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Treas.
HJ
10
.A13P4
v.345
U.S. Department of the Treasury
PRESS RELEASES
J
DEPAHTMENT
-
OF
THE
1REASt1Rtysf..~J
~\./~/
-.-
TREASURY
NEW S
17g~~"II""II"""""""""""""1I
Ol't'1CE OF rUBtlC AffAIRS· I!iOO rtNNs'iLV.\NLI> .W£Nt;£. N.W.• W4!iOHfNC;TON. D.C.• 20220 • (:W:!) 6!!2·:!!ltiO
TEXT .n.S PREPARED FOR DJ::Ll vERY
April 20,
1995
Rr.~~~~
OF TREASURY SECRET~_qy nOBERT RUB!N
U.S.-INDIA BUSINESSMF.N
BOMtl.:...Y, INDIA
Good afternoon.
~efore beqllu~ing the remark~ I prepared to ~ivp, 1 want to
speak for on:: minur.e about s('lT;'\~thing that happelH:!U ir; the United
States yest~r~~y. As many or you probably know, there was a
devastatin4 ~X~lo5ion in Okl~homa City which h~s destroyed a
federal building, kille~ an~ ~nJured people, including children,
and put in danger a numbe:. vI Tl."easury Dcpo.rtment employees wh~
work fUl me. This wa3 0. terrible tragedy Rnd it is being tredL~d
a~ un ~ct of terrorism.
I want to eHpress my cc~doi~ncp~ to the famlli~~ of the
victims of t~p Oklahoma City bou~lllg. I have directed the Burea~
of AlcohoL Tubacco and Firc:lrr:1..'::, which is ? hlJreau ot "Lhe
Treasury Departmen~, ':0 t..;t'l!"K w:th the other law enforcement
agencie~ ~nd devote evel~ ~~: cf manpower available to fi"~ the
responsible par"Lies.
T h2ve a great
today .:;u I'll plunge
~n~wer
your
d~~l ~£ territo~y
r~ght i:1 beca~se
~o
cover
,~
my
T Wi1.nt to leave
re~~rks
t':"Jlll;:; L;:;
question~_
First, however, permlt me ~" nnservatlon baseJ vn my brief
visit to Indi~ ~nd the meetlnQ~ I have had with the President,
:he Pr1.m~ M.i.:lister, the Mini:tcr of Foreign Aff~~ rs, the M1.nister
of Commercc, tr.e RBI 9over:'"l('l~ "nd of course Illy host, the Hini:Jt~r
of Finance. ~ach of those m~~Linas were 3ubctantive and focu~pn
ser iousl v V(, tr.e accomplioh::le:'.'ts
reform "nn the cha1.lenge:;
ahead. It was an exceed'ng~y :mpresslve leddersh1p gro~p and
wha: r~n12 has done sine::: 1?9: In the woy of eCOnOIT.l(: ~eform, 1!l
:rad~ uul~cy, in opening up to foreign invp~trnent a~d lnc!~~~~n9
~omFctitior. in many sp~;nrs :5 remarkabl~.
of
Ecuno!ni.:: =eform i£ producing taJ"lgi hie results, ec;ui,vmic
growth and a good h~glnni~g of wlde~~,ead and well-w~rr3nted
.;1;:"tF!ntlon for IIll.lld. -- attention th~t I believ~ wi 1 I rriPJ,.dly
.i.llcL·e:ase as you continue to pursu~ rpforrn.
Far /"P..t( relea.~es. ·speeche~. public .\chedl.lles and uffi~·iul &io~·aplrit:.J. call OilY 24 hour fax lin~ at (102) 62?204f1
RR-228
2
I asked som@on@ on my staff the other day to look up the
last time a Treasury Secrerary v1sired India. It turns our I
~rrived in New Delhi 20 yc~r3 to thc day from the la~t vi5it, by
WIllIam SImon. My vl~jt. tnl Inwing th~t nf Mr~. rlinton, three
other cabinet secretaries ~nd three of our senior SLdL~
Department officials, clearly demonstrates the priority the
United States attaches to our relarionship Wl(h Indla.
Ea~ller thlS week I observed that the life of a finance
minister has changed dramatically as the world has grown ln
economic lInkage and as sc many countries -- especially in Asia
-- have had dramatic econom~c growth. Ten or 20 years ago to
ViSit the cities absolutely critical to the U.S. economy, a
Tre~~ury Secret~ry would go to London, P~rio, Bonn ~nd Tokyo.
T0J~y th~t li.st is f~l" longer, a.nd New Delhi and Bomt~y eire
on it, because of India's growth and our deepening @conomic
relatlonshlp. Clearly, what happens In IndIa, in MexiCO, in
Indonesia and China now has important con3equences fo~ the lives
and -economic wt:ll-being of Arn9ricans. I m-=et regularly with
Arne.r ican bus :!1ess leade.rs, and they are increaslIlul V te llinu m~
~hat .they ~r2, O~ ar2 con2idering, inve~ting here, building
relationships and trad~ -- and otm; 01le; I y rlpp.pF'ninC] ()lJr hi I rlt.p.rrlJ
economic PdL luer!jll.lJ,J. Or:e l.J~Jl~.L!. L vI :ny trip is thc:.t I can
better di~cu~~ with them the opportunities India offers and \~hat
h~~
h~ppF'nF'n
nRrR
~ln~p
J~~l.
r was asked today to talk a bit about how the Unit~d States
lS prepa.r1ng lrself for the global economy, in addition to
offering a few though~s a~Gut the remarkable tran3form~tion under
way in India.
We have two ?ivota~ oeoatc3 taking pl~ce in the UDited
States, the f~~st on what 2rrr~~~h ;c; hp.~r tnr thp. rlomestlc
economy and the sccow..i Ull wlle Lllt::!. Lht::: Uni t~d States will compete
~n the glob2~ cconomy, or.d provide le~dership in dealing with i~s
,7>roblefl"ls, nr ~':rn lil1,.,';:,rn.
I
The~e
fundamental, ?hllosophical debates, unl~ke the
nltterences our polities often revolve around.
1. Vtli~v~ i..i·lC: ~Fproach chosen by the Clinton administration
domest~c~:ly, ~it~ ~nvestment in our work force and fiscal
rii ~rlp.: lne, and. lnternatlonal~y. wH:h engagement: -- i~ the
m0 r p
~re
lnrr~mp.ntrtl
<,;vLL~C.t
..:hoi:--:.
There are some people lfl. the Uul.L~u SLaLes wbo want tv
:-etreat from the ;..,Iorld, but retrenchment cannot t~ork as we face
the 21st Cent'..lry. TT:" ~c: trlJF~ In the United St:ates, and it is
:.rue 1r; I!l(jid. ImEa.i.~ C! clea.r example of how adopting 30und
econo~ic po:icic~ ~nd looking out~ard can create jobs and
opportunity, not Just rnr nnp na~lon but: for many -- India and
all i(s eco~omlC Pi:1LLri~L~.
3
The Presjdent'~ ~~nnnmi~ ~trategy focusses on fiscal
disciplll1~ -- L~~uclng our deficit -- and on public investments
in education, training, technology, the serious problems of our
inner cIties and other areas critical to productivity. III
addition, his strategy include3 opening m~rket~, r~forrning our
government and its regulation,s, and r.:nntinllinq to seek health
care and we 1 far;e refor'I1t.
In short, th~ hrp~~rh nt the ~residenr's strategy is
consistent wllll Lll~ cUlUl-il~;:'..i.Ly of a modern economy and the
complexity of po~itioning the United States for the 21st Century.
A.m.! Ll!.ls sLla.tegy ha5 been successful.
~conomlc growth in the f1rst two years has av~rdq~d d~ouL
J.G percent. lriflation i3 under 3 pcrccnt ~ yc~r. Some 6.3
million new jobs have been r:::rl?.;:ltl='ri in nllr p.c:nnnmy in tne past 26
months. Our national ull~lIlploY!lU:::llL raL~ ha.s come: down to 5.5
percent. Bu~inc~o invc~tment is at a historic high as a
p~rc~nt~0e of l.DP, ~nn WP. nrp. well along With a process of
st.reamlilllW.l our quvt:lfUUt:1"lL, reducing civilian federal employment
lcvc13 ~nd climin3ting outdated methods and programs_
I sp0~e a~ the out~et about 8 deba~e in the United St~tco
3.bou'C how we approach ;'nter .. ational rnat~~:rs -- by t07'"ni:lC] O;Jr
~u!:'r:.lng inward, or by pl'cpdri.H"l Lv LdJ<.~ aJilan"Cag-e of
theopport~nitie3 nvoil~blc to U~ and providing lead9rship in
deaL.n{] W~ t: h t hp prnh i pm:=: th? t,
teet '[r~e g10bal economy.
backs and
at
The U.S. agenda includes not only prepari~g the work forc~
and the !?cnnnmy rnr thp. future, but also aggressively pr;or.'.oting
greater OUt:HllC:::i5 .if! lLa.de: a.nd in global financial markets, and
actively cupporting the contribution to development and economic
0'r'owth Ann stnDlll ty beIng made by the interna tlonal finar~cidl
ill::;
Ll Lutions.
Many :n the Uni t:ed sea tes are, qUt:~ L.iulll!lq wlL~1..ber we shyuld
moneY into the international fin~nci~l in~~itutions. We're
cu:ting domestic progrdms and :hat m;k~~ it hMrdp.~ to spend money
A.croad. And critics are auestlC.millq wlleL!!li:r lhe World Bank and
its sister institution3 arc 3u£ficicntly sensitive to the
~~"C
environment and people
-
The3e ~=c 3criouo i~~uc~. But I see the World ~ank working
hard on T"",-fn'!""m<:;. T wnnt the Unlted !)rat:es to be fully engaged in
the ijJ~Ll.LL.:'-.!.v(l~ . . . . am cornrn:..tted to doing all that I can to
uchicvc full funding fer the U.S. com.-nil:ment to thl;' in,c::fit-IJtinr:s
b":'r~r1i~C:;? " t. is :n au!' interest :0 promo:e ;t:()!l:J1!~1~ Jt:'/I::'lop:,:..:nt:, to
~r~ctL~ ~ larger and ~ea:thie= ~orld econo~y u~d bigger a~d bette=
tr~d~ng pa=tners.
,
""a~
Th~ iln' ~,:....: '::"-a;;.p, ljc~ b~e""; 'I"~tr.:.mentai.
~~ - I" :~;;e'" ~ ¥~:r.Dh;Si; ~n ·~npn market
. .,
I'
~r.··?r;gr;;~· ~ha~ ;~rpf)'~.,
:10:
I;'
str
",r("('):1:-a01:-:: [he
'.h..
5up~i"flt the p::ivate
LUl.'ai. - reform,
se:to;r, on .
pay::.:-,,) qrea[er at~c:!!L.l.0r. :c h\.:!nun resource devl?l:'lpmem::, lnC~uLl'!'J!g
the lule c£ women, to v:a~ln1 M'rroenterprls~~ d~ ~ key too~ In
dcv~lop~a~t, ~n~ 5uppc~:lnq ~~ucatlon and health care.
""1'::> :!1ange 11: ~lllp:'asis .:.:: beginning to p<=lY oit .
:r.
T
h~lleve
~~~":', :et; me td:"'C' : ',lS: a momcn-: to tell you ~h()ut
•
-.... ,,0_
--'" ~".
... ~ •• ,~."P'"r:: yesterda Jt •"
1IJ,'c:':::e..,j
a
...... .!t:.;: ,.-"'~
.... t"'!'-" ...............
....... ••
: "'"
- ... ....
-:
""-.
\..01
""...;
....
~
..
,-.,.::'11',.:.T"~
...
".,::
...
~e:!l'
r'daipur
oSupportec
by
th":'
Wnrlr
_'lit". - . . ...
'.
~ ............. -...
\I
...
•
~
•
.i ~.ea:-c frull: pc:; a;,d, \,'o!nc:-. who Ilve i~ ~:~glle eCO:loml~
~.:a
.......\~ .:>~l-"
.... .... _, .. ;"..,
w,:.~'r- ...
3;:-,",
_
I
wi .... ' - """
I... .... _
..
c; .:.:..".n,~ta~..:::::e3, .. nose s:a:,.:i.~.=-,~ M ~lvlng 1s lJt:!.i!l~ :ifted by .::l
prog:arr. ,t:.a: ."lpClrd:;;~ Sl:r.~.:.~ ~y,L'icultural reform ,proJects
ro::..:ssea C!~ w;')lilt:f: a:-.'::! ,=,."n:-en.ae;ltal su~taJ n.::!t'lle ae,relopmeIlL,
eJ~ca tl.O;". .)r:a corr:.-.'..ma: -:i~f'" <:: lcn-maklno.
!L was an ir:.30ir.l:'1.on
eha: gi':'?~ : :..~e ar.d CO:lLe"~~ ~::> the de:OLltc~ we have in W;:1j~~lngtoI:
CU:iU': t::s51.on111 f-..::-.:il.:1~ :cr the W.,r I C1 Bank.
a.:::o~:
T reid the peculc = :r.et of my ::iupport for what
COl:,~ Iv:£: them..3cl vee.
):co?le :en ~ha: 'r' Ilage
~ii
~~
us
~1:1 ~cDefl.:
S?y ~n
yes:erd~y:
~oge~hcr
you what I said
th~y
LO
were
the
we live in ~ world today
or suffer tog~th~r.
wher~
: ;: w;;~f" rr, expand for a fc:w m:~'!ute5 on the
ce:·... ::'::::l I,',:La and the t:::iteci States, an~
a:~2s ~!jcL ~ay co~:~~bu:c to strengthenIng hotn our bilater~l
:£.c:l.Onsh:p and ~na:~'~ g!O~lnq economy.
i;C\-l:-.g
,=C'c!".~::,'r:-
w~
~.::.:d
Le: me
tna~.
.... :'l_il:10:-,S~. .:.;:
--
tr.e Un::e: S '_:! _c~ and Ind:'a -- have a corr.rr.on st.:il(p
~:
:~ci~a's :efor~ ~ttort.
1[:
5
w~
well
recoqnl~c
rofor~
is
not easy,
~nn
t~kes
courage and
perseverance.
(.Je· f~("p pr()blems in econolll.iL: .L'2fu:.:m 1n our
.
("()lJnt.ry, but we shdle Lll~ view that for ..... <:lrd-looking reform lS, .2.0
L0th our countric~, the rlght answer for thp tuture.
In both UU!
couo tries, ffi1.x·h h;,s been accomplislleu, uut much rerna.in~ to be
done.
k~y ~o 3ucceS5 ls L>rudJ~ning Bnd deepenlng CJplta!
to J\Clb:"L:e .3':.,nngs, to allocate sc<vin!]e ;;>t't:r::.2.ently,
to attract foreign r~r'r~l.
GnF
!T\c.lkc:'L::',
~nd
It ~U3t be rccogn12ea, however. that tnprp lS 2 tremendous
demand for car-itC1i riorl(l\o,'loe. We need OIlly luuk er'C the
lnfrastn.:ctuI~ :lee0::. here: 1n India
I hCJ.rd 3n estimate :n New
DeIhl TUC3d<:lj that Indla needs on the orriPT at ~28 bllllon a year
1;1 :."f.!:'2~~""1l::~l!'2 work.
ent:re leYL01)
the ce~:ury.
~eed~
=~cla
:':-Je ,=:'sian Develvf.Jln-:nt Ba:-lk estl=rta.:e3 :!lC
th.!:'oug~ the gnr 0t
abo~: $200 bill10n a year
has rTGh'prn~ wltn respec:
?lrporcs anc dOCKS -- 0uL
Caplt2i in thp
gloD2!
i...l:~st:
prublems are
flnancial markets
to !ts
ro~J~f
globCl~.
mu~L
L~~Jily
w1:l
flo ....' ,,'here tILt: ~uUe!.v~.s0ry 5t~-ucture providcG o.!.sclosure and
effectively g~~rds agalnst manlpulation rr~rtlr.P'Sf where (he
rnark~t rncrh~n'~ms a~d clearlng
eff:.c.it:ll'~, C;:llJ whe!:e there a.re
systems
~re err~(tive
and
adcquutcly tz-ained pe::-sonr.f;;l and
good COr:uTlun.l.cat:.ons ir.irastnlC'tll1"O:>. 1nc1l2 loS clearly' mo-v:no lfl
t'np.sp. dlreCllOrl$, but 1~. thl:: lli.'-!llly c..ompetltive ,",o:::-ld of cuplt.::tl ,
~0ntinued and ~apio prog.!:'c~~ is essential.
Your leadersh'p lr
Delh: clearly r~:ogr~7p~ ~n~s need, bUt has ~he alwav~
:::ask c: '."2~gt.:nc;: :he P~~e cj~::'n.5;:: legitimate COT,pcting
Jir[i~~lc
'::'Gn:5:.j.e:::aC10::,3 .
d
~~~6~ Jeal about the pe~form~~cc o~ the
::or. Indi3., lr.cluding what 1 bellev,,? -('] hp. rhp. spurs
to ".:ff iC'i ,?nrl'::'C; ,qnri capl Lal avallab1.l1 ty l.n tln~ lHci.d.~t L:Clm
I have
b3.nk:.~g
h~6lJ
3cctC:
LU)l[f-J~L~t10r:..
~arkets new
Tha.t CCI!\petltlon C<:ln br:::g -:0 india's
instrumenrs. te~hnn!ogy, ettlclenCles, and
.=.r:rp,,:,; (0 <;loC2-1 credit.
I also Wa::; lilLt:rt:.stcG:.n the recent
1l,lLlatives to enhance r~gu:~tory and supervlso~y :~p~bl::tles
<:lnci reCJC~ the degree ~f :ntP~vp~tlon ln the ban~~ng sec:c:. A
Joon deal of r:;~ogress Li;J;::, L-:::CI; 11l6uc -- 5evtr-cl :-ece!'l:
deregu18tlo~ step3 ~rc c~couraglng, par:ic~lar:y fr~~1~0 r~~ps O~
.l:;.;:gcr lC2~S -- i:n.'t :hpr,::. ;:rp lssues t:-lat :1eed fi;I,:llt:.: d.~·_t:;lL_0L,
a~d as I said, your l~~uel~h_~ in Delhi well recogni~cc ~hat
~eeds tc oe done.
forelU!;
CQpitol
Le ~
fio\-;?
meL...; !.J 1 11 (; IN
;':,'!Oh' tr-.3t
('~r,l r.::J I flews.
I
t 0
0 P e :-.1. n q
toe pen 1 n 9 tog 1 00 ale a p 1 -::: a 1
th.:..s rCi:'s~s conCl?rn~ ;;;hn:1T !Jelng buf:'E'Ced by
tnos'?
: '...:2n: (0 'C.ak~ iu::,L " fev; moments criO i()cU3
d bl t Ull Mo:::.'._,::,u iT: Has c::;n,.ec':lon, bcc3use I I ve found 0'Jer the
pa3t d~ys i~ is of lnterest h~r'? in Tnnld.
6
T'm at the end of dH extel1S:!.ve trip in which I'Y9 had the
V~~0Ltunity to con8ul~ not only with Fin;~r.p Mlnlster Sing~ but
also wi th the rl n;mc:e ministerS of i:i lluutbe:r of other emerg:ng
markets in tlLi.:> .(I!:gion. Tnc:3e di::;c1.,;.~~ions have been usefll! tn
look:.r.g .:1t :he issues th~ t-~-=:-:" ('() ~l tuation has raiseu .ill
d~veloping p.conomies, as w~ll d~ well as in thinking how to
bet tel ~Lutect the global cconomy against the ;mp~r.ts of suCh a
C<l:JC.
Thel:e is a natur.:ll tension between f?t:':onomlr. reform as the
rcquisite for growth, ~~n on the other the ~vLential for
\1()I~t~llty and vulm:lcilJ.:..lity that open m<lrkct~ bring.
The
c:UJ~Wel:" I
I believe, i;: to pursue reform, ~ take the measures
necessary to mi~imize the likelihood
instability.
ur
There .J.rc clear lessons t;;;:Jt loan be drawn from the Me,v.iean
expe r i f"nr.2 -- sue:: as the l:aI-Ju! tance of ~ound Ir,<lcrocconomic,
mur:el.dLj, debt manaacment 3.!1d e~:change rate polir.ips, and the
<J,Y.:Jilabilitv of mad:l?t-rpIAva::t data, on a L.iwely basi~, and the
1 mportance
dev~luJ..l.i;lg deep and effective capital markets"
In
I~y meetings w~th your minlsters. they had ~ k~~n and clear
~nde~£~and~ng of ~hp~p rn~tte~s.
of
A.s :!: 3.:.ic, one lesson of Mey, (':() 1 ~ hOw lmpor-cant: SOU!lJ,
credible pn 11 r.les are to sustai!l -';dfJi~al lnflows.
Ir.diu':'$ on
solid [vuL~ns in ~hi5 regard, w1th respect to most ~~p~~ - - the
lo\..,· cu!"rent account de fi r". ; t, reserve strenqths I dl~J 6 rnode~t
~hort-term external ti~LL cornpo~ent.
Therc"ic ~o analogy to the
f-i.!.ublerns of He:-:ico. But, Just as it is trllp. tor any country,
very much i~clud;~g the unlted st:ates, Lhe!~ are areas in Indi.:l
;...·:-lere rhere l~ !llUL ~ that :o~2.c. be c::.::complished.
I'c 2.ike;:on t:~K.e a fe . . ; aucsticll;:: -- so I'd li~;e to end up my
remarks wlth Ll:J.~ ubse1:va':.!o;. The Cli.nton Aciministra"(j on i sc-:,rruni tteci to looking outward and ~n(];:jglng with the gloDdl
marketplC'C"1? i " w~ys that .,;111 ~IldlJl~ Americans to shJ.rc :.~ the
jeneflt5 uf L~~t marke~place -- exports, jobs and pr~fit~.
Such
e~;ageme~t ~n=ludes taking a I~A~p.rship role In SUP~u!Ling
:-:-. ':,?rna::- ~ t:r,r. 1 e t:orts to P!()HiU L.~ deve~opment in developing
~=onomle~ ~~i to deal W~~n problemE such as Lh0~P in MeX1CO.
7 ;-'Y_~ r:as also. mi:l~t: ~::ot d-tc::slon to eng.:lge \,..Ii th the global
as I:ldl.:l r:.at alwc.ys tak~n its roLe .in the world with
:::~23: se:-lo'.!s:,.ess "n ()r~~~:::- :-especrs. a!~Ll IHd':'6'S economic reform
;:::,: . . . age :5 :;':cst .i.1ll(.;.!.1't5S1 ..... e.
:'::e f:~rJ.l.lel pa't:-.s t!-,at '..JO? h~vp
~~ose~ ~=e b:ing:~g us ~~to d ~:0SFr relatlonship and d CL~Lica:
:J:'lt:.
It:-~;-, hI" t::-'Jlt:l:l fa:: ::le :';c001e 0: bot'n cu.
.,-.r1.es,
a
- cou"'!)e:rt.nersl._;,,· i..i16: p~omote~ :cb:: ~r.2 a" better way ('of i 1 T"P' ::1 Indla
E'.r.d thc Un:. ted States.
Th~r.~· :.:nll.
.
::.~: 1.e_~_=.::;e,
-30-
DEPARTlVIENT
OF
THE
TREASURY
NEWS
TREASURY
OFFlCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C. • 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
April 20, 1995
STATEMENT OF DEPUTY SECRETARY OF THE TREASURY FRANK N. NEWMAN
On behalf of Secretary Rubin, I want to underscore the Treasury Department's
commitment to working with the Justice Department and state and local authorities to find
those responsible for the savage attack in Oklahoma City yesterday.
As the President said yesterday, this heinous act will not go unpunished. Treasury's
law enforcement bureaus continue to devote every available resource to the effort, and this
reward signifies the seriousness of our resolve.
We share the concerns for the victims of this tragedy, including those members of the
Treasury family -- from the U.S. Secret Service, the Bureau of Alcohol. Tobacco and
Firearms, the U.S. Customs Service and the Internal Revenue Service.
-30-
RR-229
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHlrNc,:TOIN'
FOR IMMEDIATE RELEASE
April 2 L 1995
Contact: Hamilton Dix
(202) 622-2960
MEDIA ADVISORY
Out of respect for the victims of the attack on the Federal Building in Oklahoma City,
the introduction of the currency bearing Treasury Secretary Robert E. Rubin's signature.
originally scheduled for 10 a.m .. April 24, 1995, at the Bureau of Engraving and Printin2" has
been postponed.
A new date will be announced.
-30RR-230
For press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
FOR RELEASE AT 2:30 P.M.
April 21, 1995
CONTACT:
Office of Financing
202/219-3350
TREASURY'S 52-WEEK BILL OFFERING
The Treasury will auction approximately $17,750 million of
52-week Treasury bills to be issued May 4, 1995. This offering
will provide about $1,150 million of new cash for the Treasury,
as the maturing 52-week bill is currently outstanding in the
amount of $16,593 million.
In addition to the maturing 52-week
bills, there are $27,563 million of maturing 13-week and 26-week
bills.
Federal Reserve Banks hold $11,205 million of bills for
their own accounts in the three maturing issues.
These may be
refunded at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $4,686 million of the three
maturing issues as agents for foreign and international monetary
authorities.
These may be refunded within t~e offering amount
at the weighted average discount rate of accepted competitive
tenders.
Additional amounts may be issued for such accounts if
the aggregate amount of new bids exceeds the aggregate amount
of maturing bills.
For purposes of determining such additional
amounts. foreign and international monetary authorities are
considered to hold $530 million of che maturing 52-week issue.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C.
This offering of Treasury securities
is governed by the ter~s and conditions set forth in t~e Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about the new security are given in the attached
offering highlights.
000
Attachment
RR-231
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERING OF 52-WEEK BILLS
TO BE ISSUED MAY 4, 1995
April 21, 1995
Offering Amount . . .
. .
$17,750 million
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Maturing amount . . .
Minimum bid amount
Multiples . .
364-day bill
912794 Y5 7
April 27, 1995
May 4, 1995
May 2, 1996
May 4, 1995
$16,593 millicn
$10,000
$1,000
Submission of Bids:
Noncompetitive bids
Competitive bids
Accepted in full up to $1,000,000
at the average discount rate of
accepted competitive bids
(1) Must be expressed as a discount rate
with two decimals, e.g., 7.10%
(2) Net long position for each bidder
must be reported when the sum of the
total bid amount, at all discount
rates, and the net long position are
$2 billion or greater.
(3) Net long position must be determined
as of one half-hour prior to the
closing time for receipt of
competitive tenders.
Maximum Recognized Bid
at a Single Yield
35~
of public offering
Maximum Award . . .
35~
of public offering
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders . .
Payment Terms .
. . .
Prior to 12:00 noon Eastern Daylight
Saving time on auction day
Prior to 1:00 p.m. Eastern Daylight
Saving time on auction day
Full payment with tender or by charge
to a funds account at a Federal
Reserve bank on issue date
NEWS
TREASURY
ornCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE,.N.W.• ~ASHINGTON, D.C .• 20220. (202) 622-2960
3
FOR IMMEDIATE RELEASE
April 21. 1995
Contact:
i
Jon Murchinson or Michelle Smith
(202) 622-2960
MEDIA ADVISORY
The following is a tentative press schedule for the G-7 Finance Ministers meeting
hosted by Treasury Secretary Robert E. Rubin next Tuesday. April 25. 1995. Unless
otherwise noted. events are at Blair House. 1651 Pennsylvania Avenue NW. This schedule
is for planning purposes only and is not for puhlication. Times are tentative and subject to
change.
Noon
Cameras should be in place in front of Blair House for arrivals of
finance ministers.
2:30 p.m.
Cameras should he in place for finance ministers and central bank
governors group photo.
2:45 p.m.
Pooled photo opportunity of finance ministers' afternoon session.
6 p.m.
Briefing by Treasury Secretary Rubin.
Location:
Secretary's Conference Room (MT 3327)
1500 Pennsylvania Avenue NW
Cameras should he in place hy 5 :45 p. m.
Media without Treasury, White House. State. Defense or Congressional credentials
planning to cover any of these events should contact the Office of Public Affairs at (202)
622-2960. with the following infonnation: name. Social Security number and date of birth,
by 5 p. m .. Monday, April 24. This information may he faxed to (202) 622-1999.
RR-232
Fur press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
Contact: Chris Peacock
(202) 622-2960
April 21, 1995
STATE\1ENT BY TREASURY SECRETARY ROBERT RUBIN
I want to compliment the hard work and quick action hy law enforcement officials.
including those of the Treasury Department, which has resulted in the apprehension of
suspects connected with the Oklahoma City bomhing.
We will not rest until we hring all
tho~e
responsihle for this vicious act to justice.
The law enforcement hureaus of the Treasury Department will continue to devote all
necessary resources to this effort as we work with the Department of
Justic~
and state and
local authorities.
-30-
RR-233
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPART~lENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W•• WASHINGTON, D.C .• 20220 • (202) 622·2960
!.
!
FOR IMMEDIATE RELEASE
April 22, 1995
,
I
I
5
Contact: Chris Peacock
(202) 622-2960
STATEMENT BY TREASURY SECRETARY ROBERT RUBIN
It is with great sadness that I announce the deaths of Assistant Special Agent in
Charge Alan G. Whicher, Special Agents Cynthia 1. Brown, Donald R. Leonard and Mickey
B. Maroney, and Investigative Assistant Kathy L. Seidl, who served our country with the
Secret Service, and Chase and Colton Smith, children of IRS employee Edye Smith and
grandchildren of IRS employee Kathryn Graham.
