilateral trade negotiations.
At the February 22 meeting of major industrial nations in
Paris, agreement wa~ reached on concrete steps to promote global
growth, reduce trade imbalances, and foster greater exchange
rate stability. The'surplus countries committed to follow
policies designed to strengthen domestic demand. Germany ag~eed
to undertake comprehensive tax reform and to increase tax reductions already enacted for 1988. Japan announced a reduction in
interest rates and agreed to prepare a comprehensive economic
program to stimulate domestic demand after the current budget
is acted apon by the Diet.
Por their part, deficit countries also committed to follow
policies designed to encourage steady, low-inflation growth,
while reducing their domestic imbalances and external deficits.
The enited States agreed to continue its efforts to reduce the
Federal budget deficit, implement a wide range of policies to
improve competitiveness, and fight protectionism.
These measures, together with continued close cooperation
among the major countries, should help improve the prospects
for a sound, growing world economy, which is essential to support
the debtor nations' own efforts to establish sustained growth.
- 6 -
Debt/Equity Swaps
Debt/~quit~ swaps have been an important part of Secretary
Baker's debt initiative. Coming as I do from an investment
banking background, I have great faith in their potential and
in the creative diversity of the marketplace. Such swaps can
contribute to a number of important objectives:
o First and foremost, converting external debt liabilities
into equity holdings helps to reduce both outstanding
debt and annual debt service burdens -- freeing a portion
of fo:eign exchange earnings for other uses, including
imports, or for reducing new borrowing needs.
o Second, the discounts on debt paper and attractive rates
for converting foreign exchange into local currency can
encourage equity investment flows over and above those
which would otherwise take place.
o Third, the shift of some debt into equity holdings helps
to improve the debt/equity mix of external liabilities,
reducing exposure to variations in global interest rates.
o Fourth, the adoption of debt/equity swa9 mechanisms by
debtor nations are frequently accompanied by some liberalization of the investment climate or the privatization of
public enterprises, thus supporting important broader
objectives.
o Fifth, where foreign exchange for debt conversions comes
from residents of. the debtor nations themselves, such
conversions can serve as a mechanism for the repatriation
of flight capital~' This is the least costly of all
sources of foreign capital.
o Sixth, commercial banks which engage in swaps reduce
their total exposure and if swaps are for their own
account maintain a positive stake in the future growth
of debtor nations.
In short, debt/equity conversions hold very important
ootential benefits for all participants. While they cannot
~erve a~ a panacea for the debt problem, they can be very useful
at the margin in redUCing both debt and debt service burdens.
They have already generated considerable interest among debtor
nations, commercial banks, and international investors. I believe
this interest will grow and that participation will broaden among
both investors making direct investments and portfolio investors
who see interesting prospects for equity investment in developing
nations through Loe mutual funds.
- 7 -
Indeed, we estimate that in 1986 some $2.5 billion in debt
conversions occurred within four of the major debtor nations
alone. A number of other nations are now moving to permit them,
and innovative mechanisms such as mutual funds which would deal
exclusively in debt/equity swaps are on the drawing board. Of
course, we will need to see a productive environment among the
debtor nations to en~ourage the continuing evolution of markets.
Are additional measures needed to stimulate the develooment
of secondar¥ markets in LDC debt paper, as an essential resource
for debt/eq~ity swaps? Do current regulatory or accounting rules
need to be clarified? Or should new regulatory, accounting, Or
tax provisions be adopted to provide incentives for swaps? This
conference may help to answer some of these questions -- or, at
a minimum, permit those of you with strong views to express them.
My own view is that we already have a functioning, albeit
thin, secondary market. Banks can sell some of their debt at a
discount if they want to. Within certain limits, U.S. banks can
swap debt for equity holdings. And tax benefits are already
provided for documented losses by U.S. banks due to the sale of
debt paper. Legislation to force banks to either sell debt at a
discount or to provide non-market stimulus to debt/equity swaps
is neither needed nor desirable. While I understand that some
banks believe there is a lack of clarity, particularly in the
accounting area, this is not a generally shared view and I would
hope that these concerns can be promptly put to rest. I hope
this conference can help contribute to this objec~ive.
Before clOSing, I would like to discuss briefly a concept
which has recently surtaced on Capitol Hill and in the academic
community. This concerns the creation of an IMF or World Bank
debt facility. For some reason the World Bank appears to be
picked on more often than the IMF, but both are offered as
potential parents.
The facility would be financed, according to these proposals,
by various means: contributions from nations with large current
account surpluses (a polite way of saying Germany and Japan);
member governments of the parent organization could be asked to
provide paid-in or callable capital, or IMF gold assets could be
used as a basis against which to borrow substantial sums in the
market; or commercial banks could receive bonds from the facility
in return for their debt paper.
These proposals suffer from a number of common problems:
Public budget and revenue costs could be extremely large.
Any contributions by current account surplus countries would only
be forthcoming if other major industrial countries, including the
United States, contributed as well. To leverage sufficient
- 8 -
financing to purchase commercial banks' outstanding debt, substantial paid-in or callable capital would be required. u.s. bank
losses on their sale of debt paper would be tax deductible; such
deductions could run into several billion dollars. The full risk
on commercial bank debt portfolios would also be assumed by the
facility -- backed in turn by member nations' taxpayers.
As with debt forgiveness proposals, banks which have taken
a substantial loss wQuld be unlikely to provide new loans for
years to come. If the facility is closely linked with the
World Bank, the Bank's credit rating would be adversely affected,
in turn increasing the cost of World Bank loans to all borrowers.
Cebtor nations might well welcome the debt relief offered by the
facility as an excuse to avoid needed policy reforms. Without
such reforms, any immediate benefits to their liquidity would
be short-lived and any boost to debtor growth and imports could
not be sustained.
Furthermore, such a proposal would provide little effective
relief for the debtor countries. Without adequate policy reforms,
any short-term boost to growth or imports could not be sustained.
And such short-term benefits would be very limited. Even if
the new facility were able to purchase the full $283 billion in
outstanding bank debt of the 15 major debtors at a 3S percent
discount, they would save only $6 billion in interest payments
annually. By way of comparison, reductions in market interest
rates since the end of 1984 have already provided over $14
billion in annual debt service savings, while reschedulings and
reductions in commercial bank spreads have provided substantial
additional -debt relief-, without the adverse repercussions of
a debt facility.
In my view, debt ~onversions or swaps into either equity or
local debt claims provide a preferable route to -debt relieffor the debtor nations, particularly if combined with measures
to encourage new equity investment and the repatriation of
flight capital. It is true that debt/equity swaps work on a
smaller amount of debt than would a World Bank debt facility.
But when a debt/equity swap occurs, it results in a total
elimination of debt .ervice on the debt swapped (rather than
just a portion of interest payments, as under the debt facility),
and a productive, job-creating investment takes place. Such
swaps support efforts to open up the investment environment,
and by doing so improve the prospects for growth.
Conclusion
In conclusion, I would reemphasize that there are no real
-overnight solutions· to debt difficulties. Progress will take
time, must be founded on economic reforms, and buttressed by
enough new financing to meet the debtors' immediate needs to
support refonD and to generate growth. That is the essence of
the strengthened debt strategy -- a process that is now being
implemented, and that has the support of debtors and creditors
alike. Our task is to get on with this program and to assure
its success.
TREASURY NEWS
D_..artmant of the Tr.aSUIY • washington, D.C •• Tale.hone 588·2041
AS PREPAREO FOR DELIVERY
Remarks by
The Secretary of the Treasury
James A. Baker,' III
at the afternoon session of the Interim Committee
of the International ~onetary FUnd
Washin;ton, D.C.
Ap r i 1 9, 19 87
The International Debt Strategy
Thank you, ~r. Chai rnaan. I welcome the o~po rtun i ty to
discuss the international debt stratec;y. In doin; so, I
would like to focus on two key questions:
(1)
Is the current strengthened debt strat89Y workin;?
(2) Are additional efforts needed to ensure continued
progress under the debt stratec;y?
I believe the answer ,to both of these questions is ·yes·. The
deoe stratec;y 1.-. working. Substantial progress i! beinq made.
aue mor~ can and should be done.
Let's turn first to the record of what is bein;
accom91i~~ed.
First, the debtor nations themselves are increasinqly
adopting aarJcet and growth-oriented reforms. In particular,
substantial efforts are being made to reduce inflation, privaeize
parsstatals, encourage greater efficiency, strengthen internal
savings, and sti~ulate the repatriation of fli;ht capital.
For example:
o
Argentina has cut inflation frOID 600 gercent to 80
percent: dramatically reduced its fiscal deficit
from 12 percent to 4 percent of GDP between 19~4 and
1996; reestablished real growth of 5.5 percent in
1986: liberalized trade: i~ptemented a nu~ber of
important tax reform Ifteasur>!!: and moved to privatize
9~blie
B 940
~nter9ri!es.
- 2 -
o
Mexico has significantly reduced the number of parastatal
cOM9anies, has replaced licenses with tariffs for
most of its impot"ts while also reducing tariffs, and
is focusing on increa~ed public investment, tax reform,
and more market-oriented pricing adjustments.
o
The Philippines has liberalized imports, is implementing
a comprehensive tax reform program, and has instituted
major agricultural reforms.
These are but a few examples of the progress unde~ay.
What are th~ results of these efforts, and those of other major
debtors?
o Growth in the major debtor nations averaged 3.5 percent
last year, the highest in 6 years, and well above
the negative 3.5 percent growth experienced in 1983.
o Per capita GOP is again on the increase.
o Export and import volumes are projected to increase by
more than 3 percent this year., the best in three years.
o Inflation has been cut by more than half since 1985.
o Aggregate reserves are expected to increase by 20
percent or $5 billion this year.
o
Ca~ital flight has either slowed or been reversed in
most debtor nations.
In addition, as we had hoped, the growth in external debt
has fallen sharply, averaging less than 3.S percent annually
sincs 1982. With reas~nable growth both within the debtor
nations and the global economy, this rate of increase in total
debt should be manaqeable and consistent with declining debt-toGNP ratios. Indeed, we estimate that for 9 of the major debtors
debt-to-GNP ratios remained flat or improved during 1996.
I would.also note that the 5-percentage point r-.duction in
interest rates since 1984 has saved the debtors over 514 billion
annually in interest payments. Interest/export ratios have
declined sharply from 31 percent in 1982 to an expecte~ 25 percent
this year, reflecting an improved abili ty to carry debt.
Second, the IMF snd World Bank have moved toward more gro~h
oriented approaches. The two institutions together have provided
nearly $12 billion in support of major debtors' r~form efforts
during the past 18 months. On the IM!' side, this includes 9
ne~ standbys and increased emphasis on structural refor~s, and
for the World Bank, major policy-based reforms in 10 of the
key debtor nations.
World Bank disbursements to the major
dabtors increased by over 40 percent in 1986, and are expect~1
to increase further in 1987.
- 3 -
Third, suppcrtive international !inancinq has been made
available for virtually all of the major debtors. The Paris
Cl~b has rescheduled S15.5 billion in outstandinq loans for
these nations. Commercial bank reschedulinqs have been
~rovided on an additional S80 billion in loans.
Aqreements
on S8.3 billion in n.w financinq have been completed or are
nearinq completion tor tour ot the major debtors since October
1985. Substantia~ additional new loans have either already
been requested or are likely to be requested tor Arqentina,
Venezu.l&, !cuador, and Brazil durinq 1981.
~i. is a qood start.
But mere needs to be done. Oebtors
need to move ahead on mar~et-openinq retorms, par~icularly in
the investMent area. The IMP needs to Itrenqthen its emphasiS
on -qrowth and supply-side retorms. '1'ne World BaM needs to
help debto~ tocus ~re explicitly on medium-term objectives
and po licies I wi th q radua ted structur al prOCJr ..s des iqned to
achieve those obje~ives. '1'he industrial nations, as WI discussed
this 1110 rninq, need to provide a 1110 re suppa r"!ive external env i ronme nt,
throuqh Itronq.r qro~h Cparcicularly in !urope and Japan) and
m.r~ets which are open to debtors' exports.
And commercial banxs
need todev.lop lIlOre tlexibili ty 1n th.ir concerted lendinq
meetlanis.s to h.lp assure continued participation in new money
packaqes.
It is this last area that I vould like to discuss in some
detail this afternoon. In liqht ot the modest amounts ot new
leDdinq envisioned in the de~ strat.;y, and co.a.rcial banx
commmitments ot support, bank lendinq ast year vas cl.arly
:!isa~pointinq.
Net lendinq to the lIIajor debtors a. a qroup was
neq&tive and the ~exic&n n.w meney packaqe hal tax.n a con.iderab~e
amount ot tim. and enerqy to co.pl.te. The difficulties stem
from a n~ber ot ta~ors: numerous banks with small expolures
which are reluct.nt" "to increase l.ndinq: difficulti •• in communication vithin the bank qroup: .s well •••n in.bility for banks
to concentrate on 1Il0r. than on. major new soney ~ckaq. at a
ti:lle.
'ort~ately, progr ••• has been ~ad. r.cently in cOlIlpletinq
• repric1nq aDd reti~ft4 .qr .... nt vith Chile, as veIL as
re.cfttd~lift9 arracg ..ene. eor Venezu.la and the Philippin.s.
Oth.r discuss10ns are also v.ll underway. Toqether with the
~exican .nd 81q.r1.n n.w men.y pacxaq •• , the •• shoul~ provide
sub.eaneial n.e new lendinq ~or the major ~eb~ors in 1981.
aut some underlylnq proble•• in 0~aniz1nq new 1.n4in9
packaq •• remain. The major debtor nation. n.ed to be able to
co~nt on receivinq tim.ly ~1sb~r.e•• nts of new lo.n. e ••• ntial t~
suppor~ well-conceived economic proqrams.
The sens. ot ~rq.ncy
and villinqne •• to cooperate 1n .~ppo~ of a larqer qeneral
interest th.t ~.lped to carry us throuqh the d1t~icult crisis
~eriod ot 1982 an4 1983 is now 1••••• id.nt.
'1'his i. un~ort~naee.
- 4 -
Doubts about financing can clearly undermine the resolve to carry
out needed economic reforms. And periodic financial crises are
hardly in the interest of the banxing community itself.
To help address t~ese problems, I believe it is important
for the commercial banks to develop a menu of alternative new
'!Doney options from which all banxs wi th debt exposure can choose
in providing continuing support for debtor refor~s. None of us
can develop such a menu for the banks -- they must do it themselves.
But we can encourage them to think creatively, and to provide a
range or-!inancing alternatives which will help to keep the banks'
doors open to international finance. The continued implementation
of the debt.~rat~y may well rest on their doing so.
I would suggest that we focus on this ~ey issue in this
afternoon's discussion, and that we take up in more detail
within the Development Committee tomorrow additional steps
which the debtor nations themselves may need to undertaxe.
Pinally, groweh prospects for the lowest-income countries
remain an issue of critical concern to the Onited States. The
international community has been moving with increased urgency to
set in place the financing and programs needed to support their
reform efforts. In particular, we are pleased to note the progress
made under the IMF Structural Adjustment Facility and the steps
taken to coordinate its programs of reform and financial assistance
wit~ the World Bank and bilateral ai~ agencies.
We will examine
the growth prospects and financing needs of the lowest-income
countries in much greater detail tomorrow in the Development
Committee an~ I shall have a number of specific comments to offer
at that time.
In concluding, I want to stress the need for all to guar~
against the e9he~ral attraction of magical solutions, which may
appear as tantalizing alternatives to the rigorous realities of
grap'~ling with our debt problems.
The siren song of quick-fixes
can lead us astray and detract us from the task at hand.
There are no quick-fixes, legislated or otherwise, that ca~
solve the debt problem. Dramatic solutions won't appear over:'light.
It took u. a-decade to g__ t into this problem, and we need to
recognize that even with intensive efforts on all our parts, it
will take several years before we fully put these problems to
rl!st.
We must also operate within the reality of fiscal limitations
within t~e industrial nations. No solutions can rest 9rimarily
on the shoulders of the taxpayer. While there is an important
role for official financing, it is to catalyse, not re91ace,
contributions from the private market.
The only path to lasting progress is to approach each
situation on a case-by-case basis, bringing to be~r the policies
and financing needed to bring that economy back to sustained
economiC growth. That is the path we properly have chosen to
pursue. We must now get on with that task.
TREASURY NEWS
D_"artment Of the TreaSulY • Washington, D.C •• Tale"hona 588-2041
AS PREPARED
rOR DELIVERY
Remarks by
The Secretary of the Treasury
James A. Baker, III
at the morning session of the Development Committee
of the International Monetary Fund and World Bank
Washington, D.C.
April 10, 1987
Chairman Chidzero, President Conable, Managing Director
Camdessus:
As always, I welcome this opportunity to discuss important
issues in economic development, but let me first take a moment to
welcome Minister Chidzero as our new Chairman. I look forward to
your able stewardship, Mr. Chairman.
As you all well know, the international financial community
is engaged in an intense discussion about what might constitute
the best approach to easing the international debt burden. I
believe this kind of , analysis is both healthy and necessary.
Yet I remain con~inced that we have made considerable
progress since we embarked upon the current debt strategy in
Seoul, in 1985. I am also convinced that this is the approach
that is most widely accepted by both debtors and creditors. Some
refin ••ents may be needed from time to time, but on balance I
believe our approach is sound.
Let •• highlight a few signs of pr09ress so far:
o
8-944
Many debtors are themselves making policy changes to promote
growth. They are taking steps to increase private savings
and investment, expose public companies to competition,
liberalize trade, and encourage the return of flight capital.
Fiscal deficits are now under better control and exchange
rates are more realistic. As a result of these efforts,
average growth in the major debtors reached 3.5 percent last
year, the best rate in six years. Import and export volumes
in 1987 are expected to be the best in three years.
Inflation has been cut in half, reserves should increase by
20 percent this year, and capital flight is being reversed.
-2o
The 1MF and the World Bank are providing important assistance
to these efforts at reform -- together theY've eommitted
nearly $12 billion in support of poliey reforms for the 15
major debtors since Oetober 1985.
o
Virtually all of the major debtor~ have ·reeeived multilateral
finaneing, or Paris Club or eommereial debt relief in the
past 18 months. This includes the rescheduling of $15.5
billion in loan~ by the Paris Club and another $80 billion by
the commereial banks.
I recosnize that commereial bank financing has been the most
difficult p4r! of the strategy to implement. Despite the modest
new financir~ called for under the debt strategy, and despite
commereial bank pledges of support", new lending by the end of
1986 was disappointing. In particular, the delay in completing
the Mexican package contributed to a financing backlog for other
nations.
Yet in recent weeks we've seen important progress. This
includes the signing of the Mexican package, a retiming and
reprieing arrangement for Chile, and rescheduling agreements for
Venezuela and the Philippines. Other countries will be seeking
new financing. I am confident that we are moving to establish
the environment which will help to assure significant new
financing for the major debtors this year.
What many of these recent agreements have in common is
greater flexibility and innovation in their finaneing mechanisms.
Philippine investment notes, Chilean retiming and repricing
mechanisms, and Argentina'S bearer bond proposals -- these are
all the result of debtor and ereditor ingenuity. Debt/equity
swaps have also helped to reduce the burden of debt -- even as
they also help to support investment, privatization, and the
return of flight capital.
I welcome this trend -- indeed, I believe it is important for
the eommercial banks to build on these kinds of mechanisms and
develop a menu of alternative new money options from which all
banks with debt exposure ean choose in providing continuing
support for debtor reforms. Governments cannot develop such a
menu for the-banks -- they must do it themselves. But
governments ean encourage the banks to think creatively, and to
provide a ran9i of financing alternatives that will help to keep
the doors of all banks open to international finance and ensure
that financing flows to the debtors in a more timely fashion.
Our strategy provldes a broad framework for action, but it
also allows for innovation -- by both debtors and creditors. It
allows debtors and creditors to work together to adapt and
implement financial strategies geared to specifie circumstanees -to individual nations and their specific needs. It puts a
premium on flexibility and ereativity -- ereativity, I might add,
that we won't get if we turn to sweeping, aeross-the-board
solutions that 1 know are popular in some quarters.
-3-
Across-the-board solutions may have general appeal, but they
would limit specialized innovation. They may also appear to
offer short-term relief, but they would do so only at the expense
of sustained growth and continued access to world financial
markets for debtor countries.
No one country can legislate a solution to the world's debt
problems. These problems developed over an extensive period, and
they will take time to resolve. Similarly, these problems cannot
be solved solely ,through action by the public sector. All of the
players in the debt strategy -- debtor and creditor governments,
commercial banks, 'and international financial institutions
must re~ain at the table.
We :an also do more on the macroeconomic front to ease the
debt burden. The sharp decline in interest rates has already
helped substantially, of course -- but recent developments in
commodity prices, in the prospects for OECO growth, and in
growing pressure for protectionism are cause for concern.
Stronger OECD growth is essential to further progress, and open
markets for trade are crucial if the debtors are to be able to
grow and service their debt by increasing exports. A basis is
being laid for stronger, non-inflationary growth through the
cooperative efforts of the industrial countries. The Louvre
Agreement, reinforced by the Statement of the Group of Seven,
represents an important step forward in our efforts to promote
higher growth, reduced imbalances, and exchange rate stability.
The United States and the six major industrial countries are
fully committed to implementing our undertakings in these
agreements.
•
On balance, as I've said, I believe our debt strategy has
made a good start. And I expect further progress. But we must
be realistic and recognize that progress will take time, and that
it will vary among-nations -- depending upon each country's
willingness to make,-the difficult reforms that will promote
growth and earn the continuing financial support of the
international community.
In recent months we have also seen improved economic
prospects in sub-Saharan Africa. Better climatic conditions have
helped, .nd we can only hope they persist. But some of the
progress has also resulted from significant reforms taken by
governments in the region. These governments deserve a good deal
of credit, and their reform efforts challenge the international
community.
Yet despite these positive developments, many African
countries will continue to confront difficult economic and
financial conditions over the next several years. Their problems
are of serious concern to the United States. We must continue to
be innovative in trying to identify measures that support their
reform efforts. In this regard, we are prepared along with other
Paris Club creditors to examine urgently what further measures
might be possible to provide greater relief on official credits.
-4-
The sub-Saharan countries will of course receive 45 to 50
percent of the $12.4 billion total in IDA's eighth replenishment.
The IDA agreement represents a major achievement in international
cooperation to help the world's poorest nations, and my
government strongly supports it. Despite our own budget
constraints, I will make every effort to win support in Congress
for the IDA and for the other multilateral institutions.
I should also point out that IDA'S replenishment provides
that $3 to $3.5 billion be made available for adjustment lending
both to sub-Saharan Africa and elsewhere. This lending should
take place in conjunction with the 1MF's Structural Adjustment
Facility, according to the terms of the cooperative policy
framework approach the Bank and the rund began last year.
Both the Bank and the Fund have made significant progress in
implementing this approach during the past year, but there is
clearly scope for further improvement. I believe, therefore,
that it would be useful to review at our next meeting what they
have achieved. The review could consider the process of
cooperation in negotiating adjustment programs, the effectiveness
of policy changes, the relationship of the adjustment programs to
the two institutions' lending programs, and the extent to which
these arrangements have catalyzed additional bilateral aid. I
recommend that the Bank and Fund staffs jointly prepare a
baCKground paper for our discussion.
The relationship between economic growth and the natural
environment is also a major issue on our agenda. I will make
only a few points now, and outline my views in more detail this
afternoon.
_ The U.S. believes ,that sustained growth in developing
countries requires the prudent management of natural resources.
Too often in the past, 'we've seen the consequences of development
that fails to protect resources -- in deforestation, in soil
erosion, and in expanding deserts.
I think we all recognize that this issue has political, as
well as economic, implications, and I look forward to our
exchange of views. Our discussions on this subject should
continue at future meetings, as we review the Bank's activities
in this area. I hope that we will generate a consensus for a
more active Bank role.
Before I close, I'd like to mention briefly a couple of other
important issues.
-5-
First, the Bank has done a service by clarifying the impact
of structural adjustment lending on the poor. We should support
the Bank's efforts to ensure that its programs protect the poor,
and to help governments design their adjustment programs with
this goal in mind. And in this connection, the U.S. government
has begun new efforts to provide more food aid to low-income
citizens of countries undertaking structural adjustments.
A second critical structural adjustment issue is government
intervention in agriculture -- and its byproducts of
overproduction, trade distortions, and resource misuse. These
practices are hurting both developed and developing countries.
The Declaration of the new trade round at Punta del Este was an
important first step in winning commitments to negotiate on all
practices that distort trade in agriculture. We must now fulfill
these commitments.
Finally, President Conable has already mentioned the
importance of the Multilateral Investment Guarantee Agency. I
hope we can meet the requirements to establish MIGA shortly, so
it can begin its work by the end of the year. For my country's
part, we have already sent the legislation to Congress and are
working hard to win approval.
Conclusion
Let me conclude by emphasizing again some of the progress
we've made in recent months and years. World economic growth
continues -- and both the developing world and the major debtor
nations are now benefiting from this growth. New and creative
financing packages, though sometimes slow in developing, are
being agreed upon by debtors and creditors. While problems
remain, we have an.~ffective strategy for addressing them. I
think we can all agree that we've come much further than we
thought possible even a few years ago.
Thank you.
June 20, 1991
THE BRADY PLAN
Background
In December 1988, President-elect Bush called for a thorough
reassessment of public policy toward international debt. The
Administration's review recognized much had been accomplished in
recent years, but more remained to be done.
At the time, several debtor countries had achieved stronger
growth. CUrrent account deficits were sharply reduced, and the
portion of export earnings going to pay interest on external debt
declined. A number of debtor nations also advanced toward more
democratic regimes.
Meanwhile, major disruptions to the global payments system
were avoided. Commercial banks had strengthened their capital
and built reserves, placing them in a stronger position to
contribute to a more rapid resolution of debt problems.
Despite these signs of progress, the u.s. review of the debt
situation concluded that several serious problems remained.
Debtor reforms in several countries were not applied
consistently: low investment and capital flight weakened future
economic prospects: new loans from commercial banks were not
always forthcoming in a timely fashion: and many debtor nations
had not achieved adequate growth on a sustained basis.
The Administration's review recognized these issues needed
to be addressed to make progress on international debt and
fundamental principles had to be maintained:
growth is essential to the resolution of debt problems;
debtor nations will not achieve sustainable levels of
growth without reform:
debtor nations have a continuing need for external
resources to support their reform efforts: and
solutions must be undertaken on a case-by-case basis.
In recognition of these principles, Secretary Brady
suggested a new approach to revitalize the international debt
strategy in March 1989. The key elements of this new approach
included:
2.2.2
Page 1
The adoption of IMF and World Bank economic reform
programs by debtor countries -- with stronger emphasis
on measures to increase foreign and domestic investment
and the repatriation of flight capital;
Financial support from the IMF and World Bank for debt
and debt service reduction transactions;
Active participation by commercial banks in providing
debt and debt service reduction, as well as new
lending, to debtors implementing economic reforms; and
Paris Club rescheduling of debt owed to official
creditors.
Under the Brady Plan, debtor countries must undertake
economic reforms and adopt sound economic and structural
policies. It is expected these policies will help promote both
foreign and domestic investor confidence, while stimulating a
sustained and durable return of flight capital to those
countries.
To support the reform efforts of debtor countries, the
Administration encouraged the IMF and World Bank to set aside a
portion of their normal policy-based loans for debt reduction
transactions, such as cash buy-backs or collateralized exchanges.
Also encouraged was interest support for transactions involving
significant debt or debt service reduction.
The commercial banks, for their part, were encouraged to
negotiate waivers, voluntary debt and debt service reduction
transactions, along with new money arrangements where needed in
order to provide timely support for debtors' reform efforts.
Finally, the Administration recognized that creditor
governments need to continue to provide substantial support for
debtor countries. In particular, official debt reschedulings are
continuing in the Paris Club, and export credit cover provides
for those countries adopting IMF and World Bank programs.
The Brady Plan is a versatile approach to increase voluntary
debt and debt service reduction by commercial banks, while
encouraging new lending and alternative sources of private
capital. Through combined international efforts, we can provide
sUbstantial benefits for debtor nations in the form of more
manageable debt service obligations, stronger economic growth and
higher standards of living for people in countries around the
world.
###
2.2.2
Page 2
TREASURY NEWS
D_..artmant of the Tr.asuIY • washington, D.C •• Tale.hone 588·2041
For Immediate Release
November 5, 1991
contact: Anne Kelly Williams
(202) 566-2041
THE UNITED STATES AND THE REPUBLIC OF PERU
SIGN AN AGREE~ENT TO COMBAT MONEY LAUNDERING
On Monday, October 14, the governments of the united States
of America and the Republic of Peru continued their fight against
illicit drug trafficking and money laundering by signing an
agreement to exchange financial information. The agreement,
signed in Lima by U.S. Ambassador Anthony C. E. Quainton, on
behalf of the U.S. Department of Treasury, and by Peruvian Prime
Minister Carlos Torres y Torres Lara, provides a mechanism for
exchanging currency transaction information recorded by financial
institutions in each country. The information will be used in
law enforcement procedures relating to drug trafficking and money
laundering. The agreement was effective upon signing.
In his remarks at the signing, Ambassador Quainton
emphasized the importance of this agreement to our bilateral
efforts in fighting narcotics trafficking and money laundering.
Prime Minister Torres y Torres Lara echoed these sentiments,
noting that the accord closed Peru's banking system to those who
would use it to launder proceeds of drug trafficking. After the
signing, Hugo Garcia Salvatecci, Peru's Superintendent of
Banking, who will implement the agreement for Peru, added that
the agreement "can support our two governments in their common
effort to stop money laundering."
Through this agreement, the Administration takes another
significant step in the effort to track illegal drug profits
around the world. It establishes a mechanism to facilitate the
exchange of financial information between the governments of Peru
and the united states of America, and strengthens our other
domestic and international initiatives aimed at combatting
illicit activities involving drugs and psychotropic substances,
and related money laundering.