Alan, Cynthia, Donald, Mickey, Kathy, Chase and Colton have been taken from
family and the Treasury Department by a despicable act of murder and terror. We mourn
their loss, and our thoughts are with the survivors and the other victims of the bombing.
Our colleagues dedicated their lives to fighting crime and protecting Americans, and
we value the work and courage of each and every one.
I speak: on behalf of everyone at Treasury charged with upholding the law that we
will continue to work relentlessly with the Justice Department and state and local authorities
to bring to justice the perpetrators of the Oklahoma City bombing and the murderers of Alan,
Cynthia, Donald, Mickey, Kathy, Chase and Colton.
~30-
RR-234
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE. N.W.• Wt}SHINGTON. D.C .• 20220. (202) 622-2960
I
I
Contact: Michelle Smith
(202) 622-2960
FOR IMMEDIATE RELEASE
April 24, 1995
RUBIN TO HOLD G-7 BRIEFING AT TREASURY
Treasury Secretary Robert E. Rubin will hold a press briefing on tomon'ows meeting
of the G-7 finance ministers at the Treaswy Department today, Monday, April 24, at 1 p.m
The briefing ,vill take place in the Secretary's Conference Room, Room 3327,
~1ain
Treaswy, 1500 Pennsylvania Avenue NW.
Cameras
shol~d
be set up by 12:30 p.m. Media without Treasmy, White House, State,
Detenseor Congressional credentials
v..~shing
to attend should contact L1e Office of P..lblic
Affairs at (202) 622-2960, with the following infonnation: name, social security number and
date of birth, by noon today.
-30-
RR-235
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
~~~~~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1I
............................
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.- 20220 - (202) 622-2960
EMBARGO TO BE SET AT BRIEFING
Remarks as prepared for delivery
April 24, 1995
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
G-7 PRESS BRIEFING
We have the pleasure of hosting in Washington this week the finance ministers and
central bank governors of the member nations of the 0-7 for the traditional Spring
assessment of the world economy. In addition to our customary discussion of the economic
outlook for the G-7 nations, and a review of the encouraging economic developments in
Russia, we'll also examine the review of the international financial system now under way in
preparation for the Halifax Summit.
There have been tremendous changes in the world in recent years, and it is important
-- as was recognized at Naples -- that we work together in dealing with the problems of the
international economy. For instance, developing nations are more important than ever to
the industrialized world. And global- capital flows have reached a size and speed that have
the potential to affect every nation.
Before I discuss the broader issues of the international financial system, I want to
touch on the encouraging economic outlook within the G-7. Recovery is now firmly
established in continental Europe, employment is growing, and there has been some
encouraging progress toward fiscal consolidation.
In the United States, growth is now slowing to a pace which will help ensure a
sustained expansion with continued low inflation. Our fiscal position is the strongest it has
been in a decade; because of the powerful deficit reduction plan passed in 1993 and our
consistent efforts at fiscal discipline, our budget deficit is now the lowest in the G-7.
RR-236
(MORE)
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
2
Make no mistake. We are committed to further progress on deficit reduction. In our
current budget before Congress we add $80 billion in deficit reduction to the more than $500
billion already in law. Because health care spending exerts the greatest upward pressure on
the deficit, we must seriously address these cost issues within the context of substantial
health care reform. We await enactment of line-item veto legislation to enable the President
to exercise additional discipline over the process. And among our criteria for assessing tax
policy changes will be rock solid requirement that any tax cut be fully paid for. Many
members of Congress have also expressed a commitment to deficit reduction. At the same
time, we must continue to focus on areas such as education and training that will increase
productivity.
Despite strong fundamentals in the G-7, there are some risks to the outlook. As the
action by the major monetary authorities over the last several weeks illustrate, recent
exchange market movements are a source of general concern.
The nascent recovery in Japan now looks more vulnerable. Finance Minister
Takemura said in Bali that in a month or two the specifics to the newest economic package
will be available, and we look forward to that. Unemployment remains very high across
Europe, underlining the importance of removing structural barriers to job creation, and
further fisca1 consolidation appears unavoidable in some countries.
On balance, we are encouraged by the IMF's view that the prospects for a sustained
expansion in the G-7 remain quite favorable.
As I mentioned, after reviewing the economic outlook we will tum to the discussion
we began in Toronto, and that will continue at the Interim and Development Committee
meetings later this week, on how to create a financial architecture that is as modern as the
financial markets and the challenges of the today's world economy.
This means addressing the new dimensions of the financial system:
Financial markets which move capital at great speed.
New forms of finance.
A more diverse group of creditors.
And a substantial increase in new destinations for private capital.
And it means addressing the problem of growth in developing nations which do not
yet have access to the global financial market.
The proposals I expect we will be considering include:
3
More effective early warning and prevention:
Most important, this requires comprehensive and timely public disclosure of monetary
and financial data. Effective surveillance also requires that the IMF develop a greater
capacity for ongoing and more intensive monitoring of countries, and of capital market
developments, that present potential risks to the system.
An emergency f"mancing mechanism:
We need a mechanism capable of mobilizing relatively large amounts of conditional
financial assistance quickly in support of a strong economic policy programs.
One possible approach would be to expand and modify the General Arrangement to
Borrow, and to trigger that arrangement in those exceptional circumstances where large IMF
programs may be necessary. In this possible approach, it would seem to make sense to
invite into appropriate arrangements with the GAB those new countries which benefit from a
stable international monetary system and have the capacity to contribute to maintaining it.
As a complement to a new emergency financing mechanism, we also see some merit
in the cautious exploration of ways to facility an orderly work out of international debt
obligations.
Managing systemic risk:
We need closer and more intensive cooperation among the regulatory and supervisory
authorities of the major financial centers to safeguard the system against potential systemic
risks.
The specialchaUenges of the poorest:
In addition to the new requirements of today's capital markets, the international
financial institutions face an enduring challenge in promoting sustainable development in
those countries which do not yet have access to the private capital markets.
We believe it is time to consider mobilizing a modest portion of the IMP's gold to
support a special capacity to provide targeted concessional assistance to help deal with the
special needs of the poorest developing countries and those countries which are emerging
from economic and political disruption. This capacity could be developed in the context of a
modified Enhance Structural Adjustment Facility in the IMP.
I will be outlining some of these proposals in more detail in my statements to the
Interim and Development Committees.
NEWS
omCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
TRANSCRIPT OF G-7 PRESS BRIEFING
U.S. DEPARTMENT OF THE TREASURY
MONDAY, APRIL 24,1995
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
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: 38
Author(s):
Title:
Transcript of G-7 Press Briefing, U.S. Department of the Treasury
Date:
1995-04-24
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
PUBLIC DEBT NEWS
Department of the Treasury - 1}ureau of the Public Debt - Washington, DC 20239
FOR IMMEDIATE RELEASE
April 24, 1995
Contact: Peter Hollenbach
(202) 219-3302
u.s. SAVINGS BONDS STUDENT POSTER CONTEST WINNERS ANNOUNCED;
l\1INNESOTA, MICHIGA,~, AND vmGNA STUDENTS ARE TOP THREE
Treasury's Bureau of the Public Bebt announced today the three winners of the annual U.S.
Savings Bonds National Student Poster Contest for students in grades 4 though 6.
First place went to Ethan Custer. a founh-grader from Bible Baptist Christian School. East
Grand Forks, Minnesota: second place went to Kevin Dufendach. a fifth-grader at Noah Webster
Academy, Ionia, Michigan: and third place went to Sara Beth Silling, a sixth-grader at Open
Door Christian School, Troy, Virginia.
"Invest In Your Future Today -- Buy U.S. Savings Bonds." the 1995 Savings Bonds Campaign
slogan. was the theme of this year's poster contest.
William Ferguson. retired Chainnan and Chief Executive Officer of NYNEX Corporation.
White Plains. New York. said that the contest. "by teaching children to invest at an early age
will promote good savings habits and help them reach future goals." Mr. Ferguson served as
the 1994 Chair of the U.S. Savings Bond Volunteer Committee.
State winners were selected earlier this year. First place entries from each state and the District
of Columbia then were forwarded to New York where a panel of judges headed by Joyce
Ferguson selected the national winners. A $1,000. $500, and $200 U.S. Savings Bond was
awarded to first. second and third place winners, respectively, in each State by local sponsors.
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PA - 180
(RR-237)
A S5.000. SI.OOO. and $500 U.S. Savings Bond also will be presented respectively to national
first. second. and third place national winners at a special awards ceremony Thursday. May 18.
al 2 p.m. in the Cash Room of the Treasury Department. Treasurer of the United States Mary
Ellen Withrow and Joyce Ferguson will present the awards.
In addition [0 Mrs. Ferguson and Mrs. Withrow. the panel of judges included: Betty Beene.
President. Tri-State United Way; Alexander Julian. Fashion Designer: Shirley Mow. Executive
Director. Westchester Education Coalition: and Tony RandalL Chainnan. The National Players
Company.
The three winners will be flown to Washington. D.C. for the awards ceremony. First place
posters from each State and the District of Columbia will be displayed at the Treasury's Bureau
of Engraving and Printing in Washington during the summer.
A list of state winners is attached.
000
1995
u.s.
FIRST PLACE
SAVINGS BONDS STUDENT POSTER CONTEST WINNERS
SECOND PLACE
THIRD PLACE
Emily Beth Dickinson
Indian Valley School
Sylacauga, AL
Hector Villarreal
Central Elementary
Hunstville, AL
Bernadette Jack
Noorvik Middle School
Noorvik, AK
Arianna Smith
Iditarod Elementary
Wasilla, AK
Jessica Shell
Mount Carmel School
Tempe, AZ
Shelbi Jane Lanue
Lorna Linda Elementary
Phoenix, AZ
Jason Colson
Westside Elementary
DeWitt, AR
Zachary Robert Payne
Pulaski Academy
i.Jittle Rock, AR
Jennifer Fein
Township Elementary
Simi Valley, CA
Julie Adversalo
Zamorano Elementary
San Diego, CA
Vividiana Chavez
Fort Lupton Middle
Fort Lupton, CO
Christopher Berk
Florida Mesa Elementa
Durango, CO
Lisa Cook
Stepney Elementary
Monroe, CT
Daniel Goldstein
Elizabeth Shelton Sch
Shelton, CT
Andre Porter
St. Anthony of Padua
Wilmington, DE
Jaclyn L. Quinn
Caravel Academy
Bear, DE
Shannon Ambush
J.G. Whittier
District of Columbia
Joi Nash and
John Paul Mock
Amidon Elementary
District of Columbia
Joshua Hoye
Beaches Chapel School
Neptune Beach, FL
Joseph L. Millado
Sacred Heart Catholic
Jacksonville, FL
courtney Laura Wigren
Memorial Day School
Savannah, GA
Aracelis Denise Vicer.
St. Mary's Elementary
St. Mary's, GA
Heizhelle Beltran
Kalakaua Intermediate
Honolulu, HI
Earnest Clore
Ahuirnanu Elementary
Kaneohe, HI
Alabama
Rob McGowin
Trinity Presbyterian
Montgomery, AL
Alaska
Amanda Dickens
Brevig Mission School
Brevig Mission, AK
Arizona
Andreanna Blaine
Lorna Linda Elementary
Phoenix, AZ
Arkansas
James Gregory
Sherwood Elementary
Sherwood, AR
California
Ava Hermine Porter
Dixie Canyon
Sherman Oaks, CA
Colorado
Krystle Cipolla
Mountainside
Fort Carson, CO
Connecticut
Julie Dunn
Hebron Avenue School
Glastonbury, CT
Delaware
Mega Portlock
Gunning Bedford Middle
Delaware City, DE
District of Columbia
Jeanny Lee
Thomson Elementary
District of Columbia
Florida
Jessica Speicher
Tropical Elementary
Merritt Island, FL
Georgia
Edd Holland
St. Mary's Elementary
St. Mary's, GA
Hawaii
Kelly Nguyen
Kalakaua Intermediate
Honolulu, HI
Idaho
Chad Smith
Butte View Elementary
Enunett, :m
Illinois
Bonnie Rooney
Dongola Unit School
Dongola, IL
Myla King
Buhl Middle School
Buhl, ID
April Hallam
Butte View Elementary
Enunett, ID
Peter Zane
Salt Creek School
Elk Grove village, IL
Tony Guida
St. Scholastica School
Woodridge, IL
Aaron McEvoy
Montpelier Middle
Montpelier, IN
Laura Miller
Carlin Park School
Angola, IN
Evan Anderson
Arthur Elementary
Cedar Rapids, IA
Lindsey Calvert
Waukee Middle School
Waukee, IA
Casey L. Riley
Derby 6th Grade Center
Derby, KS
Christopher G. Lee
Derby 6th Grade Center
Derby, KS
Breezy Jude
Warfield Elementary
Warfield, KY
Jason Russell
Holy Family Catholic
Covington, KY
Ken Wilkerson
Mitchell Elementary
West Monroe, LA
Megan Soileau
Opelousas Catholic
Opelousas, LA
Kristen J. Hopkins
Orland Consolidated
Bucksport, ME
Jason Dionne
Yarmouth Elementary
Yarmouth, ME
Sally Penner
Thomas Pullen Arts
Landover, MD
Andrea Lyddane
The Calverton School
Huntington, MD
Oks ana Shabunin
Forest Park Middle
Springfield, MA
Laura R. McTague
Kennedy Middle School
Woburn, MA
Daniel Schmitt
Poupard School
Harper Woods, MI
Colette Marie Puchacz
Hemlock Middle School
Hemlock, MI
Gabriel Durand
Biple Baptist Christian
E. Grand Forks, MN
Susannah Kristine Carlson
Washingtor. Middle School
Brainerd, MN
Robert R. Stranghoener
Power Apax School
Jackson, MS
Ben Xiang
Power Apax School
Jackson, MS
Indiana
Aaron Rush
Oakland Elementary
Lafayette, IN
Iowa
!teginald McGhee
Grant Elementary
Waterloo, IA
Kansas
Melissa Kate Steel
West Elementary
Eudora, KS
Kentucky
Keri Beth Myers
Monroe County Middle
Tompkinsville, KY
Louisiana
Jodi Renee Sylvester
Westminster Christian
Opelousas, LA
Maine
Lily Gacki
Rangeley Lakes Regional
Rangeley, ME
Maryland
Veronica Sabdivak
Fox Chapel Elementary
Germantown, MD
Masschusetts
Vladislav Yazhbin
Elias Brookings School
Springfield, MA
Michigan
Kevin Dufendach
Noah Webster Academy
Ionia, MI
Minnesota
Ethan Custer
Bible Baptist Christian
E. Grand Forks, MN
Mississippi
Kenny Ray Thompson, Jr.
Pearl River Central
Carr:ere, MS
Missouri
Andrew Carrender
Russellville Middle
Russellville, MO
Montana
Dugan D. Gravage
St. Mary's Parochial
Livingston, MT
Nebraska
Adam Jeffrey Hinrichs
Verdigre Public School
Verdigre, NE
Nevada
Natalie Wilbur
The Meadows School
Las Vegas NV
New Hampshire
Sarah Ashley Sleeper
Calvary Christian
Plymouth, NH
New Jersey
Dwayne Beckford
Alexander Street
Newark, NJ
New Mexico
Candice Adams
Des Moines Elementary
Des Moines, NM
New York
Alzaber Rubayat
Doris Cohen P.S. 230
Brooklyn, NY
North Carolina
Christy Ford
Thomasville Middle
Thomasville, NC
North Dakota
Mary Schuh
Roosevelt Elementary
Mandan, ND
Ohio
Hannah Collingwood
Heritage Christian
Findlay, OH
Oklahoma
Jeremy Taylor
Will Rogers Elementary
McAlester, OK
Oregon
Monica Whitney
Western View Middle
Corvallis, OR
I
Stephanie Bishop
Russellville Middle
Russellville, MO
Tyler Williams
Russellville Middle
Russellville, MO
Trenon L. Thomas
Albion School
Alzada, MT
Vann P. Gravage
St. Mary's Parochial
Livingston, MT
Amy C. Kucera
Verdigre Public School
Verdigre, NE
Tara A. Buss
Centennial Public School
Gresham, NE
Stephanie Mastalarz
Ruthe Deskin Elementary
Las Vegas, NV
Shelby Francoeur
Eordewich-Bray
Carson City, NV
Leah Kemner
Claremont Christian
Claremont, NH
Amy Lander
Pollard Elementary
Plaistow, NH
Ali King Kamara
Elmwood School
East Orange, NJ
Angela Ongoco
Roosevelt School
Lyndhurst, NJ
Karen Hatch
Paul D. Henry
Las Vegas, NM
Albert Truj ilIa
Whittier Elementary
Albuquerque, NM
David Qiu
Mark Twain I.S. 239
Brooklyn, NY
Claudiv Irina
Mark Twain I.S. 239
Brooklyn, NY
Kristin Hines
Sparta Elementary
Sparta, NC
Brent Nelson
South Elementary
Mebane, NC
Jeri Schmiess
Munich Public School
Munich, ND
Timothy Houck
Twining Middle School
Grand Forks AFB, ND
Mark Zuberny
Fields Sweet Elementary
N. Ridgeville, OH
Shayna Geis~
Garfield Elementary
Warren, OH
Monica Sawyers
Lincoln Elementary
Ponca City, OK
Tiffany Forbes
Purcell Middle School
Ponca City, OK
Nick Nuth
Adams Elementary
Corvallis, OR
Cara Miller
Adams Elementary
Corvallis, OR
Pennsylvania
Tegan Brozyna
M.M. Seylar
Perkasie, PA
Marcie Brozyna
M.M. Seylar
Perkasie, PA
Bernadette Giovanelli
Ave Maria School
Ellsworth, PA
Julie Ahn
St. Mary'S Bayview
East Providence, RI
Mary Liem
Williams D'Abate School
Providence, RI
William L. Blackmon
Alcolu Elementary
Alcolu, SC
Kelly Thompson
Powdersville Middle
Greenville, SC
Sam Rollefson
Elkton Public School
Elkton, SD
Kyle Williamson
Sturgis Williams Middle
SturgiS, SD
Jennifer Jogner
St. Mary's Episcopal
~emphis, TN
Rebecca Tylor
Meigs Magnet School
Nashville, TN
Cliff Jones
Magnolia Jr. High
Magnolia, TX
Dario Tiburcio
St. Peter's Memorial
Laredo, TX
Jennifer Biggs
Sunrise Elementary
Sandy, UT
Emily Ochsenhirt
Bellview Elementary
Sandy, UT
Anna Hurd
Brownington Central
Orleans, VT
Bill Morelli
Charleston Elementary
West Charleston, VT
Sean Patrick Cannon
Forest Middle School
Forest, VA
Dari Nogarr
Peninsula Christian
Smithfield, VA
Carrie Checkos
Granite Falls Middle
Granite Falls, WA
Joel Nunez
Mt. Adams Middle
White Swan, WA
Ashley Helmick
Union Elementary
Buckhannon, WV
Krystal Lynn Botkin
Upper Tract Elementary
Upper Tract, WV
Dan Nueller
Holy Family School
Green Bay, WI
Jennifer Schlosser
Holy Family School
Green Bay, WI
Coleman M. Griffth
Lucerne Intermediate
Thermopolis, WY
Amber G. Martin
Guernsey Sunrise
Guernsey, WY
Rhode Island
.Zillthony Baldino
St. Thomas Regional
Providence, RI
South Carolina
Sarah Dillow
Alcolu Elementary
Alcolu, SC
South Dakota
Daniel Paulson
Brandon Elementary
Brandon, SD
Tennessee
Lakesha Shinae Moore
Meigs Magnet School
Nashville, ':'N
Texas
Carrie Barnhart
Northwest Academy
Houston, TX
Utah
Erin Wharton
Sunrise Elementary
Sandy, UT
Vermont
Danyelle Shover
Brownington Central
Orleans, VT
Virginia
Sara Beth Silling
Open Door Christian
Troy, VA
Washington
Piper Woodruff
Montessori School
Tacoma, WA
West Virigina
Kalah Gentry
Ravenswood Middle
Ravenswood, WV
Wisconsin
Tyler R. Knowles
Eagle Orion
Muscoda, WI
Wyoming
Samantha K. Barnhill
Sibylee School
Wheatland, WY
CONSUMPTION TAX
(FLAT TAX)
INFORMATION PACKAGE
AS OF MARCH 10, 1995
lREASURY
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622-2960
For Immediate Release
Text As Prepared for Delivery
March 1, 1995
REMARKS OF LESLIE B. SAMUELS
ASSISTANT SECRETARY (TAX POLICY)
U.S. DEPARTMENT OF THE TREASURY
Federal Bar Association
19th Annual Tax Law Conference
National Press Building
Today, I would like to discuss a topic that has recently captured a lot of attention
in Congress and the media. The subject is fundamental reform of the tax system.
Several plans have been presented that would replace all or part of the income tax and
payroll taxes with a tax on consumption. These reform proposals originate in large part
from frustration with the complexity of our existing tax system as well as concerns about
our national savings rate. These frustrations and concerns are valid. The most
important reason to consider replacing the income tax with a consumption tax is that the
change could increase saving and capital formation. This would raise our standard of
living in the long run. Depending on how it is designed, a consumption tax could also
improve economic efficiency and simplify the tax system.
Some economists believe that a consumption tax would be an effective way to
encourage savings. Proponents also argue that a consumption tax would improve
economic efficiency and simplify the tax system. Most of our major trading partners rely
more heavily than the United States on consumption taxes, particularly value-added
taxes. Therefore, adoption of a VAT in the United States would be compatible with
international practices.
At this point in the discussion on consumption tax proposals, I believe it is time to
have a framework to analyze these proposals. I will briefly outline the criteria which we
believe should be used in judging the merits of reform ideas. For a more detailed
discussion of these matters, I refer you to the testimony last week of Eric Toder, the
Deputy Assistant Secretary (Tax Analysis) before the Senate Budget Committee.
RR-121
First, I would like to review briefly the categories of consumption taxes. Broadbased consumption taxes can be collected wholly from businesses, either on final sales to
consumers or on the value-added by all businesses at each stage of production. They can
be collected in part from businesses and in part from wage-earners by allowing
businesses to deduct wages and taxing them at the individual level. They can be
collected wholly from individuals by modifying the current individual income tax to allow
taxpayers to claim a deduction for all net saving. Regardless of how they are collected,
they are all consumption-based taxes if income is taxed only when it is spent on
consumer goods and services; or, in other words, if income that is saved is effectively
exempt from tax. I would mention that parts of our current income tax system resemble
a consumption tax. For example, two important sources of saving -- homeownership and
contributions to retirement plans -- are treated in a reasonably similar way as they would
be treated under a consumption tax.
Three plans have received particular attention: Representative Armey's plan
would replace the current corporate and personal income taxes with a two-part flat rate
consumption tax. Representative Gibbons' plan would adopt a subtraction method VAT
in place of the corporate income tax, the payroll tax, and most of the personal income
tax. And a plan by Senators Nunn and Domenici would replace the individual and
corporate income taxes with two types of consumption tax: a flat-rate tax on business
cash flow and a progressive-rate individual expenditure tax. Although the basic outline
of these plans have been presented, important parts are not yet finalized.
Framework for analyzing consumption tax plans
As with all tax proposals, these consumption tax plans should be carefully
evaluated according to their ability to achieve fundamental tax policy objectives -fairness, efficiency and simplicity.
Any reform should also include rules to minimize windfall gains and unexpected
losses during the period of transition to a new system. In particular, special transition
rules are needed to prevent taxing consumption paid with previously-taxed income.
Otherwise, the consumption tax could impose severe tax burdens on elderly Americans.
Also, it is widely acknowledged that consumption tax proposals will need special
rules for certain sectors, such as financial services businesses. Another issue in
considering a federal-level consumption tax is coordination with state and local
governments, which have depended heavily on retail sales taxes for revenues. The
adoption of a national sales tax or federal VAT is likely to be seen as an infringement
upon this important revenue source for state and local governments.
The current Federal income tax promotes widely-held social and economic goals,
such as home ownership, private charitable giving, and the provision of medical
insurance by employers. We expect that a new consumption tax system would still
-2-
promote certain social and economic goals. But continued use of the tax system for
these purposes would greatly lessen the possibilities for simplification and tax rate
reduction from replacing our current income tax with a broad-based consumption tax.
We recognize that the U.S. income tax system has many defects, and we welcome
discussion on how to reform it. But radical changes to our tax system involve major
costs and risks. Replacing the entire income tax with a consumption tax would be a
grand experiment of applying theory to a practical application that no other country in
the world has chosen to undertake. Proponents of these plans must, therefore, overcome
a significant hurdle -- they must show that it is worthwhile to conduct this experiment on
the world's largest and most complex economy.
Distributional effects of replacing the income tax with a consumption tax
A broad-based consumption tax, when compared with an income tax using the
same tax rate structure, would typically place a higher burden on low- and middleincome families. Replacing graduated rates with a flat rate would further shift the tax
burden from high-income families to middle- and low-income families. This point is
obvious when one looks to savings patterns of middle-income and high-income families,
and the fact that higher-income families receive the bulk of capital income.
For example, a general consumption tax (with no exemptions) at a revenueneutral flat rate of 14.3% would result in a tax increase for families with incomes below
$100,000, while those with incomes of $100,000 or more would receive a tax cut. This
baseline proposal is the simplest and most regressive form of a consumption tax.
Expressed as a percentage of after-tax income under current law, the conversion to a
14.3% broad-based consumption tax would reduce the income of families below $100,000
by 2.2% to 10.8%; while families with incomes of $200,000 or more would receive a
14.4% increase in after-tax income.
There are, of course, a number of ways to make consumption taxes less regressive
or even progressive. European countries reduce the regressivity of value-added taxes by
exempting specific goods and services from the tax, or by taxing them at a lower rate.
This approach does not make the VAT much less regressive, however, because tax relief
from exempting specific goods and services is not directly targeted to low-income
families.
Consumption taxes that are collected from individuals rather than businesses can
more easily be made progressive. This can be achieved by providing standard deductions
for low income families or by applying graduated rates of tax. But a consumption tax
that is collected solely from individuals would be more complex than our current income
tax.
-3-
Addressing the regressivity problem is a key challenge in designing a consumption
tax that will not add to the tax burdens of lower- and middle-income families. Thus, in
analyzing any of the proposals, this is the first question to be asked -- is it fair?
Comparing a proposal to our current system, who will be the winners and losers?
Effects on the Rate of Saving
A consumption tax would not tax the return to saving and new investment. An
income tax does tax this return, and thereby discourages saving and investment to some
degree. Consequently, one might expect that replacing the income tax with a
consumption tax would encourage domestic saving and capital formation.
The national saving rate in the United States declined in the 1980s compared to
the previous three decades, due to both a decline in private saving and an increase in
Federal deficits. We consider the low rate of U.S. saving to be a very serious concern.
But we must responsibly ask ourselves how much the proposals under public discussion
would help. Part of the answer may be found in the fact that the decline in saving does
not appear directly related to changes in tax policy. Marginal tax rates were lowered
substantially during the 1980s and new saving incentives were introduced. But the
overall rate of saving still fell.
So, how much would substituting a consumption tax for the income tax boost total
private saving? If the rate of return on savings goes up, one might expect that
individuals would increase savings. However, most statistical research by economists
finds that the effect of increasing the rate of return on saving is small or negligible.
An alternative way to use tax policy to increase private saving is to broaden saving
incentives within the framework of the existing income tax. Provisions that directly
encourage people to deposit some of their earnings in tax-favored accounts, such as IRAs
and 401(k) plans, could be more cost-effective ways of increasing saving without
replacing the entire income tax system. The President's fiscal 1996 budget proposes to
expand the eligibility rules for contributing to lRAs.
Simplification of tax system
Simplification of the tax system is an important goal of many tax reform
proposals, and one which we support. Three important sources of complexity -provisions to distribute the tax burden equitably; rules to measure the consumption
component of business income properly; and provisions that use the tax system to
advance certain social and economic policies -- would continue under any consumption
tax.
Unlike the existing income tax, a consumption tax collected directly from
individuals would require the measurement of net annual changes in wealth. The result
-4-
be at least as complex as the current income tax, requiring numerous new
taxpayer- reporting requirements and introducing new tax concepts and calculations. For
example, a requirement to produce annual balance sheet statements for the tax collector
would be viewed as a new and very onerous reporting burden.
COUW
As we all know, a theoretical model will be changed as it is adapted to the real
world. When we think about these proposals, we should consider them not as mere
theories, but how they will evolve in our political process. What will these proposals
look like when they emerge from a House-Senate Conference? As a lesson in the
political process, recall the changes to the BTU tax in the Ways and Means Committee.
Thus, the political crucible can be expected to greatly reduce the possibilities for
simplification and tax rate reduction.
For example, suppose that it is desirable to have a consumption tax that continues
to promote home-ownership. Because consumption taxes, unlike the income tax, would
exempt interest income from tax, continuing to allow a deduction for mortgage interest
paid would encourage homeowners to incur additional borrowing beyond their financing
needs. Rules to prevent this type of tax arbitrage would be complex and difficult to enforce.
Transition to a consumption tax
A very significant issue in converting from an income to a consumption tax system
is deciding how to treat the return to wealth that was accumulated out of after-tax
income under the income tax. Transition rules would be required to relieve the tax
burden on savers who have already paid income taxes on their savings and would be
taxed again when those savings were spent under a consumed-income tax.