NB-1533
TREASURY NEWS
D_..artmant of the Tr.aSuIY • Washington, D.C •• Tale.hone 588·2041
OffiCe of Financing
FOR RELEASE AT 2;30 P.M.
November 5, 1991
.2.0~ ~11.9'" 3 3·5.0
:"1
TREASURY'S WEEKLY BILL
O~FERING
The Department of the Treasury, by tti1s publtc notice,
invites .tenders for two series of Treasury bills ~otaling
approximately $ 20,400 million, to be issued Novetnber 14', 1991.
This offering will provide about S 625 m~llion
of new cash for
I
the Treasury, as the maturing bills are outstandi~9
in the amount
of $19,773 million. Tenders will be received at :~Federal Reserve
Banks and Branches and at the Bureau of the Publiq Debt, Washington, D. C. 202'39-1500, Tuesday, November 12, 1991,
prior to
12:00 noon for noncompetitive tenders and 'prior to 1:00 p.m.,
Eastern Standard
time, for competitive tenders. The two
series offered are as follows:
.
91-day bills (to maturity date) for 'approximately
S 10,200 million, representing an additional amount of bills
dated
February 14, 1991, and to mature February 13, 1992
(CUSIP No. 912794 XZ 2 ), currently outstanding in the amount
of $ 23,293 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $10,200 million, to be
dated November 14, 1991,. "and to mature
May.14, 1992
{CUSIP
No. 912794 YN 8 ).
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both aaries of bills will be
issued entirely in book-entry form in a m~n1mum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing November 14, 1991. Tenders from Federal
Reserve Sanks for their own account and as agents for foreign
and international monetary authorities will be accepted at
the weighted average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be .issued to
Federal Reserve Banks, as-agents for foreign and international
monetary authorities, to the extent that the aggr$gate amount
of tenders for such accounts exceeds the aggregate amount of
maturing bills held by them. Federal Reserve Banks currently
hold $ 954
million as agents for foreign and international
monetary authorities, and $ 5,038 million for their own account.
Tenders for bills to be maintained on the book-entry records
of the Department of the Treasury should be submitted on Form
PO 5176-1 (for 13-week Series) or Form PO 5176-2 (for 26-week
series) .
TnE~BURyIS
13-, 26-, AND '2-WEEK BILL OFFERINGS, Paq. 2
Each tender must state the par amount ot bills bid for,
which must be a minimum of $10,000. TAndArA OVRr $10,000 must
be in multiples of $5,000.
competitive tsnders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15'. Fractions may not ba used. A sinqle
bidder, as defined in Treasury'g single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who mak~ primary
mnrkets 1n Government securities and report daily to the Federal
Reserve Bnnk or New York their positions in and borrowings on
auch securities may submit tenders for account of customers, if
the names of the customers and the amount for each customer are
furnishedh others are only permitted to submit tenders for their
own account. Each tender must state the amount of any net long
pooition in the bills being offered if such position is in excess
of $200 million. This information should reflect positions held
as or one-halt hour prior to the closing time tor recoipt ot
tenders on the day ot the auction. Such positions would'include
billa acquired through "when issued" trading, and tutures and
forward transactions as well as holdings of outetanding bills
with the same maturity date as the new· offering, e.g.; bills
with three months to maturity previously, offored as six-month
billa. Doalers, who make primary markets in Government S9CUritieB and report daily to the Federal Reserve Bank of N.~ York
their poftitlona in and borrowinq. on .uah •• curiti •• ,
~h.n
8ub-
mltting tenders tor customers, must submit a separate tender for
ench customer whose net long position 1n the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an
agreement, nor ~ake an agreement to purchase or sell or otherwise dispose or any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
conpotitive tenders.
Payment for the tull par amount of the bills applied tor
must tlCCOmpllny all tendors submitted tor billa to ba maintained
on tho book-entry records of the Department of the Treasury.
A cash adjuatment will be m~dQ on all accapt~d t@nd@rg tor tha
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders trom incorporated barike
and trust companies and from responsible and recognized dealers
in invegtmgnt securities for bills to be m~lnt&ined on the bookentry records of Federal Reserve BanKe and Branches.
1/91
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection
of their tenders. The Secretary of the Treasury expressly
reserves the right to accept or reject any or all tenders, in
whole or in part, and the Secretary's aotion ahall be final.
Subject to these reservations, noncompetitive tenders for each
issue for $1,000,000 or less without stated yield from anyone
bidder will be accepted in full at the weighted average bank
discount rata (1n two decimals) of accepted competitive bids
for the respective issues. The calculation of purchase prices
for accepted bids will be carried to three deoimal places on the
basis of price per hundred, e.g., 99.923, and the determinations
of the secretary of the Treasury shall be final.
Settlement tor accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that data. Cash adjustment~
will be made for differences between the pa~ value ot the
maturing bills accepted in exchange and tha issue price of the
new bills.
If a bill is purchased at issue, and is held to matu~ity,
the ~mount of discount is reportable as ordinary income on 'the
Federal income tax return of'the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount tor the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed ot batore maturity, any gain in
excess of the 'basis is treated AS ordinary income.
Department ot the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms ot these
Treasury bills and govern the conditions ot their issue. Copies
ot the circulars, guidelines, and tender torms may be obtained
from any Federal Reserve Bank or Branch, or trom the Bureau of
the Public Debt.
8/89
UBLIC DEBT NEWS
l
I
FOR IMMEDIATE RELEASE "v~:
November 5, 1991
q"
1
'I'
.
I
'-I
",
'"
j'
v
U
b ~i
CONTACT: Office of Financing
0
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 3-YEAR NOTES
Tenders "for $14,000 million of 3-year notes, Series U-1994,
to be issued November 15, 1991 and to mature November 15., 1994
were accepted today (CUSIP: 912827C91).
The interest rate on the notes will be 6 %. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
yield
5.97%
6.03%
6.00%
Price
100.081
99.919
100.000
Tenders at the high yield were allotted 66%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
25,570
20,264,255
23,060
90,985
80,725
28,750
845,080
34,940
13,305
44,045
18,400
170,685
126,795
$21,766,595
Accepted
25,570
12,842,255
23,060
90,985
80,725
28,730
561,080
32,940
13,305
44,045
18,400
112,185
126,795
$14,000,075
The $14,000 million of accepted tenders includes $852
million of noncompetitive tenders and $13,148 million of
competitive tenders from the public.
In addition, $650 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $2,135 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
Na~j
535
TREASURy'.'NvEIWS
lilio na 5&&-2041
.all artm ent of til. Tra as.P I • Was iling ton , D.C•• Tela
Con tact: Clai re Buch an
(202 )566 -877 3
FOR IMMEDIA~E RELEASE
Nove mber 6, .~~91
State men t of Trea sury Secr etary Brad y
on Fed Disc ount Rate Low ering
rate is good
The Fede ral Rese rve's lowe ring of the disc ount stim
ulus for
ide
prov
Lowe r rate s will
news for the econ omy.
nt, and
stme
inve
econ omic grow th, spur ince ntiv e for busi ness
We hope the Fed' s actio n will
incr ease cons umer conf iden ce.
to cons umer s and
quic kly be refle cted in inte rest rate s ,char ged
busi ness es.
000
NB-1S36
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR RELEASE AT 3:00 PM
November 6, 1991
Contact: Peter Hollenbach
(202) 219-3302
PUBLIC DEBT ANNOUNCES ACTMTY FOR
SECURITIES IN THE STRIPS PROGRAM FOR OCTOBER 1991
Treasury's Bureau of the Public Debt announced activity figures for the month of October 1991, of
securities within the Separate Trading of Registered Interest and Principal of Securities program,
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$544,825,443
Held in Unstripped Form
$415,075,628
Held in Stripped Form
$129,749,815
Reconstituted in October
$8,809,900
The accompanying table gives a breakdown of STRIPS activity by individual loan description.
The balances in this table are subject to audit and subsequent revision. These monthly figures are
included in Table VI of the Monthly Statement of the Public Debt, entitled "Holdings of Treasury
Securities in Stripped Form." These can also be obtained through a recorded message on
(202) 447-9873.
000
PA-72
27
TABLE VI-HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, OCTOBER 31. 1991
(In thousands)
O:>',nClpal Amount OutstandIng
Matuflly Date
POr1,on Held ,n
Unstrlf)De<I Form
iatal
ReconS\ltuteD
Th,s Momn;
PortIon Held '"
Stnpped Form
S6.858.554
55.327.354
$1.331.200
S60.800
Note A·1995
2115/95
6.933.861
6.506.681
I
427.200
220.800
',.';4% Note 9·1995
5115/95
<.127.086
5.797.166
'
1.329.920
22.400
10.112 0'0 Note C.1995
8115/95
7,955.901
7.141.101
814.800
50.000
9·1/2010 "late 0·1995
11115/95
7.318.550
5,980.150
Note A·1996
2115196
8.575.199
7·318.... Note ':"996
.5115196
; I
·5/8% Note C·; 994
".;'4·,
8-718%
11115194
1.338.400
12.000
8.173.599
401.600
24.000
20.085.643
19.861.643
224.000
40.000
20.258.810
19.918.010
340.800
-0-
101.200
-0-
I
7.114% Note 0.1996
11115196.
8·11201c Note A·1997
5115197
9,921.2:!7
9,820.037
8·518 .... Note 6,1997
8115197
9.362.B:!6
9.186.836
116.000
-0-
8·7/8 .... Note C'1997
.11115197
9.808.329
9.597.129
211,200
24.000
2115198
9.159.068
9.149.788
9.280
-0-
.5/15/98
9.165.387
9.128.387
37.000
-0-
.342.646
11.213.846
128.800
9.902.875
9.754.075
i
I
8·1180/0 Note A·1998
90/. Note 6·1998
g·1I4.1o Note C·1998
8/15198
3·718% Note 0·1998
11115/98
II
148.800
-0II
148.800
8· 718 .... Note A·1999
2/15/99
9.719.623
9.602.823
116.800
II
-0-
9·118 .... Note 9,1999
5/15/99
10.047.103
9.176.703
870.400
II
-0-
80,0 NOle C·1999
81 t 5/99
10.163.644
10.081.619
82.025
-0-
7.7180 10 Note 0,1999
11115199
10.773.960
10,765.960
8.000
-0-
8·112% Note A·2ooo
2115100
10.673.033
10.673,033
-0-
-0-
8·718% NOle 6,2000
.5115100
10.496.230
10.373.030
123.200
-0-
8·314CVo Note C·20OO
.8115/00
11.080.646
11.080.646
-0-
-0-
8·1/2% Note 0·2000
.11/15/00
11.519.682
11.519.682
-0-
-0-
7·314 .... NOle A·2oo1
2115/01
11.312.802
11.308.802
4.000
-0-
.5115101
12.398.0B:!
12.398.083
-0-
-0-
8115101
12.339.185
12.337.585
1.600
-0510.400
8010 Note B·2001
7·7/8 .... Note C·2001
11·518.... 60nd 2004.
12% Bond 2005 .
to·314% Bond 2005.
8.301.806
4,812.206
3.489.600
.5/15/OS
4.260.758
1,882.808
2,377.950
423.700
· .8115/05
9.269.713
8.550.513
719,200
250,400
11115104
9-:lI8% Bond 2006.
2115106
4.755.916
11·3/4 .... Bond 2009-14
11115114
6.005.584
11·114.... 60nd 2015
10-518% Bond 2015.
I
,
4.755.916
-0-
-0-
1.818.384
4.187.200
430.400
2115/15
12.687.799
2,068.279
10.599.520
76,000
· .8115/15
7.149.916
I
1.852.836
5,497.280
105.600
6.899.859
'
2.155.859
4,744,000
113.600
9-1/4% Bond 2016.
· .2115116
7.268.854
6.502.054
764.800
86,400
7·1/4% 60nd 2016.
· " .. 5115/16
18.823.551
17.117.151
1.706,400
28,000
18.826,448
2.238.000
800.000
9-718% Bond 2015.
7·112% Bond 2016.
11115115 ..
. 11115116
18,864.448
,
I
. 5115117
18.194.169
6,186,329
12.027.840
487,040
· . 8115/17
14,016,858
9.782.458
4,254.400
578.000
9-118% Bond 2018.
· .... 5115118
8.708.639
2.148.639
6,560.000
203.200
9% Bond 2018 .....
· .... 11/15118 . ...
9.032.870
1.442.270
7.590,800
426.200
.. . 2115119
19,250.798
8.151.598
13.099.200
1.185.800
.. .. . 8/15119 '"
20,213.832
11.480• •
8.733.440
1.111,880
10.2211• •
4.030.068
8.198.800
288.100
8-314% Bond 2017
8·7/8% 60nd 2017 ............ .
8-718% Bond 2019 ...... '" ....... .
8-118% Bond 2019 .................. .
8-112% Bond 2020 .................. .
.... 2115120
8-314% Bond 2020 .................. .
.. ... 5115120 '"
10,158,883
2.952.323
7,206.580
198,240
8-314% Bond 2020. . .. . ............ .
.. ' . . 8115120
21.418.806
6.874.448
14.544,160
212.840
7·718% Bond 2021 .................. .
· .... 2115121
11.113.373
8,513.373
2.600.000
398.100
8-118% Bond 2021 .................. .
· .... 5115121 ...
11.958._
2.373.440
238.400
8-1/8% Bond 2021 ....
· ... . 8115121
12.163.482
I
9.585.448
12.152,282
11.200
-0-
544.825.443
I
415.075.1128
129.748.815
8.808.100
Tot.! ........................... .
'EIIec:IIY8 May 1. 1987.111CUrihft held in I1ripped 10rm __ eligible tor recanstItuIIon 10"., unatripped tDmJ.
Note:
On lite 4th wortcday of ellCh month a recordIng of Table VI will be _labia alter 3:00 pm. The . . . . - numbIr .. (202) 447. .73.
Tile ~ III tnia table ... IUIIjeCC 10 audit and IUIIaeqUII1t 8III\II1mat'ItlI.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the P\l.l}tk Deb,
FOR IMMEDIATE RELEASE
November 6, 1991
:j
'fflsH'in
t6h, DC 20239
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 10-YEAR NOTES
Tenders for $12,004 million of 10-year notes, Series D-2001,
to be issued November 15, 1991 and to mature November 15, 2001
were accepted today (CUSIP: 912827D25).
The interest rate on the notes will be 7 1/2%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
yield
7.50%
7.56%
7.53%
Price
100.000
99.584
99.792
$75,000 was accepted at lower yields.
Tenders at the high yield were allotted 58%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
12,366
23,099,358
15,926
11,941
25,511
17,561
514,809
18,993
5,265
19,218
5,489
297,329
12,858
$24,056,624
Accepted
12,366
11,383,478
15,926
11,941
25,511
15,461
280,029
18,993
5,265
19,218
5,451
197,329
12,852
$12,003,820
The $12,004 million of accepted tenders includes $614
million of noncompetitive tenders and $11,390 million of
competitive tenders from the public.
In addition, $473 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $300 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
The minimum par amount required for STRIPS is $80,000.
Larger amounts must be in multiples of that amount.
NB-1537
TREASURY NEWS
D_..artmant of the Tr.aSUIY • washington, D.C •• Tale.hone 588·2041
FOR IMMEDIATE RELEASE
November 6, 1991
CONTACT:Claire Buchan
(202)566-8773
Statement of Treasury Secretary Brady
on Bob Clarke
The Senate Banking Committee today completed its shameful work
on Bob Clarke's nomination.
This is crass politics and
partisanship at its worst.
It is the time honored duty of the
Senate to advise and consent; it is another thing to engage in
character assassination and persecution.
On a practical level, it makes no sense to take this action
when credit availability is lacking, the economic recovery is
sluggish, and the American people ask for leadership.
000
NB-1538
TREASURY NEWS
De.artmant of the T••asuIY • Washington, D.C •• Tale.hona 5&&.2041
CONTACT:
FOR IMMEDIATE RELEASE
November 6, 1991
Barbara Clay
202-566-5252
BRADY ANNOUNCES OECD AGREEMENT ON TIED AID
Treasury Secretary Nicholas F. Brady today announced an agreement
amonq the major countries of the Organization for Economic
cooperation and Development (OECD) to further curb trade
distortions due to the linkage of foreign aid to the purchase of
a donor country's exports, and to reduce remaining subsidies in
official export credits. The agreement, effective December 16,
1991, is the culmination of over two years of negotiation
initiated by the united States, and is subject to approval by the
individual governments.
"The OECD has taken a major step to apply the principles of a
free market economy to the world's trading system", said
Secretary Brady. U.S. Export-Import Bank Chairman John Macomber
added, "As this agreement takes hold, it should substantially
reduce the commercial disadvantages for American exporters
engendered by the tied aid practices of other countries".
The agreement, which is intended to maximize the total flow of
capital to developing countries, prohibits members of the OECD
from providing so-called tied aid to countries whose annual per
capita income exceeds $2,465. A country whose per capita income
exceeds this threshold for two consecutive years automatically
becomes ineligible. The least developed countries would not be
subject to the new prohibitions.
countries whose per capita income falls between those two
categories would be eligible for tied aid under certain
conditions. As a general principle, if a project has the
capacity to support market rates of financing, tied aid funds
should not be used. The agreement sets up tests and consultation
procedures to distinguish between projects that should be
financed on market or official export credit terms, and those
that legitimately require such aid funds. Conditions under which
tied aid could be provided to these countries include the
unavailability of commercial or export-import bank financing, or
a case where a project lacks the capacity to generate SUfficient
income to cover its costs at market prices.
In announcing the agreement today, Secretary Brady acknowledged
the important contribution of Chairman Macomber and the staff of
the Export-Import Bank to the successful conclusion of the
negotiations.
###
TREASURY NEWS
D_..artmant of the Tr.asuIY • Washington, D.C •• Tale.hone 588-2041
EMBARGOED FOR RELEASE
November 7, 1991
2:00 PM
contact: Claire Buchan
(202)566-8773
Statement of Secretary of the Treasury
Nicholas F. Brady
on Credit Crunch Guidelines
I am pleased with today's announcement by the financial
institutions regulators on guidelines for certain regulatory
policies. The new guidelines will increase flexibility and improve
consistency in bank regulation.
Treasury has been working with regulators, business leaders
and bankers for more than a year to develop a coordinated, sensible
approach to alleviate the credit crunch.
Today' s guidelines
demonstrate the regulators' continued commitment to evenhanded,
common-sense supervisory policies, and follow through on the goals
outlined by the Economic Policy Council in October.
Improving credit availability is necessary to sustaining
economic recovery. Passage by Congress of the Administration bank
reform and the President's economic growth package are also vital
to ensuring that the recovery is vibrant.
000
NFB-1540
Office of the Comptroller of the Currency
Federal Deposit Insurance Corporation
Federal Reserve Board
Office of Thrift Supervision
NEWS RELEASE
EMBARGOED FOR RELEASE at 2 p.m. EST
Thursday, November 7, 1991
FINANCIAL REGULATORS ISSUE JOINT
SUPERVISORY POLICY STATEMENT
WASHINGTON, D.C., Nov. 7, 1991
The four federal regulators of
bank and thrift institutions issued a joint statement today on the
review and classification of commercial real estate loans.
Today's
action is another step by the agencies to ensure that
misunderstandings about supervisory policies do not impede the
availability of credit to sound borrowers.
Development of this
document was announced in the Administration's October 8th statement
on "Easing The Credit Crunch To Promote Economic Growth."
The policy statement provides clear and comprehensive guidance
on the review and classification of commercial real estate loans.
The detailed guidelines, which will be sent to the chief executive
officer of each depository institution and each bank and thrift
examiner, cover loan portfolio review procedures, indicators of
troubled loans, analysis of loans and collateral values, and the
review of institutions' loss allowances.
The four regulatory agencies that issued today's guidelines are
the Office of the Comptroller of the Currency (OCC), the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board
-more-
upervisory policy statement - 2
FRS), and the Office of Thrift Supervision (OTS).
Together,
the
:our agencies supervise the activities of the nation's 12,000
:ommercial banks and 2,200 thrift institutions.
In addition to today's issuance, the regulatory agencies are
Jndertaking three other actions:
o
National Meeting of Examiners
The agencies will hold a national meeting of senior
examination personnel in Baltimore, Md., on December 16 and
17 to review the policy statement and other initiatives
related to credit availability.
o
Random Audit Program
To assess the quality of examiners'
review of collateral
value, the regulatory agencies will implement a random audit
program to determine how examiners review and analyze the
assumptions contained in appraisals as part of their loan
review process.
o
Holding Company Preferred Stock
The Federal Reserve Board, in a move designed to
g~ant
bank
holding companies greater flexibility in raising capital,
has issued for public comment a proposal to lift the limit
on the amount of noncumulative perpetual preferred stock
that bank holding companies may include in Tier 1 capital.
This proposal, if adopted, can assist organizations in
strengthening their capital positions and expanding their
ability to extend credit to sound borrowers.
All of these steps follow previous actions by the regulatory
agencies in March and July to address credit availability concerns.
iii
Office of the Comptroller of the Currency
Federal Deposit Insurance Corporation
Federal Reserve Board
Office of Thrift Supervision
Interagency Policy Statement on the Review and
Classification of Commercial Real Estate Loans
November 7, 1991
The recent decline in credit extended by depository institutions has been aLLributed to
many factors. These factorS include the general slowdown in the economy, the
overbuilding of commercial real estate properties in some markets, the desire of some
household and business borrowers, as well as some depository institutions, to
strengthen their balance sheets, changes by lenders in underwriting standards, and
concerns about the potential impact of certain supervisory policies or actions. To
ensure that regulatory policies and actions do nOl inadvertently curtail the availability
of credit to sound borrowers, the four Federal regulators of banks and thrifts have
taken a number of steps to clarify and communicate their policies. The attached policy
statement is a further step in this effort.
On March 1, 1991, the four agenCies - the Office of the Comptroller of the Currency,
the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office
of Thrift Supervision - issued generdl guidelines that addressed a wide range of
supervisory policies. Included in the March issuance were brief discussions of the
workout of problems loans, lending by undercapitalized institutions, and a general
statement on the valuation of real estate loans.
The attached policy statement expands upon the March 1 and subsequent guidance as
it relates to the review and classification of commercial real estate loans.
The intent of the statement by the agencies is to provide clear and comprehensive
guidance to ensure that supervisory personnel are reviewing loans in a consistent,
prudent, and balanced fashion and to ensure that all interested parties are aware of the
guidance.
The policy statement emphasizes that the evaluation of real estate loan,; is not based
solely on the value of the collateral, but on a review of the borrower's willingness and
capacity to repay and on the income-producing capacity of the properties.
The policy statement also provides guidance on how supervisory personnel analyze the
value of collateral. In general, examiners consider the institution's appraisals of
collateral (or internal evaluations, when applicable) to detennine value and they review
the major facts, assumptions and approaches used in detennining the value of the
collateral. Examiners seek to avoid challenges to underlying assumptions that differ in
only a limited way from nonns that would generally be associated with the property
under review. Nonemeless. when reviewing me value of the collateral and any related
management adjustments. examiners ascertain that the value is based on assumptions
that are both prudent and realistic. and not on overly optimistic or overly pessimistic
assumptions.
The policy statement covers a wide range of specific topics, including:
•
the general principles that examiners follow in reviewing commercial real estate
loan portfolios;
•
the indicators of troubled real estate markets. projects, and related indebtedness;
•
the factors examiners consider in their review of individual loans, including the use
of appraisals and the detennination of collateral value;
•
a discussion of approaches to valuing real estate, especially in troubled markets;
• the classification guidelines followed by me agencies, including the treatment of
guarantees; and
•
the factors considered in the evaluation of an institution's allowance for loan and
lease losses.
This statement is intended to ensure mat all supervisory personnel, lending institutions
and other interested panics have a clear understanding of the agencies' policies.
Interagency Policy Statement on the Review and
Classification of Commercial Real Estate Loans·
Introduction
This policy statement addresses the review and classification of commercial real estate
loans by examiners of the federal bank. and thrift regulatory agencies? Guidance is
also provided on the analysis of the value of the underlying collateral. In addition,
this policy statement summarizes principles for evaluating an institution's process for
detennining the appropriate level for the allowance for loan and lease losses, including
amounts that have been based on an analysis of the commercial real estate loan
portfolio.:3 These guidelines are intended to promote tlle prudent, balanced, and
consistent supervisory treatment of commercial real estate loans, including those to
borrowers experiencing financial difficulties.
The attachments to this policy statement address three topics related to the review of
commercial real estate loans by examiners. The topics include the treatment of
guarantees in the classification process (Attachment 1); background infonnation on the
valuation of income· producing commercial real estate loans in the examination process
(Attachment 2); and definitions of classification tenns used by the federal bank and
thrift regulatory agencies (Allachment 3).
Examiner Review of Commercial Real Estate Loans
Loan Policy and Administration Review. As part of the analysis of an institution's
commercial real estate loan portfOlio, examiners review lending policies, loan
administration procedures, and credit risk control procedures.' The maintenance of
prudent written lending policies, effective internal systems and controls, and thorough
I For purposes of this policy statement, "commercial real estale loans" refers to aU loans secured by real estate, excepl
for loans secured by I - 4 family residential propenies. 'Ibis docs not refer to loans where the underlying coUaleral has
been taken solely through an abundance of caution where the terms as a consequence have not been made more favorable
than they would have been in the absence of the lien.
Z The agencies issuing this policy statemcnt are the Board of Govcrnors of the Fcderal Reserve System, the Federal
Deposit Insurance Corporation, thc Officc of the Comptroller of the Currency. and thc Office of lbrift Supervision.
, For analytical purposcs, as pan of ilS overall estimate of the allowance for loan and lease losses (ALLL) management
may aUribute a portion of the ALLL to the commercial real est.alC loan portfolio. However, this docs not imply that any
pan of the ALLL is segregated for. or allo<:ated to, any particular asset or group of assets. The ALLL is available to absorb
aU credit losscs originating from the loan and lease ponfolio.
For savings institutions, the ALLL is refcrred to as thc "gencr." valuation aUowancc" for purposes of the Thrifl
Financial Report.
loan documentation are essential to the institution's management of the lending
function.
The policies governing an institution's real estate lending activities must include
prudent underwriting standards that are periodically reviewed by the board of directors
and clearly communicated to the institution's management and lending staff. The
institution must also have credit risk control procedures that include, for example,
prudent internal limits on exposure, an effective credit review and classification
process, and a methodology for ensuring that the allowance for loan and lease losses is
maintained at an adequate level. The complexity and scope of these policies and
procedures should be appropriate to the size of the institution and the nature of the
institution's activities, and should be consistent with prudent banking practices and
relevant regulatory requirements.
Indicators of Troubled Real Estate Markets and Projects, and Related
Indebtedness. In order to evaluate the collectibility of an institution's commercial real
estate ponfolio, examiners should be alert for indicators of weakness in the real estate
markets served by the institution. They should also be alert for indicators of actual or
potential problems in the individual commercial real estate projects or transactions
financed by the institution.
Available indicators, such as permits for - and the value of - new construction,
absorption rates, employment trends, and vacancy rates, are useful in evaluating the
condition of commercial real estate markets. Weaknesses disclosed by these types of
statistics may indicate that a real estate market is experiencing difficulties that may
result in cash flow problems for individual real estate projects, declining real estate
values, and ultimately, in troubled commercial real estate loans.
Indicators of potential or actual difficulties in commercial rcal estate projects may
include:
•
An excess of similar projects under construction.
•
Construction delays or other unplanned adverse events resulting in cost overruns
that may require renegotiation of loan terms.
•
Lack of a sound feasibility study or analysis that reflects current and reasonably
anticipated market conditions.
• Changes in concept or plan (for example, a condominium project converted to an
apartment project because of unfavorable market conditions).
•
Rent concessions or sales discounL<; resulting in cash flow below the level projected
in the original feasibility study or appraisal.
•
Concessions on finishing tenant space, moving expenscs, and lease buyouts.
2
• Slow leasing or lack of sustained sales activity and increasing sales cancellations
that may reduce the projcct's income potential, resulting in protracted repayment or
default on the loan.
• Delinquent lease payments from major tenants.
•
Land values that assume future rezoning.
• Tax arrearages.
As the problems associated with a commercial real estate project become more
pronounced, problems with the related indebtedness may also arise. Such problems
include diminished cash flow to service the debt and delinquent inLcrest and principal
payments.
While some commercial real estate loans become troubled because of a general
downturn in the market, others become troubled because they were originatcd on an
unsound or a liberal basis. Common examples of these types of problems include:
• Loans with no or minimal borrower equity.
• Loans on speculative undeveloped property where the borrowers' only source of
repayment is the sale of the property.
• Loans based on land values that have been driven up by rapid turnover of
ownership, but without any corresponding improvements to the property or supportable income projections to justify an increase in value.
• Additional advances to service an existing loan that lacks credible support for full
repayment from reliable sources.
• Loans to borrowers with no development plans or noncurrent development plans.
• Renewals, extensions and refinancings that lack credible support for full repayment
from reliable sources and that do not have a reasonable repayment schedule. 4
Examiner Review of Individual Loans, Including the Analysis of Collateral Value.
The focus of an examiner's review of a commercial real estate loan, including binding
commitments, is the ability of the Joan to be repaid. The principal factors that bear on
this analysis are the income-producing potential of the underlying collateral and the
borrower's willingness and capacity to repay under the existing loan terms from the
borrower's other resources if necessary. In evaluating the overall risk associated with
• As discussed more fully in the section on classification guidelines, the refinancing or renewing of loans to sound
borrowers would not result in a supervisory classification or criticism unless well-defined weaknesses exist that jeopardize
repayment of the loans. Consistent with sound banking practices, institutions should work in an appropriate and
constructive manner with borrowers who may be experiencing tempordry difriculties.
3
a commercial real estate loan, examiners consider a number of factors, including the
character, overall financial condition and resources, and payment record of the
borrower. the prospects for support from any financially responsible guarantors~ and
the nature and degree of prolection provided by the cash flow and value of the
underlying collateral. 5 However, as other sources of repayment for a troubled
commercial real estate loan become inadequate over time, the importance of the
collateral's value in the analysis of the loan necessarily increases.
The appraisal regulations of the federal bank and lhrift regUlatory agencies require
institutions to obtain appraisals when certain criteria are met. 6 Management is
responsible for reviewing each appraisal's assumptions and conclusions for reasonableness. Appraisal assumptions should not be based solely on current conditions that
ignore the stabilized income-producing capacity of the property.? Management should
adjust any assumptions used by an appraiser in determining value that arc overly
optimistic or pessimistic.
An examiner analyzes the collateral's value as determined by the institution's most
recent appraisal (or internal evaluation, as applicable). An examiner reviews the major
facts, assumptions, and approaches used by the appraiser (including any comments
made by management on the value rendered by the appraiser). Under the
circumstances described below, the examiner may make adjustments to this assessment
of value. This review and any resulting adjustments to value are solely for purposes
of an examiner's analysis and classification of a credit and do not involve actual
adjustments to an appraisal.
A discounted cash flow analysis is an appropriate method for estimaling the value of
income-producing real estate collateral. s This approach is discussed in more detail in
Attachment 2. This analysis should not be based solely on the current performance of
the collateral or similar properties; rather, it should take into account, on a discounted
basis, the ability of the real estate to generate income over time based upon reasonable
and supportable assumptions.
~ The lreaunent of guantntees In the classlfieauon process is discussed
\0
Atta..:hmenl \.
6 Department of the Treasury. Office of the Comptroller of the Currency. 12 CFR Part 34 (Docket No. 90-16); Board
of Govemors of the Federal Reserve System, 12 CFR Parts 201S and 225 (Regulauon H and Y; Docket No. R-(685);
Federal Deposit Insuran..:e Corpor4110n, 12 CFR 323 (RlN )OM-AB05); Departmenl of the Treasury, Office of Thnfl
SupervISIon. 12 CFR Part 564 (Docket No. 90-1495).
7 Stabilized mcome generally IS defmed as the yearly net opcraung Income produ..:cd by the property al normal
occupancy and rental rales; It may he adjusted upward or downward from today's auual markel conditions.
, The real estate apprdisal regulauons of the federal bank and thnfl regulalory agencies include a requirement thaI an
appraisal (a) follow a reasonable valuauon melhod that addresses the direct sales companson, income, and cost approaches
to market value; (b) reconcuc these approames; and (c) cxplaln the ellmlnauon of ea..:h approa..:h nUl used. A discounted
cash flow analYSIS IS re..:ognll.cd as a valuauon method for the IOwmc approadl.
4
When reviewing the reasonableness of the facts and assumptions associated with the
value of the collateral, examiners may evaluate:
• Current and projected vacancy and absorption rates;
• Lease renewal trends and anticipated rents;
• Volume and trends in past due leases;
• Effective rental rates or sale prices (taking into account all concessions);
• Net operating income of the propeny as compared with budget projections; and
• Discount rates and direct capitalization ("cap") rates. 9
The capacity of a propeny to generate cac;h flow to service a loan is evaluated based
upon rents (or sales), expenses, and rates of occupancy that are reasonably estimated to
be achieved over time. The determination of the level of stabilized occupancy and
rental rates should be based upon an analysis of current and reasonably expected
market conditions, taking into consideration historical levels when appropriate. The
analysis of collateral values should not be based upon a simple projection of current
levels of net operating income if markets are depressed or reflect speculative pressures
but can be expected over a reasonable period of time to return to normal (stabilized)
conditions. Judgment is involved in determining the time that it will take for a
propeny to achieve stabilized occupancy and rental rates.
Examiners do not make adjustments to appraisal assumptions for credit analysis
purposes based on worst case scenarios that are unlikely to occur. For example, an
examiner would not necessarily assume that a building will become vacant just
because an existing tenant who is renting at a rate above today's market rate may
vacate the propeny when the current lease expires. On the other hand, an adjustment
to value may be appropriate for credit analysis purposes when the valuation assumes
renewal at the above-market rate, unless that rate is a reasonable estimate of the
expected market rate at the time of renewal.
When estimating the value of income-producing real estate, discount rates and "cap"
rates should reflect reasonable expectations about the rate of return that investors
require under normal, orderly and sustainable market conditions. Exaggerated,
imprudent, or unsustainably high or low discount rates, "cap" rates, and income
projections should not be used. Direct capitalization of nonstabilized income flows
should also not be used.
Assumptions, when recently made by qualified appraisers (and, as appropriate, by
institution management) and when consistent with the discussion above, should be
9
Allachment 2 includes a discussion of discount
rollCS
and direct capitalization rates.
5
nge the
given a reasonable amounL of deference. Examiners should not challe
in appraisals,
underlying assumptions, including discount rates and "cap" rates used
associated with
that differ only in a limited way from norms that would generally be
ral may be
the property under review. The estimated value of the underlying collate
sh that any underlyadjusted for credit analysis purposes when the exami ner can establi
assumptions.
ing facts or assumptions are inappropriate and can support alternative
Classification Guidelines
adequately protected
As with other types of loans, commercial real estate loans that are
er, guarantor, or the
by the current sound worth and debt service capacity of the borrow
sound borrowers
underlying collateral generally arc not classified. Similarly, loans to
standards,
that are refinanced or renewed in accordance with prudent underwriting
developers, should
including loans to creditworthy commercial or residential real estate
that jeopardize
not be classified or criticized unless well-defined weaknesses exist
loans having
repayment. An institution will not be criticized for continuing to carry
tion has a wellweaknesses that result in classification or criticism as long as the institu
ve internal
conceived and effective workout plan for such borrowers, and effecti
controls to manage the level of these loans.
, examiners apply
In evaluating commercial real estate credits for possible classification
the appropriate
standard classification definitions (AltachmenL 3).10 In detenn ining
ation on repayment
classification, consideration should be given to all important inform
the value of, and
prospects, including infonnation on the borrower's creditwonhiness,
rt provided by
cash flow provided by, all collateral supporting the loan, and any suppo
financially responsible guarantors.
taken into
The loan's record of performance to date is important and must be
estate loan should
consideration. As a general principle, a pcrfonning commercial real
of the
not automatically be classified or charged-off solely because the value
loan balance.
underlying collateral has declined to an amounL that is less than the
well-defined
However, it would be appropriate to classify a performing loan when
le support for
weaknesses exist that jeopardize repayment, such as the lack of credib
full repayment from reliable sources. 11
nts of the
These prinCiples hold for individual credits, even if ponion s or segme
difficulties. The
industry to which the borrower belongs are experiencing financial
teristics
evaluation of each credit should be based upon the fundamental charac
These deflllluons are presented
superllso ry purposes.
10
In
or "loss" for
Auachment 3 and address assets claSSified "substandard," "doubtful,"
loan is the loan's lrcaunen t as an accruing asset
Another Issue thal anses 10 the review of a commercial real estate
regulatQry ilgencies have provided guidance
thnft
and
bank
or as a nonaccrual ilsSCl for reporting purposes. The federal
(Cali Reports) for banks. and in the
income
and
n
Condiuo
of
Reports
the
[or
on nonaccrual stalus In the IOSlrucUons
and In related SUperviSOry gUidance of the agencies.
IOstrucUons for the Thnit hnancla l Repon for savIOgs assoclilUonS.
II
6
affecting the collectibility of the particular credit. The problems broadly associated
with some sectors or segments of an industry, such as certain commercial real estate
markets. should not lead to overly pessimistic assessments of particular credits that are
not affected by the problems of the troubled sectors.
Classification of troubled project-dependent commercial real estate loans. 12 The
following guidelines for classifying a troubled commercial real estate loan apply when
the repayment of the debt will be provided solely by the underlying real estate
collateral, and there are no other available and reliable sources of repayment.
As a general principle, for a troubled project-dependent commercial real estate loan,
any portion of the loan balance that exceeds the amount that is adequately secured by
the value of the collateral, and that can clearly be identified as uncollectible, should be
classified "10ss.,,13 The portion of the loan balance that is adequately secured by the
value of the collateral should generally be classified no worse than "subslaIldard." The
amount of the loan balance in excess of the value of the collateral, or portions thereof,
should be classified "doubtful" when the potential for full loss may be mitigated by the
outcomes of certain pending events, or when loss is expected but the amount of the
loss cannot be reasonably determined.
If warranted by the underlying circumstances, an examiner may use a "doubtful"
classification on the entire loan balance. However, this would occur infrequently.
Guidelines for classifying partially charged-off loans. Based upon consideration of
all relevant factors, an evaluation may indicate that a credit has well-defined
weaknesses that jeopardize collection in full, but that a portion of the loan may be
reasonably assured of collection. When an institution has taken a charge-off in an
amount sufficient that the remaining recorded balance of the loan (a) is being serviced
(based upon reliable sources) and (b) is reasonably assured of collection, classification
of the remaining recorded balance may not be appropriate. Classification would be
appropriate when well-defined wcaknesses continue to be present in the remaining
recorded balance. In such cases, the remaining recorded balance would generally be
classified no more severely than "substandard."
A more severe classification than "substandard" for the remaining recorded balance
would be appropriate if the loss exposure cannot be reasonably dClennined, e.g., where
significant risk exposures are perceived, such as might be the case for bankruptcy
situations or for loans collateralized by properties subject LO environmental hazards.
In addition, classification of the remaining recorded balance would be appropriate
when sources of repayment are considered unreliable.
11 The discussion in this section is nol. intended to address loans that must be treated as "other real estate owned" for
bank regulatory reponing purposes or "real estate owned" for thrift regulatory reponing purpuses. Guidance on these assets
is presented in supervisory and reponing guidance of the agencies.
IJ For purpuses of this discussion, the "value of the collateral"' is the value used by the examiner for credit analysis
purposes, as discussed in a previous section of this policy statement.
7
ication treaonent
Guidelines for classifying formally restru ctured loans. The classif
lly be
previously discussed for a partially charged off loan would also genera
have been taken.
appropriate for a formally restructured loan when partial charge-offs
is on the ability
For a formally restructured loan, the focus of the examiner's analysis
Oassification
of the borrower to repay the loan in accordance with its modified terms.
turing, wellof a fonnally restructured loan would be appropriate, if, after the restruc
loan in
defined weaknesses exist that jeopardize the14orderly repayment of the
estate loans
accordance with reasonable modified terms. Troubled commercial real
tion's internal
whose tenns have been restructured should be identified in the institu
credit review system, and closely monitored by managemenl
Review of the Allowance for Loan and Lease Losses (ALLL)ls
based on an
The adequacy of a depository institution's ALLL, including amounts
l, well
analysis of the commercial real estate portfolio, must be based on a carefu
and lease portfodocumented, and consistently applied analysis of the institution's loan
liO.l6
management's
The detennination of the adequacy of the ALLL should be based upon
ability of
consideration of all current significant conditions that might affect the
tion. While
borrowers (or guarantors, if any) to fulfill their obligations to the institu
cal losses or even
historical loss experience provides a reasonable starting point, histori
cannot produce a
recent trends in losses are not sufficient without further analysis and
reliable estimate of anticipated loss.
consider other
In detennining the adequacy of the ALLL, management should also
the experience,
factors, including changes in the nature and volume of the portfolio;
standards; collecability, and depth of lending management and staff; changes in credit
risk; trends in
tion policies and historical collection experience; concentrations of credit
in the volume of
the volume and severity of past due and classified loans; and trends
n, this analysis
nonaccrual loans, specific problem loans and commitments. In additio
in identifying,
should consider the quality of the institution's systems and management
ement should
monitoring, and addressing asset quality problems. Furthennore, manag
and
consider external factors such as local and national economic conditions
a
110/ have reasonable modified tenns would be
An example of a restructured commen.,al real estate loan that does
provides
bUl
flow
cash
s
generale
l
coUalera
g
underlym
"cash flow" mongag e which requires interest payments only when the
no substantive benefits to the lending mSllluuon.
I(
gUidance on the allowance for loan and lease
Each of the federal hank and Ihrift regulatory agencies have issued
assessmg the adequacy of the allowance for loan and
losses. The followmg diSCUSSion summan/.cs genenll pnnciples for
lease losses.
15
estimalc of anticipated losses than could
The esumauo n process described in thiS sccUon permits for a more accurale
r. it is only an estimation proccss and
1I0weve
basiS.
e
be adueved by assesSing the loan portfolio solely on an aggregat
r asset or group of assets. The
panicula
any
10,
allocated
or
for,
ed
docs nol Imply that any pan of the I\LLL IS segregat
.
and lease portfolio
ALLL IS avatlable 10 absorb all credil losses ongtnau ng from the loan
16
developments; competition; and legal and regulatory requirements; as well as
reasonably foreseeable events that are likely to affect the collectibility of the loan
portfolio.
Management should adequately document the factors that were considered, the
methodology and process that were used in determining the adequacy of the ALLL,
and the range of possible credit losses estimated by this process. The complexity and
scope of this analysis must be appropriate to the size and nature of the institution and
provide for sufficient flexibility to accommodate changing circumstances.
Examiners will evaluate the methodology and process that management has followed
in arriving at an overall estimate of the ALLL in order to assure that all of the relevant
factors affecting the collectibility of the pOrtfolio have been appropriately considered.
In addition, the overall estimate of the ALLL and the range of possible credit losses
estimated by management will be reviewed for reasonableness in view of these factors.
This examiner analysis will also consider the quality of the institution's systems and
management in identifying, monitoring, and addressing asset quality problems.
As discussed in the previous section on classification guidelines, the value of the
collateral is considered by examiners in reviewing and classifying a commercial real
estate loan. However, for a performing commercial real estate loan. the supervisory
policies of the agencies do not require automatic increases to the ALLL solely because
the value of the collateral has declined to an amount that is less than the loan balance.
In assessing the ALLL during examinations, it is important to recognize that
management's process, methodology, and underlying assumptions require a substantial
degree of judgment. Even when an institution maintains sound loan administration and
collection procedures and effective internal systems and controls, the estimation of
anticipated losses may not be precise due to the wide range of factors that must be
considered. Further, the ability to estimate anticipated loss on specific loans and
categories of loans improves over time as substantive information accumulates
regarding the factors affecting repayment prospects. When management has (a)
maintained effective systems and controls for identifying, monitoring and addressing
asset quality problems and (b) analyzed all significant factors affecting the
collectibility of the portfolio, considerable weight should be given to management's
estimates in assessing the adequacy of the ALLL.
9
Attachment 1
TREATMENT OF GUARANTEES
IN THE CLASSIFICATION PROCESS
Initially, the original source of repayment and the borrower's intent and ability to
fulfill the obligation without reliance on third party guarantors will be the primary
basis for the review and classification of assets.! The federal bank and thrift
regulatory agencies will, however, consider the support provided by guarantees in the
determination of the appropriate classification treatment for troubled loans. The
presence of a guarantee from a "financially responsible guarantor," as described below,
may be sufficient to preclude classification or reduce the severity of classification.
For purposes of this discussion, a guarantee from a "financially responsible guarantor"
has the following attributes:
• The guarantor must have both the financial capacity and willingness to provide
support for the credi t;
• The nature of the guarantee is such that it can provide support for repayment of the
indebtedness, in whole or in pan, during the remaining loan term; and2
• The guarantee should be legally enforceable.
The above characteristics generally indicate that a guarantee may improve the
prospects for repayment of the debt obligation.
Considerations relating to a guarantor's financial capacity. The lending institution
must have sufficient information on the guarantor's financial condition, income,
liquidity, cash flow, contingent liabilities, and other relevant factors (including credit
ratings, when available) to demonstrate the guarantor's financial capacity to fulfill the
obligation. Also, it is important to consider the number and amount of guarantees
currently extended by a guarantor, in order to determine that the guarantor has the
financial capacity to fulfill the contingent claims that exist.
Considerations relating to a guarantor's willingness to repay. Examiners normally
rely on their analysis of the guarantor's financial strength and assume a willingness to
perform unless there is evidence to the contrary. This assumption may be modified
I Some loans are ongmated based pnmarily upon the financial strength of the guarantor, who IS, in substance, the
pnmary source of repayment In such Circumstances, examiners gt:nerally assess the collectibility of the loan based upon
the guaramor·s ability to repay the loan.
25orne guarantees may only proVide for suppon for certain phases of a rcal estate project. It would nUl be appropriate
to rely upon these guarantees to support a trouhled loan after the cornplcuon of these phases.
10
based on the "track record" of the guarantor, including payments made to date on the
asset under review or other obligations.
Examiners give due consideration to those guarantors that have demonstrated their
ability and willingness to fulfill previous obligations in their evaluation of current
guarantees on similar assets. An important consideration will be whether previously
required performance under guarantees was voluntary or the result of legal or other
actions by the lender to enforce the l,7Uarantce. However, examiners give limited
credence, if any, to guarantees from obligors who have reneged on obligations in the
past, unless there is clear evidence that the guar,mtor has the ability and intent to
honor the specific guarantee obligation under review.
Examiners also consider the economic incentives for performance from guarantors:
• Who have already partially performed under the guarantee or who have other
significant investments in the project;
• Whose other sound projects are cross-collateralized or otherwise intertwined with
the credit; or
• Where the guarantees are collateralized by readily marketable assets that are under
the control of a third party.
Other considerations. In general, only guarantees that are legally enforceable will be
relied upon. However, all legally enforceable guarantees may not be acceptable. In
addition to the guarantor's financial capacity and willingness to perform, it is expected
that the guarantee will not be subject to significant delays in collection, or undue
complexities or uncertainties about the guarantee.
The nature of the guarantee is also considered by examiners. For example, some
guarantees for real estate projects only pertain to the development and construction
phases of the project. As such, these limited guarantees would not be relied upon to
support a troubled loan after the completion of those phases.
Examiners also consider the institution's intent to enforce the guarantee and whether
there are valid reasons to preclude an institution from pursuing the guar.mtee. A
history of timely enforcement and successful collection of the full amount of
guarantees will be a positive consideration in the classification process.
11
Attachment 2
THE VALUATION OF INCOME-PRODUCING REAL ESTATE
Approaches to the Valuation of Real Estate
Appraisals are professional judgments of the market value of real property. Three
basic valuation approaches are used by professional appraisers in estimating the market
value of real property -. the cost approach, the market data or direct sales comparison
approach, and the income approach. The principles governing the three approaches are
widely known in the appraisal field and were recently referenced in parallel regulations
issued by each of the federal bank and thrift regulatory agencies. When evaluating the
collateral for problem credits, the three valuation approaches are not equally
appropriate.
1. Cost Approach. In the cost approach, the appraiser estimates the reproduction
cost of the building and improvements, deducts estimated depreciation. and adds
the value of the land. The cost approach is particularly helpful when reviewing
draws on construction loans. However, as the property increases in age, both
reproduction cost and depreciation become more difficult to estimate. Except
for special purpose facilities, the cost approach is usually inappropriate in a
troubled real estate market because construction costs for a new facility normally
exceed the market value of existing comparable propenies.
2. Market Data or Direct Sales Comparison Approach. This approach examines
the price of similar properties that have sold recently in the local market,
estimating the value of the subject property based on the comparable properties'
selling price. It is very important that the characteristics of the observed
transactions be similar in terms of market location, financing terms. property
condition and use. timing. and transaction costs. The market approach generally
is used in valuing owner-occupied residential property because comparable sales
data are typically available. When adequate sales data arc available. an analyst
generally will give the most weight to this type of estimate. Often. however. the
available sales data for commercial properties are not sufficient to justify a
conclusion.
3. The Income Approach. The economic value of an income-producing property
is the discounted value of the future net operating income stream, including any
"reversion" value of property when sold. If compelitive markets are working
perfectly, !.he observcd sales price should be equal to lhis value. For unique
propenics or in markcL'i that are thin or subject to disorderly or unusual
conditions, market value bascd on a comparable sales approach may be either
unavailable or dislorted. In such cases, lhe income approach is usually the
approprialc method for vaJuing Lhe property.
12
The income approach converts all expected future net operating income into
present value terms. When market conditions are stable and no unusual patterns
of future rents and occupancy rates are expected, the direct capitalization method
is often used to estimate the prescnt value of future income streams. For
troubled properties, however, examiners typically utilize the more explicit
discounted cash flow (net present value) method for analytical purposes. In that
method, a time frame for achieving a "stabilized", or normal, occupancy and
rent level is projected. Each year's net operating income during that period is
discounted to arrive at the present value of expected future cash flows. The
property's anticipated sales value at the end of the period until stabilization (its
terminal or reversion value) is then estimated. The reversion value represents
the capitalization of all future income streams of the property after the projected
occupancy level is achieved. The terminal or reversion value is then discounted
to its present value and added to the discounted income stream to arrive at the
total prescnt market value of the property.
Valuation of Troubled Income-Producing Properties
When an income property is experiencing financial difficulties due to general market
conditions or due to its own characteristics, data on comparable property sales often
are difficult to obtain. Troubled properties may be hard to market, and normal
fmancing arrangements may not be available. Moreover, forced and liquidation sales
can dominate market activity. When the use of com parables is not feasible (which is
often the case for commercial properties), the net present value of the most reasonable
expectation of the property's income-producing capacity - not just in today's market
but over time - offers the most appropriate method of valuation in the supervisory
process.
Estimates of the property's value should be based upon reasonable and supportable
projections of the determinants of future ne~ operating income: rents (or sales),
expenses and rates of occupancy. Judgment is involved in estimating all of these
factors. The primary considerations for these projections include historical levels and
trends, the current market performance achieved by the subject and similar properties,
and economically feasible and defensible projections of future demand and supply
conditions. To the extent that current market activity is dominated by a limited
number of transactions or liquidation sales, high "capitalization" and discount rates
implied by such transactions should not be used. Rather, analysts should use rates that
reflect market conditions that are neither highly speculative nor depressed for the type
of property being valued and that property's location.
13
Technical Notes
In the process of reviewing a real estate loan and ill the use of the net present value
approach of collateral valuation, several conceptual issues often are raised. The
following discussion sets forth the meaning and use of those key concepts.
The Discount Rate. The discount rate used in the net present value approach to
convert future net cash flows of income-producing real estate into present market value
terms is the rate of return that market participants require for this type of real estate
investment The discount rate will vary over time with changes in overall interest
rates and in the risk associated with the physical and financial characteristics of the
property. The riskiness of the property depends both on the type of real estate in
question and on local market conditions. l
The Direct Capitalization ("Cap" Rate) Technique. The use of "cap" rates, or direct
income capitalizatinn, is a method used by many market participants and analysts to
relate the value of a property to the net operating income it generates. In many
applications, a "cap" rate is used as a short cut for computing the discounted value of a
property's income streams.
The direct income capitalization method calculates the value of a property by dividing
an estimate of its "stabilized" annual income by a factor called a "cap" rate. Stabilized
income generally is defined as the yearly net operating income produced by the
property at normal occupancy and rental rates; it may be adjusted upward or
downward from loday's actual market conditions.The "cap" rate - usually defined for
each property type in a market area - is viewed by some analysts as the required rate
of return stated in terms of current income. That is to say, the "cap" rate can be
considered a direct observation of the required earnings-to-price ratio in current income
terms. The "cap" rate also can be viewed as the number of cents per dollar of today's
purchase price investors would require annually over the life of the property to achieve
their required rate of retm:n.
The "cap" rate method is appropriate if the net operating income to which it is applied
is representative of all future income streams or if net operating income and the
property's selling price are expected to increase at a fixed rate. The use of this
technique assumes that either the stabilized income or the "cap" rate used accurately
captures aU relevant characteristics of the propcrty relating to its risk and income
potential. If the same risk factors, required rate of return, financing arrangements, and
income projections arc used, explicit discouming and direct capitalization will yield the
same results.
1 Regulatory policy of the Office of 'Ihrift Supervision specifics that, for supervisory purposes, thrifts are to usc dIscount
rates that are consistent With generally al:ccpted accounung pnnclples for thnfts (which allow the use of an aver.tge-cost-ofcapllal·funds rate to I:aiculale net realll.able value) or discount r.tles thaI arc consistent with the practiccs of the federal
banking agem.1CS.
14
This method alone is not appropriate for troubled real estate since income generated by
the property is not at nonnal or stabilized levels. In evaluating troubled real estate,
ordinary discounting typically is used for the period before the project reaches its full
income potential. A "tenninal" "cap" rate is then utilized to estimate the value of the
property (its reversion or sales price) at the end of that period.
Differences Between Discount and Cap Rates. When used for estimating real estate
market values, discount and "cap" rates should reflect the current market requirements
for rates of return on properties of a given type. The discount rate is the required rate
of return including the expected increases in future prices and is applied to income
streams reflecting inflation. In contrast, the "cap" rate is used in conjunction with a
stabilized net operating income figure. The fact that discount rates for real estate are
typically higher than "cap" rates reflects the principal difference in the treatment of
expected increases in net operating income and/or property values.
Other factors affecting the "cap" rate used (but not the discount rate) include the useful
life of the property and financing arrangements. The useful life of the property being
evaluated affects the magnitude of the "cap" rate because the income generated by a
property, in addition to providing the required return on investment, must be sufficient
to compensate the investor for the depreciation of the property over its useful life.
The longer the useful life, the smaller is the depreciation in anyone year; hence, the
smaller is the annual income required by the investor, and the lower is the "cap" rate.
Differences in tenns and the extent of debt financing and the related costs must also be
taken into account.
Selecting Discount and Cap Rates. The choice of the appropriate values for discount
and "cap" rales is a key aspect of income analysis. Both in markets marked by lack of
transactions and those characterized by highly speculative or unusually pessimistic
attitudes, analysts consider historical required returns on the type of property in
question. Where market infonnation is available to detennine current required yields,
analysts carefully analyze sales prices for differences in financing, special rental
arrangements, tenant improvements, property location, and building characteristics. In
most local markets. the estimates of discount and "cap" rates used in income analysis
should generally fall within a fairly narrow range for comparable properties.
Holding Period vs. Marketing Period. When the income approach is applied to
troubled properties, a time frame is chosen over which a property is expected to
achieve stabilized occupancy and rental rates (stabilized income). That time period is
sometimes referred to as the "holding period." The longer the period before
stabilization, the smaller will be the reversion value included in the total value
estimate.
The holding period should be distinguished from the concept of "marketing period" a tenn used in estimating the value of a property under the sales comparison approach
15
and in discussions of property value when real estate is being sold. The marketing
period is the length of time that may be required to sell the propeny in an open
market.
16
Glossary
Appraisal. A written statement independently and impartially prepared by a qualified
appraiser setting forth an opinion as to the market value of an adequately described
property as of a specific date(s), supported by the presentation and analysis of relevant
market information.
Capitalization rate. A rate used to convert income into value. Specifically, it is the
ratio between a property's stabilized net operating income and the property's sales
price. Sometimes referred to as an overall rate because it can be computed as a
weighted average of component investment claims on net operating income.
Discount rate. A rate of return used to convert future payments or receipts into their
present value.
Holding period. The time frame over which a property is expected Lo achieve
stabilized occupancy and rental rates (stabilized income).
Market value. The most probable cash sale price which a property should bring in a
competitive and open market under all conditions requisite LO a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is not affected
by undue stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions whereby:
1. buyer and seller are typically motivated (Le., motivated by self-interest);
2. both parties are well informed or well advised, and acting in what they consider
their own best interests;
3. a reasonable time is allowed for exposure in the open
market~
4. payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and
5. the price represents the normal consideration for the property sold unaffected by
special or creative financing or sales concessions granted by anyone associated
with the sale.
Marketing period. The term in which an owner of a property is actively attempting to
sell that property in a competitive and open market.
Net operating income (NOI). Annual income after all expenses have been deducted,
except for depreciation and debt service.
17
Attachment 3
Classification Definitions l
The federal bank and thrift regulatory agencies currently utilize the following
definitions for assets classified "substandard," "doubtful," and "loss" for supervisory
purposes:
Substandard Assets. A substandard asset is inadequately protected by the current
sound worth and paying capacity of the obligor or of the collateral pledged, if any.
Assets so classified must have a well-defined weakness or weaknesses that jeopardize
the liquidation of the debt. They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies arc not corrected.
Doubtful Assets. An asset classified doubtful has all the weaknesses inherent in one
classified substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts, conditions. and
values, highly questionable and improbable.
Loss Assets. Assets classified loss are considered uncollectible and of such little value
that their continuance as bankable assets is not warranted. This classification does not
mean that the asset has absolutely no recovery or salvage value, but rather it is not
practical or desirable to defer writing off this basically worthless asset even though
partial recovery may be effected in the future.
I Office of thc,Comp~,rollcr of!hc .Currcn(;y, Comptroller's lIal'llibookfor NaJionai Bank. E=miners. Scction 215.1,
OaSSUICa1l0n ..o~ Credits; Boar~ 01 (,ollcmors of the Fcdcral Rcserve Systcm, COfNrUrcuU Bank Ex.am.inallon Manual.
~cctlOn 215.1, Classtflcalton 01 Credits;" Off,cc of Thrift SUperviSion, Thrtfl AClivilies ReguJaJory lIandbook. Section 260
Oasslflca1I~,n of As:cts;" I;cdcral f)cposltlnsuran(;c Corpor.llJon, Dr\ll.:\·wn of SupervISion Manual of Ex.am.i~/wn PolrcU!s'
eOlon 3.1, l.).)ans.
.
..
S
IX
11/~1/1991 15:39
FROM THE BOARD ~4
UF-640
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TO
9 7868450 P.02
FEDERAL RESERVE press release
F~r
immediate release
October 31, 1991
The Federal Reserve Board today requested public
comment on a
proposal to permit bank holding companies to raise
additional tier one risk-based capital through the sale of
perpetual preferred stock.
Comment should be received by the Board by November 22.
Under present risk-based capital guidelines, bank
holding companies are permitted to count perpetual preferred
stOCK up to 25 percent of their tier one capital.
The proposal
would remove the limitation for noncumulative perpetual preferred
stock but continue to limit cumulative perpetual preferred to 25
percent of tier one capital.