For example, without a transition rule for past savings, a retiree who accumulated
$100,000 in a savings account out of income that was taxed before the conversion to a
consumption tax would be taxed on withdrawals from the account that are used [or
consumption. It would be difficult to design rules that differentiate between the retiree
who is living off accumulated savings and individuals who only rearrange assets among
accounts.
Conclusion
We are not at this time convinced that the case for completely replacing the
income tax with a consumption tax is compelling. The most frequently cited economic
benefit of such a change, an increase in private saving, is uncertain and could be small
or negligible. Savings incentives within the existing income tax -- such as the President's
proposal to expand the use of IRAs -- can increase saving without replacing the entire
tax system.
-5-
In examining consumption tax proposals, it is inappropriate to compare a
theoretically ideal consumption tax and the income tax system in place today. Instead,
we should analyze a consumption tax that is likely to emerge from the political process.
Exclusions would be made under a consumption tax -- either for administrative or
political reasons or to support social and economic goals -- and those exclusions would
reduce the economic benefits of the proposals and increase complexity.
We commend the efforts to develop consumption tax proposals that are
progressive and revenue-neutral. A consumption tax collected at the individual level
could, with appropriate rates, come close to replicating the distribution of tax burdens
under current law. We are concerned, however, that such a consumption tax could be
excessively complex. Also, we can only speculate as to how introducing such a tax to
replace our existing income tax would actually work. There is no experience upon which
to gauge its effects on the U.S. economy or its administrative and compliance costs. And
there is no way to anticipate all the potential tax avoidance schemes that could be
designed to exploit the new tax rules.
In conclusion, when you consider a consumption tax proposal, apply the criteria of
fairness, efficiency and simplicity. And do not forget the effects of the political system
on grand experiments.
Thank you.
-30-
-6-
A PRELIMINARY ANALYSIS OF A FLAT RATE CONSUMPTION TAXi
Representative Armey has proposed that the United States adopt a two-part "flat tax"
which would replace the current individual and corporate income taxes. He would maintain
the current employer and employee payroll taxes that finance the Old Age and Survivors
Insurance Trust Fund (OASI), the Federal Disability Trust Fund (DI), the Unemployment
Insurance Trust Fund (UI), and the hospital insurance trust fund (HI), The proposed flat tax
is similar to the simple flat tax developed by Robert E. Hall and Alvin Rabushka. 2 Setting
the administrative details aside, the common features of these proposals are:·
1.
2.
3.
a flat rate tax on individuals' wage income,
a tax on business cash flow with a deduction for wages 3 , levied
at the same rate as the individual tax, and
standard deductions for individual taxpayers and dependents.
A flat tax with these characteristics is essentially equivalent to a tax on total consumption,
with some relief offered to low-wage individuals through the standard deduction.
The purpose of this paper is to analyze the revenue and distributional effects of a
stylized flat tax similar to the one proposed by Representative Armey. The second and third
sections of the paper describe the revenue estimates of a stylized flat tax proposal and how
the flat tax could be made revenue neutral by increasing the tax rate or reducing the standard
deduction amounts. The fourth section describes the distributional effects of replacing the
current income taxes with a flat tax. The fifth section describes the effect on the revenue
and distributional estimates of assuming that the proposal repeals the earned income tax
credit. The sixth section of the paper explains why the Armey flat tax is equivalent to a tax
on consumption. The final section of the paper identifies structural and design issues that
would need to be addressed by most consumption tax proposals. An appendix lists detailed
assumptions used in estimating the proposal.
lIn October, 1994, the Treasury Department's Office of Tax Analysis prepared an analysis of the revenue
and distributional effects of replacing the current income tax with a stylized flat tax similar to the one proposed
by Representative Anney in H.R. 4585. Subsequently, Representative Armey's staff clarified several features
of the flat tax proposal. This analysis reflects our understanding of the Armey flat tax proposal as of February,
1995. Subsequent clarifications or changes In the proposal would alter the estimates.
2Robert E. Hall and Alvin Rabushka, FLat Tru (Stanford: Hoover Institution, 1985).
3Buswe::.s cash now is e{jual to gross r~elpl'; les~ ',\ages ano pun.hases from other tirms. Purchases of
capital are immediately deductible from business cash flow, but under the Anney proposal, fringe benefits
(other than pension contributions) supplied to employees are not deductible, making non-wage compensation
taxable at the business level.
2
Revenue Estimates
In order to estimate the revenue effects associated with a flat rate consumption tax, a
number of assumptions need to be made. First, we assume that the basic structure of the
proposal follows Representative Armey's proposal. That is, the flat rate consumption tax
examined below includes three major elements:
1.
a flat 17 percent rate on wages and pension distributions,
2.
a flat 17 percent rate on the cash flow of businesses (without a
deduction for non-pension fringe benefits), and
3.
a standard deduction for all filers ($12,350 for single filers,
$24,700 for joint filers and $16,200 for head-of-household
filers), and an additional standard deduction for each dependent
($5, (00).4
Other features of the flat tax discussed below (and in the attached appendix) may deviate
from Representative Armey' s specific proposal. The Armey flat tax proposal does not
address many of the specifics. In addition, some of the features implied by the statutory
language (e.g., the apparent retention of the corporate and individual alternative minimum
tax (AMT» are probably unintended.
Second, no attempt is made to estimate the tax-induced behavioral responses of either
individuals or corporations. Following the standard revenue estimating conventions used by
both the Office of Tax Analysis and the Joint Committee on Taxation, the macroeconomic
aggregates, such as the level of compensation, prices, employment, and gross domestic
product, have been assumed to be unchanged by the proposal. In addition, we assume no
shifts in other forms of behavior, such as portfolio allocations, the allocations of investment,
or realizations of capital gains. Because the proposal taxes all forms of income of nonfinancial businesses at the same rate and exempts realized capital gains, interest, and
dividends, such behavioral shifts WOUld, for the most part, not affect revenue. 5
Third, estimates for only a single year, using the fully-phased in rate (17 percent), are
presented. However, the effects and details of the transition from current law to the flat tax
have not been considered. For example, unused foreign tax credits, general business credits,
AMT credits, depreciation on pre-1995 investment, and stocks of net operating losses from
4We understand that Representative Armey is now proposing standard deduction amounts that are larger
(' . • . . &
:hal <![ t' '41_~ ill H.R. 4585.
Yfbere may be behavioral adjustments, however, that reduce revenue. For example, businesses would have
an incentive to provide cash wages instead of fringe benefits to low-wage workers because the former, but not
the latter, would be offset by the standard deduction.
3
current law would likely be subject to transitional rules that could affect revenue by tens of
billions of dollars of tax liability during the transitional phase.
The estimates presented below reflect the change in tax liability, as opposed to the
change in tax receipts, which reflect how tax payments are made (e.g., through withholding,
estimated tax payments, final payments, tax refunds). Therefore, the estimates do not
incorporate any changes in revenues attributable to how the tax is collected .. (Representative
Armey would repeal withholding, but require individual taxpayers to remit payments in 12
monthly installments. Although this change would have a large negative impact on the
revenue estimates, no attempt has been made to incorporate this feature of the Armey
proposal.)
The revenue estimates are presented in Table 1. The 17 percent flat tax, under the
assumptions described above, would increase tax liabilities by $532 billion at 1995 levels of
income -- $305 billion from the wage tax on individuals, $163 billion from the cash flow tax
on corporations, and $64 billion from the cash flow tax on non-corporate businesses.
Repealing the current corporate and individual income taxes (except the earned income tax
credit (EITC» would reduce tax liabilities by $718 billion at 1995 income levels --$581
billion from the individual income tax and $137 billion from the corporate income tax. The
proposal would therefore lose about $186 billion per year at 1995 income levels.
Revenue Neutral Proposals
Major proponents of replacing the income tax with a consumption tax, such as, for
example, Senator Domenici, have stressed the importance of maintaining the same level of
Federal revenues. Representative Armey's proposal does not meet the goal of revenueneutrality at the tax rate and standard deduction amounts he proposes. To make the proposal
revenue-neutral, the $186 billion reduction in tax liabilities could be offset by either
increasing the flat rate or by lowering the standard deduction (or some combination of both).
A 22.9 percent rate would be needed for the proposal to be self-financing, given the standard
deductions specified in the proposal. Alternatively, the proposal could be made revenue
neutral at the 17 percent flat rate by reducing the specified standard deductions by about 68
percent, to $3,950 for single filers, $7,900 for joint filers, $5,200 for head-of-household
filers, and an additional standard deduction of $1,600 for each dependent.
Distributional estimates
The LOree major eiements of tht.: proposed flat tax are distributed separately to families
by income class. First, the flat tax on wages and pension benefits is assumed to be borne by
wage earners and pension beneficiaries, and is distributed proportionately to recipients of
wages and pensions in excess of their specified standard deduction. Second, the tax on
employer-provided fringe benefits (except pension contributions) is assumed to be borne by
4
employees and is distributed in proportion to their receipt of these benefits. Third, the flat
tax on business cash flow is assumed to be borne in proportion to capital income generally.
The $186 billion increase in the deficit under the proposal would have to be financed
in some way. Different assumptions about the method of financing the increase in the deficit
could result in quite different distributional estimates. For purposes of the distributional
estimates presented here, it is assumed that the proposal is made revenue neutral either by
increasing the flat tax rate to 22.9 percent, or by reducing the standard deduction amounts by
68 percent (to 32 percent of the amounts specified in the proposal). An alternative
assumption would be that the increase in the deficit is financed by across-the-board
reductions in expenditures for entitlement programs. Since entitlement benefits are generally
distributed quite progressively (i.e., make up a much larger share of the incomes of lowerincome families), this financing assumption would make the proposal more regressive.
The distributional effect of a 22.9 percent flat tax with Representative Armey's
proposed standard deductions appears in Table 2. While the total change in after-tax income
of adopting this proposal would be zero, the aggregate after-tax income for the group of
families with incomes below $200,000 would be lower under the proposal (i.e., a net tax
increase), while the aggregate after-tax income for the group of families with incomes of
$200,000 or more would be higher under the proposal (a net tax cut). Expressed as a
percentage of after-tax income under current law, the proposal would cause a reduction in
aggregate after-tax income of between 0.8 percent and 3.0 percent for the group of families
with incomes below $200,000 and a 8.1 percent increase for the group of families with
incomes of $200,000 or more. This amounts to a 26.0 percent reduction in Federal taxes for
the group of families with incomes of $200,000 or more and aggregate tax increases ranging
from 6.9 percent to 17.1 percent for the group of families with income under $200,000.
The distributional effect of a 17 percent flat tax with standard deductions reduced by
68 percent of their proposed values appears in Table 3. Under this proposal, families with
incomes of $200,000 or more would receive a tax reduction of almost $124 billion, or about
39 percent of their current Federal income taxes. Families with incomes below $200,000
would have corresponding tax increases averaging between 1. 2 percent to 39.1 percent.
The distributional estimates shown in Tables 2 and 3 are based on the assumption,
described above, that the flat rate tax is borne by income recipients. Since the flat-rate tax is
equivalent to a consumption tax with a credit (standard deduction) for wages, alternative
assumptions could be made about who bears the burden of the tax. A traditional assumption
is that a consumption tax is borne by consumers in proportion to their consumption.
Following this traditional approach, and assuming that the wage credit benefits workers on
wages up to the standard deduction amounts, would result in a far more regressive
distribution of tr~ ~T"o;''''~l. For example, unopr this tr(loitional apprr(lrh hmilies with
incomes of $200,()(X) or more under either revenue-neutral proposal would be shown as
receiving tax cuts of $170 billion or more, which is nearly two-thirds of their current Federal
tax burden. Middle-income families, and especially low-income families, would be shown to
5
have correspondingly much larger tax increases. We have not followed this traditional
approach in Tables 2 and 3 because it overstates the tax cut for high-income families, and the
tax increases for low- and middle-income families, by failing to adjust for temporary income
fluctuations and normal life-cycle patterns of consumption and income. In addition, lack of
reliable data on consumption by families with very high and very low incomes may make any
distributional estimates based on the traditional approach less reliable than the estimates
shown in Tables 2 and 3.
Revenue and distributional effect of repealing the EITC
The revenue and distributional estimates presented above are all based on the
assumption that the Armey proposal would retain the earned income tax credit (EITC).
However, it is not clear that Representative Armey intends his proposal to retain the EITC. 6
If the EITC were not retained under the flat tax, the deficit effect of the proposal at 1995
income levels would be reduced by $25 billion (the cost of the EITC in 1995) to $161
billion. The flat tax rate required to make the proposal revenue neutral would then be 22.1
percent.
The distributional effect of replacing the current income tax (including the EITC) with
a 22.1 percent flat tax is shown in Table 4. Families with incomes of $200,000 or more
would receive a tax cut of about $89.6 billion, or 28.3 percent of their current Federal taxes.
Families with incomes below $200,000 would have corresponding tax increases averaging
from 4.4 percent to 60.5 percent. Comparing these results with the results in Table 2, in
which the EITC is retained and the revenue-neutral flat tax rate is 22.9 percent, indicates that
repealing the EITC makes the proposal much more regressive. The increase in tax burden
from repealing the EITC falls mostly on low-income working families with children.
Why is the Armey flat tax a consumption tax?
To see why the flat tax is effectively levied on consumption, consider two other forms
of a consumption tax: a retail sales tax (RST) of the type employed by most States, and a
subtraction-method value-added tax, also called a business transfer tax (BIT).
6A1 though H.R. 4585, introduced by Representative Armey on June 16, 1994, which contains his flat tax
P/,.t>dsal2> Wt: l, , , Jlllta .. l .I~;{ proposals, (cfc.l:, to the: EITC ill Ii no.i-l.iX section, l:lL f1allax return lorm that
appeared in his Wall Street Journal article on the same day has no line for the EITe. Furthermore, in an
appearance before the Bipartisan Commission on Entitlement and Tax Reform (the "Kerrey Cornnussion") on
<xtober 6, 1994, Representative Armey stated, in response to a question from COmrrUssJOn member Thomas
Downey. that he believes that a direct income supplement rather than a tax credit should be used to transfer
income to the poor. H.R. 4585 contains no such spending proposal.
6
A RST is collected from businesses and applied to sales of goods and services to
households. While difficult to accomplish, governments generally attempt to tax only sales
to consumers by exempting from the RST sales between businesses. That is, most states
generally attempt to tax only final or retail sales as opposed to sales between producers.
Consider the example in Figure 1. In an economy with three stages of production, a 5 %
retail sales tax collects revenue of $50 on retail sales of $lO50 ($lOOO of pre-tax sales plus
$50 of tax) and collects no revenue from the manufacturer or wholesaler. 7 If the RST is
levied on a broad base (i.e., the tax is applied to all purchases by consumers, including
purchases of necessities like food and medical care which are commonly exempted from State
sales taxes), it is a tax on total consumption.
Under a BIT, a business pays tax on the difference between its sales and the cost of
its purchases from other businesses, including purchases of buildings and equipment. 8 The
deduction for business purchases ensures that the tax falls only on final consumption. In the
example in Figure 1 (second panel), a portion of the total BIT is paid at each stage of
production, but the 5 % tax still raises a total of $50 on final consumer sales of $lO50.
With only two modifications to the BTT, it can be seen why the Armey flat tax is
equivalent to a flat tax on consumption. First, suppose that businesses are allowed a
deduction for wages paid to workers. Second, suppose that individuals must pay tax at the
same rate as the business tax on their wages. If there are no exemptions or a standard
deduction, this tax is a simple flat tax, and its base is the same as that of a broad-based RST
or BIT -- total consumption. As illustrated in Figure 1, total revenue under the flat tax is
still $50: $35 collected from businesses and $15 collected from workers.
In the example described above, we have assumed that the full amount of the flat tax
-- including the portion that is collected from workers -- is passed on to consumers in the
form of higher prices. Under this assumption, after-tax wages are unchanged, and the flat
tax has the same effect on prices as a consumption tax that is collected entirely from
businesses. In fact, the price effect will depend on the willingness of the Federal Reserve to
accommodate a higher price level by increasing the money supply. Absent an increase in the
money supply, the business portion of the flat tax will initially squeeze profits and ultimately
force a reduction in wages. In the long-run, real incomes will decline by the full amount of
the tax whether prices increase, or money wages or profits fall.
7A tax of 4.762 % on a b..se that includes the tax is the same as a tax of 5 % on a base that does not include
the tax. In this example and in the ones that follow, It IS assumed that businesses pass the full amount of the
tax on to their customers.
8Most countries that have a national value-added tax (V AT) system administer it with the credit-invoice
method. Under this system, businesses pay VAT on their sales, but receive a credit against their tax liabilities
for V AT they paid on inputs purchased from other businesses. If the tax is applied to all goods and services at
the same rate, a credit-invoice method VA T will collect the same amount of revenue and affect consumers in
the same way as a similarly broad-based BIT.
7
Therefore, the flat tax has the same long-run effect on the purchasing power of most
people as a consumption tax that is collected entirely from businesses. If prices do not
ultimately increase by the full amount of the flat tax, however, people who receive income
under fixed contracts will be affected differently. For example, lenders who receive interest
income that is fixed in dollar terms will be better off than they would have been if pnces
had increased fully, and borrowers will be worse off.
Most proponents of a flat tax, including Representative Armey, support the inclusion
of a standard deduction or personal exemptions to relieve some part of earnings from the tax.
Indeed, one of the attributes of a flat tax is that some degree of progressivity can be achieved
by providing tax relief directly to low-wage individuals.
Consumption Taxes: Further Comments
The flat rate tax proposed by Representative Armey is only one of many ways to
impose a tax on consumption. Other variants of consumption taxes include:
•
a retail sales tax, which is collected from retailers and imposed on the value of
final sales to consumers;
•
a credit-invoice value-added tax, which is collected from all businesses and is
imposed on the value of sales, with a credit for tax-paid purchases from other
firms;
•
a subtraction method value-added tax (or business transfer tax), which is
collected from all businesses and is imposed on the value of sales less
purchases from other firms; and
•
a direct cash flow consumption tax, which is collected from individuals and
imposed (at either flat or graduated rates) on a base that equals income less net
saving. Under this type of tax, contributions to qualified savings accounts
would be deductible, and withdrawals from accounts would be taxable; net
proceeds from borrowing would be taxable, and repayments of loans would be
deductible.
The Armey flat rate tax, as noted above, is equivalent to a subtraction method valueadded tax, but with a deduction for wages at the business level and a tax on wages at the
individual taxpayer level. One possible modification of the Armey flat rate tax is to impose
1 ~:3duated rate schedule, instrad of a single tax rate, on the wages of ;~dividuals.
A consumption tax could be used either to replace the entire individual and corporate
income taxes (as does the Armey flat rate tax), to replace all income and payroll taxes, or to
replace only partially the income or payroll taxes.
8
Any consumption tax proposal, in combination with the taxes it replaces, needs to
address a number of concerns. To merit serious consideration, a proposal should raise
sufficient revenue, maintain the progressivity of the entire tax system, include transition rules
to minimize windfall gains and losses, and avoid additional costs of compliance and
administration. Consumption tax proposals also require provisions that address sectorspecific issues, such as the tax treatment of financial institutions, imports antj exports, nonprofit organizations and state and local governments, and housing and consumer durables.
The Armey flat tax proposal does not satisfy many of these important concerns.
9
Appendix: Detailed Assumptions
A number of assumptions were made regarding the specifics of the stylized proposal.
These assumptions include:
For the flat rate cash flow tax on Corporations:
•
Current law pass-through entities are subject to the business flat tax. These entities
include S corporations, RICs and REITs.
•
Interest income, dividends received, and capital gains income are exempt from tax.
This exemption holds for both financial and non-financial corporations.
•
Income from foreign subsidiaries is exempt from tax.
•
Income from the sale of business property (section 4797 property) is subject to tax.
•
Wages and salaries are deductible, as are contributions to pension funds. Deductions
for other fringe benefits are disallowed.
•
All interest deductions are disallowed for all corporations (because interest income is
exempt from tax).
•
The dividends-received deduction is disallowed (because dividends received are
exempt from tax).
•
The taxes paid deduction is disallowed.
•
New investment in plant, equipment, and structures is expensed instead of capitalized
and depreciated as under current law. This is consistent with the "cash-flow" nature
of the flat tax.
•
The cost-of-goods-sold deduction under current law would be replaced by a deduction
for current year purchases and related costs, regardless of when the items are
ultimately sold. This is consistent with the "cash-flow" nature of the flat tax. Under
current law, the cost of goods that are actually sold are deducted, regardless of when
they are assumed to be purchased.
Bad debt write-orfs are disallowed.
•
Firms with negative net income pay no tax in the current year and are allowed to
carry forward the net operating losses indefinitely to offset future income. These loss
carry-forwards are indexed for inflation.
10
•
All additional modifications to tax liability, such as tax credits (e.g., foreign tax
credit), the alternative minimum tax, or recapture taxes, are assumed to be repealed.
•
Because there are no border tax adjustments, exports are subject to tax and imports
are free of tax.
For the flat-rate tax on earnings and non-corporate entities:
•
Earnings are defined as the sum of wage and salaries, pension distributions, IRA
distributions and 30 percent of active business income (including sole proprietors'
income, farm proprietors' income and active partnership income).
•
The remaining 70 percent of active business income and all passive business income
is taxed at the entity level. Taxable business income can be reduced by the carryover
of prior business losses. However, passive losses can only offset passive income.
•
Business taxable income (from sole proprietors, farm proprietors, and partnerships) is
adjusted to reflect the "cash flow" of businesses similar to the adjustments made for
corporations.
•
30 percent of the net income of pass-through entities (such as partnerships) that do not
allow the payment of wages to its owners under current law are treated as wage
income, subject to the tax on earned income, and may be offset by the standard
deduction.
•
All itemized deductions are repealed.
•
The phase-out of the personal exemption (PEP) and the limitation on itemized
deductions (Pease) for high income taxpayers are both assumed to be repealed.
•
All tax credits, except the Earned Income Tax Credit (EITe), are assumed to be
repealed.
•
The individual Alternative Minimum Tax is assumed to be repealed.
•
Although governments and non-profits are not taxed, the wages and non-pension
fringe benefits of government employees are taxed.
Office of Tax Analysis
March 10, 1995
TABLE 1
COMPARISON OF TAX LIABILITIES FROM 17% FLAT TAX AND CURRENT LAW
(estimates are static, fully phased in, 1995 income levels)
(CY: $ in billions)
1. 17% Flat Tax
a.
Corporate entity-level tax
b.
Non-corporate entity-level tax
c.
Individual tax
Total
532
2. Current Law
a.
Corporate income tax
b.
Individual income tax 11
Total
137
581
718
3. Difference (flat tax less current law)
11 Estimate excludes the effect of the EITC on both revenues and outlays.
Total budgetary effect of the EITC is identical under the 17% flat tax and
current law.
163
64
305
-186
Table 2
Replace Current Individual and Corporate Income Taxes
with a 22.9% (Modified) Flat Rate Tax (1)
(1996 Income Levels)
Change In After-Tax Income Under Proposal (4)
After-Tax (3)
Family Economic
I
229% Tax on 122.9% Ta~;n I 22 9% Tax on
Repeal
Income Under: Income Tax
Income Class (2)
Current Law
(000)
($B)
I (except
I
I
Wages Over I Fringes and
EITC) IStand Oed (5~ Payroll Tax (6)1
(S6)
I
($B)
I
Percentage
-----
Change
BUSiness
Total
Percentage
In Total
Cash Flow
Change
Change
Federal Taxes
($8)
($B)-"--~) ___ .
jQ~) ____
i"I"l_
0-10
65.2
0.8
-0 3
-1 1
-D4
-1 0
-1 5
10 - 20
221.9
8.1
-2.4
-38
-3 7
-1 7
-D8
80
20 - 30
325.6
206
-104
-70
-76
-44
-1 3
87
17 1
30 - 50
738.5
686
-41 5
-181
-21 9
-no
-1 8
83
50 - 75
902.8
1049
-745
-21 9
-280
-19.5
-22
87
75 - 100
735.0
978
-79 1
-174
-231
-21 9
-30
1t 2
100 - 200
1,077 0
181 0
-1370
-200
-44.9
-208
-19
69
1,019.0
2757
-977
-5 4
-90.4
822
8 1
-260
5,0547
758.6
-4437
-949
-220.0
00
00
00
200
& over
Total (7)
---_.
-- - - - - - - - - - - - - - - _ .
Department of the Treasury
March 7, 1995
Office of Tax Analysis
(1) ThiS table dlstnbutes the estimated change in after-tax Income due to the proposal with a revenue-neutral rate of 22 9 percent (approXimately)
(2)
Family Economic Income (FEI) IS a broad-based Income concept FEliS constructed by adding to AGI unreported and underreported Income, IRA
and Keogh deductions; nontaxable transfer payments, such as SOCial Security and AFDC, employer-provided fringe benefits, InSide bUild-up on
penSions, IRAs, Keoghs, and life Insurance; tax-exempt Interest; and Imputed rent on owner-occupied hOUSing Capital gains are computed on
an accrual baSIS, adjusted for Inflation to the extent reliable data allow InflatlDnary losses of lenders are subtracted and Df borrowers are added
There is also an adjustment fDr accelerated depreCiation of nDncorporate bUSinesses
~f'1
is shDwn on a family, r;=jther than on a tax return baSIS The
economic Incomes of all members of a family unit are added to arrive at the family's eCDnomlC Income used In the dlstributlDns
(3) The taxes Included are Individual and corporate income, payroll (SOCial Securtty and unemployment), and excises Estate and gift taxes and customs
duties are exclUded. The individual Income tax is assumed to be borne by payors, the corporate incDme tax by capital Income generally, payroll taxes
(employer and employee shares) by labor (wages and self-employment Income), eXCIses on purchases by Individuals by the purchaser, and excises
on purchases by business in proportion to total consumption expendrtures Taxes due to provIsions that expire prior to the end of the Budget period
(I e before 2000) are excluded
(4)
The change In Federal taxes is estimated at 1996 income levels but assuming fully phased In law and static behaVior The InCidence assumptons for
the repealed Income taxes
IS
the same as for the current law taxes (see footnote 3) The flat tax on wages (plus pension benefits received)
IS
assumed
to be borne by wages plus pension benefits received In excess of the standard deduction The flat tax on employer-provided fringe benefits (except
pension contributions) and payroll taxes IS assumed to be borne by employees In proportion to benefits or taxes The flat tax on bUSiness cash flow IS
i'5Sum"rl to '"'" t--....rne by capitallncom~ g<>nerally.
(5) The standard deduction (in 1995$) is $24,700 UOInt) or $12,350 (Single) plus $5,000 for each dependent Non-pension fringe benefits of government
and nonprofit employees are included in wages
(6) The proposal would disallow a deduction for employer-provided fringe benefits (except pension contributions) making these benefits (primarily
employer-provided health insurance) subject to the 22.9 percent flat tax The employer portion of payroll taxes would likeWise be nondeductible
(7)
Fami~ willi i1eglltl"lC Incomo, aF. tRc~uded In the total line but not shown separately
Table 3
Replace Current Individual and Corporate Income Taxes
with a Revenue-Neutral 17% (Modified) Flat Rate Tax (1)
(1996 Income Levels)
--
I
I
I
-~~~--.------.----
-~~---
_~____--,_~_C_hang!, In Aft~r-Tax 1~_o_~~Und~r Propos~lf4) .. _______ _ _..J
After-Tax (3)
Repeal
17% Taxon
Percentage
Change
17% Tax on
17%Taxon
I
F amrly EconomiC
I
Income Class (2)
!
Income Under I Income Tax fwages Over
Current Law
i(except EITC)
(000-,--)_ _--'--I_--'--($_B~
($8)
F nnges and
tand Ded (5) Payroll Tax (6)
,
($8)
i
In Total
Business
Total
Percentage
Cash Flow
Change
Change
!Federal Taxes
(%)
(%)
($8) .. __' _-,-,($_8"-)_ _ --'-($-'8)'--
0-10
652
0,8
-15
-0 8
-03
-18
-2.8
320
10 - 20
221,9
8.1
-10,9
-28
-28
-8 4
-3.8
391
20 - 30
3256
206
-244
-53
-5 8
-149
-4 6
29.7
30 - 50
738.5
686
-71 9
-137
.166
-335
-45
21 4
50 - 75
902.8
104.9
-1037
-166
-21 2
-366
-4 1
163
75 - 100
7350
97,8
-92.2
-132
-174
-25.1
-3.4
128
100 - 200
1077 0
1810
-1355
-151
·339
-35
-0.3
12
1.0190
275.7
-797
-4 1
·683
1237
12.1
-391
5,0547
758.6
-5207
-71 7
·1662
00
00
00
200
& over
Total (7)
...
-----~--.
-
--------
--
.--~---
...
March 7, 1995
Department of the Treasury
Office of Tax AnalysIs
(1) ThiS table distributes the estimated change in after·tax Income due to the proposal
(2) Family Economic Income (FEI) is a broad·based Income concept FEliS constructed by adding to AGI unreported and underreported Income; IRA
and Keogh deductions; nontaxable transfer payments, such as SOCial Security and AFDC, employer-provided fnnge benefits; inside bUild-up on
pensions, IRAs, Keoghs, and life Insurance; tax-exempt interest; and Imputed rent on owner-occupied hOUSing. Capital gains are computed on
an accrual baSIS, adjusted for Inflation to the extent reliable data allow. Inflationary losses of lenders are subtracted and of borrowers are added.