A
copy of the Board's order is attached.
-0-
Attachment
11/01/1991 15:40
FROM THE BOARD =4
UF-640
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TO
9 7868450 P.03
FEDERAL RESERVE SYSTEM
12 eFR Parts 208 and 225
[Regulatio"H,
~egulation
Y: Docket No. R-0740]
Capital 7 Capital Adequacy Guidelines
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Notice of Proposed Revisions to Capital Adequacy
Guidelines.
SUMMARY:
.
The Board is proposing to remove the limit on the
amount of noncumulative perpetual preferred stock bank holding
companies may include in Tier 1 capital.
Cumulative perpetual
preferred stock would continue to be included in Tier 1 capital
for bank holding companies, up to a limit of 25 percent of Tier 1
capital.
DATE:
Comments on the proposed revisions to the Federal Reserve
Board's risk-based capital guidelines and leverage capital
guidelines should be submitted on or before November 22, 1991.
ADDRESS:
Comments, which shOUld refer to docket No. R-0740, may
be mailed to Mr. William W. Wiles, Secretary, Board of Governors
of the Federal Reserve System, 20th street and constitution
Avenues, N.W., Washington, D.C.
20551; or delivered to Room
8-2223, Eccles Building, tetween 8:45 a.m. an4 5:15 p.m.
weekdays.
comments may be inspected in Room B-1122 between 9:00
a.m. and 5:00 p.m. weekdays, except as provided 1n section 2612.8
11/01/1991
15:~1
FROM THE BOHRD
~4
UF-640
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TO
9 7868450
~.04
2
of the Board's Rules Re9arding Availability of Information, 12
eFR 261.8.
FOR FURTHER INFORMATION CONTACT:
Roger T. Cole, Assistant
Director (202/452-2618), Rhoger H Pugh, Manager (202/728-5883),
Norah M. Barger, supervisory Financial Analyst (202/452-2402),
Robert E. Motyka, Senior Financial Analyst (202/452-3621),
Division of Banking Supervision and Regulation: and Michael J.
O'Rourke, Senior Attorney (202/452-3288), Legal Division.
For
the hearinq impaired only, Telecommunication Device for the Deaf
(TOO), Dorothea Thompson (202/452-3544).
80PPLZHZHTARY INFORMATION
I.
8ACXGROOND
The international bank capital standards (Basle
Accord)l allow banks to include noncumulative perpetual
preferred stock place in Tier 1 capital and place no formal limit
on the amount of such instruments that may be included in Tier
1.2
The Sasle framework, which by its terms applies only to
1 The aasle Accord is a risk-based capital framework that was
proposed by the Basle Committee on Banking Requlations and
Supervisory Practices and endorsed by the central bank governors of
the Group of Ten (G-10) countries in July 1988. The Committee is
compri&ed of representatives of the central banks and supervisory
authorities from the G-10 countries (Belgium, Canada, France,
Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the united
Kingdom, and the United States) and Luxembourg.
Noncumulative perpetual preferred stock is perpetual
preferred stock whose dividends, if missed, do not acc~ue and will
never be paid. cumulative perpetual preferred stock is preferred
stock whose dividends, if missed because of insufficient earnings
2
11/01/1991 15:42
FROM THE BOARD ~4
UF-640
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TO
9 7868450 P.05
3
internationally active banks, was adopted by the Federal Reserve
for state nonmember banks.
In addition, the Board chose to apply
a risk-based capital framework similar to the Basle Accord to
u.s.
bank holding companies generally on a consolidated basis. 3
Under the Federal Reserve's bank holding company capital
guidelines, holding companies are allowed to include both
noncumulative and
cumu~ative
perpetual preferred stock in Tier 1
capital, but the total of all perpetual preferred stock
includable in Tier 1 capital is limited to 25 percent of Tier
1.4
Amounts of such stock in excess of the limitation may be
included in Tier 2 capital.
The limit on preferred stock is
consistent with the Board's long-standing view that common equity
should remain the dominant form of a banking organization's
capital structure.
A principal reason for the Board's decision to limit
the amount ot perpetual
pr~ferred
stock in bank holding Tier 1
capital is the fact that cumulative preterred, the type of
perpetual preferred most prevalent in
u.s.
financial markets,
or any other reason, accumulate until all arrearages are paid out.
Cumulative preferred dividends have preference over common
dividends, which cannot be paid out as long as any cumulative
preferred dividends remain unpaid.
, For bank holding companies with consolidated assets of less
than $150 millien 1n a.sets, the risk-based capital quidelines
generally are applied on a bank-only basis.
• Under the risk-based capital guidelines, certain types of
perpetual preferred stock do not qualify for inclusion in Tier 1
capital.
For example, perpetual preferred stock in which the
dividend is reset periodically based, in Whole or in part, upon the
banking' orqanization' s credit standing is excluded trom Tier 1
capital, but may be included in Tier 2 capital.
11/01/1991 15:43
FROM THE BOARD =4
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TO
9 7Sb8450 P.0b
4
normally involves preset dividends that eannot be cancelled, but
only deterred.
An institution that passrs dividends on
cumulative preferred stock must payoff any accumulated
arrearages before it can resume payment ot its commor. stock
dividends.
Thus, undue reliance on cumulative perpetual
preferred stock and the related possibility of large dividend
arrearages eould complicate an organization's ability to raise
new common equity in times of financial difficulty.
on the other
hand, dividends on noncumulative preferred, like dividends on
common stock, may be cancelled.
Thus, with respect to dividends,
noncumulative preferred stock has characteristics that are
consistent with common stock, the principal component of Tier 1
capital.
Conditions in the banking industry underscore the
desirability ot affording banking organizations greater
flexibility in raising capital.
This can assist organizations in
strengthening their capital positions and expanding their ability
to extend credit to sound borrowers.
In view of these
considerations, the Board is proposinq to lift the limit on the
amount ot noncumulative preferred stock that bank holding
companies may include in Tier 1 capital.
This proposal is
consistent with ether stepa initiated by the Federal bank
regulatory agencies, in conjunction with the Treasury Department,
to address concerns relating to the availability of credit to
Bound
borro~ers.
11/e1/1991 15:44
FROM THE BOARD =4
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9 7868450 P.07
TO
S
II.
Propo •• l
The Board
~s
proposing to remove the limit on the
amount of noncumulative perpetual preferred stock a bank holding
company may
ir-~ude
in its Tier 1 capital.
cumulative perpetual
preferred stock would continue to be included in Tier 1 capital
for bank holaing companies, up to a limit of 2S percent of Tier 1
capital.
By removing the limit for noncumulative perpetual
preferred stock, this proposal will achieve parity with regard to
the treatment of noncumulative perpetual preferred stock between
the
u.s. risk-based capital quidelines for bank holding companies
and the Basle tramework for banks.
Thus, the proposal will place
U.S. bank holdinq companies on a more eqUal footing with forei9n
banks subject to the Basle Accord with regard to their ability to
auqment Tier 1 capital through the issuance of
perpetual preterred stock.
noncu~ulative
The additional flexibility provided
by this step may assist bank holding companies to strengthen
their capital positions and expand their lending capacity.
Although the Board is proposing to lift the limit on
noncumulative perpetual preferred stock, it continues to believe
that bank holding companies should avoid overreliance on
preferred stock within Tier 1 capital.
In proposing this step,
the Board notes that the capital structure ot a bank holdin9
company is subject to quarterly review (through the analysis of
financial reports filed with the Federal Reserve), and the
composition ot an organization's capital base and its capital
11,O:/1991 15:~5
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UF-640
****
TO
6
plans are subject to in-depth assessment during annual
inspections and as part of the Federal Reserve's consideration of
applications.
The language of the Federal Reserve's risk-based
capital guidelines
ma~es
clear the Board's long-standing belief
that banking organizations should avoid overreliance on nonvoting
equity instruments, including preferred stock, in Tier 1 capital.
capital structures that are inconsistent with this principle may
result in supervisory or enforcement actions, il.cluding possible
denial ot applications tiled with the Federal Reserve.
In
addition, rating agencies take the amount of common equity and
preferred stock an organization has, as well as the overall
co~position
of the organization's core capital, into account in
determining the organization's financial ratings.
Thus, there
are a number of mechanisms in place to monitor banking
organizations' use of preferred stock and to discourage undue
reliance on such instruments.
III. Requlatory
Plexi~ility
Act ADalyai.
The Federal Reserve Board does not believe adoption of
this proposal would have a significant economic impact on a
substantial number ot small business entities (in this case,
small banking organizations), in accord with the spirit and
purposes of the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.).
In addition, because the risk-based and leverage capital
guidelines generally do not apply to bank holding companies with
conSOlidated assets or less than $150 million, this proposal will
11/01/1991 15:46
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9 7868450 P.09
7
not affect such companies.
List at Subjects
12 CFR Part 208
Accounting, Agricultural loan 105ses, Applications,
Appraisals, Banks, Banking, Branches, Capital adequacy,
Confidential business information, Currency, Dividend payments,
Federal Reserve system, Flood insurance, Publication ot reports
of condition, Reporting and recordkeeping requirements,
Securities, State member banks.
12 CFR Part 225
Administrative practice and procedure, Appraisals,
Banks, Banking, Capital adequacy, Federal Reserve System, Holding
companies, Reporting and recordkeeping requirements, Securities,
State
m~mbar
banks.
For the reasons set forth in this notice, and pursuant
to the Board's authority under section 5(b) of the Bank Holdin9
company Act of 1956 (12 U.S.C. 1844(b», and section 910 of the
International Lending Supervision Act of 1983 (12 U.S.C. 3909),
the Board is amending 12 CFR Parts 208 and 225 to read as
tallows:
11/01/1991 15:47
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TO
9 7868450 P.10
8
PART 208 - MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
1.
The authority citation for Part 20S continues to read as
follows:
AUTHORITY:
or
sections 9, llea), 11(c), 19, 21, 25, and 25(a)
the Federal Reserve Act, as amended (12"
u.s.c.
321-338, 24S(a),
248(c), 461, 481-486, 601, ana 611, respectively); sections 4 and
13(j) of the Federal Deposit Insurance Act, as amended (12 U.S.C.
lS14 and l823(j), respectively); section 7(a) of the
International Banking Act or 1978 (12 U.S.C. 3105) r sections 907910 or the International Lending Supervision Act of 1983 (12
U.S.C. 3906-3909): sections 2, 12(b), 12(g), 12(i), 15B(0)
(5),
17, 17A, and 23 of the Securities Exchange Act of 1934 (15 U.S.C.
78b, 78leb), 781(g), 781(i), 78o-4(c) (5), 78q, 78q-1, and 7aw,
respectively): section 5155 of the Revised statutes (12 U.S.C.
36) as amended by the McFadden Act of 1927; and sections 11011122 ot the Financial Institutions Retorm, Recovery and
Enforcement Act of 1989 (12 U.S.C. 3310 and 33J1-3351).
Appendix A - [Amended)
2.
The footnote
designat~r
in the text is removed and
footnote 6 is removed and reserved.
ll/01/1991 15:48
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UF-640
****
TO
9 7868450 P.11
9
PART 225 - BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
1.
The authority citation for Part 225 continues to read as
follows:
AUTHORITY:
12 U.S.C. lS17(j) (13), 1818, 1831i, lS43(c) (8),
1844(b), 3106, 3108, 3907, 3909, 3310, and 3331-3351.
Appendix A - [Amended)
2.
Appendix A is amended by revising paragraphs (ii) and
(iii) and adding paragraph (iv) in II.A.l., and by removing
the last three sentences in the third paragraph and the
entire fourth paragraph in II.A.1.b. and replacing them, to
read as follows:
*****
II. * ••
A.
***
(i)
.**
(ii) qualifying noncumulative perpetual preferred
stock (including related surplus).
(iii) qualifying cu.ulative perpetual preferred stock
(including related surplus), subject to certain
limitations described below.
(iv) minority interest in the equity accounts of
con~_lidated
subsidiaries.
11/01/1~91
15:~9
FROM THE BOARD
=4
****
UF-640
TO
9 7868450 P.12
10
*****
***
b. *** However, the aggregate amount of cumulative
perpetual preferred stock that
co~pany·.
~ay
be included in a holding
tier 1 is limited to one-third of the sum of core
capital elements, excluding the cumulative perpetual preferred
stock (that is, items i, ii, and iv above).
stated differently,
the aggregate amount may not exceed 25 percent of the sum of all
core capital elements, includinq cumulative perpetual preferred
stock (that is, items, i, ii, iii, and iv above).
Any cumulative
perpetual preferred stock outstanding in excess of this limit may
be included in tier 2 capital without any sublimits within that
tier (see discussion below).
While the gUidelines allow for the inclusion of
noncu~ulative
perpetual preferred stock and limited amounts of
cumulative perpetual preferred stock in tier 1, it is desirable
from a supervisory standpoint that voting common equity remain
the dominant form of tier 1 capital.
Thus, bank holding
companies should avoid overreliance on preferred stock or
nonvoting equity elements within tier 1.*****
Appendix 0 - [Amended)
3.
Appendix 0 is amended by removinq the first two
sentences in tootnote 3 and replacin9 them, to read as
follows:
1l/01/1~91 15:49
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9 7868450 P.13
11
*****
II. ***
3
At the end ot 1992, Tier 1
c~pital
tor bank holding
companies includes common equity, minority interest in the equity
accounts of consolidated subsidiaries, qualifying noncumulative
perpetual preferred stock, and qualifying cumulative perpetual
preferred stock.
(CUmulative perpetual preferred stock is
limited to 25 percent of Tier 1 capital.) •••
*****
Board of Governors of the Federal Reserve System,
October 31, 1991.
(signed) William w. wiles
William W. Wiles
Secretary of the Board
UBLIC(;,DEBT NEWS
Department of the Treasury •
Bureau of the Publil" Debt • Washington, DC 20239
I:J'J I L. ~ lOU I 0 7 2
FOR IMMEDIATE RELEASE
November 7, 1991
-
,
".,\,'
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 30-YEAR BONDS
Tenders for $12,009 million of 30-year bonds to be issued
November 15, 1991 and to mature November 15, 2021 were
accepted today (CUSIP: 912810EL8).
The interest rate on the bonds will be 8 %. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
7.98%
8.01%
8.00%
Price
100.227
99.887
100.000
Tenders at the high yield were allotted 78%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas city
Dallas
San Francisco
Treasury
TOTALS
Received
6,699
29,715,868
6,050
3,323
57,234
12,697
650,012
12,892
5,150
17,332
8,819
297,452
1,442
$30,794,970
Accepted
6,699
11,746,267
6,050
3,313
40,009
9,257
68,392
12,892
3,150
17,332
8,819
85,152
1,442
$12,008,774
The $12,009 million of accepted tenders includes $937
million of noncompetitive tenders and $11,072 million of
competitive tenders from the public.
In addition, $150 million of tenders was also accepted
at the average price from Federal Reserve Banks for their own
account in exchange for maturing securities.
The minimum par amount required for STRIPS is $25,000.
Larger amounts must be in multiples of that amount.
NB-1541
'l§J'
,~.>,~
, w--•. .
DEPARTMENT OF THE -,-REASURY
BUREAU OF THE PUBLIC DEBT
WASHINGTON, DC. 20239-0001
"
AUCTION YIELD TO PRICE CONVERSION TABLE
8% 30-YEAR TREASURY BONDS OF NOVEMBER 15, 2021
CUSIP NUMBER:
912810 EL 8
AUCTION DATE:
3ETTLEMENT DATE:
MATURITY DATE:
FIRST INT. PAYMENT:
NOVEMBER 7, 1991
NOVEMBER 15, 1991
NOVEMBER 15, 2021
MAY 15, 1992
INTEREST (COUPON) RATE:
8.000%
YIELD%
PRICE
YIELD%
PRICE
YIELD%
PRICE
YIELD%
PRICE
7.20
7.21
7.22
7.23
7.24
7.25
7.26
7.27
7.28
7.29
7.30
7.31
7.32
7.33
7.34
7.35
7.36
7.37
7.38
7.39
7.40
7.41
7.42
7.43
7.44
7.45
7.46
7.47
7.48
7.49
7.50
7.51
7.52
7.53
7.54
7.55
7.56
7.57
7.58
7.59
109.780
109.648
109.517
109.385
109.254
109.123
108.993
108.863
108.733
108.603
108.473
108.344
108.215
108.086
107.957
107.829
107.701
107.573
107.446
107.319
107.191
107.065
106.938
106.812
106.686
106.560
106.434
106.309
106.184
106.059
105.934
105.810
105.686
105.562
105.438
105.315
105.192
105.069
104.946
104.824
7.60
7.61
7.62
7.63
7.64
7.65
7.66
7.67
7.68
7.69
7.70
7.71
7.72
7.73
7.74
7.75
7.76
7.77
7.78
7.79
7.80
7.81
7.82
7.83
7.84
7.85
7.86
104.702
104.580
104.458
104.336
104.215
104.094
103.973
103.853
103.732
103.612
103.492
103.373
103.253
103.134
103.015
102.896
102.778
102.659
102.541
102.423
102.306
102.188
102.071
101.954
101.838
101.721
101.605
101.489
101.373
101.257
101.142
101.027
100.912
100.797
100.683
100.568
100.454
100.340
100.227
100.113
8.00
8.01
8.02
8.03
100.000
99.887
99.774
99.662
99.549
99.437
99.325
99.213
99.102
98.991
98.879
98.769
98.658
98.547
98.437
98.327
98.217
98.108
97.998
97.889
97.780
97.671
97.562
97.454
97.346
910238
97.130
97.022
96.915
96.808
96.701
96.594
96.487
96.381
96.275
96.169
96.063
95.957
95.852
95.747
8.40
8.41
8.42
8.43
8.44
8.45
8.46
8.47
8.48
8.49
8.50
8.51
8.52
8.53
8.54
8.55
8.56
8.57
8.58
8.59
8.60
8.61
8.62
8.63
8.64
8.65
8.66
8.67
8.68
8.69
8.70
8.71
8.72
8.73
8.74
8.75
8.76
8.77
8.78
8.79
95.641
95.537
95.432
95.328
95.223
95.119
95.015
94.912
94.808
94.705
94.602
94.499
94.396
94.294
94.191
94.089
93.987
93.885
93.784
93.682
93.581
93.480
93.379
93.279
93.178
93.078
92.978
92.878
92.778
92.679
92.579
92.480
92.381
92.282
92.184
92.085
91.987
91.889
91.791
91.693
7~87
7.88
7.89
7.90
7.91
7.92
7.93
7.94
7.95
7.96
7.97
7.98
7.99
8Q04
8.05
8.06
8.07
8.08
8.09
8.10
8.11
8.12
8.13
8.14
8.15
8.16
8.17
8.18
8.19
8.20
8.21
8.22
8.23
8.24
8.25
8.26
8.27
8.28
8.29
8.30
8.31
8.32
8.33
8.34
8.35
8.36
8.37
8.38
8.39
TREASURY NEWS
D_..artmant of the Tr.aSuIY • washington, D.C •• Tale.hone 588·2041
STATEMENT BY
THE HONORABLE JOHN ROBSON
DEPUTY SECRETARY OF THE TREASURY
ON THE SIGNING OF A
. MEMORANDUM OF UNDERSTANDING WITH THE
ROMANIAN BANKERS' ASSOCIATION AND THE NATIONAL BANK OF ROMANIA
NOVEMBER 7, 1991
WASHINGTON, D.C.
It is a pleasure to join our friends from Romania in signing
this Memorandum of Understanding to assist in the establishment of
an Institute for Banking for their reforming nation. This joint
initiative for the education and training of future employees of
banks and other financial institutions will be a crucial step to
improve the banking system that is vital to Romania's economic
reform efforts and, indeed, to the very functioning of Romania's
economy.
This agreement is consistent with considerable ongoing
international efforts to help all reforming nations.
The united
States and other maj or industrial nations remain firm in our
commitment to supporting reforms in Central and Eastern Europe.
For the united States, this means a commitment to help the region
establish more efficient and effective financial systems for
sustainable economic growth.
In today's competitive global marketplace, private business
cannot exist without a modern, dependable and efficient banking
system. Banks function as the allocators of credit for businesses
-- large and small -- and as the fundamental facilitators of
commerce through the payment system. Banks also create incentives
for savings among individuals, families, entrepreneurs and large
corporations.
In turn, those savings provide capital that fuels
the economy and helps businesses take advantage of opportunities
for growth in competitive markets.
NB-1542
2
Yet, we have found that, for many countries trying to shift
from a planned economy to a free market, one of the most ignored
links in the reform chain is the banking system.
Under the old
regimes in these countries, including Romania, banks had become
instruments of central planning, serving the narrow interests of
the regime in power rather than the broad interests of the
popUlation. It is clear that these countries now need full-service
banking systems that help consumers purchase washing machines and
cars, that safeguard the savings of couples who want to buy a
house, that help businesses export to the United states or raise
capital to expand their capacity.
In response to this need, the Bush Administration is providing
expertise and technical assistance that can help new banks get on
their
feet.
Already,
we have agreements with Bulgaria,
Czechoslovakia and Yugoslavia to help put banking systems in place.
Today, the united states and Romania are entering into a
pledge to work together in establishing a better banking system for
Romania. Since a banking system is only as effective as the people
who operate it, our agreement focuses on developing the human
resources necessary to integrate Romania's banks and capital market
into the broader international economy.
Specifically, the united states Treasury Department intends to
work with existing and future commercial banks, along with the
Romanian Bankers Association and the National Bank of Romania, to
provide comprehensive training in banking and finance. We plan to
help Romania establish an Institute of Banking with a practical
curriculum geared toward both entry-level technicians and mid-level
managers.
And, we are planning for programs to train Romanian
instructors, enabling the Institute to become self-sustaining as
soon as possible.
But, while the united states is helping the Romanian people in
the rebirth of their commercial banking industry, the real work
will be done by the Institute itself. with critically needed help
from the Romanian Bankers Association and the National Bank of
Romania, I hope we can work together to have the Institute up and
running in the next few months.
I am confident the spirit of cooperation will continue to
ensure the success of this agreement.
The establishment of this
Insti tute of Banking will be a strong move in the continued
development of a sound banking system of Romania.
It will be a
solid foundation for economic stability, sustained growth, and the
fruits of free enterprise and market economics.
Thank you.
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 12
Author(s):
Title:
MacNeil/Lehrer Newshour, Guest: Treasury Secretary Nicholas Brady
Date:
1991-11-07
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
TREASURY NEWS
D_..artment of the Tr.aSulY • Washington, D.C•• Tale.hone 588·2041
FOR RELEASE AT 2: 30 P.M.
November 8, 1991
CONTACT:' ~ 'Office of Financing
~ 20.2-219-3350
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $12,250 million of 364-day
Treasury bills to be dated November 21, 1991, and to mature
November 19, 1992 (CUSIP No. 912794 ZA 5). This issue will
result in a paydown for the Treasury of about $ 250
million,
as the maturing 52-week bill is outstanding in the amount of
$ 12,493 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500,
Thursday, November 14, 1991, prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders.
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. This series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing November 21, 1991. In addition to the
maturing 52-week bills, there are $ 20,111 million of maturing
bills which were originally issued as l3-week and 26-week bills.
The disposition of this latter amount will be announced next
week.
Federal Reserve Banks currently hold $1,612 million as
agents for foreign and international monetary authorities, and
$8,367 million for their own account. These amounts represent
the combined hOldings of such accounts for the three issues of
maturing bills. Tenders from Federal Reserve Banks for their
own account and as agents for foreign and international monetary authorities will be accepted at the weighted average bank
discount rate of accepted competitive tenders. Additional
amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing bills held
by them. For purposes of determining such additional amounts,
foreign and international monetary authorities are considered to
hold $730
million of the original 52-week issue. Tenders for
bills to be maintained on the book-entry records of the Department of the Treasury should be submitted on Form PO 5176-3.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
The following institutions may submit tenders for accounts
of customers if the names of the customers and the amount for
each customer are furnished: depository institutions, as
described in Section 19(b)(1)(A), excluding those institutions
described in subparagraph (vii), of the Federal Reserve Act
(12 U.S.C. 461(b»; and government securities broker/dealers
registered with the Securities and Exchange Commission that are
registered or noticed as government securities broker/dealers
pursuant to Section 15C(a)(1) of the Securities and Exchange
Act of 1934, as amended by the Government Securities Act of
1986. Others are only permitted to sUbmit tenders for their
own account. Each tender must state the amount of any net long
position in the bills being offered if such position is in excess
of $200 million. This information should reflect positions held
as of one-half hour prior to the closing time for receipt of competitive tenders on the day of the auction. Such positions would
include bills acquired through "when issued" trading, and futures
and forward contracts as well as holdings of outstanding bills
with the same CUSIP number as the new offering. Those who submit
tenders for the accounts of customers must submit a separate
tender for each customer whose net long position in the bill
being offered exceeds $200 million.
A noncompetitive bidder may not have entered into an
agreement, nor make an agreement to purchase or sell or otherwise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive tenders.
Tenders from bidders who are making payment by charge
to a funds account at a Federal Reserve Bank and tenders from
bidders who have an approved autocharge agreement on file at a
Federal Reserve Bank will be received without deposit. Tenders
from all others must be accompanied by full payment for the
amount of bills applied for. A cash adjustment will be made
on all accepted tenders, accompanied by payment in full, for the
difference between the par payment submitted and the actual issue
price as determined in the auction.
11/91
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection
of their tenders. The Secretary of the Treasury expressly
reserves the right to accept or reject any or all tenders, in
whole or in part, and the Secretary's action shall be final.
Subject to these reservations, noncompetitive tenders for each
issue for $1,000,000 or less without stated yield from anyone
bidder will be accepted in full at the weighted average bank
discount rate (in two decimals) of accepted competitive bids
for the respective issues. The calculation of purchase prices
for accepted bids will be carried to three decimal places on
the basis of price per hundred, e.g., 99.923, and the determinations of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing on
or before the settlement date but which are not overdue as
defined in the general regulations governing United States
securities. Cash adjustments will be made for differences
between the par value of the maturing definitive securities
accepted in exchange and the issue price of the new bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau
of the Public Debt.
11/91
~,
r
I Lf'.jS
\;
J
tv
,
'-t
.
I:'. .
,
\ -1'1, :
DEPARTMENT OF THE TREASURY
REPORT TO THE CONGRESS
ON
INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICY
NOVEMBER 1991
LIBRARY
ROOM 5030
JLJI~ -
9 1992
TREASURY DEPARTMENT
TABLE OF CONTENTS
PAGE
Part I
Introduction
1
Part II
Economic Policy Coordination and the Economic
Situation in the Industrial Countries
2
Part III
Developments in Foreign Exchange Markets
6
Part IV
u.S. Balance of Payments and Associated Issues
9
Part V
Asian Newly Industrialized Economies (NIEs) and
China
Korea
Taiwan
China
Part VI
Conclusion
Appendix: Tables and Charts
15
17
22
27
37
40
PART I: INTRODUCTION
Section 3005 of the Omnibus Trade and competitiveness Act of
1988 (Pub. L. 100-418) requires the Secretary of the Treasury to
submit to the Committee on Banking, Housing, and Urban Affairs of
the Senate and the Committee on Banking, Finance and Urban Affairs
of the House of Representatives an annual report each October 15 on
international economic policy, including exchange rate policy. In
addition, section 3005 requires the Secretary to provide a written
update of developments six months after the initial report. This is
the fourth annual report submitted to congress.
Part II of this report reviews the economic situation in the
industrial countries and efforts by major countries to coordinate
economic policies. Part III analyzes developments in the foreign
exchange markets, including the dollar's movement relative to the
currencies of major trading partners and U.S. foreign exchange
market intervention. Part IV examines the U.s. balance of payments
situation and assesses issues related to the U.s. economic and
balance of payments situation. Part V, prepared pursuant to section
3004 of the Omnibus Trade and Competitiveness Act of 1988, considers
whether countries manipulate the rate of exchange between the
currencies and the U.s. dollar within the meaning of the
legislation. In this connection, a status report on developments in
Taiwan, Korea, and China is provided. The final part provides
conclusions on the principal issues discussed in the report.
2
PART II:
ECONOMIC POLICY COORDINATION
AND THE ECONOMIC SITUATION IN THE INDUSTRIAL COUNTRIES
As the world economy has become more interdepenaent, the need
for governments to coordinate economic policies has become essential
to achieve growth and prosperity. No longer can anyone country,
not even the United States, formulate its economic policies in
isolation. Rather, national policymakers must take into account the
impact of their domestic policies on the world and the impact of
other countries' policies on their economic performance.
The major industrialized nations have therefore recognized that
the pursuit of international economic policy coordination is
essential for sustained growth with price stability. Since the mid1980s, G-7 Finance Ministers and Central Bank Governors have met
regularly to review their economic policies and performance in order
to put in place the compatible economic policies necessary to
achieve their shared objectives. As this process has intensified,
the G-7 has expanded its cooperation to a wide range of
international economic issues.
since the inception of the coordination process, economic
performance in the G-7 countries has been strengthened: the major
countries achieved sustained growth after the early 1980s recession;
inflation declined; the pattern of growth has supported substantial
reductions in external imbalances; and exchange markets have been
far more stable, reflecting G-7 cooperation and the achievement of
competitive exchange rates consistent with underlying fundamentals.
Despite these considerable successes, it is not a time for
complacency. This year the G-7 has confronted difficult economic
conditions and new global challenges. Weaknesses persist in the
world economy, and there are many risks in the current setting. At
the same time, sweeping changes are occurring in the reforming
countries of Latin America and Eastern Europe, and now the Soviet
Union. These changes must be supported to anchor the reforming
countries firmly into the world economy and to meet the challenge of
promoting global cooperation and prosperity.
Below is a description of the current economic situation and
prospects in the major countries and the G-7 response.
(See
Table 1.)
Growth
Aggregate GNP growth in the major industrial countries slowed
considerably in late 1990 and the first half of 1991. As a result,
only modest economic momentum was carried into 1991, and average
annual growth for 1991 is forecast by the IMF to be very weak, at
around 1.3 percent.