There IS also an adjustment for accelerated depreCiation of noncorporate bUSinesses
FEliS shown on a family, rather than on a tax return baSIS The
economic Incomes of a/l members of a family Unit are added to arrive at the family's economic mcome used In the distributions
(3) The taxes Included are Individual and corporate Income, payroll (Social SecUrity and unemployment), and eXCIses
Estate and gift taxes and customs
duties are exclUded, The indiVidual Income tax IS assumed to be borne by payors the corporate Income tax by capital Income generally, payroll taxes
(employer and employee shares) by labor (wages and self-employment Income) excises on purchases by IndiViduals by the purchaser, and eXCIses
on purchases by bUSiness in proportion to total consumption expenditures Taxes due to prOVISions that expire prior to the end of the Budget period
(Ie, before 2000) are excluded
(4)
The change In Federal taxes IS estimated at 1996 Income levels but assuming fully phased In law and static behaVior The InCidence assumptions for
the repealed Income taxes IS the same as for the current law taxes (see footnote 3) The flat tax on wages (plus pension benefits received) IS assumed
to be borne by wages plus pension benefits received In excess of the standard deduction The flat tax on employer'provlded fringe benefits (except
ppnsion contributions) and payroll taxes IS assumed to be borne by employees In proportion to benefits or taxes The flilt t"x on bUSiness cash flow IS
as~UI ilt:u
to bt: borne by capital InCOI ne generally
(5) The standard deduction (in 1995$) IS $7,900 (Jomt) or $3,950 (Single) plus $1,600 for each dependent Non·penslon fringe benefits of government
and nonprofit employees are Included In wages
(6) The proposal would disallow a deduction for employer·provlded fringe benefits (except pension contributions) making these benefits (primarily
employer-provided health Insurance) subject to the 17 percent nat tax. The employer portion of payroll taxes would likeWise be nondeductible
Table 4
Replace Current Individual and Corporate Income Taxes (Including the EITe)
with a 22.1 % (Modified) Flat Rate Tax (1)
(1996 Income levels)
!
Family Economic
r----
______ Change~~~er-Tax_lnc~rTl~ _~nder r::.ropo~a~J4L
i
!
After-Tax (3)
I Income Under
I
i
22 1% Tax on 122 1 % Tax on 22 1% Tax on ;
Repeal
'Wages Over
Fnnges and
Change
Business
Total
Percentage
In Total
Cash Flow
Change
Change
Federal Taxes
I
Current Law I Income Tax Stand Oed (5~Payroll Tax (6)
I _-'--($_B-,--)
_ _-----'--(000---')_ _-----'--_-'-($-'-S-'.)_---C($B)
_t$ B_) _
Income Class (2)
Percentage
I
_ ___ (%) _____
--,-($_B-,--)_ _ _ ($8)
("/0)
0-10
652
-1 5
-03
-10
-04
-3,2
-5,0
568
10 - 20
221,9
-3,5
-23
-36
-35
-130
-5,9
605
20 - 30
3256
11 1
-100
-68
-7 3
-129
-4 0
258
30 - 50
7385
641
-399
-174
-21 1
-14 3
-19
91
50 - 75
902,8
1040
-716
-21 1
-270
-156
-1 7
70
75 - 100
735
a
976
-761
-168
-222
-174
-24
89
100 - 200
1,077 0
1809
-131 7
-192
-431
-13.2
-12
44
200 & over
1,0190
2757
-939
-5 2
-869
896
88
-283
Total (7)
5,054 7
7294
-4266
-91 2
-211 6
00
00
00
- - - - ------- - - - -
Department of the Treasury
March 7, 1995
Office of Tax AnalYSIS
(1) ThiS table distributes the estimated change In after-tax Income due to the proposal With a revenue-neutral rate of 221 percent (approximately)
(2)
Family Economic Income (FEI) IS a broad-based Income concept
FEliS constructed by adding to AGI unreported and underreported Income, IRA
and Keogh deductions; nontaxable transfer payments, such as Social Security and AFDC, employer-provided fnnge benefits, inSide build-up on
pensions, IRAs, Keoghs, and life Insurance, tax-e)empt Interest; and Imputed rent on owner-occupied hOUSing
Capital gains are computed on
an accrual baSIS, adjusted for Inftatlon to the extent reliable data allow Inflationary losses of lenders are subtracted and of borrowers are added
There IS also an adjustment for accelerated depreCiation of noncorporate bUSinesses
FEI IS shown on a family rather than on a tax return baSIS
The
economic Incomes of all members of a family unit are added to arrive at the family'S economic Income used In the distributIOns
(3) The taxes Included are Individual and corporate Income, payroll (SOCial Security and unemployment), and excises
Estate and gift taxes and customs
duties are excluded, The individual income tax is assumed to be borne by payors the corporate Income tax by capital Income generally payroll taxes
(employer and employee shares) by labor (wages and self-employment Income) excises on purchases by Ind,vlduals by the purchaser, and
e~clses
on purchases by business In proportion to total consumption e)pendltures Ta)es due to prOVISions that expire pnor to the end of the Budget penod
(Ie, before 2000) are exctuded
(4)
The change in Federal taxes IS estimated at 1996 Income levels but assuming fully phased In law and static behaVior
The InCidence assumptions for
the repealed Income taxes IS the same as for the current law taxes Isee footnote 3) The flat tax on wages (plus pension benefits received) IS assumed
to be borne by wages plus pension benefits received In excess of the standard deduction The flat tax on employer-provided fringe benefits [except
pension contributions) and payroll taxes IS assumed to be borne by employees In proportion to benefits or taxes
d~Sl'
,
The flat tax on bUSiness cash flow IS
t" 1,_ Jurne by capltdl I; ,Cuffle generalli
(5) The standard deduction (in 1995$) IS $24,700 UOln!) or $12,350 ISlngle) plus $5,000 for each dependent
Non-pensIon fringe benefits of government
and nonprofit employees are Included In wages,
(6) The proposal would disallow a deduction for employer-provided fringe benefits (except pension contnbutlons) making these benefits (pnmanly
employer-provided health Insurance) subject to the 22 1 percent flat tax The employer portion of payroll taxes would likeWise be nondeductible
Figure 1: Examples of Different Types of Consumption Taxes
(tax-inclusive base, single 5% rate)
Case 1: Retail sales tax (RST)
Stage of production
Manufacturer
1.
Sales (including RSn
2.
RST on sales (4.762% of line 1)
3.
Purchases
4.
Wages
5.
After-tax profit
200
Wholesaler
Retailer
Total
300
700
1050
0
0
50
0
300
700
100
100
100
300
300
200
700
50
1050
Case 2: Subtraction method VAT
(or business transfer tax)
Stage of production
Manufacturer
1.
Sales (including VAn
Wholesaler
Retailer
315
735
1050
Total
2.
Purchases (including VAn
a
315
735
3.
Wages
100
100
100
4.
VAT-inclusive base (line 1-line 2)
315
420
315
5.
VAT owed (4.762% of line 4)
15
20
15
50
6.
After-tax profit
200
300
200
700
300
Case 3: Flat rate consumption tax without
Stage of production
personal exemptions
Total
Manufacturer
Wholesaler
Retailer
315
735
1050
0
315
735
Wages
105
105
105
Tax-inclusive base (line 1-line 2-line 3)
210
315
210
10
15
10
35
200
300
200
700
105
105
105
315
Taxation of businesses:
1.
Sales 0ncluding tax)
2.
3.
Purchases (including tax)
4.
5.
Tax owed (4.762% of line 4)
6.
After-tax profit
315
Taxation of individuals:
7.
8.
9.
Tax base (wages)
Tax owed (4.762% of line 7)
Aftpr-t::lx waqps
5
5
5
15
100
100
100
300
10. Total tax
Note: A VAT of 4.762% on a tax-inclusive base is equivalent to a VAT of 5% on a tax-exclusive base.
These ex~ples aSSlJme that businesses pass forward the full amount of the tax to their customers.
50
Replace Current Individual and Corporate Income Taxes
with a 22.9% (Modified) Flat Rate Tax (1)
(1996 Income Levels)
~
l
-
I
--
--~-----T--
Federal
I
Taxes Under
Family Economic
I
I
I
Income Class (2)
I
Law (3)
I
($8)
!
(000)
I
_J
Current
-
--
----
Federal
Taxes as a Percent of
Taxes with
I
I
I
22.9% Flat
Pre-Tax Income Under
Change In
with 22.9%
Rate Tax (4) . Federal Taxes
I
I
($8)
($8)
Current Law
Flat Rate Tax
(%)
(%)
0-10
S.7
6.7
10
80
10 - 20
21 S
232
17
88
95
20 - 30
SO.1
545
44
133
14.5
130
175
189
21 6
94
30 - SO
156.3
169.3
50 - 75
224.0
243.S
195
19.9
75 - 100
196.1
218.0
21 9
21 1
234
100 - 200
303.0
323.8
208
220
235
200 & over
3166
234.4
-82.2
237
175
1,275.1
1275.1
00
201
201
Total (S)
-----------
Department of the Treasury
April 6, 1995
Office of Tax Analysis
(1) This table distributes the estimated change In Federal taxes due to a (modified) flat rate tax with a revenue-neutral rate of 22 9 percent (approximately)
which replaces the current individual and corporate income taxes
(2)
Family Economic Income (FEI) IS a broad-based income concept FElis constructed by adding to AGI unreported and underreportcd Income: IRA
and Keogh deductions; nontaxable transfer payments, such as Social Security and AFDC, employer-provided fringe benefits, inside build-up on
pensions, IRAs, Keoghs, and life insurance, tax-exempt Interest, and Imputed rent on owner-occupied hOUSing
Capital gains are computed on
an accrual basis, adjusted for Inflation to the eldent reliable data allow Inflationary losses of lenders are subtracted and of borrowers are added
There IS also an adjustment for accelerated depreciation of noncorporate bUSinesses
FElis shown on a family lather than on a tax return baSIS The
economic Incomes of all members of a family unit are added to arrive at the family s economic Income used In the distributions
(3) The taxes Included are IndiVidual and corporate Income, payroll (SOCial Security and unemployment), and excises
duties are excluded. The individual Income tax IS assumed to be borne by payors
(employer and employee shares) by labor (wages and self-employment Income)
Estate and gift taxes and customs
the corporate Income tax by capital Income generally, payroll taxes
excises on purchases by IndiViduals by the purchaser and excises
on purchases by bUSiness in proportion to total consumption expenditures Taxes due to provIsions that e,OIre prior to the end of the Budget period
(Le., before 2000) are excluded
(4)
The change in Federal taxes IS estimated at 1996 Income levels but assuming fully phased In law and static behaVior
the repealed income taxes IS the same as for the current law taxes (see footnote 3)
The inCidence assumptions for
The flat tax on wages (plus pension benefits received) IS assumed
to be borne by wages plus pensIOn benefits received In excess of the standard deduction
The flat tax on employer-provided fringe benefits (except
pension contributions) and payroll taxes is assumed to be borne by employees In proportion to benefits or taxes The flat tax on bUSiness cash flow IS
assumed to be borne by capital income generally
The standard deduction (In 1995$) IS $24,700 (Joint) or $12,350 (Single) plus $5,000 for each dependent
Non-pen~lon
fringe benefits of government
and nonprofit employees are included In wages
The proposal would disallow a deduction for employer-provided fringe benefits (except pension contributions) making these benefits (primarily
employer-provided health Insurance) subject to the 22.9 percent flat tax
(5)
The employer portion of payroll taxes would likeWise be nondeductible
Families With negative incomes are included in the total line but not shown separately
Distributional Effect of Federal Tax System Under
Current Law and With the Individual and Corporate
Income Taxes Replaced by a 22.9% Flat Rate Tax
Effective Tax Rate (Taxes as a Percent of Pre-Tax Income)
•
o
Current Law (Includes effects of the 22.9% flat rate tax, payroll taxes, and excise taxes)
Current Law with individual and corporate income taxes replaced by 22.9% flat rate tax
23.4
23.5 23.7
20
17.5
10
o
0-10
10-20
20-30
30-50
50-75
Income in $1 ,000's
75-100
100-200 200 and
over
Distributional Effect of Replacing
Indvidual and Corporate Income Taxes With a
22.9% Flat Rate Tax
Change in Effective Tax Rate (Taxes as a Percent of Pre-Tax Income)
5
3
2.3
1
o
-1
-3
-5
-7
-6.2
I
------------------------------------------------~~.
LI
0-10
10-20
20-30
30-50
50-75
Income in $1 ,000's
75-100
100-200 200 and
over
Distributional Effect of Federal Tax Systel11 With
the Individual and Corporate Income Taxes
Replaced by a 22.9% Flat Rate Tax 1/
Effective Tax Rate (Taxes as a Percent of Pre-Tax Income)
23.4
23.5
20
10
o
0-10
10-20
20-30
30-50
50-75
75-100
Income in $1 ,000's
l!lncludes effects of the 22.9% flat rate tax, payroll taxes, and excise taxes.
100-200 200 and
over
Distributional Effect of
Current Federal Tax System
j}
Effective Tax Rate (Taxes as a Percent of Pre-Tax Income)
23.7
20
10
o
0-10
10-20
20-30
30-50
50-75
Income in $1 ,000's
75-100
100-200 200 and
over
J! Includes effects of individual and corporate income taxes, payroll taxes, and excise taxes.
u.s. Among
Lowest Taxed of Major Economies
1992 Taxes as a Percent of GDP
43.6
40
30
20
10
o
u.s.
Japan
U.K.
Canada Germany
Italy
France
Distributional Effect of
Current Federal Tax System
Y
Effective Tax Rate (Taxes as a Percent of Pre-Tax Income)
23.7
20
10
o
0-10
10-20
20-30
30-50
50-75
Income in $1 ,ODD's
75-100
100-200 200 and
over
1/ Includes effects of individual and corporate income taxes, payroll taxes, and excise taxes.
Distributional Effect of Replacing Income Taxes
with a 22.9% Revenue-Neutral Flat Tax
with Standard Deductions
Percent Change in After-Tax Income
9
8.1
7
5
3
1
-1
-0.8
-3
-5
-3.0
0-10
10-20
20-30
30-50
50-75
75-100
Income in $1 ,000's
100-200 200 and
over
Distributional Effect of Replacing Income Taxes with
an Illustrative 14.3°/c, Flat Rate Consumption Tax
Percent Change in After-Tax Income
14.4
15
10
5
o
-2.2
-5
-10
-10.8
-15~'------------------------------------~
0-10
10-20
20-30
30-50
50-75
Income in $1 ,000's
75-100
100-200 200 and
over
Most Taxpayers Claim the Standard Deduction
Percentage of Tax
Returns Claiming
lie Itemized Deductions
Percentage of Tax
Returns Claiming
Standard Deduction II
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASmNGTON, D.C. - 20220 - (202) 622-2960
For Release Upon Delivery
Expected at 9:30 a.m.
February 22, 1995
STATEMENT OF ERIC TODER
DEPUTY ASSISTANT SECRETARY (fAX ANALYSIS)
DEPARTMENT OF THE TREASURY
BEFORE THE
SENATE BUDGET COMMITTEE
RR - 97
Table of Contents
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Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
' a consumption
.?
What is
tax. ........•...••..•......•.. 3
Options for taxing consumption . . . . . . . . . . . . . . . . . . . . . . . . 3
1. Retail sal.es tax . . . . . . • . . . . . . . . . • • . . . . . . . . • . . 4
2. Value-added tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Two-part individuallbusiness consumption tax .......... 4
4. Consumed income tax . . . . . . . . . . . . . .
4
G
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Distributional effects of replacing the income tax with a consumption tax ., , 5
Replacing the income tax with a consumption tax . . • • • • • • • . . . . 5
Redistributing the consumption tax burden ................. 6
3.conomic effects of replacing the income tax with a consumption tax ••... 8
Saving and investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1. National sa.ving • . • . . . . . • • . • • . . . • . . . . • • . . . • • . 8
2. Tax policy and private saving . . . . . . . . . . . . . . . . . . . . 9
3. Saving and investment ............•........... 9
4. Interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Allocation of ca.pital .••••. . . • . . . • • • • . . . . . • • • • . •
10
Labor supply and wage tax avoidance ...............••... 11
International trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Sector-specific issues of adopting a consumption tax •••..•••••• 13
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CIty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Redistributing the tax burden . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Measuring consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Promoting social and economic goals . . . . . . . . . . . . . . . . . . . . . 16
~ransition
to a consumption tax . . . . . . . . . . . . . . . . . . . . . . . . . • . . 17
Coordination with State and local taxes . . . . . . . . . . . . . . . . . . . 18
:onclusion .
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'abIes and charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
For Release Upon Delivery
Expected at 9:30 a.m.
February 22, 1995
STATEMENT OF ERIC TODER
DEPUTY ASSISTANT SECRETARY (TAX ANALYSIS)
DEPARTMENT OF THE TREASURY
BEFORE THE
SENATE BUDGET COMMITrEE
Introduction
Mr. Chairman and Members of the Committee:
I am pleased to discuss today proposals for fundamental reform of the tax system.
During the last two years, several proposals have been made that would replace all or part of
the income tax and payroll taxes with a tax on consumption. The conceptual proposals under
current discussion include Representative Armey's plan to adopt a two-part flat consumption
tax in place of the current corporate and personal income taxes, Representative Gibbons' plan
to adopt a subtraction method value-added tax (VAT) in place of the corporate income tax,
the payroll tax, and most of the individual income tax; and a plan by Senators Nunn and
Domenici to replace the individual and corporate income taxes with two consumption taxes: a
flat-rate tax on business cash flow and a progressive-rate individual expenditure tax. Some
of these proposals have been introduced as bills, but we understand that they are not yet in
final form.
The interest in consumption taxes apparently arises for several reasons. The most
frequently cited benefit of moving from a system that taxes income toward one that taxes
consumption is that a consumption tax will improve saving rates and capital formation, and
our standard of living in the long run. Proponents of consumption taxes also argue that a
consumption tax would improve economic efficiency - and thereby increase national output
-- and simplify the tax system. Some supporters of consumption taxes point out that most of
our major trading partners rely more heavily on consumption taxes, particularly VATs, and
that adoption of a VAT in the United States would be more compatible with international
practices.
Mr. Chairman, we recognize that the current U.S. income tax system has many
defects, and we welcome the discussion on how to reform it. Since radical changes to the
tax system - especially changes that would completely replace the existing system -- involve
costs and risks, they should be carefully evaluated according to their ability to achieve the
fundamental objectives of a tax system -- fairness, efficiency, and simplicity. We believe a
tax system should:
2
•
•
•
•
•
raise sufficient revenue,
distribute the burden of taxes equitably,
avoid excessive intrusion of tax considerations into private economic decisions,
promote economic prosperity and growth,
and limit the costs to families and businesses of complying with the tax and the
costs to the government of administering it.
Reforms should also include rules to minimize windfall gains and losses during the period of
transition to a new system. Consumption tax proposals, in particular, should address the
effect of the transition on the tax burden of the elderly, should include rules for the treatment
of certain hard-to-tax economic sectors, such as financial institutions, and should address the
coordination of a Federal consumption tax with State and local retail sales taxes.
In addition to these general tax policy objectives, the Federal income tax has, over the
years, been used to promote widely-held social and economic goals, such as home
ownership, private charitable giving, and provision of medical insurance by employers. It is
likely that these goals would continue to be seen as pursuits worthy of preference under a
reformed tax system. To the extent that a reformed system is to be used to promote social
and economic goals, possibilities for simplification and tax rate reduction would be materially
reduced.
A very careful scrutiny of consumption tax proposals is necessary to determine
whether any proposal yet designed can reasonably satisfy the objectives described above. In
this regard, it is noteworthy that the details of these tax reform proposals have not yet been
provided, and that the details will affect the analysis of any proposal.
The strongest argument for a consumption tax is that it will probably increase saving
and investment. but the amount of any increase is highly uncertain and could be small.
Other ways of increasing national saving - such as further deficit reduction or expanding
saving incentives within the income tax - can accomplish the same objective either more
surely or with less overall disruption than a wholesale replacement of the existing income
tax.
Replacing the income tax with a consumption tax also raises concerns about fairness,
because many consumption tax alternatives would increase the tax burden on low- and
middle-income families. Efforts to improve the progressivity of consumption taxes would,
however, require significant increases in costs of compliance and administration. Moving
from one tax system to another would also be complex and costly and would create both
intended and unintended winners and losers.
Replacing the entire income tax with a consumption tax would be a grand experiment
of applying theory to a practical application that no other country in the world has chosen to
undertake. Proponents of these plans must, therefore, overcome a significant hurdle - they
3
must show that it is worthwhile to conduct this experiment on the world's largest and most
complex economy.
The remainder of my testimony will describe (i) various types of consumption taxes,
(ii) the distributional and economic effects of replacing the income tax with a consumption
tax (including the international aspects of the proposals), (iii) transition issues, (iv) some
issues related to specific economic sectors that would have to be addressed in implementing a
consumption tax, and (iv) coordination of proposals with State and local retail sales taxes.
Background
Wbat is a consumption tax?
Broad-based consumption taxes can be collected wholly from businesses, either on
final sales to consumers or on the value-added by all businesses at each stage of production.
They can be collected in part from businesses and in part from wage-eamers by allowing
businesses to deduct wages and taxing them at the individualleve1. They can be collected
wholly from individuals by modifying the current individual income tax to allow taxpayers to
claim a deduction for all net saving. Regardless of how they are collected, they are all
consumption-based taxes, if income is taxed only when it is spent on consumer goods and
services; or, in other words, if income that is saved is exempt from tax.
Consumption taxes that are collected from businesses grant an immediate deduction
for purchases of new capital. This immediate deduction - or -expensing- - effectively
eliminates tax on the return from new investment. Relieving new saving and new investment
from tax is seen as the primary benefit of taxing consumption instead of income. Because
the after-tax return to savers will increase, families will have an incentive to save more. But
exempting the return to new saving reduces the tax base, requiring higher tax burdens on
wage income. Moreover, because lower-income households typically do not save as large a
percentage of their incomes as higher-income households, flat rate consumption taxes are
regressive - effective tax rates decline as family incomes rise. Addressing the regressivity
problem is a key challenge in designing a consumption tax that will not add to tax burdens of
lower- and middle-income families.
(hltions for taxin, consumption
There are a number of ways to administer a consumption tax, and while the various
forms would all not tax the return from new saving, the distributional effects and
administrative costs would differ. A consumption tax can be collected from businesses,
individuals, or in part from each. The statutory rates can be flat, or they can differ across
individuals or across different types of consumption. And a consumption tax that is collected
4
from businesses can be broad-based, or it can exempt certain goods and services or
businesses from tax.
The descriptions below generally describe the theoretical model for each plan.
Applying theory to practice will involve compromises with the theory. The degree of the
deviations will be important in assessing the possible viability of any particular proposal.
1. Retail sales tax CRSD. Businesses are the sole collection agents for retail sales
taxes - like those used by most Slates - and VATs. A RST is applied to sales of goods and
services to households. In order to tax only sales to consumers, the RST should exempt
sales between businesses. If the RST is levied on a broad base, it is a tax on total
consumption. However, Slate sales taxes in the United Slates are not broad-based, because
certain purchases, including purchases of necessities like food and medical care, are taxexempt. Because a RST is collected on all retail sales to domestic consumers, it
automatically taxes imports and exempts exports.
2. value-added tax. Most countries that have a national consumption tax administer
it as a credit-invoice VAT. Under this system, businesses are liable for VAT on their sales,
but receive a credit against their tax liabilities for VAT they paid on inputs purchased from
other businesses. Credit-invoice VATs in effect in other countries tax imports and exempt
exports. They achieve this result by exempting export sales, while allowing exporters a
credit for all purchased inputs, and imposing tax on inputs purchased from other countries.
Under a subtraction method VAT (also called a "business transfer tax" or Bm, a
business is liable for tax on the difference between its sales and its purchases from other
businesses, including purchases of buildings and equipment. If the tax is applied to all goods
and services at the same rate, a credit-invoice method VAT is economically equivalent to a
similarly broad-based subtraction method VAT or RST.
3. Two-pan jndividuallbusiness consumption tax. Another form of consumption tax
is collected in part from individuals and in part from businesses. The tax could be
administered in the same way as a subtraction method VAT, except that it would allow
wages to be deducted from the business tax base and would tax them at the individual level.
If wages are subject to the same, single tax rate that is applied to businesses, the tax is
"flat." Alternatively, the individual portion of the tax could be levied at graduated rates.
With no exemptions or deductions, the base of this two-part tax is the same as that of a
broad-based VAT or RST - total consumption.
4. Consumed income tax. A consumption tax collected solely from individuals
would be levied directly on their reported income, just like the current income tax, but would
allow a deduction for net saving. The base of this tax is equal to consumption, because
consumption is the difference between income and net saving. In order to measure income
properly, proceeds from all forms of borrowing would need to be included in the tax base,
and all forms of saving would be deductible.
Distributional effects
or replacing the income tax with a consumption tax
Re,placin& the income tax with a flat-rate consumption tax
The effect on the distribution of the tax burden of replacing the income tax with a
consumption tax depends on the form of tax that is adopted and on which taxes are replaced.
Generally, however, taxing consumption places a higher burden on low- and middle-income
families -- who typically do not save much of their income - relative to an income tax.
Because capital income is concentrated among high-income families, eliminating the tax on
income from new capital will disproportionately benefit high-income families. The change
will, therefore, shift the tax burden away from high-income families to middle-and lowincome families.
Table 1 shows the distributional effect of replacing the revenue of the corporate and
personal income taxes (including the earned income tax credit) with a general consumption
tax with no exemptions. 1 At a revenue-neutral tax tate of 14.3 percent, the aggregate aftertax income for the group of families with incomes below SI00,OOO would be lower under the
flat tax (i.e., a net tax increase), while the aggregate after-tax income for the group of
families with incomes of 5100,000 or more would be higher under the flat tax (a net tax
2
CUt). Expressed as a percentage of after-tax income under current law, the proposal would
cause a reduction in aggregate after-tax income of between 2.2 percent and 10.8 percent for
the group of families with incomes below S100,000 and a 14.4 percent increase in after-tax
income for the group of families with incomes of S200,00Q or more.' This amounts to
aggregate inc;reases in Federal·taxes ranging from 8.6 percent to 104 percent for the group of
families with income under $100,000, and a 47.6 percent reduction in taxes for the group of
families with incomes of S200,000 or more. 4,5
1For an explanation of how to desip a COIHPIJneci income tax that ia distributionally neutnl across
income quiDtilcs, ICC U.S. Conpeuional Budget Office, E.rtinuJlD for a Prototp Saving-Exempt Income Tax,
Congressional Budget Office, 1994, pp. 19-28.
lne 14.3 percent tax rate would be applied on a tax-inclusive basis, in a lIlIDDer similar to the income
tax. The equivalent rate calculated on • tax-exclusive basis, • would be relevant UDder • VAT, is 16.7
percent.
~ results are illustrated in Owt 1.
"The distributional estimates shown in the Table 1 ue based on the I8SI1II1ption that the CODSWDption tax
is bome by taxpayers in proportion to their eamiDg8 and capital mcome. AlterDalive &88UIDptiODB could be
made about who bears the bu.rdeD of the tax. A tnditiowassumption is that • consumption tax is bome by
consumers in proportion to their consumption. We have Ilot followed this approach. because it overstates the
tax cut for high-income families and the tax iDcreases for low- aud middle-income families by failing to adjust
for temporary income fluctuatiODS aad nora:W life-cycle pattems of amsumption and income. In addition, lack
of reliable data on consumption by families with very high and very low incomes make distributional estimates
based on the traditioaal approaclllcss reliable than those shown in Table 1. Following this approach would lead
6
In this analysis, the burden of the consumption tax is distributed to taxpayers
according to components of current income. But individuals may base current expenditures
on their expectation of future income as well as on current income. For example, college
students who earn very little while they are in school might, nevertheless, have high current
consumption expenditures if they are able to borrow against the expectation that they will
have high incomes in the future. In such cases, annual income understates economic wellbeing. Annual income may overstate economic well-being in a year when a family receives
income from a transitory source, such as a large bonus. For these reasons, some economists
argue that lifetime income is a better measure of an individual's long-term economic wellbeing than annual income. Our analyses, however, do not distribute tax burdens according
to lifetime income because future earnings are uncertain, and even if future earnings were
known, lifetime income would be difficult to measure with accuracy. In addition, lifetime
income is an inappropriate measure of current well-being if individuals are unable to smooth
their consumption over their lifetime by borrowing and saving. For example, if the college
students mentioned above are not able to borrow against their uncertain future earnings, it
may be inappropriate for the tax system to view them as well-off currently.6 Nevertheless,
some studies show that distributing a general consumption tax to families according to their
estimated lifetime income makes the tax appear to be less regressive.
Redistributin& the consumption tax burden
An important difference among the various forms. of consumption taxes lies in the
mechanisms available for distributing the tax more equitably among families with different
incomes. One way that European countries reduce the regressivity of the VAT is by
exempting specific goods and services from the tax or taxing them at a lower rate. This
approach does not reduce regressivity effectively because tax relief from exempting specific
goods and services is difficult to target to low-income families. While the tax preference
does relieve the burden on low-income families, middle- and upper-income households also
benefit when they purchase tax-preferred goods and services, requiring higher rates on other
goods and services that low-income families buy to raise the same revenue. Other
to a more regressive distributiOD of the tax than that shown in the lu'ched table.
sne finding that replacing the income tax with a flat-rate couumptiOD tax would redistribute tax
burdens from low-income to high-iDcome families is consistent with previous IDIIYIeI. For eumpl~, CBO and
Jet find that, under a broad-bued VAT, low-income families would pay a hiper fraction of their in1:ome iII
laX compared to hish-income families. See U.S. Congressional Budpt Office, F8ects of Adopting a ValueAdded Tax, U.S. Coopasiooal Bud,ct Office. 1992. pp. 32-7, and loint Committee on Taxation, Methodology
and Issues in Measuring Changes in the Distriblllion of Tax BIITdms, U.S. Government Printing Office, 1993,
p. 54-5.