3
In the first half of this year, economic activity was
characterized by recession in the united State~, united Kingdom, and
Canada, and a significant slowdown in France and Italy. In
contrast, growth was rapid in Japan and Germany. Important
contributing factors to the overall slowdown included hostilities in
the Persian Gulf (leading to a temporary oil price surge and sharp
decline in consumer and business confidence), and the cumulative
effect of relatively restrictive macroeconomic policies.
since then, the divergence in cyclical positions has narrowed.
The United Kingdom is moving toward recovery while recovery is
underway in the United states and Canada; these countries are likely
to have established a pattern of moderate growth by year-end.
Growth in Japan is cooling substantially. Developments in
continental Europe are being heavily influenced by developments in
Germany and growth has slowed on a broad front.
Moreover, while G-7 activity is on the path of recovery, this
recovery is widely expected to be far more modest than in the past.
As a result, aggregate industrial country growth in 1992 is forecast
to rise to 2-3/4 percent, reflecting the moderate recovery in the
recessionary economies, somewhat greater strength in continental
Europe (outside Germany), and a decline in German and Japanese
growth trends.
External Account Developments
In addition to the overall weak economic growth picture, new
challenges face the external adjustment process. Substantial and
continuing progress has been made in reducing external imbalances,
especially in the united states as well as in Germany this year.
But large external imbalances are reemerging in Japan, and
projections suggest that imbalances may resume widening in some
other countries.
The U.s. current account deficit is expected to decline almost
$90 billion this year to the $5 billion range, reflecting both large
one-time Desert storm transfer receipts and continued stronger
growth of exports than imports.
(Detailed discussion of u.s.
developments will be found below.)
The German external accounts are also experiencing major
shifts. The IMF forecasts Germany's current account balance will
move from a $47.9 billion (2.9 percent of GNP) surplus in 1990 to a
deficit of about $8 billion this year. Special Desert storm·
transfer payments account for a portion of the shift, but the bulk
reflects major changes in trade patterns: a sUbstantial increase in
imports and a diversion of exports to meet unification-related
domestic demand; and, a decline in former East German exports to the
former COMECON area. Import growth is likely to be more limited in
1992 as a result of slower aggregate German demand growth,
contributing to a projected rebound of the current account to a
surplus of about $9 billion (0.6 percent of GNP).
4
In Japan, however, external accounts in 1991 have been moving
in the direction of larger imbalances. The import bill has been
limited by slower domestic consumption and investment and lower oil
prices, while exports to the Asian region have been strong; on the
other hand, Japanese exports to the u.s. have changed little.
Latest IMF projections indicate that Japan'~ current account
surplus could increase to about $63 billion this year, or about 1.9
percent of GNP; but this is likely to be an underestimate, since the
cumulative Japanese surplus totaled $55.8 billion through September.
The surplus is forecast by the IMF to remain at roughly this level
next year ($59 billion), despite the fact that import growth may be
constrained somewhat by slower domestic demand while export growth
could get a modest boost from recovering demand in the industrial
countries as a group.
Price Trends
Meanwhile, overall inflation trends have shown clear
improvement. After averaging 5.3 percent on an annualized basis
during the August 1990-February 1991 period, G-7 consumer price
inflation slowed to an annualized rate of 2.8 percent between
February 1991 and August 1991. Of course, both periods were
strongly affected by oil market developments, first inflationary and
then disinflationary, and various other transitory influences such
as tax changes. Nevertheless, the general trend has been positive.
within the G-7, the united Kingdom had the highest consumer
inflation rate (9.5 percent, annual average) in 1990. Germany and
Japan were the lowest (2.7 and 3.1 percent, respectively), while the
United states registered a slightly above average 5.4 percent.
However, the latest data show important shifts. During
February 1991 - August 1991, consumer price inflation fell to an
annualized rate of 4.9 percent in the United Kingdom, 2.2 percent in
the united states, 3.1 percent in Canada, and 1.4 percent in Japan.
Only in Germany did the inflation rate increase substantially, to
5.4 percent, reflecting both the temporary impact of consumption tax
increases as well as more fundamental wage and fiscal trends.
For 1991 as a whole, weighted average consumer price inflation
in the industrial countries is expected to decline to about 4.5
percent, after 4.9 percent in 1990. The easing of price pressures
is likely to be more evident on a "through-the-year" basis, with the
G-7 weighted average declining to under 4 percent when measured from
the fourth quarter of 1990 to the fourth quarter of 1991.
There is a fairly solid consensus that inflation rates in 1992
will largely reflect the trends established during the latter part
of this year. Moderate overall industrial country demand growth,
coupled with continued macroeconomic policy restraint and relatively
stable commodity prices, should hold average industrial country
inflation to the 3-1/2 percent range for the year.
5
The G-7 Response
The current global economic challenges and conditions make it
critical for the industrial countries to return to a path of
sustained growth. In this regard, the sUbstantial reductions in
inflation achieved in most countries provide an important foundation
for sustaining recovery with price stability.
The G-7 Ministers and Governors have met often this year
against this background. Most recently, at their June meeting in
London and mid-October meeting in Bangkok, they emphasized the
importance of fiscal and monetary policies, which while reflecting
the differing circumstances in each country, provide the basis for
lower real interest rates and sustained growth with price stability
in a medium term context. Progress is being made in this regard.
Interest rates have declined in the United states, Japan, Canada,
and the united Kingdom.
In contrast, however, they have remained broadly unchanged in
Germany. Reflecting the impact of regional transmission mechanisms,
interest rate developments in continental Europe have been
importantly influenced by developments in Germany.
This has
contributed to the persistence of high real interest rates
internationally, with important implications for growth and
investment.
Furthermore, the G-7 has stressed the importance of a
strengthening of global saving to meet legitimate demands for
capital that may emerge over the medium term. In this connection,
the full implementation of budgetary measures adopted in some
countries is essential to achieve sUbstantial reductions in budget
deficits. Also, obstacles to private saving should be removed.
sustained growth and improved market access are also important
for strengthening world economic activity, and in particular for the
external environment facing the reforming countries. In this
regard, the Ministers and Governors emphasized the importance of a
rapid and successful conclusion of the Uruguay Round.
G-7 economic policy coordination, including cooperation on
exchange markets, has also contributed to greater stability of
exchange rates. This topic is discussed in the following section.
6
PART III:
DEVELOPMENTS IN FOREIGN EXCHANGE MARKETS
Overview
Over the past year, exchange market activity at times was
heavily influenced by perceptions of relative economic performance
in the major countries, movements in interest differentials, and
global political developments. Nevertheless, on balance, the dollar
continued to move in a generally stable pattern, continuing the
trend of recent years.
G-7 cooperation played a major role in contributing to this
result. Small dollar purchases in February helped improve market
psychology as the dollar declined toward historic lows against the
Deutschemark. Later in the year, sales of dollars after the June
G-7 Ministerial meeting contributed to a revision of market views on
the dollar's potential for further appreciation at that time. In
retrospect, G-7 cooperation can be seen as a significant factor in
contributing to the broad pattern of stability in dollar movements
over the past year.
The dollar's path over the year can be broadly described as
showing a decline in late 1990 and early 1991, followed by a sharp
rebound into mid-1991, and a gradual downward trend thereafter.
These trends are described in greater detail below.
(See Table 2.)
Late 1990-Early 1991
During the final quarter of 1990 and early in 1991, despite
occasional bouts of safe haven demand, the dollar came under selling
pressure prompted by concerns about the effect of the Gulf crisis on
u.s. economic performance.
Amid the air campaign in the Gulf War, the G-7 Finance
Ministers and Central Bank Governors stated at their January 21
meeting that they were "prepared to respond as appropriate to
maintain stability in international financial markets."
This
statement and subsequent intervention reassured markets concerning
the G-7 commitment to cooperative action.
Subsequently, however, downward pressure on the dollar
continued ahead of the beginning of the land war in the Gulf region.
On February 11, the dollar reached an historical low of DM1.4433,
after the Bundesbank raised interest rated on January 31 and the
Federal Reserve lowered interest rates on February 1.
After the quick success of the land campaign in the Gulf War,
market psychology shifted in favor of the dollar. This shift was
influenced by an increasingly critical view of developments in the
German economy, Eastern Europe and the Soviet Union, as well as by
concerted dollar purchases by G-7 monetary authorities.
7
April through Mid-Summer
with the end of the Gulf War, the dollar appreciated rapidly.
The u.s. economy was considered likely to begin recovery around midyear, while investor interest in the reunified Germany proved cooler
than expected and deteriorating conditions in the USSR raised
concerns. Dollar demand continued in the face of concerted
intervention sales in the period ahead of the April 28 G-7 meeting.
Exchange rates were little affected by a cut in the Federal
Reserve's discount rate to 5-1/2 percent from 6 percent, and
lowering of the Fed funds "target" to 5-3/4 percent from 6 percent,
at the end of April. Instead, the cut focussed market attention on
the scope for interest rate cuts overseas. In following weeks,
interest rates were cut in several European countries, and market
expectations of monetary easing in Japan increased.
In early summer, demand for the dollar surged in the wake of
improving u.s. employment data, which encouraged expectations of an
accelerating u.S. economic recovery. Against many European
currencies, the dollar appreciated to levels not seen since autumn
1989. It also appreciated against the yen, prompting the Bank of
Japan to intervene in support of the yen.
Mid-Summer to Autumn
But in mid-summer the dollar began to depreciate, first against
the yen in mid-June, and in early July against the OM and
continental European currencies. Interest rate prospects and
underlying expectations regarding the pace of economic activity in
the united states generally governed the downward trend in the
dollar over the remainder of the reporting period. Particularly
influential were U.S. data showing unexpected declines in employment
in June and July. The only significant interruption of the
downtrend occurred at the time of the August coup in the USSR.
The yen began a rebound after mid-June following release of
data showing rapid growth in the Japanese economy in the first
quarter of 1991. But, the dollar held firm against the mark into
early July, amid uncertainties surrounding Russian Federation
elections and a German court decision raising the possibility of a
withholding tax on interest earnings on German assets.
Intervention, and perception of official attitudes toward
exchange rates, heavily influenced exchange market activity at this
time. Prior to the June 23 G-7 meeting, the market grew cautious
about the possibility that the G-7 would decide to curb the dollar's
rise. At the meeting, the G-7 reaffirmed its "commitment to
cooperate closely, taking account of the need for orderly markets,
if necessary through appropriately concerted action in exchange
markets."
8
Thereafter, the Bundesbank made a symbolic public sale of
dollars in Frankfurt. Also, the u.s. and German monetary
authorities indicated that they had reduced their reserves in offmarket transactions, and the market inferred that they were
~reparing to intervene.
Subsequently, there were some concerted
1ntervention sales of dollars, and the u.S. authorities joined in at
one point.
(The dollar sales were not related to the U.S.-German
off-market transactions, however.)
Market caution about intervention persisted after the
Economic Summit in mid-July, and the dollar settled into a
trading range. Over following months, comments by various
Japanese, and German monetary officials were perceived by
participants as strongly suggesting that none of the major
countries was dissatisfied with the easing of the dollar.
London
lower
U.S.,
G-7
In August, dollar selling accelerated, reflecting market
concern over a weak U.S. recovery and expectations of lower U.S.
interest rates.
Early in the month, the Fed reduced the apparent
target Fed funds rate to 5-1/2 percent from 5-3/4 percent. At midmonth, the Bundesbank raised official interest rates, as did some
other European central banks.
In early September, the dollar settled into a lower trading
range on market anticipation of further Fed easing. At mid-month,
the Fed cut the discount rate to 5 percent from 5-1/2 percent and
moved the apparent target for the Fed funds rate another 1/4
percentage point lower to 5-1/4 percent, amid indications of
decreasing price increases, weak demand, and slow money growth.
uncertainties over prospects for interest rate differentials
preoccupied the market into October. Attention focussed especially
on Administration concerns about the slow pace of the U.S. recovery
and the possible need for further monetary easing.
Meanwhile, the yen -- which earlier in the summer had been
depressed by Japanese financial scandals -- rose ahead of the
October 12-13 G-7 meeting on market perceptions that the G-7 would
tolerate SUbstantial appreciation of the yen. While the G-7's
statement following the meeting did not specifically address the
yen, the market inferred that the G-7 was endorsing the upward trend
of the yen given its reference to the need to avoid the reemergence
of very large imbalances.
9
PART IV: u.s. BALANCE OF PAYMENTS AND ASSOCIATED ISSUES
In the early and mid-1980s, large and growing imbalances
emerged among the major countries, giving rise to protectionist
pressures in the world economy. A major goal of the G-7 economic
policy coordination process has been to reduce these imbalances in
the context of sustained growth with price stability and an open
international trading system.
SUbstantial progress has been made in achieving this objective,
especially in reducing U.S. external deficits, resulting in a
strengthening of u.S. economic performance. This owes much to the
G-7's role in helping achieve and maintain competitive exchange
rates, consistent with underlying economic fundamentals, in the wake
of the Plaza Accord, as well as in shifting the pattern of growth in
the major countries to support external adjustment.
Indeed, the
u.S. trade and current account deficits have declined substantially
since their peaks in 1987, and the u.S. current account in 1991 is
likely to register near balance, albeit in part due to one-time
factors.
Nevertheless, important medium term issues remain that
will affect balance of payments performance over coming years.
Below is a discussion of the balance of payments situation and
outlook in the United States.
In addition, key issues regarding the
u.S. external position and the export-driven adjustment of recent
years are highlighted. Also presented is a discussion of the medium
term issues concerning U.s. balance ~f payments prospects, as
highlighted by the IMF in its recent "Article IV" bilateral
surveillance consultation with the United States.
Developments in 1991
The u.S. trade deficit in the first half of 1991 continued the
decline which began in late 1987. The first half deficit at an
annual rate (balance of payments basis) was $68 billion, down from
$108 billion for the full-year 1990 and a peak of $160 billion in
1987.
(See Tables 3 and 4.)
First half 1991 exports reached $410 billion at an annual rate,
$25 billion or 6-1/2 percent from the level for the same period
1n 1990. As has been the case since 1987, export growth, and in
particular capital goods exports, has continued to lead the
adjustment of the trade deficit. Capital goods and industrial
supplies and materials each contributed roughly one-half of the
first half increase in exports over the year-earlier period. On a
geographic basis, over 1/3 of the increase in exports went to
Europe, with the remainder spread over other geographic areas. Only
in the case of Canada, suffering a particularly severe economic
downturn, was there a slight decline in exports. This sustained
export strength reflects a continued solid competitive position for
u.S. products.
~p
10
Imports for first half 1991 were $478 billion at an annual
rate, down about $20 billion from the full-year 1990 level. On an
area basis, the bulk of the overall import decline occurred vis-avis Western Europe and the Asian NIEs; changes vis-a-vis other areas
were modest. capital goods imports actually increased, countering
the overall declining pattern; with this exception, import declines
were spread widely across product categories. This pattern of
import declines is consistent with the idea that the soft u.s.
economy has been an important factor in the most recent trade
balance developments.
In terms of area balances, the balance with Western Europe
continued to make a major contribution to the overall decline in the
U.S. deficit. The united States ran a trade surplus of $17.6
billion (seasonally adjusted, annual rate) in trade with Western
Europe during the first half of 1991, up from $2.1 billion for fullyear 1990. Other major contributions to overall trade deficit
reduction came in the deficits with OPEC (down from $24.6 billion in
1990 to an annual rate of $16.6 billion in first half 1991) and the
Asian NIES (down from $20.6 billion to $10 billion over the same
period). By contrast, first half deficits (again, at annual rates)
vis-a-vis Japan and Canada showed little or no change from full-year
1990 levels.
The difference between the u.s. trade balance and the current
account balance reflects u.s. performance on services, investment
income, and transfers. The current account during the first half of
1991 was heavily influenced by a number of factors.
o
First, the single most important contributor to the lower
current account deficit was the lower trade deficit, which
declined substantially as set out above.
o
Second, there were the one-time and extraordinary receipts of
transfers reflecting allied support contributions for Operation
Desert Storm.
o
Third, there was a rising trend in u.S. surpluses on both
investment income and services.
All together, after taking account of the Desert Storm receipts
which totalled over $34 billion, the current account balance in the
first half of the year was in surplus by over $13 billion (at an
annual rate). Abstracting from the non-recurring Desert Storm
receipts, however, the current account was in deficit by about $21
billion ($42 billion at an annual rate). This is still down
substantially from the 1990 level of $45 billion for first half and
$92 billion for the full year.
Analysis of the capital flows which financed the current
account continues to be hampered by the very large statistical
discrepancy, at least part of which generally is thought to reflect
unrecorded capital flows. However, it may be significant that the
11
data for recent quarters indicate a sUbstantial decline in direct
investment inflows, compared with the very high levels of 1987-89.
During these three years, direct investment flows into the United
states averaged over $60 billion annually. During the latter half
of 1990 and the first half of 1991, the total recorded direct
investment inflow was less than $20 billion. It is too early to
speculate to what extent this represents a reaction to the U.s.
slowdown, and how much simply reflects the substantially smaller
current account deficit.
Prospects for the Full-Year 1991 and 1992
The outlook for the remainder of 1991 depends substantially on
the strength of the u.s. recovery. If the recovery is gradual, as
expected in the Administration forecast, imports should remain
subdued for the remainder of the year. At the same time, we expect
any slackening in growth abroad to be gradual as well, so that
export growth should be sustained at rates of recent quarters.
Barring unforeseen shocks such as a sharp change in oil prices, the
trade deficit for the full year 1991 should be in the range of $6570 billion.
The trends noted in services and investment income also are
expected to continue, yielding a current account deficit of $45
billion or so before account is taken of the non-recurring Desert
storm transfers. When these receipts -- which should total over $40
billion for the full year -- are taken into account, the 1991
current account deficit could fall below $10 billion for the first
time since 1982.
conventional models of trade and current account performance,
based upon a number of static assumptions, suggest that there may be
a very modest increase in the trade deficit in 1992. Exports should
continue their steady growth of the past several years, assuming
sustained moderate growth in our major trading partners. Also, in
this regard, the U.s. competitive position should remain solid,
assuming the dollar's value relative to other major currencies
remains around current levels.
On the import side, it will be difficult to repeat the import
moderation of 1991 (an actual decline in the first half) if the u.s.
recovery proceeds as expected during 1992. Both oil and non-oil
import volumes should rebound during the course of the 1992, as part
of a normal cyclical recovery.
These likely trends point to a 1992 trade deficit in the $75
billion range, up modestly -- perhaps $10 billion or so -- from the
1991 level but still well below $100 billion.
However, underlying current account performance -- abstracting
from the very large 1991 Desert storm receipts
1S likely to show
little change. The favorable underlying trend in the services
12
balance is projected to continue, and this improvement is forecast
to offset at least part of the expected trade balance deterioration.
Analysis of the Reduction of the u.s. External Deficit
The u.s. balance of payments situation, and the sUbstantial
adjustment we have witnessed since 1987, highlight a number of
favorable developments.
First, the adjustment that has taken place since 1987 has been
both considerable and continuous. This owes much to the dynamism of
G-7 economic policy coordination.
A sUbstantial portion of the underlying adjustment of external
imbalances that has occurred reflects the lagged effects associated
with the achievement of competitive exchange rates, consistent with
underlying fundamentals, in the wake of the Plaza Accord of 1985.
Moreover, economic policy coordination has contributed
importantly to improved growth in the G-7 as a whole, which has
furthered the adjustment process. The G-7 recovery in the late
1980s was importantly characterized by a shift in the pattern of
growth: in the united states, output growth exceeded domestic demand
growth; in Japan and Germany, domestic demand growth exceeded
overall GNP growth. This development was associated with the
recognition among the major countries that the responsibilities for
adjustment were shared by both surplus and deficit countries.
Second, this pattern of growth meant that the adjustment
process in the united states has been driven by growth in exports,
rather than by import compression. since 1987, annual u.s. export
growth in value terms has averaged just over 13 percent. As noted
above, this reflects both sustained growth abroad and the continued
solid competitiveness of u.S. products, which is in large measure
exchange rate related.
The u.S. dollar, on a trade-weighted basis vis-a-vis
currencies of our major trading partners adjusted for inflation
differentials, has remained broadly stable over the past four years.
(See chart in appendix.) To be sure, there have been fluctuations
in both directions. But these have tended to be reversed. The
experience of recent years suggests that modest, temporary currency
movements have had relatively little impact on trade flows.
Third, our strong export growth has had important implications
for overall u.S. economic performance. Exports are contributing
significantly to u.S. growth, particularly at this time of moderate
domestic activity. Between 1987 and 1990, real net exports (change
in exports less imports on a national income accounts basis)
contributed 27 percent to growth. In 1990 alone, real net exports
accounted for over 40 percent of growth.
13
Fourth, this export growth has substantially narrowed the gap
between exports and imports. When the deficit was at its peak ($160
billion in 1987), imports at roughly $410 billion were over 60
percent larger than exports ($250 billion). This gap meant that at
equal growth rates of imports and exports, the trade deficit would
constantly widen. So far in 1991, imports are around 17 percent
larger than exports; thus the gap has been reduced by nearly threequarters.
Fifth, the u.S. performance on services and investment income
has demonstrated longer-run strength. Many analysts had anticipated
that with the deterioration in the u.S. net investment position,
u.S. investment income performance would steadily deteriorate due to
the need to service our net debtor position; in turn, the favorable
impact of trade deficit reduction on the current account would be
offset. However, this has not been the case. Given the relatively
soft economy at home, payments on foreign investments in the united
States have been weak, whereas strong growth overseas has resulted
in higher u.S. earnings on u.S. assets abroad. Also, the declines
in u.S. interest rates have resulted in reduced investment income
payments. Another significant factor has been net receipts for
services, which show a solid favorable trend reflecting longer term
competitive strength in a range of categories.
Issues Regarding Medium Term u.S. Balance of Payments Performance
Despite this considerable progress, however, the prospects for
the u.S. external position pose a number of important issues. Over
the medium term, u.S. current account performance will -- ex post -reflect trends in our national savings and investment.
The recent u.S. Article IV consultations with the International
Monetary Fund highlighted this basic fact. Indeed, examining u.S.
payments prospects from this perspective, the Fund -- in the 1991
U.S. Article IV consultations and its World Economic Outlook -projected that the United States faces medium term current account
deficits of some 1-1/2 to 1-3/4 percent of GNP. In this regard, the
IMF emphasized that low national savings would have important medium
term implications for domestic investment, productivity growth, and
the u.S. current account.
For its part, the IMF noted that the United States must
address these issues if it is to sustain medium term growth without
recourse to foreign savings. Accordingly, the Fund recommended that
fiscal policies, emphasizing expenditure restraint, would need to
playa key role in raising u.S. national savings. In this regard,
the Fund urged the Administration to implement the Budget Agreement
fully. The Fund also underscored the importance of raising private
savings.
with respect to monetary policy, the Fund noted recent declines
in u.S. interest rates, and was of the view that the appropriate
long term goal of monetary policy should be the attainment of price
14
stability. The Fund also welcomed the reaffirmation of the u.s.
commitment to the achievement of freer trade on a multilateral basis
and the priority attached by the United states to a successful
conclusion of the Uruguay Round.
The United states has no target for its external position.
However, it will be important for the united states to help ensure
that its external position is "sustainable" and does not contribute
to an excessive build-up in external indebtedness.
Sustainability cannot be quantified. It depends importantly on
the perceptions of market participants, and their willingness to
finance the u.s. external position at any given level of interest
and exchange rates.
There are a number of fundamental reasons, however, why the
U.S. position is sustainable.
o
First, as noted, sUbstantial progress has been made in
correcting imbalances, and the u.s. export sector remains
highly competitive.
o
This progress, achieved with the help of G-7 economic policy
coordination, underscores the commitment of the major countries
to adapt policies to promote the smooth functioning of the
international monetary system. The G-7 process is a dynamic
one, focusing on a broad range of economic fundamentals.
o
In this connection, the G-7 have recognized that exchange rates
are not the sole means of adjustment. Rather, they are an
essential complement to the sound fiscal, monetary and
structural policies which are key to achieving sustained growth
with price stability and assuring longer term competitiveness.
o
Finally, the united states remains the world's largest and most
open economy. Our capital markets are the deepest and most
liquid in the world. The size, strength, and openness of the
u.s. economy will continue to make the United states an
extremely attractive center for investment in the years ahead.
The united states is committed to the open and growing
multilateral trade and payments system upon which the
prosperity of the world economy rests.
15
PART V: ASIAN NEWLY INDUSTRIALIZED
ECONOMIES (NIES) AND CHINA
overview
Under Section 3004 of the Omnibus Trade and Competitiveness Act
of 1988, the Secretary of the Treasury is required to ..... consider
whether countries manipulate the rate of exchange between their
currency and the United States dollar for purposes of preventing
effective balance of payments adjustment or gaining unfair
competitive advantage in international trade. If the Secretary
considers that such manipulation is occurring with respect to
countries that (1) have material global current account surpluses
and (2) have significant bilateral trade surpluses with the united
States, the Secretary of the Treasury shall take action to
initiate ... negotiations on an expedited basis ... for the purpose of
ensuring that such countries regularly and promptly adjust the rate
of exchange between their currencies and the United States dollar."
It was concluded in the October 1988 report that Taiwan and
Korea "manipulate" their exchange rates, within the meaning of the
legislation. Pursuant to section 3004, Treasury initiated bilateral
negotiations with Taiwan and Korea for the purpose of ensuring that
these two economies regularly and promptly adjust the rate of
exchange between their currencies and the U.S. dollar to permit
effective balance of payments adjustment and to eliminate unfair
competitive advantage.
In April 1990, Treasury concluded that Taiwan and Korea were no
longer directly "manipulating" their currencies within the meaning
of the legislation. This finding was reaffirmed in fall 1990 and
spring 1991. However, it was noted that Taiwan's external surpluses
remained large and that in both Taiwan and Korea, exchange rate
policy would continue to have an important role to play in promoting
economic adjustment. In addition, the reports concluded that in
Korea, liberalization of remaining exchange and capital controls was
required to improve the functioning of the exchange markets and
assure the full operation of market forces in exchange rate
determination. In Taiwan, foreign exchange and capital controls
were cited as impediments to the operation of market forces in
exchange rate determination.
The Treasury Department has held several formal discussions
with both Korea and Taiwan on their respective controls on exchange
activities and capital movements, in addition to general banking and
securities matters. Both Korea and Taiwan, in our judgment, must
liberalize significantly the existing discriminatory restrictions
placed on foreign institutions and generally let market forces play
a greater role in their economies.
16
China's large external surpluses, including its growing
bilateral trade surplus with the united states, sUbstantial
depreciation of the renminbi, and administrative controls over
foreign exchange allocation and trade have prompted serious concerns
as to the applicability of Section 3004 to China. The fall 1990
report, the first to cover China, concluded that China's trade
surplus with the United states was primarily due to causes other
than exchange rate manipulation. However, it was noted that China's
administrative controls over the external sector were of serious
concern, and that the United states would press China to remove
them. The spring 1991 report reaffirmed these conclusions. This
report contains a more detailed discussion of China's external
surpluses and exchange rate system.
A summary of economic and exchange rate developments in Korea,
Taiwan, and China follows. (See Chart 5.)
17
KOREA
The Korean won has further depreciated against the u.s. dollar
in nominal terms since the spring 1991 Exchange Rate Report. This
depreciation reflects in part the continued adjustment in Korea's
external accounts, where significant deficits have emerged in 1991.
However, the exchange rate also continues to be influenced by
pervasive foreign exchange and capital controls in Korea. These
controls constrain the forces of supply and demand in the exchange
market, distort trade and investment flows, and position the
authorities to manipulate the exchange rate through indirect means.
Trade and Economic Developments
Kore~~s real GNP is expected to register nearly 9 percent
growth in '1991, repeating the performance of last year and in line
with Korea's historic growth rates over the past three decades.
Growth in 1991 is again being led by private consumption and fixed
investment, with the construction and manufacturing sectors
registering particularly strong performances. Inflation remains a
concern and is expected to reach a 9.5 percent rate for the whole
year. Unemployment remains low at 2.3 percent of the labor force.
Korea's external accounts have undergone substantial adjustment
since 1989. This adjustment -- which has moved the current account
from a surplus of 2.5 percent of GNP in 1989 to a forecast deficit
of 2.5 percent of GNP 1991 -- has resulted largely from the strong
growth of the domestic economy and imports; rising wage demands and
other factors adversely affecting Korea's export competitiveness;
and rising oil import prices and lost export opportunities in the
wake of the Persian Gulf crisis.
For the first time since 1985, the current account fell into
deficit in 1990, by $2.1 billion (0.9 percent of GNP). This
included a trade deficit of $1.9 billion on a balance of payments
basis, compared with a trade surplus of $4.5 billion in 1989. In
the first eight months of 1991, these trends accelerated. The
Korean government now projects a current account deficit in 1991 of
some $7 billion (2.5 percent of GNP) and a trade deficit of $6
billion. However, these deficits do not appear to be structural in
nature; external surpluses are expected to reemerge from 1993.
According to u.s. customs data, the U.S. bilateral trade
deficit with Korea in 1990 fell to $4.1 billion, down 38 percent
from 1989. This was based on a 7 percent increase in u.s. exports
to Korea and a 6 percent decline in imports from Korea. In the
first eight months of 1991, the United states ran a trade deficit of
$860 million with Korea, representing a 70 percent decline in the
deficit compared with the same period last year.
18
Reflecting the rise in the external deficits, Korea's gross and
net debt figures have continued to rise in 1991. After declining
steadily since 1985, Korea's gross external debt rose to $31.7
billion at the end of 1990 and to $36.8 billion at the end of June
1991. However, the mid-1991 figure was equal to only 14 percent of
GNP, compared with 52 percent of GNP in 1985. Net debt doubled
between the end of 1990 and mid-1991, exceeding $10 billion at the
end of June for the first time in three years. The debt service
ratio fell below 10 percent at the end of 1990 -- less than half the
level of three years earlier -- and is expected to decline further
to about 8 percent in 1991.