6por a more detailed diJcuaaiOD of tbcae points. lee Joint Committee 00 Tuation, Methodology and
Issues in M~uring Changes in the Distriblllion of Tax BID'dens, U.S. GOVetnmel1t PriDtiDg Office, 1993, pp.
82-6.
7
approaches, such as refundable credits and expansion in government transfer programs are
more effective ways to offset regressivity, but would add to administrative costs and require
explicit increases in government outlays.
A consumption tax that is collected at least in part from individuals can better account
for differences in ability to pay among families and individuals than one that is collected
solely from businesses. Such a tax can be made less regressive through standard deductions
and/or graduated rates. Refundable credits like the earned income tax credit (ElTC) can also
be used to reduce the tax burden on low-income families, but credits carry with them
administrative costs. For example, low-income families, who otherwise might be excluded
from the tax system, would be required to file a return in order to receive the credit.
Alternatively, a VAT or BIT could be imposed at a moderate rate to replace a
portion of income tax revenues. This approach would retain the income tax system to ensure
that higb income individuals with low consumption relative to their income continue to pay
an equitable share of taxes, and refundable credits could be used to offset the effects of the
consumption tax on low-income families.
While consumption taxes can be made less regressive, there is a clear and important
tradeoff between progressivity and simplicity. The forms of tax that are the simplest and
probably the least costly to administer and with which to comply (the RST and V AT) are not
easily made progressive. The forms that are collected solely from individuals are more
easily made progressive, but would be at least as complex - and probably more complex than our current tax system. A pure consumed income tax, for example, would impose
numerous reporting requirements on taxpayers and would introduce complicated tax
calculations in ways that would be new to taxpayers, tax prepare!S, and the IRS. I will
describe some of these complexities in more detaillatcr in my testimony when I evaluate the
effects of tax reform on simplicity.
Transition from the existing income tax to a new consumption tax raises an additional
series of equity and compliance issues. These are also discussed below.
8 .
Economic effects of replacin& the income tax with a conmmption tax7
Sayin~
and investment'
The main reason to consider replacing the income tax with a consumption tax is that
this change could encourage domestic saving and capital fonnation and promote economic
growth. A consumption tax would not tax the return to savings and new investment. The
income tax does tax this return, and thereby discourages saving and investment to some
degree. The key issue is whether substituting a consumption tax for an income tax will raise
saving enough to overcome its other problems.
1. National savin,. The low rate of U.S. saving is a serious concern. The national
saving rate in the United States has declined in the 19805 compared to the previous three
decades (Table 2). Although private saving decreased during this period, it remained
positive. Public saving, however, has been consistently negative as a result of Federal
budget deficits.
The reasons for the decline in private saving rates in the United States are unclear. It
could be due to demographic factors that may reverse as the baby boom generation enters
later middle age and saves for retirement. It may also be attributable to an increase in the
availability of insurance and Social Security benefits, which reduce the necessity for private
saving. 9 The decline in saving does not appear to have been caused by changes in tax policy.
Marginal tax rates were lowered substantially during the 19805 and new saving incentives
were introduced, but the rate of saving still feD.
According to a recent report by the Organization for Economic Cooperation and
Development, the saving rates of our major trading partners also have declined since the
19605. 10 All of these countries except Japan, however, rely more heavily on consumption
7This section malyzes the long-nm economic effects of switching to a COD5WDption tax system. The
short-run effects could be quite different from the long-run effects, but malysis of short-run effects is beyond
the scope of this testimony.
'Discuasion of the points made in this 8ection of the testimony appean in loint Committee on Taxation,
Factors Affecting lhe Competili...eMSS oflhe UniUd Slaw, U.S. GoVCI'DIDCIIlt Printing Office, 1991, pp. 44-52;
U.S. Congressional Bud,er Office,lJ/eClS of Adopting IJ V~-Adde.d Tax, CoqtesaioDll Bud,et Office, 1992,
pp. 51-5; and Joint Committee OD Taxation, Ducription and Analysis of TQ)C Proposals Relating to Individual
Saving, U.S. Govemmeot Printing Office, 1995, pp. 63-72.
~or a more dctai.lcd discussion, ace loint Committee on Taxation, Ducriplion fWi Analysis of TQ)C
Proposals Relating to Individual Saving. U.S. Govemmeot Printina Office, 1991, p 72.
l°Organization for Economic Cooperation and Development, Tauuion and Household Saving, 1994, pp.
17-24.
9
taxes for revenues than does the United States, both as a percentage of gross domestic
product (GDP) and as a share of total tax revenues (Tables 3 and 4). While Japan depends
the least on consumption taxes for revenues, it also had the highest saving rate during the
1980s (Table 5) and the highest rate of growth in real per capita GDP (Table 6).
The most direct way to increase national saving is to reduce the Federal budget
deficit. The Federal government may also be able to affect private saving through changes
in tax policy. However, if tax policy changes also increase the Federal budget deficit there
may be no net increase in national saving.
7
2. Tax policy and private saving. Two effects from substituting a consumption tax
for the income tax could boost total private saving. Economic theory suggests that if the rate
of return on savings goes up, individuals would increase saving to consume more in the
future since the "price" of future consumption in tenns of foregone current consumption is
lower. However, most empirical studies find that the effect of increasing the rate of return
on the level of saving would be quite small. l1 In addition, some people are "savers," while
others consume essentially all their income. Shifting the overall burden of taxes from saver
to consumer households can increase aggregate private saving, but it would also result in an
increased concentration of private wealth.
While a pure consumption tax would encourage private saving more than a pure
income tax, the effect on saving of substituting a consumption tax for our existing income tax
is less clear. Our current income tax includes powerful incentives for employers to provide
retirement saving plans for all their employees - including low-income employees who
would not be likely to respond to tax incentives. The incentive for employers to establish
retirement plans would be much weaker under a consumption tax.
An alternative way to use tax policy to increase private saving is to broaden saving
incentives within the framework of the existing income tax. Provisions that directly
encourage people to deposit some of their earnings in tax-favored accounts, such as IRAs and
401(k) plans, could be more cost-effective ways of increasing saving without replacing the
entire tax system. Toward that end, the Administration's budget has proposed an expansion
in the eligibility rules for contributing to IRAs.
3. Saving and investment. Advocates of replacing the income tax with a
consumption tax often discuss effects on saving and investment as if they are interchangeable.
But saving and investment can diverge significantly because of the increased amount of
international capital flows in today's global economy. More specifically, the relative effects
on saving and investment would depend on the extent to which the consumption tax were
used to reduce corporate or individual income tax rates. Eliminating the corporate tax would
llSee loint Committee on Taxation, Ducription tmd A1uUy$U of Tax Propostili Relating 10 lMividlUJ1
Saving, U.S. Government Printinl Office, 1995, p. 46.
10
increase domestic investment more than private saving, and eliminating the individual
would increase private saving more than domestic investment.
tax
Under U.S. tax rules, corporate income tax is imposed on the return to equityfinanced capital used in the United States regardless of who owns it,l2 whereas the individual
income tax is imposed on the return to capital owned by U. S. residents regardless of where it
is used. Eliminating the corporate tax would increase domestic investment more than saving,
because it would reduce the cost of capital to both U.S. corporations and foreign
corporations investing in the United States by much more than it would increase the after-tax
return to U.S. savers. In contrast, eliminating the individual income tax would increase
saving more than domestic investment because it would increase the after-tax return to U.S.
personal saving invested both in the United States and abroad, but, with internationally-linked
capital markets, would not provide a relative advantage to capital invested in the United
States.
4. Interest rates. It is not clear how a switch to a consumption tax would affect U.S.
interest rates in the long run." The net demand by U.S. investors for interest-bearing assets
would increase, pushing bond prices up and yields down. This would occur because the
consumption tax would remove interest flows from tax calculations. Also, under a
consumption tax, domestic borrowers would not be willing to pay as high a rate of interest
because interest would no longer be deductible, and U.S. lenders would be willing to accept
a lower rate of interest because interest income would no longer be taxed. But in today's
world economy, the U.S. interest rate is closely linked to rates in other advanced countries.
With foreign interest rates unchanged and debt capital flowing freely across international
borders, any ~uction in U.S. interest rates would be dampened significantly. The likely
result is that U.S. interest rates would fall somewhat, but by much less than the initial tax
benefit to savers. After-tax yields to U.S. savers and after-tax interest costs to U.S.
borrowers would increase.
Allocation of capital
Because a consumption tax does not tax the return to new investment and treats all
businesses unifonn1y, it would not favor some assets or industries over others. Unlike the
12U.S. COIpOratiOll5 are taxed on their worldwide income, but receive a tax credit for foreip income
taxes paid. The residual U.S. tax mae 011 active foreign-soW'Ce income of U.S. corporations, after accounting
for foreign taxes, is galet'&lly quite low.
l>rhe short-run effects on interest rates would depeod on actions taken by the Federal Reserve during
the period of transition to a new tax system. Similarly, some forms of consumption taxes could also affect the
overall price level, but this effect is difficult to predict, because it will clepead lar,ely on ICtions taken by the
Federal Reserve. For a discuuion of the effects on prices of adopting a VAT, see U.S. Congressional Budget
Office, Effects of Adopting a Vallie-Added Tax, Coogn:ssiooal Budget Office, 1992, pp. ~S.
11
current U.S. income tax, it would not favor non-corporate over corporate investment or
investments in capital owned by State and local governments, owner-occupied housing,
consumer durables, and other personal assets over business investments. Asa consequence,
investors would be encouraged to hold assets that were expected to produce the highest
economic returns. Investment would be expected to shift out of the sectors that enjoy favor
under the income tax - owner-occupied housing, other personal assets, and noncorporate and
State and local capital - and into corporate capital. In addition, a consumption tax, unlike
the current income tax, would not favor corporate debt over equity financing, reducing tax
considerations from business financial decisions.
The resulting gains in economic efficiency are substantially reduced if the replacement
consumption tax departs from a very broad base. However, such departures may be desired
for a number of reasons. For example, most countries attempt to reduce the number of
taxpayers in the system by exempting small businesses from the V AT. Some industries, such
as banking and insurance, are typically excluded from the VAT because their tax bases are
difficult to define. Some forms of capital, such as owner-occupied housing, might be given a
preference to support social and economic goals. Each such exemption reduces the
efficiency and simplification benefits attributable to the uniform treatment of capital.
Labor sYW1y and See tax avoidance
Both
an income tax and a consumption tax affect the choice between work and leisure
by reducing the relative purchasing power of wages. An income tax reduces the relative
value of wages by taxing them directly. A consumption 1aX that is collected from businesses
reduces the value of wages to the extent that the business tax is passed forward to consumers
in the form of higher prices or back to workers in the form of lower wages.14
The effect on labor supply of switching to a consumption tax depends on changes in
effective tax rates. Effective tax rates reflect the combined effects of the statutory rate
structure and other tax proposal provisions, such as denying deductions for wages and
employee fringe benefits at the business level and retaining payroll taxes. Examining the
proposed statutory rate structure alone would overstate the possible decline in tax rates and
the increase in work incentives.
A tax that is collected from individuals and businesses at different tax rates can create
an incentive for business owners to reduce their tax burden by classifying their income as
either a return to business capital or a return to. labor. If the top tax rate applied to
businesses is lower than the top rate applied to individuals, business owners will have an
incentive to pay themselves lower salaries, ensuring that the income is taxed as business
U.S. ConJreuiODll Budget Office, F;ffecu of NJopting II VtJlut-AdMd Tar,
Budget Office, 1992. p. 57.
14Sec
u.s.
Congressional
12
income. To reduce these distortions under a two-patt, graduated-rate consumption tax, the
top statutory rate applied to individuals should be the same as the business tax rate.
International trade
It is sometimes argued that because indirect taxes can be refunded on exports, the
adoption of a VAT or other indirect consumption tax to replace part or all of our current
income taxes would encourage U.S. exports. However, trade economists generally agree
that such a tax change would not permanently improve either U.S. exports or the U.S. trade
balanCe. 1S
Eliminating or substantially reducing income taxes could affect the trade balance,
however. because income taxes may discourage both saving by U.S. residents and investment
in the United States, and lowering U.S. income taxes could affect private saving and
investment by different amounts. If private saving increased more than invesunent, the
United States would import less capital and net exports would increase; if investment
increased more than private saving, net exports would decline. Which effect would dominate
depends on the specific form of the income tax cut and on the relative responsiveness of
saving and investment.
Eliminating or reducing U.S. income taxes could also affect the relative
competitiveness of different industries, because the income tax imposes different effective tax
rates on production in different economic seeton. For example, reducing the cost of capital
in the United States would generally favor the production of capital-intensive goods over
labor-intensive goods. This differential benefit would affect the composition of trade,
because goods that became relatively more expensive to produce in the United States would
be increasingly imponed, and goods that became relatively inexpensive to produce at home
would be increasingly exported. However, there is little rtaSOI1 to believe that the net trade
balance would be much affected by this change in relative trade positions.
While border tax adjustments for consumption taxes have no permanent effect on the
trade balance, it should be noted that some types of consumption taxes are accepted as
border-adjustable under the General Agreement on Tariffs and Trade (GAm, and others are
not. Indirect taxes, such as credit-invoice VATs used in most other countries, are borderadjustable under the GATI'. Consumption taxes collected from individuals, such as the
consumed income tax, are unlikely to be refundable under the GAIT. Although a broadbased, single-rate subtraction method VAT is economically equivalent to a similarly broad-
lSSce U.S. CoDgreasioaal Budget Office, Effeas of Adopt;ng II Valw-Add«J Ta, U.S. Coqre&sional
Budget Office, 1992, p. 63.
13
based credit-invoice VAT, a GAIT ruling would consider other factors. Whether a
subtraction method VAT would survive a GAIT challenge is an untested issue. 16.17
SectQr-pcific issues of adqptine a consumption taxll
Special treatment may be appropriate for specific business sectors under those fonns
of tax that are collected at least in part from businesses. High administrative and compliance
costs relative to revenue collected may justify special treatment for certain seeton and for
small businesses. Special rules are required for taxing goods and services with hard-tomeasure tax bases, such as financial services. The tax base for these services is not
explicitly separated from other charges, and it is difficult to apportion the benefit from
fmancial services to those who receive them. For example, the charge for intermediation
services provided by banks is included in the difference between the interest rates charged to
borrowers and paid on deposits. That difference also includes the return to equity-holden.
Moreover, it is difficult to allocate the intermediation charge to a specific savings account or
loan.
I'
Taxing governments and non-profit organizations is difficult because there often is no
market price for their production and many are currently not subject to tax. Most countries
with VATs attempt to tax the commercial operations of this sector, but this approach requires
differentiating between taxable and non-taxable activities which can be administratively
complex. While special treatment for specific sectors might ease administration of a
consumption tax, exclusions from the tax base would increase economic distortions relative
to a very broad-based consumption tax.
Taxation of housing and consumer durables can also be problematic. To minimize
economic distortions, rental housing, owner-occupied housing, and other durable goods
I~e&e points are discussed in more detail in Jomt Committee on Tuation, Factors 4tf~cting 1M
Competilivtness OflM Unit«l SlaJes, U.S. Govcmmcnt Printing Office, 1991, pp. 302-4, and U.S.
Congressional Budget Office, Effects of Adopting a Value-Added Tat, U.S. Congressional Budget Office, 1992,
pp.63-4.
171be
Treasury departmeat bas previously responded to a query by Seuators Nunn and Domenici on
this issue.
1'Thcse issues are discuued in de&ail in Joint Committee on Taution, FaCfors 4/f.Cfing 1M
Comperil;~ness
oflM Unit«l SlaJes, U.S. CongressioDal Budget Office, 1991, pp. 314-20, and U.S.
Congressional Budget Office, E,JfeClS of Adopting a Vc:alMe-Added Tat, U.S. Congressional Budget Office, 1992,
pp.26-30.
U'For a discussion of the difficulties related to taxing insurmc:e and other financial services under a
VAT, see Joint Committee on Taxation, FaclOTS AJf~CI;ng lhe CompetiliwM.fs ofllle United StaJes, U.S.
Government Printing Office, 1991, pp. 315-18.
14
should be treated similarly. When businesses are allowed to expense capital purchases,
purchases of buildings or durables for use as rentals would be deductible, and rental receipts
would be taxed. However, the same treatment of owner-occupied housing and consumer
durables would be difficult to administer, since it would be based on an imputed annual
amount of rental services from these assets.20 An alternative approach is to tax the total
purchase price of homes and durable goods, but not the rental services from them. This
approach can lead to significant tax bills for buyers and windfall gains for current owners.
Many consumption tax proposals assume that exports will be relieved of the tax and
imports will be taxed. Making the appropriate adjustments can be difficult if the tax base is
not broad or if tax rates vary. In addition, it can be difficult to collect the tax on services
that businesses purchase from abroad.
Simplicity
Simplification of the tax system is a primary goal of many tax reform proposals, and
one which we support. To evaluate reform proposals on the basis of this objective, however,
it is useful to examine the sources of the complexity that plagues our current system. One
source of complexity, the measurement of capital income, would be largely eliminated under
some forms of consumption tax. Three others, the desire to distribute the tax burden
equitably, the necessity to measure the consumption component of business income properly,
and the use of the tax system to advance certain non-tax social and economic policies, would
likely persist under any consumption tax. If a consumption tax were implemented in the
United States, the final form of the tax would lilcely differ from the ideal for these same
reasons. Divergence from the simple, broad-based, flat-rate, consumption tax model - for
whatever reason - will tend to lead to more complicated tax calculations, higher tax rates
overall, and reduced efficiency gains.
Correctly measuring capital income is difficult, and approximations designed to
reduce that complexity can invite tax avoidance and an inefficient use of economic resources.
Therefore, one of the attractions of a consumption tax is that many of the onerous
calculations related to capital income would be eliminated. Depreciation and other costrecovery provisions, for example, would be replaced with expensing, and it would not be
necessary to maintain records on asset costs in order to compute capital gains.
Unlike the existing income tax, however, a consumed income tax collected from
individuals would require the measurement of annual changes in wealth. As suggested
earlier in this testimony, a consumed income tax system could, therefore, be at least as
complex as the current system, posing numerous new taxpayer reporting requirements and
20Sce U.S. Congressiooal Budget Office, Effects of AlWpting a Valut-Atkkd Tat, U.S. Congressional
Budget Office, 1992, pp. 28-9.
15
introducing new tax concepts and calculations. Under one approach to a consumed income
tax, proceeds from all forms of borrowing - whether through a loan or a balance carried
over to the next year on a credit card - would be added to a family's tax base. The net
contribution to all forms of savings would be deducted from the tax base and withdrawals
from savings- would be taxed. It might not be complicated to calculate tax liability under this
approach for a family that borrowed no money during the year, had no end-of-the-year credit
card balance, and only made contributions to a passbook savings account. But in the modem
U.S. economy, even a moderate-income family might in a typical year purchase deductible
mutual fund shares through a dividend reinvestment plan, cash in a taxable bond, and carry
taxable balances on several credit cards. Some proposals might not require families to pay
tax on short-term credit or might allow tax-free withdrawals from savings in cases of
hardship, but such reductions in the tax base would require higher tax rates overall and
complex rules to determine eligibility for exemptions and to prevent tax avoidance.
Redistributin& the
tax
burden
Most of the mechanisms available under a consumption tax for redistributing the
burden of the tax introduce complexities. Exempting certain goods and services from a VAT
and taxing others at alternate rates increases the compliance burden on businesses that would
have to determine which rates to charge for their products and, in some cases, would be
required to apportion their deductible costs among taxable and non-taxable sales. To make
up the revenue loss from reducing tax on some goods and services, tax rates on the
remaining goods and services would have to be raised.
A tax that is collected wholly or in part from individuals can be applied at graduated
tax rates, which would complicate the tax only slightly: it is not much more difficult for
taxpayers to look up their tax liability on a table - as they do now - than it would be for
them to apply a single rate to all taxable income. But in the case of a two-part consumption
tax, as noted above, ensuring that the same top statutory rate applies to both individuals and
businesses would ease administration and improve compliance.
Many consumption tax proposals offer large standard deductions and exemptions for
dependents in order to relieve some income from tax and to remove large numbers of people
from the tax system altogether. The latter benefit is reduced, however, if refundable tax
credits - like the BITe - are used to redistribute the burden of the tax. Low-income
_families that otherwise might not be required to file a tax return would have to fill out a
return in order to receive the credit. So that credits can be targeted to needy households, a
family might be required to calculate income, which it otherwise would not have to report
under some fonns of consumption tax. The relative increase in burden of offering
refundable credits might be small in the case of a consumed income tax, under which much
of the income tax structure would be retained. The relative burden would be more
significant, however, if the income tax had been completely replaced by a business-level
consumption tax.
16 .
Measurin& consumption
Like the existing income tax, a consumption tax that is collected from businesses
would require rules for determining deductible business costs. Some business purchases have
a consumption component that should be excluded from deductible business purchases. For
example, a business' purchase of a company car that is also available for an employee's
personal use has a consumption component, as do many business expenditures for travel and
entertainment. The rules for determining allowable costs under a consumption tax. would be
similarly complex to the related rules under the income tax. Moreover, the timing of
deductions for capital purchases would make the problem more serious under a consumption
tax. Under a consumption tax, business assets would be expensed, leaving only a single year
of records for each asset, and accelerating the benefit received - and tax revenue lost - from
circumventing the rules.
Promotin& social and economic
~oaIs
A U.S. consumption tax is likely to be used to advance certain widely-held social and
economic goals. Home-ownership is treated preferentially under the current income tax.
primarily by allowing families a deduction for interest they paid o!l their home mortgages.
Allowing current law treatment of mortgage interest under a consumption tax would
encourage homeowners to incur additional borrowing beyond their financing needs. Because
mortgage loan proceeds under current law arc not included in taxable income, while the
amounts deposited in a savings account under a consumption tax would be deductible,
mortgage loans used to transfer money to a savings account would reduce tax liability. In
addition, allowing only some forms of loans to be exempt would introduce distortions
relative to a system that treated all borrowing equally. As under the existing income tax,
taxpayers would have an incentive to reclassify all forms of household debt as mortgage debt
to maximize the benefit of the tax preference.
Deductions for charitable contributions and State and local taxes paid could be
allowed for families under a consumed income tax and for wage-eamers and businesses
under a two-part consumption tax. A tax preference for employer purchases of health
insurance and fringe benefits could be provided under a two-part consumption tax. by
allowing businesses to deduct these costs. Under an individual-level consumption tax,
employer-provided health insurance and other fringe benefits could be taxed by imputing
their value to the recipients and including the imputed value in taxable income; not imputing
the value to recipients would treat these benefits preferentially relative to other forms of
compensation. Each of these tax preferences, however, would require rules to determine
which fringe benefits and business expenses are included in or excluded from the tax base,
and these rules would be equally complex as those under current law. Such tax base
reductions would also require overall tax rates to be raised and would reduce the efficiency
gains from taxing all forms of consumption equally.
17
Transition to a consumption tax
The most significant issue in converting from an income to a consumption tax system
is deciding how to treat the return to wealth that was accumulated out of after-tax income
under the income tax. The return to new saving and investment would be exempt under a
consumption tax, but without an explicit exemption for old wealth, the return to and
withdrawals from the stock of existing assets that are not reinvested will be taxed. For
example, imposing a Federal VAT would automatically tax all withdrawals from existing
savings that are used for consumption - even if those savings were accumulated out of aftertaX income. To illustrate the magnitude of this problem, consider the value of current 21
household wealth. The total wealth of u.s. households is estimated at about $23 trillion.
Much of this wealth is in the form of assets such as pensions and unrealized capital gains,
which have not yet been taxed. But, excluding housing, the basis of private assets in the
United States could be as much as $10 trillion. Transition rules governing the treatment of
consumption financed by existing wealth will determine to what extent this significant amount
of previously taxed savings is subject to the consumption tax.
Transition rules would be required to relieve the tax burden on savers who have
already paid income taxes on their savings and would be taxed again when those savings
were spent under a consumed income tax. For example, without a transition rule for past
savings, a retiree who accumulated SI00,OOO in a savings account out of after-tax income
before the imposition of a consumption tax would be taxed on withdrawals from that account
that are for consumption expenditures. A transition rule could allow savings that were
accumulated under the income tax to be segregated from "new" savings and deducted from
income. This rule would treat the $100,000 as tax-paid savings and would enable the retiree
to make tax-free withdrawals from the savings account. It is difficult, however, to design
rules that differentiate between individuals who reduce their accumulated savings in order to
consume, and individuals who only rearrange assets among accounts. Allowing tax-free
withdrawals from past savings, for example, would enable any individual with accumulated
wealth to gain a tax deduction simply by transferring old assets into "new" savings accounts.
Such a rule would enable a millionaire living off the interest on her accumulated assets, for
example, to receive the equivalent of tax-free interest income - a substantial benefit
compared with current law. 22
21
Board of Governors of the Federal Reserve System,
.
Balan~
Shuts oj U.
s. HolUeholds.
nUnder a tranaition rule that treats withdrawals from existing livings that are deposited into new
savings accounts as new savings. In individual could draw down existing savings, deposit the amount in a new
savings vehicle, and receive a tax deduction for'the amount deposited. If the return to this "new- savings is
used for consumption, the individual would pay tax on that return. But the origiDal tax deduction would provide
a benefit that would be equivalent 10 receiving the interest income to-free.
18
A similar problem exists for businesses that have purchased equipment prior to the tax
change and have unused depreciation allowances. Denying depreciation deductions under the
consumption tax would mean that businesses would not be able to recover fully the cost of
those capital purchases, and that income from capital purchased before the effective date
would be overtaxed. It would impose windfall losses on firms that invested prior to the
effective date, placing them at a disadvantage relative to businesses that purchased equipment
just after the effective date of the new consumption tax ..
Transition rules could reduce windfall losses in this case, but they would likely
sacrifice tax revenue and lead to greater complexity. For example, if the consumption tax is
collected only at the business level, businesses could be allowed to deduct immediately the
balance of their depreciation allowances, though little revenue would be collected from
businesses during the early years of the tax under this scheme. Extending the depreciation
deductions over a number of years would spread out the revenue loss, but it would require
businesses to segregate old and new assets during the transition period and, therefore, would
increase complexity.
Coordination with State and local sales taxes
An additional administrative consideration is the coordination of a Federal
consumption tax with State and local government tax systems. Historically, States have
depended heavily on retail sales taxes and excise taxes for revenues. The adoption of a
national sales tax or Federal VAT is likely to be seen as an infringement upon this important
revenue source for State and local governments. In addition, a Federal VAT or national
sales tax would create a new type of tax for businesses to administer. Some businesses
would be responsible for either the VAT (or national sales tax) or a State sales tax, while
others would be liable for both. The amount of State sales tax or VAT (or national sales tax)
collected would depend on which tax was applied first and whether that tax was included in
the tax base for the other one. Particular goods and services might be taxable under a VAt
(or national sales tax) and exempted under the State sales tax, or vice versa, thereby creating
additional administrative problems. Although sales taxes are generally under the purview of
the States, the closeness of the tax bases would put the States under pressure to conform to
Federal law.
Conclusion
A change as dramatic as replacing the income tax system with a consumption tax
should only be attempted if the expected economic benefits of taxing consumption are
reasonably certain to be larger than the total costs, burdens, and risks of moving to a
completely new tax system. In making such a determination, it is misleading to compare a
theoretically ideal consumption tax and the income tax system in place today. A realistic
comparison would recognize that exclusions would likely be made under the replacement
19
system - either for administrative reasons or to support social and economic goals - and that
those exclusions would reduce the economic benefits of the change and increase complexity.
A realistic comparison would also recognize that what we call an income tax in the United
States is really a hybrid tax system. While it is based on income, it incorporates a number
of consumption tax features that help promote saving. For example, contributions to
pensions, deductible IRAs, and other types of retirement savings are deducted from taxable
income, and the earnings on these savings are not taxed until they are withdrawn. Most of
the savings of middle-income Americans are in assets such as pensions and home equity that
are already exempt from tax. Proposals for further reduction in taxes on income from
savings of middle-income Americans, such as the proposal in the President's budget to
expand the use of IRAs, should be carefully examined before we consider doing away with
the income tax.
Based on all of the considerations described in my testimony today, we are not
convinced that the case for completely replacing the income tax with a consumption tax is
compelling. The most frequently cited economic benefit of such a change, an increase in
private saving, is uncertain and could be small. The fairness of replacing the income tax
with a consumption tax is also a concern. Moving to a flat-rate consumption tax would
increase the tax burden on low-income families and lower the tax burden on high-income
families. Efforts to improve the progressivity of consumption tax proposals result in
complexity.
In general, divergence from the simple, broad-based, flat-rate, consumption tax model
-- for administrative reasons, to address distributional problems, or to promote social and
economic goals - will result in more complicated tax calculations, higher tax rates overall,
and reduced efficiency gains. In addition, the transition could take many years to complete,
and could be very costly and complex. Absent special transition rules, the move to a
consumption tax could create many unintended winners and losers. New savers would be
advantaged relative to those who saved in the past, including many of the elderly.