Gross official reserves at the end of 1990 totaled $14.8
billion, representing 2.2 months of import coverage. with the
negative trends in the current account, reserves fell to $13.4
billion by the end of June 1991.
Exchange Market Developments
Under the "market average rate" (MAR) system of exchange
determination, introduced on March 2, 1990, the won/dollar exchange
rate at the beginning of each business day is equal to the weighted
average of transactions in the inter-bank market on the preceding
business day.
Inter-bank and customer rates are allowed to float
freely within specified margins, which were expanded in September
1991. Exchange rates between the won and third currencies are set
in accordance with dollar rates in international currency markets.
During the first nineteen months of the MAR system (through
October 18, 1991), the won depreciated 8.3 percent in nominal terms
against the U.S. dollar.
Foreign banks accounted for a large share
of transactions in the inter-bank market, generally between 40-60
percent of the total. The Bank of Korea (BOK) was not a direct
participant in the market, and other government-owned banks
accounted for only a small share of inter-bank activity.
The cumulative nominal depreciation of the won against the U.S.
dollar since the first of these reports was issued in october 1988
now stands at 5.9 percent. Since the spring 1991 report, this
nominal depreciation has accelerated; the Korean currency has fallen
3.6 percent against the dollar over the past six months. However,
because of higher inflation in Korea than in the united states, the
won has shown little change in real terms against the dollar over
this period.
Foreign Exchange and capital controls
The Korean authorities maintain a comprehensive array of
controls on foreign exchange and capital flows.
These controls
prevent market forces of supply and demand from playing a fully
effective role in exchange rate determination, distort trade and
investment flows, and provide the Korean authorities with tools for
indirectly manipulating the exchange rate.
19
One of the most onerous controls is the requirement that
foreign exchange banks obtain and review, prior to entering into
most foreign exchange transactions, original documentation of an
underlying commercial transaction. This ureal demand" rule
seriously hampers the development of Korea's foreign exchange
market, reflects the government's continued controlling hand in the
foreign exchange market and its fundamental lack of confidence in
market forces, and is inappropriate for a country at Korea's stage
of development.
Other exchange and capital controls severely restrict the use
of short-term trade finance, while there are effective limitations
on a variety of current account transactions such as travel and
remittances. Direct portfolio investment in Korea will be opened to
foreigners for the first time in early 1992, but a number of
restrictions -- including a 10 percent limit on total foreign
investment in any Korean stock and a 3 percent limit on investment
by individual foreigners -- will initially keep foreign
participation in Korea's capital markets to a minimum. Capital
flows in connection with foreign direct investment in Korea, as well
as investment abroad or foreign borrowing by Korean residents, are
also restricted. These and other controls hinder the ability of
branches and subsidiaries of foreign companies located in Korea to
obtain investment and working capital and even import finance.
In June 1991, the Korean government announced its intention to
revise the Foreign Exchange Control Act (FECA) to adopt a "negative
list" approach to the regulation of foreign exchange transactions.
Under the proposed plan, currently under consideration in the
National Assembly, all foreign exchange transactions would be
permitted in principle, with exceptional restrictions explicitly
listed in the regulations. While the move to a negative list
approach is welcome in principle, it remains to be seen precisely
how the FECA and its associated regulations will be revised and how
many restrictions will remain. The U.S. Treasury Department has
conveyed to the Korean authorities that we would expect the negative
list of restrictions to be short. In particular, we would consider
a revision of the FECA unsatisfactory if it did not include
significant relaxation or elimination of the underlying
documentation requirement.
Financial Policy Talks
Capital and exchange controls and other financial policy issues
are the subject of the ongoing Financial Policy Talks between the
Treasury Department and the Korean Ministry of Finance. Three
formal rounds of these talks, and several informal rounds, have been
held since February 1990, most recently in September 1991. The
purpose of the talks is to provide a mechanism for addressing
specific market access problems that U.S. banks and securities firms
face in doing business in Korea, and for encouraging broader
liberalization of Korea's financial, capital, and exchange markets.
20
Progress in the Financial Policy Talks has been limited. The
Ministry of Finance has taken some concrete measures over the past
two years to improve the treatment of foreign financial institutions
in Korea. These steps include increases in the ceiling on issuance
of certificates of deposit (CDs) by foreign banks, elimination of
the ceiling on foreign banks' paid-in capital in Korea, and
permission for foreign securities firms to establish branches in
Korea.
However, significant denials of national treatment for foreign
financial institutions in Korea remain. In particular, foreign
banks continue to face severe difficulties in meeting the local
financing needs of their traditional clients. The marginal
increases in CD limits, while helpful, have been inadequate to
address the local currency funding problem; the ceilings should be
substantially expanded or eliminated altogether. At the same time,
discrimination against foreign banks in the interbank call money
market persists, while another potential won funding source, the
trust business, is hindered by the requirement that a high
percentage of trust deposits be invested in low-interest government
bonds. In the securities area, stiff criteria for branch
establishment and a limited scope of permissible activities
effectively limit the attractiveness of the Korean market for
foreign securities firms.
Most troubling at this stage is that the Korean Government
appears to lack a "vision" and well-defined strategy for broader
liberalization of its tightly controlled financial markets.
Recently announced plans for the deregulation of interest rates,
liberalization of foreign exchange controls, and opening of Korea's
capital markets -- while steps in the right direction -- do not
appear to go far or fast enough, or to be part of a coordinated
strategy. The Treasury Department has called on the Korean
Government to develop and publish a comprehensive blueprint with
clear timetables for the full liberalization of its financial
sector.
The Treasury Department views the lack of progress in these
areas as evidence of an unwillingness on the part of the Korean
government to undertake fundamental reform of its financial sector.
We will continue to pursue these issues with the Korean Ministry of
Finance through the bilateral Financial Policy Talks and the Uruguay
Round financial services negotiations.
Assessment
There continues to be no basis at this time for concluding that
Korea is directly "manipulating" its exchange rate, within the
meaning of the legislation. This assessment is based on the
following factors: the emergence of significant trade and current
deficits in 1991, the decline in Korea's foreign reserves in the
first half of 1991, the lack of evidence that the Bank of Korea is
21
intervening directly in the exchange market, and the modest role of
other government-owned foreign exchange banks in the market.
Nonetheless, the exchange rate determination system in place in
Korea, while an improvement over the previous regime, is far from a
truly market-determined one. In particular, we remain seriously
concerned that pervasive Korean exchange and capital controls
significantly constrain supply and demand in the currency market.
Liberalization of these controls -- especially the "real demand"
rule for foreign exchange transactions -- is imperative to
strengthen the role of market forces in exchange rate determination
and in Korea's trade and investment flows.
Therefore, in the period ahead, the Treasury Department will
continue to monitor developments in Korea's external accounts and
the operation of the MAR exchange rate system. We will also
continue to press for liberalization of Korea's financial, capital,
and exchange markets, as well as to seek improved treatment for u.s.
financial institutions in Korea.
22
TAIWAN
Taiwan's trade surplus with the U.S. has decreased so far this
year while the New Taiwan (NT) dollar has appreciated against the
U.S. dollar in nominal terms by 2.6 percent since the end of 1990.
However, Taiwan is expected to finish the year with extremely large
overall trade and current account surpluses; the overall trade
surplus may exceed that registered last year. The full operation of
market forces in determining the exchange rate is impeded by
continued limitations on foreign exchange transactions and capital
flows, and by likely central bank intervention to dampen
appreciation. This combination of practices contributes to Taiwan's
efforts to generate the trade surpluses it views as necessary for
reserve accumulation. These policies amount to indirect
"manipulation" of the exchange rate and impede further adjustment in
Taiwan's external imbalances.
Trade and Economic Developments
Taiwan's global current account surplus decreased by
5.4 percent in 1990 to $10.8 billion. As a proportion of GNP, this
represented a decrease to 6.7 percent from 7.5 percent in 1989.
Taiwan's overall trade surplus (c.i.f. basis) was down 10 percent in
1990 to $12.5 billion. Taiwan experienced a substantial rise in net
capital outflow in 1990, due largely to sizable increases in
overseas investment and short-term flows from NT dollar to foreign
currency accounts, in part reflecting political uncertainties.
A noteworthy development this year has been a reduction in the
U.S. bilateral trade balance with Taiwan. The U.S. trade deficit
(according to U.S. statistics) with Taiwan in the first 8 months of
1991 was, at $5.1 billion, 19.8 percent lower than in the same
period in 1990. Imports from Taiwan have decreased by 3.1 percent
while U.S. exports to Taiwan increased by 13.1 percent.
Factors such as the relocation of labor-intensive export
industries overseas; rising wages and production costs; and
inflationary pressures continue to play an important role in
reducing Taiwan's trade surplus. Slow growth over the past year in
Taiwan's major export markets, particularly in the united States,
has also been a significant factor over the past year.
Over the first 8 months of 1991, according to Taiwan's economic
statistics, the u.S. share of Taiwan's exports fell 4.5 percentage
points to 28.8 percent and its share of Taiwan's overall trade
surplus fell to 60 percent, compared to 77 percent over the same
period in 1990. The authorities on Taiwan have publicly expressed
their concern with this decline. Taiwan's exports to Asia have
increased dramatically this year as a result of Taiwan's efforts to
diversify its export markets and growing demand for inputs from
Taiwan's offshore industries.
23
The recent decrease in Taiwan's bilateral trade surplus with
the United states is likely to slow or reverse as the united states
recovers from recession. Taiwan's most recent data shows that its
September exports to the United states increased by 21.4 percent
over September 1990, the largest percentage growth since January
1988.
Taiwan's overall trade and current account surpluses are
demonstrating virtually no adjustment. Taiwan's authorities have
predicted that the overall trade surplus for 1991 may rise to $13.6
billion, an 8.5 percent increase over 1990. Taiwan's overall trade
surplus increased by 3.6 percent in the first 9 months of 1991 as
its widening deficit with Japan was more than balanced by
dramatically increased surpluses with Hong Kong and Europe.
Taiwan's authorities are predicting a current account surplus
of approximately $10 billion in 1991, a slight decrease from last
year. The Central Bank projects that the balance of payments
surplus will widen significantly to $5 billion this year. Taiwan's
foreign exchange reserves increased since 1990 to $76.4 billion
(sufficient to cover more than 14 months of imports) in September
1991, the world's largest stock. This level of reserves is
excessive, especially given the investment needs of the economy.
According to the most recent official Taiwanese projections,
the economy is growing at an annual rate of about 7 percent in 1991,
up from 5.3 percent in 1990. Inflation is expected to decrease
slightly from 1990's rate of 4.1 percent.
Exchange Rate Developments
Since the Fall 1988 report, Taiwan's cumulative exchange rate
appreciation has totaled only 9.5 percent vs. the u.S. dollar in
nominal terms. From mid-1990 to early-1991, the NT dollar
fluctuated within a small range against the u.s. dollar. Since mid1991, the NT dollar has appreciated slowly by 2.6 percent against
the U.S. dollar. The NT dollar depreciated against all other major
currencies as a group through the end of 1990; its performance has
been mixed during 1991. As of October 18, the exchange rate stood
at NT$26.41/US$1.
Given the continued strength of Taiwan's economic fundamentals,
the expectation of increased growth, a steady and still-large
current account surplus, excessively high reserves, and a more
stable political environment, further strengthening of the NT dollar
over the near-term is expected.
Exchange Rate System
The Central Bank has reportedly occasionally intervened to
moderate upward pressure on the NT dollar (and to a lesser extent,
downward pressure) although not with the same dominance as before
the institution of the new exchange rate system in 1989. However,
24
there is no evidence to suggest that the Central Bank has recently
been consistently intervening in the market to gain unfair
competitive trade advantage.
Taiwan has instituted a number of measures over the past
several years to liberalize the exchange rate system and reduce
capital controls. As a result, the exchange rate system appears now
to reflect market forces more fully. The rate for foreign exchange
transactions is freely determined between buyers and sellers. These
measures have been detailed in previous reports; no new steps have
been taken since our last report.
The remaining limitations on foreign exchange transactions and
capital flows, while less pervasive than those imposed by some other
economies in the region, impede the full operation of market forces
in exchange rate determination, and remain far too restrictive for
an economy with the stated objective of becoming a regional
financial center. Several of the limitations are especially harmful
to foreign banks and securities firms.
Taiwan continues to limit the amount of cash an individual can
carry in and out of Taiwan (NT$40,000 or about $1,500). It also
restricts annual non-trade-related capital inflows and outflows to
$3 million per individual or firm (capital flows for trade purposes
are unlimited). It is our expectation and hope that the Central
Bank will raise in tandem or dismantle these limits as the market
remains stable and as inflows and outflows reflect underlying market
conditions as opposed to short-term speculative movements.
Limits on foreign exchange positions largely eliminate the
operation of a forward foreign exchange market, a potentially major
area of business for foreign banks. Ceilings limits on foreign
exchange positions are based on local assets. The local assets of
foreign banks, however, are relatively small since Taiwan has
restrictions on their operations and branches, consistent with
Taiwan's generally discriminatory treatment of foreign banks.
Ceilings on overbought ("long") positions -- $50 million for the
five large domestic banks and $20 million for all other banks,
including foreign banks -- constrain operations in the forward
market. Limits on foreign exchange liabilities ("short" positions),
which vary from bank to bank have the same effect and also restrict
the ability of foreign branches to offer foreign currency loans in
Taiwan and to use swap funding for local currency lending. Taiwan
also uses a cash or "spot" basis to calculate a bank's foreign
exchange position, contrary to the internationally-accepted practice
of using an accrual basis. These various requirements not only
discriminate against foreign banks but also limit the range of
financial instruments available to Taiwan's economy, thereby
reducing its efficiency.
25
Financial Talks
constraints on banking, foreign exchange and other financial
policy issues are the subject of ongoing financial policy talks
between the Treasury Department and Taiwan's authorities conducted
under the auspices of the American Institute in Taiwan and the
Coordinating Council on North American Affairs. These talks provide
a forum for addressing specific market access problems encountered
by u.s. banks and securities firms in Taiwan, and for encouraging
Taiwan's authorities to undertake further liberalization of its
financial capital and exchange markets.
In addition to the constraints imposed by Taiwan's controls on
foreign exchange transactions and capital flows, u.s. financial
services firms continue to face significant denials of national
treatment. In many instances, there is outright discrimination
against foreign banks and securities firms. For example, the number
and location of additional foreign bank branches is still
restricted. Special ceilings, over and above those faced by
domestic banks, are imposed on loans made by a foreign bank to any
single customer. Foreign banks also cannot deal directly in short
term-money instruments. Substantial restrictions are placed on
foreign institutional investment in the stock market, while
investments by foreign individuals are prohibited altogether.
Foreign firms cannot manage private pension funds.
The Treasury Department believes these continued restrictions
are evidence that the authorities on Taiwan have been excessively
cautious in their efforts to increase foreign participation in the
financial sector, particularly in view of their desire to develop
Taiwan as a regional financial center. We will continue to pursue
these issues in our discussions with Taiwan's authorities.
Assessment
We recognize the decline in Taiwan's bilateral trade surplus
with the u.s. so far this year. This development is primarily
attributable to the dual realities of the slowdown in the u.s.
economy and a shift in Taiwan's traditional labor-intensive
production to China and other locations. Despite this decline, the
continued high surplus is still unsustainable and indicates a need
for further adjustment, particularly since the resumption of growth
in the united states will likely slow or reverse this trend in
coming months. In addition, adjustment in Taiwan's overall
surpluses does not appear likely this year; in fact, its overall
trade surplus is expected to increase. These persistently large
external surpluses continue to generate concern. Substantial
further adjustment is required and appreciation of the NT dollar
must continue to playa role in the process.
We have no evidence of direct exchange rate "manipulation",
within the meaning of the 1988 legislation. However, the Central
Bank reportedly intervenes to moderate the pace of appreciation.
26
These actions may be motivated by the authorities' concern about
their declining exports to the u.s. and their desire to maintain
their large stock of foreign exchange reserves.
As we noted in our last report, the exchange rate system now
more fully reflects market forces. However, limitations on foreign
exchange transactions and capital flows remain far too restrictive
and impede the full operation of market forces in exchange rate
determination. We are increasingly concerned about the apparent
lack of progress in removing the remaining restrictions. Given the
advanced state of economic development on Taiwan, and the stated
desire of Taiwan's authorities to develop Taiwan as a regional
financial center, such limitations should be significantly relaxed
in the near future.
In view of the persistence of Taiwan's large trade and current
account surpluses, we are again concerned that Taiwan's exchange
rate policies, in conjunction with continued limitations on foreign
exchange transactions and capital flows, contribute to indirect
"manipulation" of the exchange rate. Given this situation, we will
continue to monitor carefully the pace of adjustment in the overall
and bilateral trade balance and the role of currency appreciation in
that process, and indicate the depth of our concern to Taiwan's
authorities. In our discussions with Taiwan's authorities, we will
continue to push for further liberalization of controls on capital
and foreign exchange transactions and seek improved treatment for
U.S. financial institutions.
27
CHINA
The Treasury Department is seriously concerned about the size
of China's trade and current account surpluses. These surpluses
stem primarily from the network of pervasive administrative controls
maintained by the Chinese authorities over all aspects of external
economic activity. The authorities combine a highly regulated
system of foreign exchange allocation with strict import licensing
and an array of other controls to tightly manage China's trade
flows. The result is large and growing external surpluses.
Since the last report, the Treasury Department has intensified
its examination of China's foreign exchange policies. Treasury
delegations traveled to China in July and September of this year for
consultations with the Chinese authorities both to deepen our
understanding of the foreign exchange regime and to seek concrete
steps toward a more market-oriented system of exchange rate
determination in China. These consultations will continue in the
period ahead.
Trade and Economic Developments
China's external accounts underwent significant adjustment in
1990. Through much of the 1980s, China had overall trade and
current account deficits. Between 1989 and 1990, however, the trade
balance experienced a swing of over $15 billion (4.8 percent of
GNP), moving from a deficit of $6.6 billion in 1989 to a surplus of
$8.7 billion in 1990. The current account also moved from a $4.3
billion deficit in 1989 to a $10.2 billion surplus in 1990.
The large external surpluses continued through the first six
months of 1991. According to Chinese data, the trade surplus for
January through June jumped to $3.7 billion, an increase of 43
percent over the same period of 1990. However, while exports have
remained strong, import growth has continued to accelerate in 1991,
which will moderate the increase in the trade surplus for the year.
A surplus on the order of $10 billion is expected in 1991.
A principal factor in the strengthening of China's balance of
payments in 1990 was the retrenchment program launched in the last
quarter of 1988 to curb excess demand and high inflation, which had
the effect of slowing import demand and boosting exports. In
addition, an important element of the retrenchment program was
stricter application of direct administrative controls over imports,
which further contributed to the swing in the external accounts.
This latter factor has gained increasing prominence as other
retrenchment policies have been eased in 1991.
As a result of the SUbstantial adjustment in the trade and
current accounts, China's foreign exchange reserves climbed 38
percent from $17 billion at the end of 1989 to $27.3 billion,
equivalent to nearly eight months of imports, at the end of last
year. By end-June 1991, reserves had reached $35.2 billion.
28
According to u.s. customs data, China has a large and growing
bilateral trade surplus with the united states. 1 The Chinese
surplus rose from $6.2 billion in 1989 to $10.4 billion in 1990, an
increase of 67 percent. (According to Chinese customs statistics,
China had a deficit of $1.4 billion with the united states in 1990.)
Through the first eight months of 1991, U.S. customs data show a
Chinese bilateral trade surplus of $7.2 billion, compared with $6.4
billion in the same period of 1990, an increase of 13 percent.
China's exports to the united states in 1990 rose 27 percent,
following a 41 percent expansion in 1989. These growth rates were
significantly above those for China's global exports during the same
period (18 percent and 7 percent, respectively). This discrepancy
can largely be explained by the sizeable transfer of labor-intensive
production facilities from Hong Kong and Taiwan to the mainland,
boosting China's export capacity in such goods as clothing, toys,
sporting goods, footwear, and consumer electronics -- products often
bound for the u.s market. In the first six months of 1991, Chinese
exports to the united states continued to increase, but at a slower
pace of 15 percent.
According to Chinese customs statistics, Chinese imports from
the united states fell 17 percent in 1990, more than the 10 percent
contraction in China's global imports. This resulted from the
tightening of import controls over 13 key commodities, including
grains, sugar, steel, and tobacco, which accounted for roughly half
of total u.s. exports to China in 1988. In the first six months of
1991, Chinese imports from the united states rose 6.2 percent over
the same period last year.
Domestically, the Chinese economy has recovered from the slower
growth of 1989-90 as the authorities have eased earlier retrenchment
policies. Real GNP is expected to grow 6.8 percent in 1991,
following a growth of 5 percent in 1990 and less than 4 percent in
1990 (the slowest growth rates in a decade).
Inflation fell to 2
percent in 1990, down from 18 percent in 1989, and is running at an
annualized rate of roughly 3 percent this year.
Neither country counts its goods which are shipped to
Hong Kong and then re-exported to the other country as exports to
that country. Because the amount of Chinese goods re-exported to
the united states substantially exceeds the amount of u.s. goods
re-exported to China, u.s. data are more accurate and will be
used for the purposes of this analysis.
29
Exchange Rate System
China officially has a dual exchange rate system. There is an
administered rate which generally applies to trade transactions
under the state plan. There is also a "market" rate determined in
the foreign exchange adjustment, or "swap", centers, where foreign
invested enterprises (FIEs; mostly joint ventures) and domestic
entities that are allowed to retain their foreign exchange earnings
can buy and sell foreign exchange at rates established through a
regulated auction system. Outside the official dual rate system,
there is a sizeable, but diminishing, black market for foreign
exchange.
Foreign Exchange Allocation at the Administered Rate: In April
1991, China adopted what it calls a "managed float" system for
determining the administered, or official, exchange rate. In the
past, the official rate had been devalued periodically by the
authorities in sizeable increments (e.g., by 21 percent in December
1989 and 9.6 percent in November 1990). Under the new system, the
state Administration of Exchange Control (SAEC) fixes and publishes
a new rate each morning, which may vary slightly upward or downward
(The trend has been toward
from the previous day's rate.
devaluation.) In theory, this rate is linked to a basket of
currencies (principally the U.S. dollar) and follows trends in
international currency markets. However, the actual criteria used
by the SAEC in determining the daily rate are unclear.
The official rate generally applies to transactions under the
state foreign exchange plan, which spells out planned exports and
imports of priority products. In effect, only state enterprises
have access to this rate.
On the import side, importers (generally government-owned
foreign trade corporations) are allocated foreign exchange at the
official rate for purchases of "priority" imports, i.e., goods that
cannot be produced domestically in sufficient quantities and those
that are urgently needed by the state, particularly for important
projects. The importer is given a quota account by the SAEC. At
the time of payment for the import, foreign exchange is given to the
importer subject to its providing local currency against its quota
account in the SAEC.
Domestic enterprises can also obtain foreign exchange at the
Official rate for purchases of non-priority (i.e., off-plan)
imports. However, such purchases require an import license issued
by the Ministry of Foreign Economic Relations and Trade (MOFERT).
Moreover, applicants for licenses for non-priority imports must
first obtain the approval of the ministry responsible for the
enterprises producing domestic sUbstitutes for the proposed import.
Imports of certain "luxury" consumer items -- such as computer
hardware, televisions, and VCRs -- are not permitted.
30
On the export side, foreign exchange earned by a state
enterprise must initially be surrendered to the Bank of China (BOC)
in exchange for local currency at the official rate. After each
sale, the government gives the enterprise a foreign exchange quota
according to a retention ratio determined by the government. In
principle, this ratio was universally revised upward this year to 80
percent of foreign exchange earnings, but actual retention rights
may vary by locality and product. The enterprise can then open a
non-interest-bearing foreign exchange retention quota account at the
SAEC. Though expressed in u.s. dollars, the quota accounts are not
foreign currency accounts. They merely determine the amount of
foreign exchange each enterprise is entitled to obtain from the
state for approved purposes.
since 1988, retention quotas have been transferable among firms
through the foreign exchange adjustment, or "swap," centers. In
these centers, domestic enterprises with excess foreign exchange can
sell their quota rights for renminbi at a more favorable (i.e.,
depreciated) rate to other firms which need foreign exchange. The
operations of the swap centers are discussed in greater detail
below.
As an increasing percentage of China's trade is covered by
foreign exchange transactions in the swap centers, the relative
importance of the official allocation system, and thus of the
administered exchange rate, has declined. Indeed, there is evidence
that the Chinese government has deliberately attempted to wean state
enterprises from access to subsidized foreign exchange allocated by
the state. Nevertheless, a large percentage of China's imports is
still covered by the official allocation system.
Swap centers: China's foreign exchange adjustment centers,
commonly known as "swap centers," are SAEC-supervised "markets" for
the exchange of foreign currency. The first swap centers were
established in late 1986 to enable foreign invested enterprises
(FIEs) to buy and sell foreign exchange, theoretically at freely
determined rates. Previously, FIEs had difficulty meeting the
requirement that they balance their foreign exchange receipts and
expenditures, i.e., that they earn sufficient foreign exchange to
cover all their import needs. Establishment of the swap centers
enabled FIEs to swap renminbi earned locally for foreign currency.
In early 1988, state- and collectively-owned domestic
enterprises -- both those with a surplus of foreign exchange to sell
as a result of increases in retention rights, and those which had
been unable to obtain foreign exchange at the official rate to meet
their import purchase requirements -- were also permitted to operate
in the centers. Private domestic enterprises and individuals may
not use the centers.
The first swap center was established in the Shenzhen Special
Economic Zone (SEZ) , with centers quickly spreading to other major
cities. At present there are about 100 swap centers throughout
31
China: in all provincial capitals (except Lhasa), in the 14 open
coastal cities (including Shanghai, Guangzhou, and Tianjin) , in
Beijing, and in the five SEZs.
Transactions volume in the swap centers has grown significantly
since their establishment. The SAEC estimates that $4.2 billion was
traded in swap centers throughout China in 1987, $6.2 billion in
1988, $8.6 billion in 1989, and $13.2 billion in 1990 (about onefourth the value of China's global exports). FIEs accounted for
about $2 billion (15 percent) of the total swap transactions in
1990. The trading volume has been heaviest in the SEZs and
Shanghai.
The buying and selling of foreign exchange quotas comprises the
bulk of transactions in the swap centers. FIEs may hold foreign
exchange bank accounts and swap renminbi directly for foreign
currency. Domestic enterprises generally trade in quota rights. On
an experimental basis, domestic firms in the SEZs and some coastal
cities have been allowed to sell actual foreign exchange, not just
quota rights, in the swap centers.
The state Council's 1986 decree permitting FIEs to engage in
currency swaps provided little in the way of detailed guidelines on
how the swap centers were to operate. As a result, a decentralized
and varied system has developed. Most notably, only the Shanghai
and SEZ centers use an open auction system, in which multiple
brokers buy or sell foreign currency at any price at any time;
elsewhere, deals are made through face-to-face negotiations between
prospective buyers and sellers in the local offices of the SAEC.
Some basic features are common to all swap centers. To trade,
an application is submitted to the provincial or municipal branch of
the SAEC. Foreign exchange buyers that plan to use their hard
currency to purchase imports must supply documentation of import
approval, a foreign exchange invoice, and proof of actual receipt of
the product. Documentation of purpose for the purchase of local
currency is not required, nor is documentation of the source of
foreign exchange being sold. 2 Participants must inform the center
of the total amount of foreign exchange they wish to buy or sellon
a given day. They cannot exceed that amount without informing
center officials but need not trade the full amount.
2
However, FIEs trading renminbi for foreign currency may
be asked to document how they earned the local currency. The
local exchange authority may also review the FIE's annual foreign
exchange plan, which outlines the venture's domestic sales
projections and expected foreign exchange needs. This plan must
be consistent with the FIE's business plan, which was initially
approved by MOFERT and the planning and exchange control
authorities.
32
A number of restrictions apply to trading in the swap centers.
Transactions between centers in different parts of the country
require the approval of the SAEC and are only permitted for purposes
of balancing supply and demand for foreign exchange rather than for
price arbitrage.
Forward transactions are not permitted in the
swap centers, making foreign exchange hedging operations impossible.
And speculation on exchange rates is strictly prevented by the
requirement that all swap transactions be tied to an underlying
"real demand" for foreign exchange.
The most important source of government control over the swap
centers lies in the delineation of the purposes for which foreign
exchange obtained there may be used. According to published SAEC
rules, foreign exchange may be purchased in the swap centers only
for the importation of goods deemed by the state to be "necessary"
for China's development. These goods include advanced technology,
certain machinery and equipment, raw materials and spare parts, and
educational materials. There is also a published list of 24
prohibited items for which foreign exchange may not be purchased,
mainly consumer products such as televisions and other home
appliances and clothing. However, the actual list of prohibited
imports may be longer, according to the discretion of the local SAEC
officials who supervise the swap centers.
Local swap center rules mimic the state rules covering domestic
enterprises and add provisions that deal specifically with FIEs. In
the Shanghai rules, for example, the purchase of foreign exchange by
FIEs must be made pursuant to the "satisfaction of foreign exchange
requirements of enterprises with foreign investment within their
business scopes, repayment of principal and interest of loans, and
remittance of profits." The authorities want to ensure that the
foreign exchange purchased by a foreign enterprise will be used for
China-related business purposes.
In addition to its control over uses of foreign exchange, the
Chinese authorities are positioned to intervene in the swap centers
by buying or selling foreign exchange to help stabilize the rate.
However, there is no evidence that the government regularly
intervenes to move the market in a specific direction. In addition,
local swap center officials are authorized to shut down trading if
fluctuations in the rate extend beyond set bands. Again, it appears
that this authority has rarely been used.