Businesses that invest after enactment of the consumption tax would have a competitive
advantage over businesses that invested just prior to the change. Rules that would address
these situations would be complex.
We commend efforts to develop consumption tax proposals that are progressive and
revenue-neutral. We recognize that the details of recent tax reform proposals have not yet
been provided, and that the details will affect the analysis of any particular proposal.
However, we believe that replacing the income tax with a consumption tax ultimately could
be excessively complex and could create economic disruption. Moreover, adopting a form of
consumption tax other than a credit-invoice VAT or RST would be venturing into the
unknown. We can only speculate as to how a consumption tax collected at the individual
taxpayer level would work. There is no experience upon which to gauge its effects on the
U.S. economy or its administrative and compliance costs, and no way to anticipate all the
potential tax avoidance schemes that could be designed to exploit the new tax rules.
20
Other countries have typically introduced consumption taxes, not as replacements for
progressive income taxes, but in place of existing distorting sales or turnover taxes. Most of
our trading partners now rely on a mixed tax system that combines income and consumption
taxes. Consequently, a wholesale replacement of the income tax with a consumption tax
would represent a grand international experiment. The burden lies with the proponents of
consumption taxes to show that it is worthwhile to conduct this experiment on the world's
largest and most complex economy.
Mr. Chairman, we look forward to working with the Congress on improving our tax
system. In particular, we will give serious consideration to proposals that meet the tax
policy objectives set forth above - proposals that would simplify the tax system and improve
economic incentives without sacrificing revenue or fairness.
Table 1
Replace Current Individual and Corporate Income Taxes (Including the EITC)
wHh a 14.3% Flat Rate Consumption Tax with No Exemptlons(1)
(1994 Income levels)
Family Economic
Income Class (2)
(000)
After-Tax (3)
Income Under
Current Law
($B)
0- 10
10-20
20-30
30-50
50-75
75 -100
100 -200
200 & over
Total (5)
79.3
249.4
Change in After-Tax Income rrom Proposal (4)
Flat Rate
Total Change
Consumption
Tax with No
Percentage
Repeal
Change
Income Tax
Amount
Exemptions
($8)
($B)
(%)
($B)
Percentage
Change
In Total
Federa' Taxes
(%)
906.8
148.8
240.1
-5.1
-25.2
-42.7
-100.2
-124.1
-101.6
-131.8
-109.2
-31.7
-15.1
17.0
130.9
-2.2
1.9
14.4
97.9
104.0
53.0
25.2
15.5
8.6
-7.0
-47.6
4,711.2
641.1
-&41.1
00
0.0
00
342.6
728.8
865.4
680.2
902.5
-1.2
-1.6
13.7
61.8
92.4
86.5
-6.3
-26.8
-29.0
-38.4
-8.0
-10.8
-8.5
-5.3
-3.7
Department of the Treasury
Office of Tax Analysis
February 14. 1995
(1) This table distributes the estimated change In after-tax income due to the proposal with a revenue-neutral rate of 14.3 percent.
(2) Family Economic Income (FEI) is a broad-based income concept. FEI is constructed by adding to AGI unreported and underreported income; IRA
and Keogh deductions; nontaxable transfer payments, such as Social Security and AFDC; employer-provided fringe benefits; inside build-up on
pensions, IRAs: Keoghs, and life insurance; tax-exempt interest; and imputed rent on owner-occupied houSing. Capital gains are computed on
an accrual basis, adjusted for inflation 10 Ihe extent ,eliable data allow. Inflationary IosSH of lenders are subtracted and of borrowers are added.
There is also an adjustment for accelerated depreciation of l'lOflCOfPO'ate businesses. FEI is shown on a family, rather than on a tax retum basis. The
economic incomes of all members of a family unit are added to anive at the family's economic income used in the distnbutions.
(3) The taxes included are individual and corporate income, payroll (Social Security and unemployment), and excises. Estate and gift taxes and customs
duties are excluded. The individual income tax is assumed to be borne by payors, the corporate income lax by capital income generally, payroll taxes
(employer and employee shares) by labor (wages and self-employment income), excises on purchases by individuals by the purchaser, and excises
on purchases by business in proportion to total consumption expenditures. Taxes due to provisions that expire prior to the end of the Budget period
(i.e., before 1999) are excluded.
(4)
The change in Federal taxes is estimated at 1994 income levels but assuming fully phased in law and static behavior. The incidence assumptions for
the repealed incorrM! taxes is the same as for the current law taxes (see footnote 3). The portion of the flat rate consumption tax that falls on wages,
fringe benefits, and pension benefits is assumed to be borne proportionately by wages, fringe benerlts, and penslon benefit.. The remaining pextion of
the flat rate consumption tax, which fans on business cash flow, is assumed to be borne by capital income generany.
(5)
Familin with negative incomes are included in the total Hne but not shovm separately.
Chart 1: Distributional Effect of Replacing
Current Individual and Corporate Income Taxes
with a 14.3% Flat Rate Consumption Tax·
0/0 Change in After-Tax Income - - - - - - - - - - - - ,
14.4
15
10
5
o
-5
-10
-10.8
-151L-------------------------------------~
0-10
10-20
20-30 30-50 50-75 75-100 100-200 200+
Income Class in $1,000
Source: Department of the Treasury (See Table 1 for details)
Table 2.
Components of Net U.S. National Savings as a Percentage of GOP
1929 - 1994
Year
Net
Personal
Saving
1929
1939
1949
1959
1969
1979
1989
1990
1991
1992
1993
1994
2.4
1.9
2.7
4.5
4.5
5.0
2.9
3.1
3.7
4.1
3.0
3.0
2.8
0.8
4.2
3.2
2.6
2.5
1.7
1.6
1.7
1.2
4.7
4.7
5.5
4.5
3.4
Average
Average
Average
Average
Average
1950-59
1960-69
1970-79
1980-89
1990-94
Office of Tax Analysis
U.S. Department of the Treasury
Net
Business
Saving
Total Net
Private
Saving
Public
Saving
2.2
2.0
5.2
2.6
6.9
7.7
7.1
7.5
4.6
4.7
5.4
5.4
5.3
5.0
1.0
-2.6
-1.2
-0.6
1.0
0.4
-1.5
-2.5
-3.2
-4.3
-3.4
-1.9
2.9
3.6
2.6
1.5
1.8
7.6
8.2
8.1
6.0
5.1
-0.1
-0.1
-1.0
Total Net
National
Saving
-2.4
-3.1
February 1995
Source: Department of Commerce, Bureau of Economic Analysis
6.2
0.0
5.7
7.1
8.1
7.9
3.1
2.2
2.2
1.1
1.9
3.0
7.5
8.1
7.2
3.6
2.1
Table 3
Tax Revenues by Type of Tax as a Percentage of GDP
for Selected Countries: 1992
Total
Income &
Profits
Social
Security
Property
Goods &
Services
Other!
Canada
36.5
16.4
6.0
4.0
9.5
0.5
France
43.6
7.6
19.5
2.2
11.7
2.7
Germany
39.6
12.7
15.2
1.1
10.6
0
Italy
42.4
16.6
13.3
1.0
11.4
0.1
Japan
29.4
12.5
9.7
3.1
4.1
0.1
United Kingdom
35.2
12.7
6.3
2.8
12.1
1.3
United States
29.4
12.2
tS.8
3.3
5.0
Source:
Organization for Economic Cooperation and Development, Revenue Statistics of
aECD Member Countries, 1965-1993, 1994.
1 Includes certain payroll taxes that are not earmarked for
social security, taxes imposed on other bases not otherwise
identified or identifiable and fines and penalties.
Table 4
Tax Revenues by Type of Tax as a Percentage of Total Taxation
for Selected Countries: 1992
Income &
Social
Profits Security
Property
Goods &
services
Other)
Canada
45.0
16.5
11.1
26.1
1.4
France
17.3
44.6
5.0
26.8
6.3
Germany
32.0
38.4
2.7
26.9
Italy
39.1
31.3
2.4
26.9
0.3
Japan
42.4
32.8
10.5
14.0
0.3
United Kingdom
36.1
17.8
7.9
34.4
3.7
United states
41.5
29.9
11.4
17.1
Source:
Organization for Economic Cooperation and
Development, Revenue Statistics of OECD Member
Countries, 1965-1993, 1994.
I Includes certain payroll taxes that are not earmarked for
social security, taxes imposed on other bases not otherwise
identified or identifiable and fines and penalties.
Table 5
Average Net National Saving Rates for Selected Countries
country
1980 l s
1990
llll
1lll
Canada
8.4
5.0
2.5
1.5
France
7.9
8.6
7.6
6.5
Germany
9.8
12.5
10.4
9.8
Italy
9.8
7.8
6.8
5.2
Japan
18.2
19.8
20.0
18.2
United Kingdom
4.8
3.6
2.4
2.0
United states
4.5
3.1
2.8
1.9
Source:
Note:
OECO, National Accounts 1980-1992, 1994.
Data are based on the OECD System of National Accounts
(SNA) methodology which differs slightly from the U.S.
National Income Accounts System.
Table 6
Average Annual Growth Rates of Real Per Capita GOP
in G7 Countries, 1980 - 1992
1980 to
Country
1990 to
1990
1992
(percent)
Canada
1.9
-1.9
France
1.8
0.4
Germany
2.0
2.0
Italy
2.0
0.9
Japan
3.5
2.4
United Kingdom
2.5
-1.8
United States
1.8
-0.1
Office of Tax Analysis
February 1995
U.S. Treasury Department
Source: Organization for Economic Cooperation and Development
UBLIC DEBT NEWS
Departmcnt of the Treasury
.c.
;Bureau of the Public Debt
/
:
'-
FOR IMMEDIATE RELEASE
April 24, 1995
• Washington, DC 20239
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILL8
Tenders for $11,694 million of 13-week bills to be issued
April 27, 1995 and to mature July 27, 1995 were
accepted today (CU8IP: 912794896).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.64%
5.66%
5.66%
Investment
Rate
5.82%
5.84%
5.84%
Price
98.574
98.569
98.569
$10,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 47%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.60 -- 98.584
RR-238)
Received
$48,637,887
Accepted
$11,693,761
$43,299,910
1,277,377
$44,577,287
$6,355,784
1,277,377
$7,633,161
3,544,400
3,544,400
516,200
$48,637,887
516,200
$11,693,761
5.65 -- 98.572
UBLIC DEBT NEWS
Department oftht' Treasury •
Bureau of the Public Debt - Washington, DC 20239
CONTACT: Office of Financing
202-219-3350
FOR IMMEDIATE RELEASE
April 24, 1995
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $11,736 million of 26-week bills to be issued
April 27, 1995 and to mature October 26, 1995 were
accepted today (CUSIP: 912794V43).
R~~GE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.72%
5.75%
5.75%
Investment
Rate
5.99%
6.02%
6.02%
Price
97.108
97.093
97.093
Tenders at the high discount rate were allotted 21%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.73 - 97.103
(RR-239)
Received
$49,105,994
Accepted
$11,735,929
$42,586,560
1.040,034
$43,626,594
$5,216,495
~Q40,034
3,150,000
3,150,000
2,329,400
$49,105,994
2,329,400
$11,735,929
5.74 - 97.098
$6,256,529
TREASURY
OFFICE OF PUBUC AFFAIRS e1500PENNSYLVANIAAVENUE, N.W. e WASHINGTON, D.C. AJ~l2p
-&02)16gO'5960
Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data for the month of
March 1995.
As indicated in this table, U.S. reseIVe assets amounted to $86,761 million at the end
of March 1995, up from $81,439 million in February 1995.
End
of
Month
Total
ReseIVe
Assets
Gold
Stock 11
Special
Drawing
Rights 1.111
Foreign
Currencies
~I
Reserve
Position in
IMF 1./
1995
February
81,439
11,050
11,158
46,378
12,853
March
86,761
11,053
11,651
50,639
13,418
11
Valued at $42.2222 per fine troy ounce.
1/
Beginning July 1974, the IMF adopted a technique for valuing the SDR based on a
weighted average of exchange rates for the currencies of selected member countries. The
U.S. SDR holdings and reserve position in the IMF also are valued on this basis
beginning July 1974.
J/
Includes allocations of SDRs by the IMF plus transactions in SDRs.
~I Includes holdings of Treasury and Federal Reserve System; beginning November 1978,
these are valued at current market eXChange rates or, where appropriate, at such other
rates as may be agreed upon by the parties to the transactions.
RR-240
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UBLIC DEBT NEWS
Department of the Treasury •
FeW
Bureau of the Public Debt • Washington, DC 20239
IMJV1EDIATE RELEASE
Ap l i 1 :2 c),
CONTACT: Office of Financing
202-219-3350
1 CJ 95
RESULTS OF TREASURY'S AUCT:tON 'OF 2-YEAR NOTES
Tenders for $17,751 million at 2-year notes, Series AD-1997,
to be issued May 1, 1995 and to mature April 30, 1997
wer~ accepted today (CUSIP: 912827T51).
Tho::: interest rate on the notes will be 6 1/2%. All
tenders at yields lower than 6.524% were accepted in
tull.
Tenders at 6.524% were allotted 76%. All noncompetitive and
successful competitive bidders were allotted securities at the yield
(It (.574%, with an equivalent price of
99.956.
The median yield
was 6.500%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 6.480%;
that is, 5% of the amount of accepted competitive bids were
t~ndered at or below that yield.
comp~titive
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Received
$41,203,984
Accepted
$17,751,448
The $17,751 million of accepted tenders includes $1,005
milliorl of noncompetitive tenders and $16,746 million of
c:ompetitlve tenders from the public.
In addition, $533 million of tenders was awarded at the
l1igh yield to Federal Reserve Banks as agents for foreign and
intF::rnational monetary authorities.
An additional $350 million
(If
tenders was also accepted at the high yield from Federal
Reserve Banks for their own account in exchange for maturing
securities.
RR-24 1
DEPARTMENT
OF
THE
omCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENl1E. N.W .•
FOR RELEASE AT 2:30 P.M.
April 25, 1995
TREASURY
WASHI~GTON.
CONTACT:
D.C.. 20220. (202) 622-2960
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $24,400 million, to be issued May 4, 1995.
This offering will result in a paydown for the Treasury of about
$3,175 million, as the maturing 13-week and 26-week bills are
outstanding in the amount of $27,563 million. In addition to the
maturing 13-week and 26-week bills i there are $16,593 million of
maturing 52-week bills. The disposition of this latter amount
was announced last week.
Federal Reserve Banks hold $11,205 million of bills for
their own accounts in the three maturing issues. These may be
refunded at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $4,611 million of the three
maturing issues as agents for foreign and international monetary
authorities_ These may be refunded within the offering amount
at the weighted average discount rate of accepted competitive
tenders. Additional amounts may be issued for such accounts if
the aggregate amount of new bids exceeds the aggregate amount
of maturing bills. For purposes of determining such additional
amounts, foreign and international monetary authorities are
considered to hold $4,081 million of the original 13-week and
26-week issues_
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securitie9
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bondsDetails about each of the new securities are given in the
attached offering highlightR_
000
Attachment
RR-242
HrGRL~GHTS
OF TREASURY OPFBRZNGS OF WEBXLY BXLLS
TO BB rSSUBD MAY 4,
1995
April 25.
Offering Amount .
Description of Offeringl
Te~m and type of security
CUSIP number
Auction date
Issue date
Maturit.y date .
Original issue date
Currently outstanding
~-1inimum bid amount
1-1ul t ipl es .
$12,200 million
~l-day
bill
912794 U3 6
May 1, 1995
May 4, 1995
August 3, 1995
February 2, 1995
$13,560 million
$10,000
1,000
$
1995
$12,200 million
182-day bill
912794 V5 0
May 1, 1995
May 4, 1995
NovenIDer 2, 1995
May 4, 1995
$10,000
$ 1,000
The fcllowinq rules aoply to all securities mentioned above,
Submission of Bigs:
Noncompetitive bids
Accepted in full up to $1.000,000 at the average
diacoun~ rate of accepted competitive bids
Compec.itive bids
(1)
Nust. be expressed as a discount rate wi th
two decimals, e.g., 7.10\.
{2} Net long position for each bidder must be
reported when the sum of the total bid
amount. at all discount rat.es. and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single yield
35% of public offering
Maximwn Award .
35t of public offering
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon Eastern Daylight. Saving time
on auction day
Compet.itive tenders .
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Payment Tenus .
Full payment wit.h tender or by charge to a funds
account at a Federal Reserve Bank on issue date
DEPARTlVlENT
OF
THE
TREASURY
NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANlA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622·2960
!
EMBARGO TO BE SET AT BRIEFING
Text as prepared for delivery
April 25, 1995
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
POST G-7 PRESS CONFERENCE
You all have the communique, so I won't read the whole text to you.
Let me start giving you a sense of our discussion on the key issues, and then I'll
take a few questions.
First, and very importantly, we reached a common view that recent exchange rate
movements have gone beyond the levels justified by underlying economic conditions in
the major countries, and that an orderly reversal of these movements would be desirable.
We also agreed to strengthen our respective efforts to reduce internal and external
imbalances and to continue to cooperate closely in exchange markets.
This statement reflects a general view that the most effective route to promote
greater financial market stability is to get the fundamentals right, and to strengthen them
where necessary.
Let me say, and I think it's very important, that the tone of our discussions was
very constructive. The spirit was one of cooperative enterprise. We agreed to remain
in close contact and to continue to work closely together as we go forward.
We had an opportunity to discuss the very substantial progress made in respect to
many areas of the U.S. economy -- progress that has not been entirely understood
abroad. I made it clear, as the President has on many occasions, that we are committed
to further deficit reduction and that we will not support tax cuts that would increase the
deficit. I expressed the view that many in Congress are committed to deficit reduction.
The President has proposed a budget that further reduces the deficit as a share of our
economy, and I believe that after what undoubtedly will be a lengthy process in Congress
we will come out with precisely that -- a budget that continues to reduce the deficit as a
share of our economy.
RR-243
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We also had an extensive discussion of the Halifax agenda for reform of the
international financial institutions.
Our priorities are first to improve our capacity to deal with the challenges
presented by the changes in the global financial system, and, second, to develop more
effective means to promote sustainable development, particularly in the poorest
developing countries.
We reviewed the proposals I covered in my press conference yesterday, and a
variety of other issues. And, although it would not be appropriate to go into the details
of our discussions, I will say that we have made a reasonable amount of progress since
our meeting in Toronto toward agreement on broad directions and specific proposals for
reform. We will each have an opportunity over the next two days to consult on these
issues with the broader membership of the IMF and the World Bank. And that will help
us as we continue our preparations for the Summit over the next several weeks.
Finally, on Russia, we were encouraged by the renewed commitment by the
Russian authorities toward stabilization and reform. We urged them to push ahead with
their privatization efforts and with strengthening the legal framework necessary to
support private sector development.
We look forward to reaching agreement in the Paris Club to RSchedule Russia's
official debt service payments falling due in 1995.
With that introduction, I would be happy to take your questions.
-30-
April 25, 1995
STATEMENT OF THE GROUP OF SEVEN
Finance Ministers . .aoc! ge.ntral Bank Governors
1.
The Ministers and Governors exchanged views on current
global economic and financial conditions and issues related to
the review of the international economic architecture initiated
at the Naples Economic Summit. The Ministers and Governors
joined by representatives of the EC also reviewed developments in
the Russian Federation with Russian officials.
2.
In reviewing the recent economic performance of the G-7,
they agreed that the recent performance of their economies is
encouraging. Growth in most of the major industrial countries
has been stronger than expected, and the broad-based expansions
now in place will contribute to increased employment. As
recovery spreads, the pattern of growth will help promote
adjustment of external imbalances.
3.
Considerable progress has been made in establishing the
conditions conducive to achievement and maintenance of price
stability. The Ministers and Governors agreed that policies
should continue to be directed towards the objective of
sustaining non-inflationary growth, which will in turn contribute
to financial market stability.
4.
Fiscal imbalances have been reduced in a number of
countries. However, further efforts to raise savings and improve
confidence in financial markets will be required in many
countries to establish conditions conducive to lower long-term
interest rates and thus underpin continued economic growth. In
this context, governments need to implement existing
consolidation efforts and strengthen them as necessary.
2
5.
The Ministers and Governors expressed concern about recent
developments in exchange markets.
They agreed that recent
movements have gone beyond the levels justified by underlying
economic conditions in the major countries.
They also agreed
that orderly reversal of those movements is desirable, would
provide a better basis for a continued expansion of international
trade and investment, and would contribute to our common
objectives of sustained non-inflationary growth.
They further
agreed to strengthen their efforts in reducing internal and
external imbalances and to continue to cooperate closely in
exchange markets.
6.
In preparation for the annual Economic Summit, the Ministers
and Governors reaffirmed their strong support for the Bretton
Woods Institutions, and discussed how their role could be adapted
to meet the challenges of today's global economy.
In this
context, they reviewed the lessons that can be drawn from
Mexico's recent financial problems and had an extensive
discussion of approaches which may be desirable to facilitate
continued progress toward sustained growth and employment, the
maintenance of financial stability, and the promotion of
sustainable development.
7.
The Ministers and Governors met with Russian economic
officials, led by First Deputy Prime Minister Chubais, and
exchanged views on the Russian economy.
They welcomed Russia's
economic reform program, which has earned the IMF's support under
a $6.8 billion standby program, and expressed approval that the
program aims at achieving a lasting stabilization of the Russian
economy and the liberalization of the energy sector, which
vital key to Russia's economic future.
lS
a
The Ministers and
Governors urged Russia to expedite the second stage of its mass
privatization program and the legal framework needed to support
the private sector.
Finally, they noted that firm implementation
of Russia's 1995 economic program is essential to build the
3
confidence of Russia's people and foreign investors in the future
of Russian reform.
Subject to completion of all outstanding
bilateral agreements, they invited official bilateral creditors
to provide an appropriate rescheduling of Russia's debt service
obligations due in 1995.
They also invited official bilateral
creditors to include a strong good will clause pointing towards
the possibility of a comprehensive rescheduling which addresses
Russia's medium-term debt problems.
8.
The Ministers and Governors congratulated Ukraine on its
$1.5 billion stand-by agreement with the IMP, which will support
Ukraine's ambitious economic reform goals for 1995.
It will also
facilitate the necessary energy sector reform and thus lay the
basis for early closure of Chernobyl.
The Ministers and
Governors pledge their continued support for ongoing economlC
reforms in Ukraine.
DEPARTMENT
OF
THE
TREASURY
NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C. • 20220· (202) 622-2960
TRA:\lSCRIPT OF POST (;-7 PRESS BRIEFING
DEPARTMENT OF THE TREASliRY
TllESDA Y APRIL 25, 1995
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TREASURY·
NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
April 26, 1995
STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN
IMF INTERIM COMMITfEE
WASIDNGTON, D.C.
I am pleased to be attending my first meeting of the Interim Committee of the
International Monetary Fund. This committee plays a central role as a forum for
consultations and cooperation on the critical issues confronting the international
monetary system and the world economy. I look forward to working with each of you
in trying to make the next 50 years of the International Monetary Fund as successful as
the first 50 years.
World Economic Outlook
We are living in a curious time. The fundamental health of the global economy
looks stronger than it has in thirty years. Yet, the opportunities created by the rapid
development of global capital markets have created new challenges, and recent
turbulence in financial markets casts a shadow of uncertainty over the outlook.
The industrial economies, with the notable exception of Japan, are experiencing
strong expansions. There is enough momentum to the growth to generate employment,
but not enough to create serious inflationary pressures. Indeed, in many countries
inflation is at levels not seen for 30 years.
Better performance in the industrial countries has been reinforced by strong
forces already in motion in developing countries. Emerging market economies of Asia
continue to set remarkable standards for growth. Some African economies are
beginning to see growth as their efforts at structural transformation take hold. Several
of the transition economies have turned the corner and are once again growing. Russia
and Ukraine have recently adopted stabilization programs that merited the strong
support of the IMF. The outlook for Latin America is somewhat less rosy in the wake
of Mexico's crisis, but the initial repercussions for the region have been contained.
With appropriate policies, the improved fundamentals across much of the world
economy provide the basis for continued expansion, despite the risks posed by recent
financial market developments.
RR-244
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L
In the United States we are shifting to a period of more moderate but solid
growth that should allow us to maintain high levels of employment and low inflation.
We are committed to continuing fiscal consolidation, building on the major reductions
in the budget deficit that were accomplished in the first two years of the
Administration. Under the President's budget proposal, the government deficit -currently the lowest among G-7 countries -- will decline further as a share of GDP over
the balance of this decade. As the President has often stated, it is our firm intent to
reform the health care system, which is essential to contain costs and achieve
additional improvements in the underlying fiscal position of the United States. Our
shared commitment with the Federal Reserve to the goals of sustaining growth with
low inflation has paid off. Soft landing may be a journalistic cliche, but I think it
pretty well captures current developments in the United States.
While the fundamentals look solid in the United States and in many other
countries, there are some risks to the outlook, and recent financial market
developments warn us against slipping into complacency.
In this regard, developments in exchange markets have been a matter of concern.
Yesterday, the G-7 agreed that recent movements have gone beyond the levels justified
by underlying economic conditions in the major countries, and they also agreed that
orderly reversal of these movements is desirable.
The movement of the dollar has coincided with a sharper movement of some
other currencies, most notably the yen. Japan, unlike the other industrialized countries,
has not participated in the revival of activity that took hold in 1994. The recent
monetary policy measures are welcome, and we look forward to the additional and
more specific measures on fiscal stimulation that have been announced and are
expected to be forthcoming in the near future to revitalize the Japanese economy.
Japan needs to import more and to absorb more of its available savings, so that its
external surplus adjusts to a more sustainable level.
In other parts of the industrial world, the expansion presents an opportunity to
correct underlying structural problems. Fiscal positions are benefiting from the cyclical
upturn, but continued efforts will be needed in many countries to put deficits on a
clearly declining path. Unemployment remains high and employment growth relatively
slow despite the expansion, which attests to the importance of structural reforms in
labor markets to provide more flexibility and greater incentives.
The Mexican financial crisis demonstrated just how important it is not to mistake
surface stability for true sustainability. The markets can be unforgiving if latent
problems go uncorrected too long. Mexico has now faced its difficulties resolutely. It
is implementing a strong stabilization program that is already beginning to show
progress such as a reduction of the money supply. Demand for peso assets is beginning
to recover. We are cautiously optimistic. Nevertheless, financial support will continue
to be needed.
3
We remain ready to make available $20 billion in bilateral support. Full
implementation of the $17.8 billion IMF stand-by will be essential for the successful
conclusion of this major undertaking.
One region where hard work on the fundamentals is beginning to payoff is the
economies in transition. Many of the economies of central Europe have stabilized.
Market forces are taking root, and growth is beginning. One or two countries face the
novel but not unwelcome problem of dealing with surges in capital inflows. The job
won't be finished for years to come, but the path ahead looks clearer. We are
particularly pleased that both Russia and Ukraine have recently concluded stand-by
arrangements with the IMP. The preparatory work that was done under earlier IMF
agreements greatly increases the likelihood that these programs will succeed.
Stabilization of these two major economies will set the stage for the full integration of
all the countries of the former Soviet Union into the global economy.
The evolving role of the IMF
The international financial system has changed dramatically since the IMF was
created 50 years ago. Capital markets have become truly global in size and scope.
Today, foreign exchange transactions exceed in a week the value of international trade
for a year. Markets have become decentralized, with instruments that are increasingly
complex. The distinction between domestic and international finance is increasingly
blurred.
Our international financial institutions must adapt to these new realities. The
IMF has proven itself adept in dealing with emerging problems such as Mexico.
However, we need to be able to stay ahead of and influence events, not merely react to
them. And, we must not lose sight of the needs of those countries which rely primarily
on official financing to support reform efforts, particularly the countries emerging from
political and economic chaos and the poorest, most heavily indebted countries.
We need an architecture for the IMF that is as modern as the financial markets,
while also being responsive to the needs of countries that do not rely on the private
markets. This will require an IMF that is capable of:
o
serving as an effective early warning and prevention mechanism;
o
responding quickly and effectively to liquidity crises that pose a broader
threat; and
o
dealing with the unique challenges faced by heavily indebted poorer
countries and those countries emerging from protracted political and
economic disruption.
4
An ounce of prevention
Surveillance has been at the center of the IMP's efforts to spot emerging
problems and to encourage policy responses that will prevent crises from erupting. The
effectiveness of surveillance depends critically on the willingness of members to
cooperate with the Fund, by providing the comprehensive and timely data essential for
sound analysis, and a commitment to enter into a dialogue with the Fund on the core
issues of economic policy within its mandate. The failure of a member to provide the
necessary information which the IMF has a right to expect under its Articles of
Agreement, or to engage in consultations as needed, should be viewed as a "red flag"
that a problem exists requiring Executive Board consideration. Repeated failure
should be considered a violation of a members' obligations, with potential
consequences for its ability to obtain IMF financing.
The Fund also has to change the way it operates. It has to build a capacity for
more intensive ongoing assessments of countries whose underlying financial position
poses potential risks even if they are not under or emerging from an IMF program. It
needs an improved capability for assessing capital market developments. It needs to be
willing to be direct and candid with member countries in identifying policy risks. The
IMF is not and should not become a global rating agency; however, in discharging its
responsibilities it needs to be more transparent and accountable.
Surveillance is not the function solely of the IMF. The financial markets conduct
their own assessments of our economic policies and performance every day, and with a
degree of frankness that is often uncomfortable. The opening of capital markets and
the globalization of finance have contributed to a more efficient allocation of resources
and have helped to boost investment and growth. At the same time, recent experience
has demonstrated that international capital can move quickly and with force in
response to actual and perceived risks, reducing the room for maneuver that policy
makers may have felt they enjoyed in the past and increasing the intensity of the
penalty for policy mistakes. In these circumstances, the benefits of globalization can
be maximized and the downside risks minimized when foreign capital is used in
moderation to supplement domestic savings for productive investment, when the
authorities respond promptly to emerging problems through measures to reduce
reliance on external finance, and when inflation threats are confronted before they
emerge.
The days when governments could influence market judgements by withholding or
manipUlating information or adjusting the timing for the release of data are long gone.
The effort to do so contributes to the very volatility that governments are seeking to
avoid by fueling rumors and mistrust. In today's global market place where capital has
many suitors, transparency is of overwhelming importance. The timely and frequent
publication of comprehensive data on national accounts, on monetary conditions, and
on central bank balance sheets can make an important contribution to international
confidence in those countries which practice full disclosure.
5
It also serves to signal problems, at an early stage, and thus can encourage policy
responses to deal with market reactions. And, perhaps most importantly, transparency
exercises important policy discipline by reducing the ability to sweep problems under
the rug.
.
Transparency is an important complement to IMP surveillance and a legitimate
objective of the Fund. To this end, therefore, we believe that the IMF shouW
encourage greater transparency by, for example, developing standards to guide
members' policies on the publication of data, indicating publicly those countries which
meet the standards and requiring commitments to greater transparency as part of IMF
programs. The recent decisions by APEC finance ministers to support timely
publication of key financial data reflects a growing recognition of the new realities and
acceptance of the benefits of more openness in this area.
Emergency financing mechanism
Even the best early warning and prevention system, however, cannot be fail-safe.
Governments make policy mistakes. Markets overreact. Liquidity and confidence
problems occur, sometimes posing broader risks.
The IMF was created to help members deal with balance of payments problems
without recourse to measures disruptive of its own or the world economy. The
globalization of financial markets heightens, not lessens, the need for the Fund to
consider how better to position itself to deal with those problems which, like Mexico,
may pose a serious threat to the system.
Concerns that an enhanced IMF capacity may create moral hazard are legitimate
and have been at the center of every debate on the role of the Fund since its inception
50 years ago. The challenge is to design an emergency financing mechanism which
minimizes these risks. This requires that any loan carry substantial policy
conditionality. While the amount of financing provided must be credible in dealing
with potential problems, any expectation of automaticity or entitlement to financial
support must be avoided. The interest charged on such loans should cover all
operational costs, include a risk premium, and provide a penalty rate to encourage the
borrower to return to the private markets as soon as possible.
The means of financing such a mechanism could also seNe to reduce moral
hazard. One possible approach would be to expand and modify the General
Arrangements to Borrow, and to trigger that agreement in those exceptional
circumstances where large IMP programs may be necessary. In this possible approach,
it would seem to make sense to invite into appropriate arrangements with the GAB
those new countries which benefit from a stable international monetary system and
have the capacity to contribute to maintaining it.
6
Such an approach would be preferable to ~ large incr~ase in the I~'s .
permanent quota resources, which are better sUlted to meetmg normal financmg needs.
We recognize that the IMP has stepped up its lending activity substantially this year
and that its liquidity position should be monitored closely.. However, the IMFs
financial position is strong at present and capable of meetmg normal demands .. In
these circumstances, it would be premature to conclude now that a large, early mcrease
in quotas is needed.
Similarly, there would appear to be little merit to designing a new safety net
based on the SDR when the GAB already exists. Proposals for the IMF to borrow
SDRs require a finding of global need for a general SDR allocation, which we do not
believe exists at present. Proposals for special SDR allocations to finance an IMF
safety net would involve a fundamental change in the role of the SDR, an issue which
would be more appropriately considered in the context of a broader comprehensive
review of the SDR.
The days are long past when the IMF's Managing Director could convene a small
group of bankers to deal with the international debt problems of a country. Financing
is now provided by a much larger and more diverse pool of largely anonymous
investors rather than a few banks. Moreover, opportunities for residents in a distressed
country to mobilize domestic capital and send it abroad have grown dramatically. As
a consequence, even in those limited cases where an exceptional official response is
justified, the IMF, in cooperation with other official lenders, is likely to be able to meet
only a fraction of the resources required, and the effort to do so can create a moral
hazard with respect to private creditors.
The international community -- debtors, private markets, governments and the
institutions -- has a clear interest in achieving an orderly resolution of debt problems.
As part of the new international architecture, consideration may also need to be given
to procedures that will allow official debtors and private creditors to work out
problems in a manner which retains market incentives while ensuring appropriate
policy responses through conditionality.
A global financial marketplace that is decentralized, growing rapidly, and with
ever more complex instruments poses new challenges for our ability to ensure that the
mark~ts rem~n robus~ in the face of potential shocks. Supervisors and regulators in
large mdustnal countnes should strengthen their own cooperative efforts and be
prepare~ to ~sist their counterparts .in developing countries, particularly countries
where fmanclal markets are developmg rapidly. Policymakers should take actions
req~ired to ensure t~at ~nancial authorities' oversight capabilities keep pace with the
rapId pace of expansIOn m these markets.
7
Meeting the needs of poorer countries
As we build a new architecture to deal with the globalization of financial
markets, we must not lose sight of the needs of those countries which rely primarily on
official sources of finance. The IMF's Enhanced Structural Adjustment Facility has
made an enormous contribution to improving access of poorer countries to more
affordable financing in support of strong adjustment and reform programs. It is a tool
that will continue to have a clear purpose for the foreseeable future.
We believe that the ESAF could be modified to provide targeted concessional
assistance to help deal with the special needs of the poorest, most indebted countries
and those which are emerging from economic and political disruption. For this
purpose, consideration should be given to mobilizing a modest portion of the IMF's
gold.
Conclusion
The task before the IMF is important and challenging. We must forge a
consensus that will enable us to sustain and extend the global expansion now under
way. At the same time, we must adapt the architecture of the IMF to enable it to
better deal with the rapid changes now underway in the global financial system. And
we must develop new instruments to help those countries undertaking the difficult
transition from political and economic disruption and poverty so that they may also
enjoy the full benefits of a growing world economy and a stable financial system.
-30-
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Publif Debt· -Washington. DC 20239
i •.• {
FOR IMMEDIATE RELEASE
April 26, 1995
i
.. "
~Jc0NTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Tenders for $11,502 million of 5-year notes, Series K-2000,
to be issued May I, 1995 and to mature April 30, 2000
were accepted today (CDSIP: 912827T69).
The interest rate on the notes will be 6 3/4%. All
competitive tenders at yields lower than 6.815%> were accepted in
full. Tenders at 6.815% were allotted 43%. All noncompetitive and
successful competitive bidders were allotted securities at the yield
of 6.815%, with an equivalent price of 99.729. The median yield
was 6.800%; chac is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 6.771%;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Received
$34,642,068
Accepted
$11,502,017
The $11,502 million of accepted tenders includes $477
million of noncompetitive tenders and $11,025 million of
competitive tenders from the public.
In addition, $550 million of tenders was awarded at the
high yie~d to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $353 million
of tenders was also accepted at the high yield from Federal
~eserve Banks for their own account in exchange for maturing
securities.
RR-245
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
Text as Prepared for Delivery
April 27, 1995
Testimony of Ronald K. Noble
Under Secretary of the Treasury for Enforcement
Senate Judiciary Committee
RR-246
For press releases, speeches, public schedules and official biographies, call our 24-11 our fax line at (202) 622-2040
TESi'ThlONY OF TEE EONORABU !RONALD X. NO:BLE
UNDER SECRETARY OF TEE TREASURY FOR EN.FORCEl',IENl'
MR. CHAIRMAN, SENATOR BIDEN, MEl\ffiERS OF THE COMMITTEE:
I AM PLEASED TO HAVE THE OPPORTUNITY TO SPE&1r{
TO YOU TODAY ABOUT THE TREASURY DEPARTMENT'S
EFFORTS IN THE AREA OF DOMESTIC AND rnTERNATIONAL
TERItORISM. SECRETA.~y RUBIN IS
PE.~ONALLY
C01YIMl1*l'ED
TO THE FIGHT AGAINST TER..T.(ORISM, AND STRONGLY
SUPPORTS TREASURY ENFORCEMENT'S EFFORTS IN TInS
AREA.
I HAVE BEEN TO OKLAHOMA CITY TO SEE THE
DEVASTATION THAT OCCURRED, AND TO TALK TO THE
FAMlllES AND VlCIlMS. IN THE LAST THREE DAYS, I
\
AITENDED FUNERALS TIiAT WERE NEEDLESSLY CAUSED BY
TIllS SENSEI .ESS BONIBING. I HAVE ALSO SEEN THE
MAGNIFICENT JOINT LAW ENFORCEMENT EFFORT TO
LOCATE THE BOMBERS AND BRING THEM TO JUSTICE. WE
MUST ALL J3E C01DAITr.c.D TO MAXING SURE THAT TIllS KIND
OF
HO:R..~O:R i'rEVE~1.
.AG.;-illl CCClmS.
THE TREASURY DEPARTMENT PLAYS A CENTRAL ROLE
IN THE F1GHT AGAINST TE.T{...~ORISM. OUR ENFORCBl\ffiNT
BUREAUS PROTECT THE MOST VISmLE TERRORIST TARGETS
IN THE U.S., ENFORCE LAWS DIRECTED AT THE MOST
C01vThl0N INS"n.U1IEl'ITS OF TE."'L~OR,
P~OTECT
AGAINST
T:~
SMUGGLING OF W-;e.AFONS OF MASS DESTRUCTION AND
I
ENFORCE ECONOMIC SANCTIONS AGAINST COUNTRIES AND
GROUPS THAT PROMOTE TERRORISM.
MR. CHAllUv1AN, LET ME FIRST TELL YOU BRIEFLY OUR
PHll..OSOPHY FOR APPROACHING TERRORISM THREATS, AND
OUR POUCIES FOR CONDUCTING INVESTIGATIONS:
.
WE MUST ENFORCE TAE LAW, AND WE DO. WE MUST
PROTECT INNOCENT CITIZENS FROM CRIME AND TE.UORlS~A,
AND WE DO. BUT FIRST, AND FOREMOST, WE ARE
3
COWvITll'ED TO RESPECTING THE CONSTITUTIONAL RIGHTS
OF ALL Ai\1ERlCA1'IS.
TO THAT END, WE CONDUCT CRIMINAL
INVESTIGATIONS ONLY OF INDIVIDUALS OR GROUPS WHO WE
HAVE REASON TO BELIEVE MAY BE VIOLATING LAWS THAT
FALL UNDER OUR JURISDICTIONAL PURVIEW, OR ARE
PLOTIING TO VIOLATE THOSE LAWS. L.c-r ~ffi MAKE
CLEA.~
THAT WE DO N.QI INVESTIGATE INDIVIDUALS OR GROUPS OF
INDIVIDUALS MERELY BECAUSE TIlEY ADVOCATE
UNPOPULAR OR UNCONVENTIONAL IDEAS.
NOR DO WE
INVESTIGATE GROUPS SOLELY BECAUSE THEY
~~
LEGALLY
OBTAINING FIREARMS OR AMMUNITION.
OF COURSE, WE KEEP OUR EYES AND EARS OPEN WHEN
INDIVIDUALS MAKE THREATENING STATEMENTS., AS PART
OF ITS PROTECTIVE FUNCI10N, THE SECRET SERVICE
MUST
.
MONITOR ANY ORGANIZATION THAT POSES A POTENTIAL
VIOLENT THREAT TO ITS PROTECl EES.
4
scan OJ" TIIE :rnO:BUl'rl- ])O~IISl1Cj\LLY
MR.
CHAIRl\1Al~,
LET ME NOW TUR.i\l TO WHAT WE SEE
AS THE ~~ DOMESTIC Ta~ORISM SITUATION.
I AM PLEASED TO TELL YOU THAT THERE IS
OUTSTANDING COOPERATION AND JOINT EFFORT AMONG
FEDE.~
LAW
ENFOR~YIE1Vr
DOMESTIC TERRORISM
AGENCIES rn ATIACaNG TR3
PROB~'A.
ATP, FBI, SECRET
SERVICE, CUsrOMS, IRS, THE TREASURY DEPARTMENT, AND
THE JUSTICE.DEPARTMENT ARE SHARING INFORMATION
ABOUT THE CRIME THREAT POSED BY C""dTAIN ORGANIZED
GROUPS.
DOMESTIC TERRORISM IS A BROAD CONCEPT WITHOUT
A PRECISE DEFINITION. WHEN 1 USE THAT TERM TODAY, \-1
AM REFERRING TO INDIVIDUALS OR GROUPS WITHIN
THE
,
UNITED' STATES WHO REJECT THE LEGITIMATE AUTHORITY
OF THE UNITED STATES GOVERNMENT, WHO DO NOT
RECOGNIZE THE VALIDITY OF FEDERAL LAW, OR WHO
s
ADVOCATE THE
GOVERL'DtlEl'IT,
OVlli~THROW
~
OF THE UNITED STATE
WHO USE OR PLAl'1 TO USE
VlO~'\JCE
OR TO OTHERWISE VIOLATE FEDERAL LAW IN FURTHERANCE
OF THESE OBJECTIVES.
TREASURY'S ENFORCEMENT AGENCIES BELIEVE THAT
DOMESTIC TERRORISM HAS BEEN GROWING STEADll..Y. WE
HAVE NOTED AN ESCALATION IN VIOLEL'IT INCIDENTS
DURING THE PAST DECADE.
BETWEEN 1983 AND 1993, THE NUMBER OF YEARLY
BOMBINGS IN THE UNITED STATES MORE THAN TRIPLED.
BOMBING DEATHS Ju'ID INJURIES
WE.~
AT AN ALL TIl\tIE
mGH IN 1993 WITH 49 DEATHS AND 1,323 INJURED. THE
OKLAHOMA CITY BOMBING Wll..L MAKE 1995 THE MOST
DEADLY YEAR, YET.
OUR BEST ESTIMATE IS THAT IN THE PAST FIVE ~~,
THE V)Sf MAJORITY OF BOMBING INCIDENTS HAVE
INVOLVED CRIMlliAL I:ESTRUCTION OF PROPERTY OR NON-
6
THAT T.d?:x2 IS .\l"\IINCREASING ThiDENCY A\10NG S01IE
GROUPS TO El'JGAGE IN Al'ITI-GOV<NMENT AND ANTI-LAW
ENFORCBvIENT VIOLENCE.
CIVILIANS, AS WELL AS FEDERAL AND LOCAL-LAW
ENFORCEMENT
PE.~ONNEL,
HAVE BEEN THREATENED,
HARASSED, SmVETI I ED, ASSAULTED, AND 1-IURDE..!ffiD.
FEDERAL ID/IPLOYEF.S, SUCH AS
ms AUDITORS, EXE..~CISING
THEIR LAWFUL DUTIES HAVE BEEN CONFRONTED BY
RESISI' ANCE, SOMETIMES ARMED, BY GROUPS mAT
CHALLENGE THE AUTHORITY OF THE
FEDE..~
GOVERNMENT .
LET ME TALK A LrITLE BIT ABOUT THESE GROUPS. WE
HAVE INVESTIGATED VIOLENT ACTS BY INDIVIDUALS
CONNECl'ED TO WHITE SUPREl\11ClST GROUPS, . MILITIA OR
PATRIOT GROUPS, SECTS AND CULT-TYPE GROUPS, AND
ANTI-ABORTION GROUPS. I HASTEN TO SAY THAT WE DO
NOT CONSIDER
EVE.~y
ONE OF TH2SE GROUPS TO BE
7
INVOLVED IN' DOMESTIC
~"tt.~OR!S};1.
WE HAVB,
HOWEV2..~,
RECEIVED INFOllivIATION ABOUT ILLEGAL COi'IDUCT BY
PERSONS CONNECTED TO THESE GROUPS OR ON THE FRINGES
OF TImSE GROUPS. WE HAVE INVESTIGATED THAT
CONDUCT,' Al'lD, IN THE COURSE OF THESE INVESTIGATIONS,
WE HAVB LEARNED A SIGNIFICANT AMOUNT ABOUT THESE
GROUPS.
IT IS BELIEVED THAT THERE ARE SEVERAL HUNDRED
VIOLENT WHITE SUPREMACIST GROUPS IN THE UNITED
STATES. IN RECENT YEARS, INVESTIGAnONS OF CRIMINAL
CONDUCT BY MEMBERS OF THESE GROUPS HAVE YIELDED
SEIZURES OF ll..LEGAL WEAPONS CACHES, AND THE
DISCOVERY OF PLOTS TO COMMIT MASS MURDER AND PLOTS
TO DESTROY PROPERTY.
THE MILITIA MOVEMENT IS A GRASSROOTS
. POPULIST
MOVEMENT THAT DERIVES ITS PHILOSOPHY FROM THE
SECOND Al\ffiNDMENT TO TIlE CONSTITUTION. MILITIAS ARE
GROUPS OF INDIVIDUALS WHO ARE VlRULE!'ITLY ANTI-GUN
8
CONnOL Ju"'ID Ai'ITI-FEDERAL GOVE..~'\IMENT. THEY BAiW
TCGhlHE.1. TO CONDUCT P~-U-1TILl1'iL~Y TRAINING, TO
ACQUIRE DESTRUCTIVE DEVICES, AND TO POSSESS
~\{S, INCLUDING IN SOME CASES ILLEGAL FIREARMS.
SOME MD-ITIAS CHALLENGE THE LEGITIMACY OF THE
FEDERAL GOVERNMENT, AND REFUSE TO COMPLY WITH
OBUGAnONS IMPOSED BY THE GOVE..WMEl'IT, SUCH AS
PAYING TAXES. MILITIAS HAVB BEEN FORMED IN
APPROXIMATELY 34 STATES, WITH MEMBERSHIP RANGING
FROM TEN TO SEVERAL HUNDRED IN EACH GROUP. THEY
CAN POSE A SERIOUS THREAT TO GOVERNMENT EMPLOYEES
AND ESPECIALLY FEDERAL LAW ENFORC3MENT.
CURRENTLY, IT IS ESTIMATED THAT THERE ARE
BETWEEN 700 AND 2,QCO SEcrs OR CULT-LIKE GROUPS IN THE
UNITED STATES. SOME OF THESE
GRO~S
ARE COVEH.TLY
OBTAlNING FIREA1UdS AND EXPLOSIVE MATERIALS IN ORDER
TO PREPARE FOR WHAT THEY BELIEVE IS THE COMING END
OF THE WORLD, OR ARMAGEDDON. MANY OF THESE
Page 3 of 5
FEDERAL FINANCING BANK
MARCH 1995 ACTIVITY
ORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
OVERNMENT - GUARANTEED LOANS
RURAL UTILITIES SERVICE (continued)
Plains Elec. #918
Plains Elec. #918
Plains Elec. #918
Plains Elec. #918
central Power Elec. #395
Pineland Telephone #403
Oglethorpe Power #335
Allegheny Electric #255
Alle9heny Electric #255
HOOS1er Energy Elec. #901
Hoosier Energy Elec. #901
Hoosier Energy Elec. #901
Northwest Iowa Power #907
Oglethorpe Power #916
Oglethorpe Power #916
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Sho-Me Power #913
Sho-Me Power #913
;ho-Me Power #913
3ho-Me Power #913
)ho-Me Power #913
~ited Power Assoc. #911
Jnited Power Assoc. #911
fuited Power Assoc. #911
Jnited Power Assoc. #911
~ited Power Assoc. #911
:r. is a Quarterly rate.
maturity extension
306C refinancing
3/7
3/7
3/7
3/7
3/13
3/13
3/28
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
$946,231. 37
$496,378.45
$1,684,532.14
$596,708.92
$217,000.00
$809,000.00
$22,607,000.00
$3,728,438.47
$5,327,005.39
$39,365,538.20
$16,020,816.84
$9,841,384.54
$7,819,875.90
$19,819,503.21
$23,045,785.50
$2,352,807.05
$889,218.73
$1,410,631.48
$9,928,007.80
$3,277,134.26
$2,661,635.85
$11,100,594.68
$1,050,162.73
$12,143,433.92
$16,520,846.77
$10,784,151.77
$12,321,735.05
$3,726,311.23
$23,812,735.05
$40,137,274.24
$40,425,802.73
$1,205,501. 39
$467,512.08
$468,272.43
$468,401.62
$468,355.31
$941,311.57
$11,295,737.73
$3,652,214.15
$3,077,426.90
$3,653,334.52
6/30/95
12/31/18
6/30/95
6/30/95
12/31/26
1/2/24
3/31/97
4/1/96
4/1/96
6/30/95
6/30/95
6/30/95
6/30/95
4/1/96
4/1/96
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
1/3/17
1/3/17
6/30/95
1/3/17
6/30/95
6/30/95
6/30/95
1/2/96
1/2/96
1/2/96
1/2/96
1/2/96
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
5.977% Qtr.
7.498% Qtr.
5.977% Qtr.
5.977% Qtr.
7.524% Qtr.
7.524% Qtr.
6.690% Qtr.
6.503% Qtr.
6.503% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
6.304% Qtr.
6.304% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
7.295% Qtr.
7.295% Qtr.
5.840% Qtr.
7.295% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
6.168% Qtr.
6.168% Qtr.
6.168% Qtr.
6.168% Qtr.
6.168% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
10
NUCLEAR fvlATEliALS Al'ID ASSOCIATED TEC'.dNOLCGIES, WE
ANTICIPATE INCREASED TER'r{ORIST
..
PROBLBvlS. WEAPONS
PROCUREMENT NETWO~~ ARE BECOMING MORE ADVAl'lCED
AND CLANDESTINE.
TO COMBAT THESE PROBLEMS, TREASURY, THROUGH
THE U.S. CUSTOMS SERVICE, IS INCREASING ITS LIAISON
WITH THE U.S. INTELLIGENCE COMMUNITY AND FOREIGN
CUSTOMS Al'ID OTHER LAW
fuWOR~\1ENT AGE1~CIES,
PARTICULARLY IN EASTERN EUROPE AND THE FORMER
SOVIET UNION.
ATF IS ALSO CONTINUING ITS INTERNATIONAL TRAFFIC
IN ARMS (l.T.A.R.) PROGRAM,WHICH IS DESIGNED TO
CURT~ INTERNATlONAL AlU\iS TRAFFICKING. THE I.T.A.R.
PROGRAM WAS DEVELOPED WHEN IT BECAME APPARENT \
THAT FIREARMS ORIGINATING FROM THE UNITED
. STATES
WERE BEING RECOVERED WORLDWIDE IN SUCH CRIMINAL
ACTS AS NARCOTICS TRAFFICKING AND TERRORISM.
Page 3 of 5
FEDERAL FINANCING BANK
MARCH 1995 ACTIVITY
ORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
OVERNMENT - GUARANTEED LOANS
RURAL UTILITIES SERVICE (continued)
Plains Elec. #918
Plains Elec. #918
Plains Elec. #918
Plains Elec. #918
Central Power Elec. #395
Pineland Telephone #403
Oglethorpe Power #335
Allegheny Electric #255
Alle9heny Electric #255
Hoos1er Energy Elec. #901
Hoosier Energy Elec. #901
Hoosier Energy Elec. #901
Northwest Iowa Power #907
Oglethorpe Power #916
Oglethorpe Power #916
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
5eminole Electric #905
5eminole Electric #905
5eminole Electric #905
5ho-Me Power #913
3ho-Me Power #913
3ho-Me Power #913
)ho-Me Power #913
)ho-Me Power #913
Jnited Power Assoc. #911
Jnited Power Assoc. #911
fuited Power Assoc. #911
Jnited Power Assoc. #911
fuited Power Assoc. #911
~.
is a Quarterly rate.
maturity extension
306e refinancing
3/7
3/7
3/7
3/7
3/13
3/13
3/28
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
$946,231.37
$496,378.45
$1,684,532.14
$596,708.92
$217,000.00
$809,000.00
$22,607,000.00
$3,728,438.47
$5,327,005.39
$39,365,538.20
$16,020,816.84
$9,841,384.54
$7,819,875.90
$19,819,503.21
$23,045,785.50
$2,352,807.05
$889,218.73
$1,410,631.48
$9,928,007.80
$3,277,134.26
$2,661,635.85
$11,100,594.68
$1,050,162.73
$12,143,433.92
$16,520,846.77
$10,784,151. 77
$12,321,735.05
$3,726,311.23
$23,812,735.05
$40,137,274.24
$40,425,802.73
$1,205,501.39
$467,512.08
$468,272.43
$468,401.62
$468,355.31
$941,311.57
$11,295,737.73
$3,652,214.15
$3,077,426.90
$3,653,334.52
6/30/95
12/31/18
6/30/95
6/30/95
12/31/26
1/2/24
3/31/97
4/1/96
4/1/96
6/30/95
6/30/95
6/30/95
6/30/95
4/1/96
4/1/96
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
1/3/17
1/3/17
6/30/95
1/3/17
6/30/95
6/30/95
6/30/95
1/2/96
1/2/96
1/2/96
1/2/96
1/2/96
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
5.977% Qtr.
7.498% Qtr.
5.977% Qtr.
5.977% Qtr.
7.524% Qtr.
7.524% Qtr.
6.690% Qtr.
6.503% Qtr.
6.503% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
6.304% Qtr.
6.304% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
7.295% Qtr.
7.295% Qtr.
5.840% Qtr.
7.295% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
6.168% Qtr.
6.168% Qtr.
6.168% Qtr.
6.168% Qtr.
6.168% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
12
ATF'S TECHNICAL Al\ID INVESTIGATIVE EXPERTISE. FOR
EX&'JPLE, ATF'S INTE..~rATIONAL RESPONSE TEA.L\IS
ASSISTED IN THE INVESTIGATION OF THE 1992 BOMBING OF
THE ISRAELI EMBASSY IN BUENOS AIRES, ARGENTINA.
AS WE SIT HERE TODAY, OVER 130 ATF PERSONNEL ARE
IN OKLAHOMA CITY WORKING HAND-IN-HAND WITH THE FBI
AND
OTHE.~
AGENCIES TO SOLVB THE EVIL BOMBING
COMMITTED THE.lffi. ATF IS PROVIDING THE TECHNICAL
BOMBING EXPERTISE AT THE OKLAHOMA CITY BOMBING
SITE.
•
THE SECRET SE..~VICE IS RESPONSmLE FOR PROTECTING
TIlE NATION'S MOST VISmLE TARGETS FOR TERRORISTS: THE
PRESIDENT, THE FIRST FAMILY, mE VICE PRESIDENT,
FORMER PRESIDENTS, FOREIGN HEADS OF STATE WHO VISIT
THE UNITED STATES, THE WHITE HOUSE COMPLEX,
AND
.
FOREIGN EMBASSIES LCCATED IN THE UNITED STATES. THE
SECRET SERVICE WORKS CLOSELY WITH OTHER LAW
ENFORCEMENT AGENCIES AND THE INTELUGENCE
13
COMMUNITY TO ENSURE THE SAFETY OF ITS PROTEC"l'EES.
THE SECRET SERVICE SEEXS TLVIELY Ai'ID RELIABLE
INTEllIGENCE RELATING TO THE EXISTENCE, CAPABILITY,
HISTORY, PLANS AND INTENTIONS OF BOTH DOMESTIC AND
INTERNATIONAL TERRORlSI' GROUPS. TInS INFORMATION IS
ESSENTIAL TO THE ABILITY OF THE SECRET SERVICE TO
ASSESS THE THREAT POSED BY TImSE EXTREMIST GROUPS
AND TO PREVENT AN
ATfAC~
ON mE PRESIDENT,
VICE-PRESIDENT, FOREIGN DIGNITARIES, OTHER PROTECTEES
AND PROTECtED FAcnJTIES. IN ADDmON, THE SECRET
SERVICE INVESTIGATES DIRECT THREATS TO PROTEClEES
MADE BY PERSONS ASSOCIATED WITH EXTREMIST GROUPS.
•
TIm U.S. CUSTOMS SERVICE IS RESPONSmLE FOR
COMBATIING ILLEGAL EXPORTS AND IMPORTS OF
MATERIALS THAT SUPPORT TERRORISM. THE CUSTOMS
SERVICE IS CONTINUOUSLY WORKING TO DISCOVER ILLEGAL
NETWORKS RESPONSIBLE FOR SUPPORTING TERRORISM.
THEsE ILLEGAL NETWORKS OfTEN ARE RESPONSIDLE FOR
OBTAINING AND SHIPPING WEAPONS, INCLUDING WEAPONS
14
OF MASS DESTRUCTION AL'ID ASSOCIATED DUAL-USE
TECHNOLOGIES. TO COMBAT THESE NETWORKS, THE
CUSTOMS SERVICE INTERDICTS SHIPMENTS AT THE BORDER,
INVESTIGATES ll..LEGAL EXPORTS, ANALnBS TACTICAL
lNTEWGENCE AND ENGAGES IN INTERNATIONAL
COORDINATION THROUGH JOINT OPERATIONS, TRAINING,
AND INFORMATION SHARING WITH FOREIGN BORDER
AGENCIES A1W LAW ENFORCEMENT PERSONNEL.
IN ADDmON, THE CUSTOMS SERVICE MAINTAINS A
TERRORIST DATABASE IN THE TREASURY ENFORCEM;ENT
COMMUNICATIONS SYSTEM AND IS LINKED DIRECTLY TO
THE CIA'S
CO~~
TERRORISM CENTER. RECENT
EXAMPLES OF CUSTOMS COUNTER TERRORISM ACTIVITIES
INCLUDE THE INTERCEPTION OF SOPHISTICATED
ELECTRICAL EQUIPMENT AND POISONOUS GAS PRECURSORS
INTENDED FOR IRAQ.