Exchange Rate Developments
Administered Rate: On October 4, 1991, the official rate of
the renminbi stood at 5.38 yuan to the u.s. dollar. This represents
a nominal depreciation against the dollar of nearly 2 percent since
3
There are technical barriers to arbitrage as well, since
the swap centers are not connected by telecommunications links
and there is no electronic transfer of funds between them.
33
the adoption of the "managed float" system in April 1991, 3 percent
since the last major devaluation in November 1990, and some 45
percent since the first of these reports was issued in October 1988
(when the rate stood at 3.72 yuan to the dollar). As noted earlier,
these trends reflect the Chinese government's new policy of
gradually devaluing the renminbi in small steps, rather than
undertaking large devaluations on a periodic basis.
From 1986 to 1989, the nominal devaluation of the renminbi
against the dollar was not sufficient to offset the impact of rising
prices in China.
(Inflation averaged 7 percent in 1987, 19 percent
in 1988, and 18 percent in 1989.) In real terms, therefore, the
renminbi appreciated against the dollar over this period. However,
as a result of the two major devaluations at the end of 1989 and
1990, as well as lower inflation in China in 1990 and 1991 (2
percent and an estimated 3 percent, respectively), there has been
renewed depreciation in real terms against the dollar over the past
two years.
The Chinese authorities offer several explanations for the
latest devaluations in the administered exchange rate. First, they
cite the need to ease the burden on the central government of costly
export subsidies. These subsidies were established to compensate
Chinese exporters for an overvalued domestic currency, which reduced
China's export competitiveness. Burgeoning fiscal deficits in
recent years forced the central government to announce the
elimination of all export subsidies on January 1, 1991. {It is not
clear whether all subsidies have in fact been eliminated.} The
Chinese authorities argue that the phasing out of subsidies
necessitated a more "realistic" (i.e., devalued) exchange rate to
restore China's export competitiveness.
Another stated goal of the Chinese authorities in devaluing the
renminbi is to unify China's dual exchange rates. As discussed
below, the official devaluations of the past two years have resulted
in a SUbstantial narrowing of the gap between the administered and
swap center rates. The authorities have stated that further
devaluations will occur, at a slower pace, until the two rates are
unified. It is unclear precisely what unification will mean, since
some kind of official rate with privileged access will apparently
continue.
A related objective is the desire to eliminate the black market
for foreign exchange. While information on unofficial transactions
is sketchy, it appears that this effort has had some success, as the
black market exchange rate has reportedly moved very close to the
swap center rates.
34
Swap Rates: The average exchange rate in the swap centers 4
rose (i.e., the renminbi depreciated) from about 6 yuan to the U.s.
dollar at the beginning of 1988 to a peak of 7 yuan in september
1988, reflecting the entry of domestic enterprises into the centers,
mostly as buyers of foreign exchange.
Beginning in February 1989,
the renminbi began to steadily appreciate in the centers because of
tighter credit and control over import licensing, which suppressed
demand for foreign exchange. As a result, swap rates reached about
6 yuan at the end of 1989 and 5.7 yuan at the end of 1990. Over the
past year, rates in the swap centers have stabilized, with a slight
trend toward depreciation; at the end of September 1991, the rate
was approaching 5.9 yuan to the dollar. The spread between the
official and swap rates has thus declined to less than 10 percent,
compared with 80 percent as recently as 1989.
Foreign Exchange and External Trade System
China's foreign exchange regime must be viewed within the
framework of the country's broader economic policies. According to
Chinese officials, the primary goal of balance of payments
management is to secure enough foreign exchange to pay for priority
imports and debt service, while securing a sufficient level of
reserves. The authorities use a number of tools to accomplish this
goal, including both the exchange allocation system and direct
controls over imports and exports. These tools are often
overlapping and redundant.
For example, as discussed earlier, an importer wishing to
obtain foreign exchange for non-priority imports must obtain not
only authorization from the SAEC but also an import license from
MOFERT and explicit approval from the ministry responsible for
enterprises producing domestic SUbstitutes. The various approval
processes do not necessarily operate consistently. Possession of an
import license does not guarantee that an importer will be allocated
foreign exchange, nor does approval of foreign exchange use
automatically entitle the importer to a license.
In practice, it appears that the strict import licensing system
is often the most significant obstacle to the importer's ability to
obtain foreign exchange. Thus an effort to remove foreign exchange
controls without a complementary effort to address direct trade
restrictions is unlikely to result in a significant expansion of
Chinese imports. At this time, we see little evidence that the
Chinese authorities are contemplating reforms which would address
Swap rates vary from center to center depending on local
supply and demand for foreign exchange.
For example, the rate in
the Shenzhen center tends to be lower (i.e., more appreciated)
than the rate in other centers because of the volume of exports
and thus foreign exchange earnings in the Shenzhen SEZ.
35
either of these impediments. Until such reforms are undertaken,
there will continue to be constraints on the operation of market
forces in the foreign exchange swap centers.
Assessment
The Treasury Department remains seriously concerned about the
size of China's global trade and current account surpluses, as well
as its growing bilateral trade surplus with the United states. It
is our assessment that a principal cause of these large external
surpluses is the network of pervasive administrative controls over
external trade, including the foreign exchange allocation system,
which restrict imports and prevent market forces from freely
determining the exchange rate.
The Chinese government clearly manages its balance of payments
in such a way as to generate a target level of foreign exchange
reserves -- a level sufficient to cover imports critical for China's
development as well as debt service payments, and to provide a
cushion in the event of external shocks. Achieving this target
requires China to suppress "non-priority" imports, resulting in
large external surpluses.
The authorities use a variety of direct and indirect
instruments to reach these broader objectives. One such tool is the
highly controlled system of foreign exchange allocation, which
constrains the forces of supply and demand in determining the
exchange rate and distorts China's trade and investment flows. The
foreign exchange system works in tandem with import licensing and
other direct controls to effectively restrict China's imports to
those deemed by the central authorities to be critical for
development. Removing one aspect of these controls without
simultaneously addressing the others will not have the desired
effect of promoting market forces in China and producing more
balanced trade flows.
While it is apparent that the Chinese government closely
manages the trade regime, including foreign exchange allocation, to
support its balance of payments objectives, there is no clear
evidence that the authorities manipulate the exchange rate itself,
within the specific terms of the legislation. The recent
devaluations of the renminbi appear aimed at the goals of unifying
China's dual exchange rates and eliminating costly export subsidies,
although they obviously have the effect of making Chinese exports
more competitive and therefore further contribute to China's
surplus. In the eyes of the Chinese authorities, the above goals
are based on a perception that the exchange rate remains overvalued,
particularly as compared with the swap and black market rates.
Nevertheless, in our view, the multifaceted controls maintained by
the central authorities over the external sector are a much more
significant contributor to China's large external surpluses.
Extensive liberalization of these controls is required.
36
Next steps: The Treasury Department believes that it is
imperative that China take steps to eliminate its pervasive controls
over foreign exchange allocation and trade so as to reduce its large
and destabilizing external surpluses while achieving a more marketdetermined system of exchange rate determination.
In that context, further devaluation of the official rate, in
the absence of far-reaching reform of China's trade, foreign
exchange, and domestic price regimes, is likely to exacerbate
China's already large external surpluses and to raise serious
concerns in the international community about China's policy
objectives.
At the same time, the Chinese authorities should take a number
of concrete measures to permit the exchange rate to more fully
reflect market forces.
These include steps to make foreign exchange
allocation automatic for companies which either have import licenses
or are authorized to import without licenses, thus removing foreign
exchange allocation as a redundant barrier to imports.
China should
also loosen controls on the swap centers, expanding participation
and allowable transactions, to develop the centers into true markets
for foreign exchange.
In addition, all rules and regulations
pertaining to foreign exchange should be made publicly available,
and any proposed changes to the rules published in advance for
review and comment by interested parties.
These and other issues are the subject of discussions with the
Chinese authorities launched by the Treasury Department in the
summer of 1991. The Department intends to continue to use this
forum to discuss China's foreign exchange policies and to seek a
more market-oriented system of exchange rate determination and
allocation. At the same time, China's trade restrictions are the
subject of a u.s. Government investigation recently initiated under
Section 301 of the 1974 Trade Act.
37
PART VI:
CONCLUSION
The period since the spring report on International Economic
and Exchange Rate Policy has been marked by an expansion of the
challenges facing the global economy, and, in particular, the major
industrialized nations.
The G-7 have had to contend with weak economic performance,
with aggregate growth among them projected at slightly above 1
percent for 1991. Moreover, while aggregate G-7 economic activity
is recovering, the recovery is expected to be far more modest than
in the past, registering growth of 3 percent next year. Large
external imbalances are reemerging in Japan, and projections suggest
that imbalances may resume widening in other countries.
These developments have intensified the need for effective
international economic policy coordination to achieve sustained
growth with price stability.
In this context, the Ministers and
Governors, at their recent meeting in Bangkok, reemphasized the
importance of fiscal and monetary policies which can provide the
basis for lower real interest rates.
Progress is being made in this regard.
Interest rates have
declined in the United States, Japan, Canada, and the United
Kingdom.
But they remain broadly unchanged in Germany, with
important influences on interest rates in continental Europe.
At the same time, the major countries have focused on
developments in other parts of the globe. An increasing number of
countries are joining the trend toward market-based economic reform,
including Latin America, Eastern Europe, and now the Soviet Union.
To support this historic trend, which carries the promise of
unprecedented global integration and prosperity, the G-7, working
with the international financial institutions and others, are
cooperating to forge effective means for supporting economic reform.
To meet expanding global demands for capital, the G-7 stressed
the need for a strengthening of global savings, which will require
full implementation of measures to reduce high budget deficits and
removal of obstacles to private savings. Moreover, the G-7 noted
the importance of an open external environment for reforming
countries and emphasized the need for a rapid and successful
conclusion of the Uruguay Round.
Though the G-7 bear a special responsibility for the smooth
functioning of the world economy, all countries have a role to play
in promoting sustained growth with stable prices and adjustment of
external imbalances.
In this context, it was determined in the
October 1988 and April 1989 reports that Taiwan and Korea, within
the meaning of section 3004 of the Omnibus Trade and Competitiveness
Act of 1988, were "manipulating" their exchange rates against the
U.s. dollar to prevent effective balance of payments adjustment or
gain unfair competitive advantage in international trade.
Since
April of 1990, however, it has been concluded there were no
38
indications of currency "manipulation," within the meaning of the
legislation, in either Taiwan or Korea.
This report includes analyses of economic and exchange rate
developments in Korea, Taiwan, and China.
The sUbstantial adjustment in Korea's external accounts, which
began in 1989, has continued.
Following the small current account
deficit of 1990, the first deficit since 1985, the current account
deficit for 1991 is projected by the Korean government to rise to $7
billion (2.6 percent of GNP), with a trade deficit of $6 billion.
The U.S. bilateral trade deficit with Korea continues its sharp
decline. After a 38 percent drop in 1990, the U.S. bilateral trade
deficit for the first eight months of 1991 fell 70 percent from the
same period last year to $860 million. There continues to be no
basis for concluding that Korea is directly "manipulating" its
exchange rate:
significant trade and current account deficits have
emerged in 1991; Korea's foreign reserves declined in the first half
of the year; there is no evidence that the Bank of Korea is
intervening directly in the exchange market; and other governmentowned foreign exchange banks play a modest role in the market.
Nevertheless, we remain seriously concerned that pervasive
Korean exchange and capital controls significantly constrain supply
and demand in the currency market. And the Korean government still
lacks a well-defined strategy for full liberalization of its tightly
controlled financial markets. The Treasury Department views the
lack of progress in these areas as evidence of unwillingness on the
part of the Korean government to undertake fundamental reform of its
financial sector. We will continue to press for liberalization of
Korea's financial and exchange markets, as well as to seek improved
treatment for U.S. financial institutions in Korea.
Taiwan's overall current account surplus will decrease slightly
in 1991 while the trade surplus will increase. Taiwan's authorities
project that the current account surplus will be about $10 billion,
while the trade surplus is expected to reach $13.6 billion.
It is
notable, however, that in the first eight months of this year, the
U.S. bilateral trade deficit with Taiwan dropped sharply by nearly
20 percent to $5.1 billion. The U.S. share of Taiwan's exports fell
4.5 percent, while Taiwan's exports to China and other parts of Asia
increased dramatically, evidence of Taiwan's effort to diversify
markets.
Nevertheless, the persistence of large external surpluses and
excessive reserve holdings (sufficient to cover 14 months of
imports) remains worrisome.
SUbstantial further adjustment is
required and appreciation of the NT dollar must continue to play a
role in the process.
We have no evidence of direct exchange rate "manipulation",
within the meaning of the legislation. However, the Central Bank
reportedly intervenes to moderate the pace of appreciation.
In
addition, we remain concerned that limitations on foreign exchange
39
transactions and capital flows, though reduced, continue to impede
the operation of market forces in exchange rate determination and
contribute to indirect "manipulation" of the exchange rate.
Moreover, U.S. financial services firms continue to face significant
denials of national treatment. We will therefore continue to
monitor carefully the pace of adjustment in the overall and
bilateral trade balances and the role of currency appreciation in
that process. In financial policy talks with Taiwan's authorities,
we will continue to push for further liberalization of controls on
capital and foreign exchange transactions and seek improved
treatment for U.S. financial institutions.
China's current account, which had been in deficit for much of
the 1980s, moved dramatically into a surplus of $10.2 billion in
1990. In 1991, the surplus has continued to expand.
The trade
surplus, nearly $9 billion in 1990, is projected to surpass $10
billion in 1991. By end-June 1991, foreign exchange reserves
reached $35.2 billion.
A principal cause of these large external surpluses is the
network of pervasive administrative controls over external trade
which severely inhibit imports, including from the united states.
The Chinese government manages its balance of payments in such a way
as to generate a target level of foreign exchange reserves
sufficient to cover critical imports, service debt, and provide a
cushion against external shocks. It uses a variety of tools to
manage the external balance, including foreign exchange allocation
controls, import licensing, and controls over domestic economic
activity, such as the price system. All of these controls must
simultaneously be addressed to promote market forces in China.
While it is apparent China closely manages the trade regime,
including foreign exchange allocation, to support payments
objectives, there is no clear evidence the authorities manipulate
the exchange rate itself within the specific terms of the
legislation. Recent devaluations of the renminbi appear aimed at
the goals of unifying China's dual exchange rates and eliminating
costly export subsidies, although they obviously have the effect of
making Chinese exports more competitive and therefore further
contribute to China's surplus. In the eyes of Chinese authorities,
the above goals are based on a perception that the exchange rate
remains overvalued, particularly compared with swap and black market
rates. Nevertheless, in our view, the multifaceted controls
maintained by China over the external sector are a much more
significant contributor to China's large surpluses. Extensive
liberalization of these controls is required.
In the summer of 1991, the Treasury Department launched
discussions with the Chinese authorities on China's foreign exchange
policies. The Department intends to continue to use this forum to
address concrete measures necessary to reduce control over foreign
exchange allocation and permit the exchange rate to more fully
reflect market forces.
40
APPENDIX
TABLES AND CHART
1.
Economic Performance of Key Industrial Countries
2.
Measurements of Dollar Movements Versus G-7 Currencies
3.
Summary of U.S. Current Account
4.
Summary of U.S. Capital Account Flows
5.
Asian NIEs and China:
6.
Chart: Real Trade-Weighted Exchange Rate Indices for
the Dollar, Yen, and OM
Trade and Currency Changes
Table 1
ECONOMIC PERFORMANCE
OF MAJOR INDUSTRIAL COUNTRIES
I. Real GNP/GDP (percent change; annual average)
United states
Japan
Germany*
France
United Kingdom
Italy
Canada
1989
2.5
4.7
3.8
3.9
1.8
3.0
2.5
1990
1.0
5.6
4.5
2.8
0.6
2.0
0.5
1991
-0.2
4.5
3.1
1.3
-1.8
1.3
-0.9
Total G-7
3.2
2.6
1.3
1992
3.2
3.4
2.0
2.4
2.4
2.5
3.8
2.9
II. Consumer Prices (percent change; annual average)
United states
Japan
Germany*
France
united Kingdom
Italy
Canada
4.8
2.3
2.8
3.5
7.8
6.3
5.0
5.4
3.1
2.7
3.4
9.5
6.5
4.8
4.4
3.4
3.5
3.3
5.9
6.3
5.9
3.8
2.7
3.5
3.0
3.9
5.6
2.8
Total G-7
4.2
4.8
4.4
3.7
III. Current Account
united states
Japan
Germany*
France
united Kingdom
($ billions and percent of GNP)
-106.3
(2.0)
57.2
(2.0)
57.2
(4.8)
-4.6
(0.5)
-32.5
(3.9 )
Italy
Canada
-10.6
(1.2)
-17.5
(3.2 )
-92.1
(1. 7)
35.8
(1. 2)
47.9
(2.9)
-8.4
(0.7)
-24.7
(2.5)
-14.5
(1.3)
-18.9
(3.3)
-5.0
(0.1)
62.7
(1. 9)
-8.1
(0.5)
-9.3
(0.8)
-10.8
(1. 1)
-13.2
(1. 2)
-16.8
(2.8)
-50.0
(0.8)
59.4
(1.7)
9.4
(0.6)
-8.0
(0.7)
-12.3
(1. 2)
-16.1
(1. 4)
-14.6
(2.3)
Data for U.S.: Official forecasts; for all other countries, and
G-7 totals: International Monetary Fund.
* GNP and inflation data cover west Germany only; current account
data cover all of Germany from 7/1/90.
Table 2
Measurements of Dollar Movements
Vs. G-7 Currencies
Percent Appreciation (+) or Depreciation (-)
Value of the
Dollar in
Terms of:
Since
Dollar
Peak
2126/85
Since
Plaza
Accord
9/20/85
Since
Louvre
Accord
2120187
Over
Year
Since
10118/90
Since
Previous
Report
4112191
Japanese yen
-50.3%
-46.0%
-15.4%
4.2%
-4.8%
German mark
-51.3%
-40.8%
-7.4%
12.2%
1.3%
British pound
-39.5%
-20.6%
-11.1%
13.9%
4.10/0
French franc
-45.6%
-33.8%
-5.2%
14.1%
2.0%
Italian lira
-41.7%
-34.2%
-2.6%
12.0%
1.9%
Canadian dollar
-19.6%
-18.0%
-15.0%
-3.6%
-1.9%
Source: New York 9:00 a.m. exchange rates
Table 3
SUMMARY OF U.S. CURRENT ACCOUNT
(MILLIONS OF DOLLARS, S.A. )
Annual
Quarters
89:3
89:4
90:1
90:2
90:3
90:4
91:1
91:2
------- ------- ------- ------- ------- ------- ------- -------
-------
1988
1989
-------
-------
1990
90142
92493
95244
97088
96638
100580
100900
104108
320337
361451
389550
Agricultural
10145
10539
10740
10201
9819
9457
9940
9498
38237
42185
40217
NonAgricultural
79997
81954
84504
86887
86819
91123
90960
94610
282100
319266
349333
Total Imports
119330
121104
122781
121178
125398
128308
119294
119732
447323
477368
497665
Petroleum
13052
13271
15806
12825
15456
18021
13219
12904
39632
50920
62108
106278
107833
106975
108353
109942
110287
106075
106828
407691
426448
435557
TRADE BALANCE
-29188
-28611
-27537
-24090
-28760
-27728
-18394
-15624
-126986
-115917
-108115
Partial Bal (Excl.
Ag Exps & Pet imps
-26281
-25879
-22471
-21466
-23123
-19164
-15115
-12218
-125591
-107182
-86224
6762
8955
8901
6605
9205
13607
11955
10430
15693
25102
38318
Invest. Income
499
2472
3002
7
2802
6133
4883
2464
5354
2687
11944
Other Services
6263
6483
5899
6598
6403
7474
7072
7966
10339
22415
26374
-3794
-5044
-4031
-4693
-4326
-9280
16939
8160
-14943
-15492
-22330
Remits & Pensions
-1111
-1145
-1218
-1123
-1302
-1201
-1316
-1300
-4437
-4420
-4844
Govt Grants
-2683
-3899
-2813
-3570
-3024
-8079
18255
9460
-10506
-11072
-17486
2968
3911
4870
1912
4879
4327
28894
18590
750
9610
15988
-26220
-24700
-22667
-22178
-23881
-23401
10500
2966
-126236
-106307
-92127
Desert shield support incl. in
n.a.
in transfers
n.a.
n.a.
n.a.
n.a.
4260
22674
11617
n.a.
n.a.
4260
Total Exports
Non-Petroleum
Net Services
Total Transfers
NET INVISIBLES
CURRENT ACCOUNT
SUMMARY OF U.S. CAPITAL ACCOUNT FLOWS
(MILLIONS OF DOLLARS, S .A.)
Annual
Quarters
89:3
89:4
90:1
90:2
------- ------- ------- -------
90:3
90:4
91:1
------- ------- -------
-------
91:2
1988
-------
-------
1989
1990
-------
US Reserve Assets
(Incr(-)Decr(+»
Other Govt Assets
-5996
-3202
-3177
371
1739
-1091
-353
1014
-3913
-25293
-2158
564
119
-669
-800
-314
4759
1422
-560
2966
1319
2976
Foreign Official Assets
Industrial
OPEC
Other
13053
7608
4500
945
-7158
-2443
-1401
-3314
-7022
-6917
3094
-3199
5805
6393
193
-781
13341
13231
-1699
1809
20301
12840
575
6886
6631
-8411
988
14054
-3650
-3291
-2680
2321
39656
30306
-2996
12346
8623
-238
10738
-1877
32425
25547
2163
4715
3859
-24864
28723
13453
-23912
37365
13851
57085
-43234
-8275
-17255
8980
16984
-9984
26968
-7252
-24513
17261
1803
20598
-18795
-37935
-11248
-26687
13913
-56322
70235
12127
-51255
63382
15308
5333
9975
Securities, net
Foreign Securities
u.S. Treasury Securities
Other U.S. Securities
13316
-9651
12544
10423
11109
-4503
5024
10588
-8510
-8756
-1151
1397
-4733
-11160
4287
2140
-3548
-1014
24
-2558
-8773
-7546
-2029
802
-715
-9430
3409
5306
15982
-13235
13905
15312
38747
-7845
20239
26353
45963
-22575
29618
38920
-25564
-28476
1131
1781
U.S. Direct Invest. abroad
Reinvested Earnings
Equity & Inter-co. Debt
-8114
-6035
-2079
-10168
-4161
-6007
-8985
-5789
-3196
-2858
-4780
1922
-17792
-5443
-12349
-3802
-6239
2437
-11852
-7605
-4247
-2642
-5100
2458
-17882
-12616
-5266
-33387
-22368
-11019
-33437
-22251
-11186
For. Direct Invest. in U.S.
Reinvested Earnings
Equity & Inter-co. Debt
11446
48
11398
22373
-2116
24489
16269
-3081
19350
9346
-912
10258
7060
-2760
9820
4538
-7256
11794
4336
-3958
8294
3276
-4325
7601
59424
6561
52863
70551
-3844
74395
37213
-14009
51222
Other U.S.-Corp., net
Claims
Liabilities
384
2318
-1934
2691
645
2046
2309
1649
660
-1061
-1760
699
4936
676
4260
-4349
-2509
-1840
-2924
-1308
-1616
n.a.
n .a.
n.a.
2562
-3064
5626
8035
2581
5454
1835
-1944
3779
28512
29217
4066
-2205
22406
4331
-1652
-24515
135473
87938
28598
-2292
-4517
18601
24383
1475
19072
-8849
21550
-9236
18369
63531
26220
24700
22667
22178
23881
23403
-10501
-2965
126237
106307
92129
Banks, net:
Claims
Liabilities
NET CAPITAL FLOWS
Statistical Disc.
TOTAL
*
ASIAN NIES AND CHINA: TRADE AND CURRENCY CHANGES
Cumulative Change against US$ as of October 18, 1991
Since:
HK$
Won
Singapore$
NT$
Yen
OM
Yuan
(Plaza)
9/20/85
end-86
end-87
(Report)
10/14/88
end-89
end-90
0.79%
18.52<>k
29.88%
53.43%
86.60%
70.86%
-44.98%
0.47%
14.12%
28.02%
34.42%
22.99%
14.80%
-31.00%
0.08%
4.98%
17.67%
8.10%
-4.75%
-5.48%
-31.00%
0.77%
-5.88%
19.24%
9.43%
-2.58%
6.82%
-31.00%
0.66%
-10.07%
12.09%
-0.93%
10.70%
0.11%
-12.24%
0.59%
-5.07%
2.57%
2.64%
4.53%
-11.45%
-3.21%
Rate on 10/18/91
HK$
W
S$
NT$
Y
7.7535
754.7
1.695
26.41
129.77
1.689
5.3944
OM
Yuan
* [ - ] signifies depredation against the U.S. dollar.
U.S. Trade Balance with Asian NIEs and China [1 ]
(U.S. $ billions)
1985
1986
1987
1988
1989
1990
1-8/90
1-8/91
% ChanQe
Hong Kong
Korea
Singapore
Taiwan
-5.6
-4.1
-0.8
-11.7
-5.9
-6.4
-1.3
-14.3
-5.9
-8.9
-2.1
-17.2
-4.6
-8.9
-2.2
-12.6
-3.4
-6.3
-1.6
-13.0
-2.6
-4.1
-1.8
-11.2
-1.7
-2.9
-1.2
-7.5
-0.4
-0.9
-0.2
-6.0
-74.3%
-70.6%
-80.0%
-19.8%
TOTAL NIEs
-22.1
-27.8
-34.1
-28.2
-24.3
-19.7
-13.2
-7.5
-43.2%
0
-1.7
-2.8
-3.5
-6.2
-10.4
-6.4
-7.2
13.1%
-132.1
-152.7
-152.1
-118.5
-108.6
-101.0
-63.7
-39.9
-37.4%
NIEs % Total U.S.
Trade Sal.
17%
18%
22%
24%
22%
20%
21%
19%
China + NIEs
% Total U.S.
17%
19%
24%
27%
28%
30%
31%
37%
China
Total U.S.
Trade Sal.
Real Trade-weighted Exchange Rate Indic es
for the Dollar, Yen, and OM from 80/1 to 91/1 0*
140
130
140
I.
I
fur. i l
\} \ ,
130
•
\.
~ I. .
8
.\
I
".I
a 110
120
110
00
0\
~
~
"'E
~ 100
I
'"
•
,,-
1
=
JA: _~
...
I"
'~I
-~
,
£
100
•
~
90
80
'~I
.,
r- 0;.11'; -
, _.
~~~.~ --O M-]
I'" "I' ""/" "'/ ""'I' ""I'" "I" "'I' ""I'" "I""'I" "'1"'1111 " 11111 " 111111111 " 111111111 " 1"11"11111"11"1"11"11111 " 11"1
80/1 81/1 82/1 83/1 84/1 85/1 86/1 87/1 88/1 89/1 90/1
91/1 91/1 0
*Sour ce:JP
Morgan; 1980 trade weigh ts (18 industrial and 22 develo ping countries; 1980- 82= 100.
Octob er 1991 data is 10/1 -10/18 .
90
80
TREASURY NEWS
Dellartment of the Treasury. Washington, D.C .• Telellhone 5&&-2041
EMBARGOED FOR RELEASE
EXPECTED AT 10:00 AM
NOVEMBER 12, 1991
STATEMENT OF THE HONORABLE
DAVID C. MULFORD
UNDER SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
SUBCOMMITTEE ON INTERNATIONAL FINANCE AND MONETARY POLICY
UNITED STATES SENATE
NOVEMBER 12, 1991
Mr. Chdirman and members of the Committee:
1 am pleased to discuss the Department of the Treasury's fall
1991 report on international economic and exchange rate policy.
These reports and the consultations with Congress on U.S.
international economic policy have increased understanding of global
economic developments and advanced U.S. international economic
objectives.
Economic Policy Coordination
Starting in the mid-1980s, G-7 Finance Ministers and Central
Bank Governors began to meet regularly to review their economic
policies and performance and to put in place compatible policies.
The aim was policy coordination of unprecedented scope, covering
monetary and fiscal policies and structural policies, as well as
exchange rate policy.
It was understood from the beginning that the
major industrial countries could not achieve their shared objectives
of sustained growth with price stability without such broad
cooperation.
It has not been easy to pursue such an ambitious agenda.
But
the effort has clearly borne fruit.
We now have a well-established
mechanism for consulting on G-7 economic policies.
Participants now
routinely consider the global economic context as they make policy
decisions.
Moreover, the process has broadened further to cover a
NB-1544
2
wide range of international economic issues, including developments
outside the G-7 economies.
Even more importantly, the G-7 process has yielded solid
results in terms of G-7 economic performance.
o
The major industrial countries achieved sustained growth
averaging 3.3 percent per year from 1986 to 1990. This was a
significant improvement over the 2.5 percent average annual
growth rate for the G-7 in the first half of the 1980s.
a
Higher growth was not achieved at the cost of higher inflation.
The G-7 inflation rate for 1986-1990 averaged 3.4 percent per
year, compared to 5.9 percent for 1981-1985.
a
Exchange markets have been far more stable, reflecting
achievement of exchange rates consistent with underlying
fundamentals.
For example, the annual range in the movement of
the deutschemark against the dollar has declined from 100
pfennigs in 1985 (35 percent) to around 17 percent after 1987.
This year, the range has widened slightly to about 24 percent
in the wake of heightened uncertainties about developments in
the Soviet Union.
Progress has been particularly striking on the problem which at
the time was probably the most important catalyst for G-7
cooperation: large external imbalances. The U.S. current account
deficit has plunged from its 1987 peak. This year, the U.S. current
account deficit is expected to decline almost $90 billion to the $5
billion range, including large one-time Desert Storm transfer
receipts.
Even without Desert Storm receipts, the current account
deficit for 1991 would be down to about $45 billion, sharply lower
than the 1990 level of $92 billion and the 1987 peak of $160
billion.
It is important to note that this adjustment in the U.S.
external position has been export driven.
Since 1987, growth in our
exports has averaged over 13 percent per year.
Exports are
contributing significantly to U.S. economic growth, particularly at
this time of moderate domestic activity.
In 1990 alone, real net
exports accounted for over 40 percent of U.S. growth.
The size of
the export contribution to U.S. growth confirms the need for a
continued U.S. commitment to a healthy global economy and a strong
G-7 cooperative process.
Unfortunately, 1991 has not provided the G-7 an opportunity to
rest on its laurels based on this record of success. The G-7 have
been confronted with major challenges. Overall growth for the G-7
has slowed substantially, and the economic situations of individual
G-7 members have diverged, which has led to divergent priorities.
3
In the first half of this year, the United States, the United
Kingdom, and Canada were in recession, and economic activity in
France and Italy was weak.
In contrast, growth was rapid in Japan
and Germany. More recently, however, the divergence has narrowed.
Recovery, though sluggish, is underway in the United States, growtr
has picked up markedly in Canada, and the United Kingdom is moving
toward recovery.
But growth in Germany and Japan has slowed
substantially.
Major weaknesses and risks remain.
The G-7 upturn is expectec
to be more modest than in the past.
For 1991, average growth is
forecast at little more than 1 percent. And for 1992, aggregate Ggrowth is forecast at just under 3 percent. Moreover, large
external imbalances are reemerging in Japan, and projections sugge~
that imbalances may resume widening in some other countries.
These conditions create a clear need for industrial countries
to pursue policies that will return them to a path of sustained
growth and less divergent performance. The G-7 process must adjust
to changing economic conditions and prospects.
Despite differing
economic circumstances, participants must undertake the difficult
task of reestablishing a common set of objectives and priorities.
And to meet these common ends, comprehensive action must be agreed
upon and implemented, encompassing all G-7 members and a broad ranc
of policies.
Progress on inflation reinforces the basis for a growthoriented strategy. Price trends have been favorable.
G-7
inflation, just under 5 percent in 1990, is projected to ease to tr
4-1/2 percent range this year, and to around 3-1/2 percent next
year.
The G-7 Ministers and Central Bank Governors have met often
this year to pursue stronger and more sustained growth. Most
recently, at their mid-october meeting in Bangkok, they reemphasized
the importance of fiscal and monetary policies, which, while
reflecting the differing circumstances in each country, provide the
basis for lower real interest rates and sustained growth with price
stability. We are seeing real progress in this regard:
interest
rates have declined in the United States, Japan, Canada, and the
united Kingdom. But they remain broadly unchanged in Germany, and
high real interest rates persist internationally, hampering growth
and inveatment.
Additional policy actions must be brought to bear in this
effort. The G-7 has stressed the importance of strengthening globe
savings to meet legitimate capital needs as they emerge over the
medium term. This will mean full implementation of measures which
have been adopted to achieve substantial reductions in budget
deficits and the removal of obstacles to private savings.
4
The G-7 also emphasized the need for a rapid and successful
conclusion of the Uruguay Round to strengthen world economic
activity.
sustained growth and improved market access can provide a
crucial boost to reforming countries in many regions of the world,
including the Soviet Union, which are embarking on major marketoriented economic reform.
Finally, the G-7 will have to continue its record of effective
cooperation on exchange markets. The benefits of G-7 cooperation
were particularly evident early in the year when the dollar reached
historic lows against the German mark as well as following the June
G-7 Ministerial meeting, when sales of dollars contributed to a
change in market views on the potential for further dollar
appreciation. On balance, the dollar, despite several ups and downs
this year, has continued to move in a generally stable pattern,
consistent with the trend of recent years.
G-7 cooperation can be
seen as a critical factor in this regard.
Foreign Exchange Policies in other Economies
The newly industrializing countries also have an important role
to play in promoting sustained growth and adjustment of external
imbalances. The large trade and current account surpluses that
developed in several of these economies in the 1980's gave rise to
concern that exchange rate policies played a role in impeding the
adjustment process.
Pursuant to Section 3004, which reflected these concerns,
Treasury's October 1988 report concluded that Taiwan and Korea
manipulated their exchange rates, within the meaning of the
legislation. Treasury subsequently initiated bilateral negotiations
with Taiwan and Korea for the purpose of ensuring that these two
economies regularly and promptly adjust the rate of exchange between
their currencies and the U.s. dollar to permit effective balance of
payments adjustment and to eliminate unfair competitive advantage in
trade.
Treasury's efforts encouraged these economies to develop
exchange rate policies that more fully reflect market forces.
Both
Korea and Taiwan introduced new exchange rate determination systems
that rely more on the forces of supply and demand.
These
developments were reflected in reductions in the large external
surpluses in both economies.
In the Spring 1990 report, Treasury
concluded that Taiwan and Korea were no longer directly manipulating
their currencies within the meaning of the legislation, a finding
reaffirmed in our subsequent reports, including this most recent
one.
In the case of Korea, the balance of payments has undergone
significant adjustment since 1989. Having moved into deficit in 1990
for the first time in five years, Korea's current account is
expected to post a deficit of roughly $7 billion this year, while
5
the global trade deficit is likely to be on the order of $6 billion.
Bilaterally, the u.s. trade deficit with Korea fell 70 percent in
the first eight months of 1991 compared with the same period of last
year, and is now less than $1 billion. While the won has continued
to depreciate throughout 1991, there is no evidence that the Bank of
Korea is intervening in the market to encourage this depreciation.
For these reasons, there is no basis for concluding that Korea is
manipulating its exchange rate for purposes of competitive gain.
With regard to Taiwan, while the Central Bank occasionally
intervenes in the foreign exchange market, there is no evidence of
direct exchange rate manipulation within the meaning of the
legislation. Taiwan's trade surplus with the u.s. has dropped by 20
percent in the first eight months of 1991 compared to the same
period last year, and the NT dollar has appreciated by 2.6 percent
since the end of 1990. However, the overall trade and current
account surpluses are demonstrating virtually no adjustment in 1991
and still remain too large.
Substantial further adjustment is
required.
In view of this situation and Taiwan's excessive reserve
holdings, we remain strongly concerned that Taiwan's exchange rate
policies, in conjunction with some continued limitations on foreign
exchange transactions and capital flows, are contributing to
indirect manipulation of the exchange rate. We will continue,
therefore, to monitor carefully the pace of adjustment in Taiwan's
overall and bilateral trade balances. We believe that currency
appreciation must be a factor in that adjustment process.
We also recognize that other financial policies can also have
an important effect on the currency markets.
Both Korea and Taiwan
maintain an array of controls over financial activity, including the
activities of foreign financial firms, which severely constrain the
forces of supply and demand in their economies. To address this
broader need for financial market liberalization, as well as to
improve the treatment of u.s. financial institutions in the two
economies, the Treasury Department launched separate bilateral
discussions with Taiwan and Korea.
Some progress has been achieved in these broader financial
policy discussions, but much work remains to be done.
In Korea,
significant denials of national treatment for u.s. financial
institutions remain. Moreover, the Korean government still lacks a
well-defined strategy for complete liberalization of its tightly
controlled financial markets. The Treasury Department views the
lack of progress in these areas as evidence of unwillingness on the
part of the Korean government to undertake fundamental reform of its
financial sector.
Indeed, we have not yet received a response from
the Koreans to our communication following up on the latest round of
Financial Policy Talks in late September. We had asked the Korean
authorities to clarify their plans for financial market
liberalization and to provide us with a broad idea of the time fraMe
for implementation. We will continue to monitor developments in
Korea's exchange rate and external adjustment, and, through our
6
ongoing Financial Policy Talks with the Ministry of Finance, to
press for liberalization of Korea's financial and exchange markets.
In Taiwan, liberalization of the financial sector is proceeding
at an excessively slow pace.
U.S. financial institutions are not
accorded full equality of competitive opportunity, and in some
cases, face outright discrimination, including restrictions on the
number and location of additional bank branches. We welcome the
recent announcement that Taiwan's forward foreign exchange market
has been reopened as of November 1, one of the many steps Treasury
has long urged Taiwan's authorities to take.
Nevertheless,
significant restrictions remain in this and many other areas, and
should be relaxed. We will continue to indicate the depth of our
concern to Taiwan's authorities, and in the ongoing talks with
Taiwan's authorities, will push for more rapid liberalization of the
financial sector.
Our experience with exchange rate and broader financial
policies in Korea and Taiwan has been relevant to our approach to
these issues in China, where the root of the problem lies in broader
policies beyond the exchange rate itself.
Balance of payments developments in China continue to be a
source of serious concern.
China's global trade and current
accounts, which moved sharply into surplus in 1990, are likely to
register even larger surpluses this yec c.
By end-June 1991, foreign
eXGhange reserves had reached $35.2 billion. And China's large
bilateral trade surplus with the United states, over $10 billion in
1990, grew 13 percent in the first eight months of 1991 over the
same period of last year.
A principal cause of these large external surpluses is the
network of pervasive administrative controls over external trade
which severely restrict imports, including those from the United
states. The Chinese government manages its trade and balance of
payments in such a way as to generate sufficient foreign exchange
reserves to cover critical imports and debt service payments and to
provide a cushion against external shocks.
It uses a variety of
tools to manage the external sector, including mandatory foreign
exchange surrender requirements and controls over foreign exchange
allocation, import licensing, and controls over domestic economic
activity, notably prices. All of these controls must simultaneously
be addressed in order to promote market forces and market-oriented
trade flows in China.
While it is apparent that the Chinese government closely
manages the trade regime, including foreign exchange allocation, to
support its balance of payments objectives, there is no clear
evidence that the Chinese authorities are manipulating the exchange
rate itself within the specific terms of the legislation. The
recent devaluations of the renminbi appear aimed at the narrower
goals of unifying China's dual exchange rates and easing the
7
budgetary burden of export subsidies, although they obviously have
the effect of making Chinese exports more competitive and therefore
further contribute to China's surpluses.
In the eyes of the Chinese
authorities, the above goals are based on a perception that the
exchange rate remains overvalued, particularly as compared with the
swap and black market rates.
In our view, the multifaceted controls
maintained by the central authorities over the external sector are a
much more significant contributor to China's large external
surpluses.
Extensive liberalization of these controls is required.
In the summer of 1991, the Treasury Department launched
discussions with the Chinese authorities on China's foreign exchange
policies. We intend to continue to use this forum to seek concrete
measures to reduce control over foreign exchange allocation and
permit the exchange rate to reflect market forces more fully.
Conclusion
Mr. Chairman, as the trend toward market-based economic reform
sweeps the globe, I believe we have an historic opport~nity to
promote unprecedented integration and cooperation in the global
economy.
All countries must playa constructive role in meeting
this challenge. We are continuing to make progress, but there is
much left to be done in coordinating economic policies and sharing
responsibility for promoting a healthy world economy.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
November 12, 1991
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $10,247 million of 13-week bills to be issued
November 14, 1991 and to mature February 13, 1992 were
accepted today (CUSIP: 912794XZ2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.63%
4.65%
4.64%
Investment
Rate
4.76%
4.78%
4.77%
Price
98.830
98.825
98.827
$1,000,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 17%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
34,205
32,267,145
17,275
48,580
83,170
35,025
1,060,410
52,455
21,725
30,220
21,965
742,200
926 1 245
$35,340,620
Acce12ted
34,205
8,405,510
17,275
48,580
74,870
30,875
270,000
14,155
13,425
30,220
21,965
360,150
926 1 245
$10,247,475
Type
Competitive
Noncompetitive
Subtotal, Public
$30,916,540
1 1 728 1 665
$32,645,205
$5,823,395
1 1 728 1 665
$7,552,060
2,533,010
2,533,010
162 1 405
$35,340,620
162 1 405
$10,247,475
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $83,295 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1545
UBLIC DEBT NEWS
Department of the Treasury • Bureau ofth~ Public Debt • Washington, DC 20239
CGNmAC~:
FOR IMMEDIATE RELEASE
November 12, 1991
Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,326 million of 26-week bills to be issued
November 14, 1991 and to mature May 14, 1992 were
accepted today (CUSIP: 912794YN8).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.69%
4.71%
4.71%
Investment
Rate
4.88%
4.90%
4.90%
Price
97.629
97.619
97.619
Tenders at the high discount rate were allotted 35%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
27,635
30,465,510
14,750
28,965
126,215
39,430
1,405,135
33,835
18,895
38,670
16,625
770,025
712,185
$33,697,875
Accepted
27,635
9,064,810
14,750
28,965
88,515
32,400
158,385
15,585
12,395
38,670
16,625
114,725
712,185
$10,325,645
Type
Competitive
Noncompetitive
Subtotal, Public
$29,387,995
1,216,185
$30,604,180
$6,015,765
1,216,185
$7,231,950
2,550,000
2,550,000
543,695
$33,697,875
543,695
$10,325,645
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $292,405 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1546
TREASURY NEWS
Dellartment of tile Treasury • Wasilington, D.C. • Telellhone 5&&.204!
FOR RELEASE AT 2:30 P.M.
November 12, 1991
CONTACT:
Office of Financing
202/ 219-3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $ 20,400 million, to be issued November 21, 1991.
This
offering will provide about $300
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $ 20,111 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500, Monday, November 18, 1991,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Standard
time, for 'competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$10,200
million, representing an additional amount of bills
dated August 22, 1991
and to mature February 20, 1992
(CUSIP No. 912794 YA 6 ), currently outstanding in the amount
of $ 10,422 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $10,200
million, to be
dated November 21,1991,
and to mature May 21,1992
(CUSIP
No. 912794 yP 3 ).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of S10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing November 21, 1991.
In addition to the
maturing l3-week and 26-week bills, there are $ 12,493 million of
maturing 52-week bills. The disposition of this latter amount was
announced last week. Tenders from Federal Reserve Banks for their
own account and as agents for foreign and international monetary
authorities will be accepted at the weighted average bank discount
rates of accepted competitive tenders. Additional amounts of the
bills may be issued to Federal Reserve Banks, as agents for foreign
and international monetary authorities, to the extent that the
aggregate amount of tenders for such accounts exceeds the aggregate amount of maturing bills held by them. For purposes of determining such additional amounts, foreign and international monetary
authorities are considered to hold $ 857
million of the original
l3-week and 26-week issues.
Federal Reserve Banks currently hold
$1,587
million as agents for foreign and international monetary
authorities, and $ 8,392 million for their own account. These
amounts represent the combined holdings of such accounts for the
three issues of maturing bills. Tenders for bills to be maintained
on the book-entry records of the Department of the Treasury should
be submitted on Form PD 5176-1 (for 13-week series) or Form
PD 5176-2 (for 26-week series).
NB-1547
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount ot bills bid tor,
Wllich must be a minimum ot $10,000; Tandara over $10,000 must
be In multiples of $5,000. competiti~e tsnders mctst also show
the yleld desired, expressed on a bank disoount rate basis with
two d~cimal9, e.g., 7.15\. Fractions may not be used. A aingle
bidder, a9 defined 1n Treasury's aingle bidder guidelines, shall
not submit noncompetitivB~tBnders totaling more than $1,000,000.
Banking institutions and dealers who make primary
mnrkets in Government securities and report daily to the Federal
Reserve Dank ot New York their positions in and borrowings on
such securities may submit tenders tor account ot customers, it
the names of the customers and the amount for each customer are
furnished. others are only permitted to submit tenders for their
own account. Each tender must state the amount of any nGt long
poaition in the bills being oftered·if such position is in excess
of $200 million. This information should reflect positions held
as of one-half hour prior to the closing time tor receipt of
tenders on the day of the auction. Suoh positions would'include
billa acquired through "when issued" trading, and tuttlres and
forward transactions as well as holdings of, outetanding bills
with the same matu~ity date as the new offering, e.q., bills
with tllree.months to maturity previousl~ offered as six-month
billa. 00a10r8, Whb make primary markets in Government $90Uritiea and report daily to the Federal ReservG Bank of Ne~ York
their poftition. in and
bor~ow1nq.
0"
.udh •• cu~iti •• ,
~he"
8ub-
mlttlng tenders tor customers, must submit a separate tender tor
ench customer whose net long position in the bill being bftered
exceeds $200 million.
A noncompetitive bidder may not have entered into an
agreement, nor make an agreement to purchase or sell or otherwise dispose of any noncompetitive awards at this issue being
auctioned prior to the designated closing time for receipt of
conpotitive tenders.
Payment for the tull par amount of t~e bills applied tor
must nccompany all tenders submitted tor bills to be maintained
on tho book-entry l-ecords of the Department of. the Treasury.
A cash adjustment will be made on 811 acoepted tand@ra lor the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders tram incorporated barike
and trust companies and from responsible and recognized dealers
in inVQ9tment securities for bill" to ba maint&ined on the bookentry records of Federal Reserve Banks and Branches.
1/91
TREASURY'S 1J-, 26-, AND 52-WEEK BILL OFFERINGS, Page J
Public announcement will be made by the ()apartment of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection
of their tenders. The Secretary of the Treasury expressly
reserves the right to accept or reject any or all tenders, in
whole or in part, and the Secretary's aotion ahall be final.
Subject to these reservations, noncompetitive tenders for each
issue for $1,000,000 or less without stated yield from anyone
bidder will be accepted in tull at the weighted average bank
discount rate (in two decimals) of accepted competitive bids
tor the respective issues. The calculation ot purchase prices
tor accepted bids will be carried to three deoimal places on the
basis at price per hundred, e~g., 99.923, and the determinations
at the Secretary of the Treasury shall 'be final.
Settlement tor accepted tenders for billa to be maintained
on the book-entry records at Federal Reserve Banks and Branches
must be made or qompleted at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or 1n Treasury bills maturing on that date. Cash adjustment~
will be made for ditferences between the par value ot the
~aturing bills accepted in exchange and the issue price of the
new bills.
I! a bill is purchased at Issue, and is held to maturity,
the amount ot discount is reportable as ordinary income on the
Federal income tax return ot the owner tor the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 ot the Internal Revenue Code
must include in income the portion at the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary inoome.
Department ot the Treasury Circulars, Public Debt Series -
Hos. 26-76, 27-76, and 2-86, a9 applioable, Treasury's sinqle
bidder guidelines, and this notice prescribe the terms ot these
Treasury bills and govern the conditions ot their issue. Copies
of ' the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.
8/89
TREASURY NEWS .~.:
Dellartment of the Treasury • Washington. D.C•• Telephone 5.8-204'
FOR IMMEDIATE RELEASE
NOVEMBER 13, 1991
contact:
Keith Carroll
(202) 566-5252
Thomas E. Anfinson Appointed
Executive Director of the
United States Savings Bond Division
Thomas E. Anfinson was appointed executive director of the u.S.
savings Bonds Division, Department of the Treasury, by Secretary
Nicholas F. Brady. He was sworn in on October 15, 1991.
As executive director, Mr. Anfinson will direct the national
program for marketing and sales of U.S. Savings Bonds. This
national effort uses savings Bond division resources and
volunteers from the business, banking and communications sectors.
Since 1989, Mr. Anfinson had served as deputy under secretary for
management at the u.S. Department of Education. In this
position, he was responsible for the overall direction and
administration of the department's administrative management and
financial functions.
Mr. Anfinson has served in various positions within the federal
government. From 1986 to 1989, he was the chairman of the
Federal Prevailing Rate Advisory Committee. Prior to this, he
served as special assistant to the associate administrator of the
Health Care Financing Administration at the U.S. Department of
Health and Human Services. From 1985 to 1986, Mr. Anfinson was
the special assistant to the assistant secretary for Employment
and Training Adminstration at the U.S. Department of Labor.
Previously, Mr. Anfinson served at the u.S. Department of Housing
and Urban Development. In addition to his government service,
Mr. Anfinson was deputy treasurer for the Reagan-Bush 1984
Committee to Re-Elect the President.
Mr. Anfinson received his B.S. in business from the University of
Southern California in 1964. He is married and has 3 children.
Mr. Anfinson and his family reside in Great Falls, Virginia.
NB-1548
000
OVERSIGHT BOARD
Resolution Trust Corporation
1 7 7 7 f 5 T R E E T. N. W.
WAS 1-1 I N G TON. O. C .2 0 .2 3 .2
CONTACT:
FOR IMMEDIATE RELEASE
November 13, 1991
Arthur Siddon
(202)786-9675
ors 91-82
A Senate proposal to restructure the Resolution Trust
Corporation (RTC) is "deeply flawed," RTC National Advisory Board
Chairman Philip F. Searle said to~ay.
The bill, S. ~943, introduced by Senate Banking Committee
Chairman Donald Riegle CO-MIl, "provides no funding whatsoever
tor the S&L cleanup," Searle stated, and wo~d remove eritieally
needed independent oversight.
The RTC was established by Congress in August 1989 to manage
and sell failed savings S&Ls and recover taxpayer funds through
the management and sale of the institutions I assets. It
currently has run out of funds, and the Administration has asked
for $SO billion to complete the task of elo~inq and selling
failed institutions and paying off their depositors.
The National Advisory Board, chaired by Searle, is made up
of chairpersons of the six pr'ivate-sector Regional Advisory
Soards established to advise the RTC on policies and programs for
the disposal of real estate acquired from failed S&Ls. Searle
made his comments today before a meeting of the Re9ion 1 Board in
Tampa.
The RTC proposal that the Administration took to Conqress,
Searle explained, not only would provide sufficient funds, but
would answer Conqressional concerns reqardinq structure nwithout
increasing the life or the cost of the 5&L eleanup" or disrupting
the momentum of the RTC. It's important to note, he said, that
the Administration's proposal nis strongly endorsed by the people
who have to do this job -- including the new RTC CEO, Albert v.
casey. It
-- more -
-2-
Searle, who ear~ier had been invited to testify on
restructuring betore the Banking committee's Subcommittee on
Consumer and Regulatory AIfairs, said he was disappointed in the
legislative product resulting from those hearings.
"The lack ot" independent oversight would put the expenditure
of up to $l60 billion of taxpayer funds and the disposition of
huge amounts of property and securities in the hands of a fully
independent board without proper oversight by the Administration,
which wi~l be he~d accountable," Searle stressed.
"The GAO has testified that independent oversight of the
RTC t S expenditures is essential, n he added, and, in testimony
be!ore Congress, "I have urged that effective oversight also
include RTC performance and accountability."
searle also stressed that unless Congress provides funds by
its Thanksgiving adjournment, February 1 will be the earliest
such runds can next be provided. The cost of this delay, he
said, "is estimated at $300 million to $400 million ror the
quarter --or an average or $3 million to $4.5 million each
day. It
Having criticized the senate legislation, Searle also
discussed the RTC refunding bill recently reported out of the
House Financial Institutions Subcommittee. Faulting this bill
for not providing full fundinq, Searle noted that, with limited
mod~fications, however, this legislation could be improved to
provide both adequate funding and appropriate, independent
oversight. The Riegle proposal, he said, could not.
,Searle, retired cha.irman of SunBanks Inc., also criticized
amendments in both bills that he said would tie the hands of the
CEO, creating bureaucratic obstacles and limiting flexibility in
decision making. He also pointed out several provisions -including those "with laudable social 9'oals" such as affordable
housing, minority and women institutions and environmental
concerns -- that would add "substantial additional costs to the
cleanup.
II
Passage of "thoughtfully conceived legislation now," Searle
concluded, "is critical to the future successful operation of the
RTC.II The Region 1 Advisory Board concurred, voting unanimously
in support of Searle's views.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
November 14, 1991
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Tenders for $12,264 million of 52-week bills to be issued
November 21, 1991 and to mature November 19, 1992 were
accepted today (CUSIP: 912794ZA5).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.71%
4.73%
4.72%
Investment
Rate
4.97%
4.99%
4.98%
Price
95.238
95.217
95.228
Tenders at the high discount rate were allotted 9%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
14,810
47,988,970
13,115
10,285
15,095
27,730
1,502,110
18,535
5,475
16,170
9,880
914,420
236,890
$50,773,485
Acce12ted
14,810
11,656,490
13,115
10,285
15,095
15,000
194,210
8,895
5,475
15,260
9,880
68,520
236,890
$12,263,925
Type
competitive
Noncompetitive
Subtotal, Public
$46,718,000
475,485
$47,193,485
$8,208,440
475,485
$8,683,925
3,150,000
3,150,000
430,000
$50,773,485
430,000
$12,263,925
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-J542
TREASURY NEWS .~
Department Of tile Treasury • Wasilington, D.C. • Telellhone 5&&-2041
FOR IMMEDIATE RELEASE
November 14, 1991
contact:
Desiree Tucker-Sorini
202-566-8191
statement by
Nicholas F. Brady
Secretary of the Treasury
Last night the Senate passed an amendment to S. 543
which would regulate the interest rates charged to customers by
credit card companies. The result will be less credit available
to the lower and middle income Americans who need it the most.
The Administration strongly supports lower credit card
rates.
In fact, several companies have already lowered rates
charged to consumers.- But we should let the market place
determine the rates, not inflexible legislation that some
estimate could reduce credit to Americans by $100 billion. This
would only make the credit crunch worse and impede the economic
recovery. This legislation could eliminate one-third to twothirds of outstanding credit cards, is regressive and would
benefit the more fortunate at the expense of the less fortunate.
We strongly oppose this amendment and will work to
eliminate it from the final banking package.
* * *
NB-1550
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 23
Author(s):
Title:
Easing the Credit Crunch to Help Promote Economic Growth, Remarks by John Robson,
Deputy
Secretary of the Treasury
Date:
1991-10-31
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
FOR IMMEDIATE RELEASE
November 14, 1991
CONTACT:
Cheryl Crispen
(202) 566-2041
STATEMENT BY
NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
The failure of the House of Representatives to pass H.R.
2094 is a blow to taxpayers and depositors, and a step backward
for banking reform.
Despite this failure, today's votes show
that interstate branching continues to have the support of a
bipartisan majority in both the House and the Senate.
Congress must pass banking reform this year that will do
more than just replenish the Bank Insurance Fund. We need
legislation that addresses the underlying structural problems of
the industry.
Legislation that simply pours money into the Fund,
without fixing the industry so that it can pay for itself would
leave the taxpayer exposed and contribute to the credit crunch.
000
NB-1551
FOR :IMMEDIATE RELEASE
November 15, 1991
David Michael Nummy
Appointed Assistant secretary
For Management
David Michael Nummy was sworn in today by Treasury Secretary
Nicholas F. Brady as assistant secretary of the Treasury for
management.
As assistant secretary for management, Mr. Nummy will develop and
manage the budget for the Department of the Treasury and preside
over the daily management and administrative affairs of the
department.
Since 1989 Mr. Nummy had served as deputy assistant secretary for
finance and management with the Treasury Department.
Prior to
joining Treasury, he was the comptroller of the Bush-Quayle '88
campaign, and comptroller for the office of the President-elect.
Mr. Nummy had previously worked with the accounting firm of Ernst
& Whinney and became a certified Public Accountant in 1980. He
subsequently served on the staff of the Senate Budget Committee
for several years as an analyst for the Federal Credit Programs,
as senior analyst for tax policy, and as special assistant to the
staff director. He also has served in the private sector as
business manager for a consulting firm before joining the BushQuayle campaign.
Born on April 6, 1957 in Oklahoma City, Oklahoma, Mr. Nummy is
the son of James A. and Dorothy A. Nummy. He received both a
bachelor of science and a master of sc~ence degree from Oklahoma
State University.
Mr. Nummy resides in washington, D.C.
000
NB-1552
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 14
Author(s):
Title:
Meet the Press, Guests: Treasury Secretary Nicholas Brady, Senator Alfonse D'Amato, and
former FDIC Chairman William Seidman
Date:
1991-11-17
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
November 18, 1991
RESULTS OF
CONTACT: Office of Financing
202-219-3350
T~EASURY'S
AUCTION OF 13-WEEK BILLS
Tenders for $10,245 million of 13-week bills to be issued
November 21, 1991 and to mature February 20, 1992 were
accepted today (CUSIP: 912794YA6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.54%
4.58%
4.58%
Investment
Rate
4.67%
4.71%
4.71%
Price
98.852
98.842
98.842
Tenders at the high discount rate were allotted 69%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in
thousa~ds)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
25,965
30,725,315
16,350
47,390
6:...,860
26,080
941,205
50,430
21,650
29,410
18,830
739,215
872,395
$33,576,095
$10,244,520
Type
Competitive
Noncompetitive
Subtotal, Public
$29,11.5,575
1,512,290
$30,627,865
$5,734,000
1,512,290
$7,296,290
2,708,985
2,708,985
239,245
$33,576,095
239J45
Federal Reserve
Foreign Official
Institutions
TOTALS
AcceQted
25,965
8,882,360
16,350
47,390
48,760
24,770
139,395
10,430
17,000
29,410
18,830
111,465
872,3S15
$10,244,520
An additional $6,155 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1553
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington. DC 20239
FOR IMMEDIATE RELEASE
November 18, 1991
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,210 million of 26-week bills to be issued
November 21, 1991 a~d to ~ature May 21, 1992 were
accepted today (CUSIP: 912794YP3).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Lo\v
High
Average
Discount
Rate
4.59%
4.62%
4.62%
Investment
R::l.te
4.78%
4.81%
4.81%
Price
97.680
97.664
97.664
Tenders at the high discount rate were allotted 82%.
The investment rate is the equiv&lent coupon-issue yield.
TENDERS RECEIVED ANC' ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
chicago
st. Louis
rHnneapolis
Kansas· City
Dallas
San Francisco
Treasury
TOTALS
Received
26,160
26,283,840
14,515
34,075
97,235
23,095
896,545
35,085
21,380
30,531
12,090
701,130
645,225
$28,820,905
Acce12ted
26,160
8,890,160
14,515
34,075
65,935
22,915
255,145
19,185
20,480
30,530
12,090
173,270
645,225
$10,209,685
Type
Competitive
Noncompetitive
Subtotal, Public
$24,279,110
1,090,840
$25,369,950
$";,667,890
1,090,840
$6,758,730
2,650,000
2,650,000
300,955
$28,820,905
800,955
$10,209,685
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $42,545 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1SS4
@FedFRASER