•
THE OFFICE OF FOREIGN ASSETS CONTROL (OFAC)
ADMINISTERS OUR COUNTRY'S ECONOMIC SANCTIONS
15
PROGRAi\1S AGAINST SELEerED FOREIGN COUNTRIES AND
GROUPS THAT SUPPORT TER..~ORlSM OR COMlvnT TER.~ORlST
ACTS. THESE PROGRAMS INCLUDE $2.8 Bn.LION IN ASSET
FREEZES AND TRADE EMBARGOES AGAINST SEVERAL STATE
SPONSORS OF TERRORISM, INCLUDING LIBYA AND IRAQ, AND
IMPORT AND PETROLEUM DEVELOPMENT SANCTIONS
AGAIN~
IRAN. OFAC SANCTIONS ALSO TARGET DOMESTIC
FUNDRAISING ACTIVITY BY MIDDLE EAST TE..~T{ORIST
GROUPS.
•
THE INTERNAL REVENUE SERVICE, ALTHOUGH NOT
USUALLY DmECTLY INVOLVED IN COUNTER-TERRORISM
INVESTIGATIONS, CONDUCTS INVESTIGATIONS OF TAX
PROTESI'ERS, MANY OF WHOM ARE LINKED TO
ORGANIZATIONS, SUCH AS MILITIAS, THAT CHALLENGE THE
LEGITIMATE AUTHORITY OF THE U.S. GOVERNMENT. IRStS
INSPECTlONS DIVISION HAS BEEN INVOLVED IN
INVESTIGATING THREATS AGAINST IRS PERSONNEL MADE BY
PROTESTER GROUPS.
16
rrm FINANCIAL CRIMES ENFORCEME!'lT NETWORK
(WHAT WE CALL FlNCEN) PROVIDES VALUABLE
INTELLIGENCE SUPPORT TO LAW ENFORCE!\IENT AGENCIES
CONDUCTING INVESTIGATIONS OF TERRORISTS. IN THE
PiSf, FINCEN HAS PROVIDED ANALYfICAL INTELLIGENCE IN
SUPPORT OF INVESTIGATIONS OF MURDER AND BOMBINGS
CARRIED OUT BY SUSPECI'ED ~~ORISTS.
THROUGH RESEARCH Al'ID ANALYSIS OF VA.t.~OUS .LAW
ENFORCEMENT AND COMMERCIAL DATABASES, FINCEN IS
ABLE TO RAPIDLY DEVELOP INFORMATION CONCERNING
RESIDENCES UTII JZED BY SUSPECTS. DOMESTIC
Al~
INTERNATIONAL FINANCIAL TRANSACI10NS, FOREIGN
TRAVEL, BUSINESS ACTIVITIES. NAMES OF ASSOCIATES, AND
AIJASES USED BY SUSPECfS. THIS INFORMATION PROVIDES
TiMELy INVESTIGATIVE LEADS THAT CAN BE USED TO
IDENTIFY TERRORISTS AND THEIR ASSETS.
FINALLY. ALL OF THE TREASURY ENFORCEMENT
BUREAUS ARE FOCUSED ON ATIACKING mE MEANS BY
17
WHICH ORGAl'llZED CRIMINAL GROUPS FUND THEIR
OPE..~TIONS.
'WE HAVE FOUND TIlAT OFTEN CRIlvIES LIX2
FINANCIAL FRAUD OR COUNTERFEITING ARE USED TO
FINANCE ACTS OF TERRORISM. WE ARE DEDICATED TO
USING OUR FINANCIAL CRIMES EXPERTISE TO ATI'ACX TIIESE
FUNDING MECHANISMS.
RECENT PRESIDENTIAL INITIATIVES
ON JANUARY 23rd OF TInS YEAR, PRESIDENT CLIl'ITON
SIGNED AN EXECUTIVE ORDER PROHIBITING TRANSACTIONS
WITH TERRORISTS WHO THREATEN TO DISRUPT THE MIDDLE
EAST PEACE PROCESS. THIS ORDER IS BEING ENFORCED BY
OFAC. THE ORDER BLOCKS PROPERTY OF CERTAIN
TERRORIST ORGANIZATIONS, OR PERSONS ACTING ON THEIR
BEHALF, THAT THREATEN TIlE MIDDLE EAST PEACE
PROCESS. THE ORDER ALSO PROHIBITS THE TRANSFP-RING OF
ANY CONTRIBUTION OF FUNDS, GOODS, OR SERVICES TO OR
FOR THE BENEFlI OF SUCH PERSONS. THE ORDER PROVIDES
A NEW TOOL TO COMBAT FUNDRAISING IN TIllS COUNTRY
18
ON BEBALF OF ORGANIZATIONS THAT USE Ta~'<OR TO
UNDER.iYIINE TA3 ~IIDDLE EAST PEACE PRecESS Al'ID CUTS
OFF THEIR. ACCESS TO SOURCES OF SUPPORT IN THE U.S.
ANDTO THE U.S. FINANCIAL SYSTEM.
SECTION 301 OF THE OMNIBUS COUNTERTERRORISM
ACT OF 1995, WlnCH WAS RECENTLY TRANSMlITED BY
P:RESIDENT CLINTON, CONTAINS
SIMILA.~
BLCCXING
PROVISIONS AND PROHIBmONS AGAINST TIm MAKING OR
RECEIVING OF CERTAIN CONTRIBUTIONS TO DESIGNATED
TERRORISTS.
THIS WEEK, THE PRESIDENT ANNOUNCED NEW ANTITERRORISM MEASURES IN WAKE OF THE BOMBING IN
OKLAHOMA CrIT. WE WELCOME THE OPPORTUNITY TO JOIN
OUR RESOURCES AND EXPERTISE WITH OTHER FEDERAL UW
ENFORCEMENT AND INTELLIGENCE AGENCIES. IN AITACKING
THE Ta~ORISM PROBLEM. TIm ANTI...TERRORISM INITIATIVE
THAT THE PRESIDENr DISCUSSED LAST NIGHT WITH
CONGRESSIONAL LEADERSHIP AlSO CONTAINS PROVISIONS
19
THAT Wll..L Bl'ffiANCE OUR ABn..rrY TO ENFORCE TAE
EXPLOSIVES LAWS AND TO ADDRESS T& TEL"lORlSi'tI
PROBLEM.
THAT COMPLETES MY STATEMENT. I WILL BE HAPPY
TO ANSWER ANY QUESTIONS.
DEPARTMENT
OF
THE
TREASURY
~2i178~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
..............................
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
Contact: Michelle Smith
(202) 622-2960
FOR IMlv1EDIATE RELEASE
April 27, 1995
RUBIN, ORTIZ PHOTO OPPORTUNITY
TreaslUY Secretary Robert E. Rubin and J'v1exican Secretary of Finance and Public
Credit GuillemlO Ortiz \:vill be available for a photo opportunity at I
p.l1l
TODAY, Thmsday.
April 27. Cameras should be in place by 12:45 pIn in Room 3327_ the Secretary's
Conference Roon"l at I'vIain Treasury
Press without Treaswy or White HOLL<.;e press credentials should contact freaswy's
Office of Public Affairs at (202) 622-2960 for clearance into the building
-30-
RR-247
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE. N.W .• WASHINGTON, D.C. • 20220 • (202) 622-2960
FOR HvtMEDIATE RELEASE
Text as Prepared for Delivery
April 27, 1995
STAlEMENT OF TREASURY SECRETARY ROBERT E. RUBIN
AT 1lIE DEVELOPMENT COMMfITEE OF THE
WORlD BANK AND 1l-IE INTERNAll~AI_
WASHlNGfO~,
~ETARY
FlJND
D.C
l\1r. Chainnan and Corrnnittee members. I welcome this opporhmity to exchange views
on how we can enhance our cooperative efforts in the development arena
As some of you may know, I recently rettuned from an extended trip to Asia. For me,
that trip was a remarkable experience. A great sense of economic dynrunism is manifest in
the Asian economies. Outward-orientecL market-based policies have produced growth and
advanced social progress. Poverty rates are declining ruld living standards are rising.
Yet even in Asia, as in other developing regions, particularly Africa, enonnous
challenges remain. Much llt;;eOS to be done in key areas sllch
,-L') ~)overty
reduction,
employment generatioI\ and environmental protection. TIle financing demands for
infrastructure services are enonnous. In today's interdependent world these challenges faced
by developing coW1tries are also global challenges.
RR-248
FQr press releases, speeches, public schedules and official biographies, call our 24-lwur fax line at (202) 622-2040
2
The World Bank and the regional development banks are at the forefront of our
collaborative efforts to meet these challenges. We rely on the banks to promote sOlmd
economic management, encourage policy refonn, facilitate the flow of trade and capital, and
most importantly, to reduce poverty. In India, I had the benefit of visiting a World Bank
supported land management project. The prQject is both increasing the incomes of the poor,
and improving the local environment. It demonstrates effective development in action.
Now, some in the United States -- and some in our Congress -- question whether we
should continue participating in the multilateral development banks. I say to them what I say
to you now. The United States must remain fully engaged in these vital institutions,
including the International Development Association, and I will do all that I can to achieve
full fimding for our conuninnents. At the same time, the banks must demonstrate that they
are responding effectively and efficiently to the needs of their member counnies. The Halifax
Review of the international econOlnic architecture, and the work of the Development
Committee Task Force, will sharpen our focus on ways to improve the effectiveness of the
banks.
If the Bank is to succeed in advancing economic prot-rre~s, it must put the people
whose lives its work affects first, by increasing the focus on social investment. Only through
direct support for social investments is there the prospect of building a durable and inclusive
prosperity. That means enhancing governments' capacity to provide services as efficiently
and equitably as possible. The Bank should use its leverage to ensure that there is more
3
prirnruy health care, and more primaI)' schools. There must be a renewed Bank-borrower
partnership to ensure that the benefits of grassroots experiences find their way into lending
operations.
Incorporation of local knowledge vastly improves the quality of development
projects.
The World Bank has identified infrastructure as an area of particular importance and
particular promise. And it has agreed that an approach that fosters a sOlmd policy
environment and private sector participation must be at the heart of development. Only the
private sector has the capacity to generate the enormous financial and managerial resources
needed to fuel infrastructure development. But the private sector will not respond effectively
if it is hamstnmg by regulation, misdirected by distorted incentives, enmeshed in a cloud of
non-transparent requirements, or exposed to high levels of political risk. Attracting private
capital is furthered by clearing away obstacles to success by providing the policy and
institutional environment needed to attract private firumce, allocate it efficiently, and allow it
to work.
The World Bank and its regional cOlmterpart banks ought no longer to be seen as the
main actors in the role of financing national infrastructure.
"me (~mands go far beyond their
resolU"ces. l'vloreover, there are critical needs in social areas, such as education and healtl\
that private sector finance will not support, and which are more appropriate for bank and
official investment.
4
Similarly, govenunents' role in developing infrastructure can be reduced. Utilities,
teleconnmmicat:ions, and many other sectors are logical candidates for private participation.
Improved services to the public are the demonstrated result.
What governments and official institutions like the banks can and must do is bolster
the legal and institutional frameworks necessary to ensure private participation in
infrastructure development. Domestic capital markets must be broadened and deepened, if
cOlmtries are to mobilize domestic savings and allocate them efficiently. Regulatory and legal
regimes must be strengthened to assure transparency, predictability. and competition.
Helping meet these challenges is one way the banks can catalyze domestic and
external resources for investment. Though support for public sector refonn and institutionbuilding, the banks can bolster national efforts to create a favorable policy environment. The
banks' financial sector lending programs can bring resources ,md expertise to bear on the
essential task of developing domestic financial markets. 111ese are areas in which the banks
can best make a difference, complementing, without seeking to supplant private finance and
partici patlon.
Global markets can supplement domestic sources of fimds for infrastructure
development. However, there is a tremendous demand for capital worldwide. In this highly
competitive enviromnent, very few developing cmmnies can borrow the large amounts
5
required long teon on a project finance basis. In this respect, many countries are in
transition. The World Bank's strengthened guarantee program for addressing the nonconnnercial risks associated with private sector investments in infrastructure can help in this
context, and the United States supports this initiative. TIle Bank cannot stand still in this
area tvluch stronger coordination within the World Bank Group is needed to fully integrate
the IFe and MIGA into the Bank's
COtmtry
assistance strategies, so that we can best deploy
all the instnnnents at om disposal.
rvtany of the points I've made are of particular importance in the environmental sector.
Environmental infrastructure, such as sewage treatment plants or investments in pollution
prevention, is a pressing requirement. Private sector support is often inadequate to meet the
need, because private investors cannot collect many of the returns offered by environmental
infrastructme. The banks should make this a focus of their infrastructure investments.
Environmental concerns must also be central to the development of infrastructme in
other sectors, such as power and transportation, if we are to encourage development that
actually makes peoples lives better. Over the past few years, the World Bank and regional
banks have adopted stron~ r')licies on PTl";Y')nment and n8tLU~:~ resource issues. These
policies should markedly improve the economic, social and environmental content of the
banks' projects, to the benefit of the banks' and their borrowers.
The banks should pursue
full compliance with these policies at every stage of the infrastructure program and project
development process.
6
In addition, environmental considerations should be involved in the banks' policy
dialogue with regard to the framework for private sector investment. The banks can and
should assist governments in developing soood legal and re!:,>u.latOl), frameworks in the
environment and natural resomce sectors.
There are sometimes environmental tradeoffs where infrastructure development is
concerned. But in recognizing these tradeoff-;, we must not lose sight of the enormous array
of win-win approaches which the development banks should promote. Cuts in subsidies for
connnodities that encomage overuse of resources, sanitation and clean water efforts -- all of
these foster growth even as they remove incentives for
en\~ronmental
degradation.
In closing, I would like to commend Lewis Preston for his outstanding leadership at
the helm of the World Bank. Lew's focus on perfonnance and efficiency have generated an
impressive array of operational and administrative refonns which v"iIl hm'e a lasting impact.
We are all greatly indebted to him
UBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
April 27, 1995
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Tenders for $17,884 million of 52-week bills to be issued
May 4, 1995 and to mature May 2, 1996 were
accepted today (CUSIP: 912794Y57).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Discount
~ate
Low
High
Average
S.88%
5.91%
5.90%
Investment
Rate
6.26%
6.29%
6.28%
Price
94.055
94.024
94.034
Tenders at the high discount rate were allotted 17%.
The investment rate is the equivalent coupon-issue yield.
':'ENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Received
$64,470,776
AcceQted
$17,884,419
$58,218,447
1,072,329
$59,290,776
$11,632,090
1,072,329
$12,704,419
4,650,000
4,650,000
530,000
$64,470,776
530,000
$17,884,419
An additional $36,700 thousand of bills will be
issued to foreign official institutions for new cash.
5.89 - 94.045
RR-249
federal financing
WASHINGTON, D.C
20220
bonkNE
i\pril 28,
lY95
FEDERAL FINANCING BANK
Charles D. Haworth, Secretary, Federal Financing Bank (FFB)
announced the following activity for the month of March 1995.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $98.3 billion on March 31, 1995,
posting a decrease of $2,121.2 million from the level on
February 28, 1995.
This net change was the result of a decrease
in holdings of agency debt of $1,188.8 million, in holdings of
agency assets of $815.0 million, and in holdings of agencyguaranteed loans of $117.3 million.
FFB made 19 disbursements
during the month of March, 30 maturity extensions of REAguaranteed loans, and 32 306C refinancings of REA-guaranteed
loans.
FFB also received 39 prepayments in March.
Attached to this release are tables presenting FFB March
loan activity and FFB holdings as of March 31, 1995.
RR-ZSO
I
Page 2 of 5
FEDERAL FINANCING BANK
MARCH 1995 ACTIVITY
AMOUNT
BORROWER
OF ADVANCE
FINAL
MATURITY
3/1
3/6
3/9
3/17
3/21
3/24
3/24
3/24
3/28
3/28
3/30
3/31
$87,888.00
$220,464.00
$2,712,609.00
$2,342,530.00
$103,889.00
$1,343.80
$316,057.85
$1,362.20
$1,205,882.52
$2,181,810.00
$2,740,925.25
$187,038.98
6/30/95
12/11/95
12/11/95
12/11/95
12/11/95
4/1/97
12/11/95
1/3/22
9/1/95
12/11/95
1/2/96
12/11/95
6.164%
6.544%
6.564%
6.382%
6.400%
6.893%
6.379%
7.607%
6.118%
6.268%
6.346%
6.373%
3/2
3/14
$215,000.00
$9,377,287.85
11/2/26
11/2/26
7.599% Sf A
7.591% Sf A
3/3
3/6
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
3/7
$2,473,000.00
$4,403,000.00
$1,341,493.13
$6,304,841.06
$9,708,993.05
$10,462,107.05
$7,545,223.95
$7,676,874.46
$6,876,362.15
$3,570,726.41
$13,749,170.60
$13,268,808.97
$13,931,216.40
$4,216,030.65
$4,963,473.54
$6,097,572.66
$3,961,621.87
$10,899,754.52
$10,813,912.49
$3,157,046.25
$974,959.24
12/31/14
12/31/24
1/3/17
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
1/3/17
6/30/95
6/30/95
1/3/17
1/3/17
1/3/17
1/2/18
6/30/95
1/2/18
1/2/18
1/2/18
6/30/95
1/3/17
7.496%
7.631%
7.474%
5.976%
5.977%
5.977%
5.977%
5.977%
7.474%
5.977%
5.977%
7.474%
7.474%
7.474%
7.488%
5.977%
7.488%
7.488%
7.488%
5.977%
7.474%
DATE
INTEREST -,
RATE
GOVERNMENT - GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
HCFA Services
Foley Services Contract
Foley Square Office Bldg.
Foley Square Courthouse
Foley Services Contract
Chamblee Office Building
Fole¥ Services Contract
Miaml Law Enforcement
Atlanta CDC Office Bldg.
Foley Square Office Bldg.
Memphis IRS Service Cent.
Foley Services Contract
S/A
S/A
Sf A
Sf A
Sf A
Sf A
Sf A
S/A
S/A
Sf A
S/A
S/A
GSA/PADe
rCTC Building
ICTC Building
RURAL UTILITIES SERVICE
Guam Telephone Auth. #371
Alabama Electric #393
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
+Plains Elec. #918
S/A is a Semi-annual rate:
+ 306C refinancing
3/7
Qtr. is a Quarterly rate.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Page 3 of 5
FEDERAL FINANCING BANK
MARCH 1995 ACTIVITY
ORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
$946,231.37
$496,378.45
$1,684,532.14
$596,708.92
$217,000.00
$809,000.00
$22,607,000.00
$3,728,438.47
$5,327,005.39
$39,365,538.20
$16,020,816.84
$9,841,384.54
$7,819,875.90
$19,819,503.21
$23,045,785.50
$2,352,807.05
$889,218.73
$1,410,631.48
$9,928,007.80
$3,277,134.26
$2,661,635.85
$11,100,594.68
$1,050,162.73
$12,143,433.92
$16,520,846.77
$10,784,151.77
$12,321,735.05
$3,726,311.23
$23,812,735.05
$40,137,274.24
$40,425,802.73
$1,205,501. 39
$467,512.08
$468,272.43
$468,401.62
$468,355.31
$941,311.57
$11,295,737.73
$3,652,214.15
$3,077,426.90
$3,653,334.52
6/30/95
12/31/18
6/30/95
6/30/95
12/31/26
1/2/24
3/31/97
4/1/96
4/1/96
6/30/95
6/30/95
6/30/95
6/30/95
4/1/96
4/1/96
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
1/3/17
1/3/17
6/30/95
1/3/17
6/30/95
6/30/95
6/30/95
1/2/96
1/2/96
1/2/96
1/2/96
1/2/96
6/30/95
6/30/95
6/30/95
6/30/95
6/30/95
INTEREST
RATE
OVERNMENT - GUARANTEED LOANS
RURAL UTILITIES SERVICE (continued)
Plains Elec. #918
Plains Elec. #918
Plains Elec. #918
Plains Elec. #918
Central Power Elec. #395
Pineland Telephone #403
Oglethorpe Power #335
Allegheny Electric #255
Alle9heny Electric #255
Hoos~er Energy Elec. #901
Hoosier Energy Elec. #901
Hoosier Energy Elec. #901
Northwest Iowa Power #907
Oglethorpe Power #916
Oglethorpe Power #916
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Saluda River Elec. #903
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
Seminole Electric #905
,ho-Me Power #913
Sho-Me Power #913
Sho-Me Power #913
Sho-Me Power #913
:lho-Me Power #913
~ited Power Assoc. #911
Jnited Power Assoc. #911
fuited Power Assoc. #911
Jnited Power Assoc. #911
~ited Power Assoc. #911
:r. is a Quarterly rate.
maturity extension
306C refinancing
3/7
3/7
3/7
3/7
3/13
3/13
3/28
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
5.977% Qtr.
7.498% Qtr.
5.977% Qtr.
5.977% Qtr.
7.524% Qtr.
7.524% Qtr.
6.690% Qtr.
6.503% Qtr.
6.503% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
6.304% Qtr.
6.304% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
7.295% Qtr.
7.295% Qtr.
5.840% Qtr.
7.295% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
6.168% Qtr.
6.168% Qtr.
6.168% Qtr.
6.168% Qtr.
6.168% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
5.840% Qtr.
Page 4 of l
FEDERAL FINANCING BANK
MARCH 1995 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTERESTRATE
GOVERNMENT - GUARANTEED LOANS
RURAL UTILITIES SERVICE (continued)
+United Power Assoc. #911
+United Power Assoc. #911
+United Power Assoc. #911
+United Power Assoc. #911
*Wolverine Power #349
Qtr. is a Quarterly rate.
* maturity extension
+ 306C refinancing
3/31
3/31
3/31
3/31
3/31
$3,889,349.41
$4,310,904.45
$1,208,851. 70
$920,010.00
$1,287,448.80
6/30/95
6/30/95
6/30/95
6/30/95
3/31/97
5.840%
5.840%
5.840%
5.840%
6.820%
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Page 5 of 5
FEDERAL FINANCING BANK
(in millions)
Program
Agency Debt:
Department of Transportation
Export-Import Bank
Resolution Trust Corporation
Tennessee Valley Authority
U.S. Postal Service
sUb-total*
Agency Assets:
FmHA-ACIF
FmHA-RDIF
FmHA-RHIF
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural Utilities Service-CBO
Small Business Administration
sUb-total*
Government-Guaranteed Loans:
DOD-Foreign Military Sales
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration +
DOl-Virgin Islands
DON-Ship Lease Financing
Rural utilities Service
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
DOT-Section 511
sub-total*
grand-total*
*figures may not total due to rounding
+does not include capitalized interest
March 31, 1995
$
0.0
3,149.8
19,756.1
3,200.0
7,873.1
33,979.1
5,453.0
3,675.0
23,631.0
10.5
33.8
4,598.9
february 28, 1995
$
0.0
3,448.6
20,646.2
3,200.0
7.873.1
35,167.9
Net Change
FY '95 Net Change
3/1/95-3/31/95
10/1/94-3/31/95
$
0.0
-298.8
-890.1
0.0
0.0
-1,188.8
~
0.9
37,403.1
38,218.1
-515.0
0.0
-300.0
0.0
0.0
0.0
Q,Q
-815.0
3,635.4
95.9
1,688.5
2,189.3
21.2
1,432.1
17,292.7
21.6
496.2
11.4
26,884.3
3,689.4
95.9
1,688.5
2,173.1
21. 2
1,432.1
17,360.4
26.6
502.9
11.5
27,001.6
-54.0
0.0
0.0
16.2
0.0
0.0
-67.7
-5.0
-6.7
-0,1
-117.3
....
5,968.0
3,675.0
23,931.0
10.5
33.8
4,598.9
=========,:;;::::
:::========
=====:::==
$ 98,266.4
$100,387.6
$-2,121.2
$
-664.7
-776.6
-6,763.0
-200.0
-1.100.0
-9,504.3
-610.0
0.0
-760.0
-14.8
-1. 9
0.0
-0.2
-1,387.0
-150.0
-14.0
-58.0
159.8
-0.7
-47.4
-23.9
-35.1
-26.8
-3.2
-199.5
=========
$-11,090.7
NEWS
TREASURY.
OFFICE OF PUBUC AFFAIRS. 1500 PENNSnVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960
FOR IMMEDIATE RELEASE
April 28, 1995
Contact:
Jon Murchinson
(202) 622-2960
BORROWING ADVISORY COMMITTEE MEETING, REFUNDING PLANNED
The Treasury Department's Borrowing Advisory Committee will hold an open meeting
at 11 :30 a.m. Tuesday, May 2. 1995 in the Cash Room, Main Treasury. 1500 Pennsylvania
Avenue NW.
Deputy Assistant Secretary (Federal Finance) Darcy Bradbury will announce the
Treasury Department's quarterly refunding at :2 p.m. on Wednesday. May 3. 1995 in the Cash
Room.
Media without Treasury. White House, State, Defense or Congressional credentials
wishing to attend should contact the Office of Public Affairs at (202) 622-2960, with the
following information: name, Social Security number and date of birth. by 5 p.m. Monday,
May 1 for Tuesday's event and by 5 p.m. Tuesday, May 2 for Wednesday's event. This
information can be faxed to (202) 622-1999.
-30-
RR-251
Far press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
DEPARTMENT
OF
lREASURY
THE
TREASURY
NEWS
~~/789~~. . . . . . . . . . . . . . . . . . . . . . . . . .. .
....
OFFICE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• -WASHINGTON, D.C.. 20220. (202) 622·2960
FOR RELEASE
April 28, 1995
Contact:
Rebecca Lowenthal
(202) 622-1997
RUBIN TO ADDRESS TREASURY CONFERENCE FOR BUSINESSES
Treasury Secretary Robert E. Ruhin will address the Department's
PARTNERSHIPS '95 conference for small, minority and women-owned businesses in the
Cash Room of the main Treasury huilding at 9:30 a.m. on Tuesday, May 2. The
ceremony and the two-day conference will he held in the Cash Room of the main
Treasury building.
Rubin will discuss how reinvention initiatives can help foster relationships with
underutilized businesses. During the opening ceremony, Rubin will recognize Treasury's
Small and Large Business Partners of the Year. Also speaking will he Treasury A')sistant
Secretary for Management George Munoz and Steve Kelman, Administrator, Office of
Federal Procurement Policy.
Over $3 million worth of contracts were available for bid at Treasury's two
previous conferences in Los Angeles and Washington. At the upcoming two-day
conference, Treasury bureaus will offer over $1.5 million in contract opportunities;
smaller purchases will be made with the government purchase card, a credit card that
eliminates paperwork and ensures swift payment to businesses. Many of Treasury's
prime contractors will he available to discuss suhcontracting opportunities. Conference
activities include hands-on training in electronic commerce and help in registering with
Treasury's vendor database. Treasurer of the United States Mary Ellen Withrow will be
on hand to sign currency during the conference.
Treasury, White House, Defense, State Department or Congressional press
credentials are required to gain access to the Treasury building, 1500 Pennsylvania
Avenue, NW. Any journalists wishing to attend Rubin's remarks without one of these
credentials must call Treasury Public Affairs at (202) 622-2960 with the following
information before 5:00 p.m. on Monday, May 1: name, organization. date of birth, and
social security or passport number. Journalists without Treasury or White House passes
who plan to visit the conference at other times should call Public Affairs in advance for
clearance.
RR-252
-30-
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
IREASURY
OF
THE
TREASURY
NEWS
~~178G9~. . . . . . . . . . . . . . . . . . . . . . . . . . . ..
............................
OFFICE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
Text as Prepared for Deli very
May 1, 1995
Testimony of Ronald K. Noble
Under Secretary of the Treasury for Enforcement
Senate Appropriations Subcommittee on Treasury,
Postal Service and General Government
RR-253
Fur press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT OF THE TREASURY
STATEMENT OF RONALD K. NOBLE
UNDER SECRETARY (ENFORCEMENT)
MAY 1, 1995
BEFORE THE SENATE COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON TREASURY, POSTAL SERVICE,
AND GENERAL GOVERNMENT
GOOD AFTERNOON MR. CHAIRMAN AND MEMBERS OF THE
SUBCOMMITTEE. TODAY I AM ACCOMPANIED BY THE DIRECTOR
OF THE SECRET SERVICE, ELJAY BOWRON AND THE ASSOCIATE
DIRECTOR OF THE BUREAU OF ALCOHOL, TOBACCO, AND
FIREARMS, CHARLIE THOMSON.
IT IS AN UNSPEAKABLE TRAGEDY THAT BRINGS US
TOGETHER TODAY. THE EVENTS OF APRIL 19TH, PERHAPS, HAVE
FOREVER CHANGED SOME OF OUR PERCEPTIONS ABOUT OUR
SOCIETY. WHAT REMAINS IMMUTABLE, HOWEVER, IS THE ABILITY
2
OF ALL GOOD AMERICANS TO PULL TOGETHER IN TIMES OF
CRISES. WE HAVE SEEN THIS IN THE SEARCH AND RESCUE
OPERA TIONS IN OKLAHOMA CITY, AND WE HAVE SEEN THIS IN
THE PUBLIC'S CHARITABLE OUTPOURINGS. WE ALSO HAVE SEEN
THIS SPIRIT AT WORK IN THE EXCEPTIONAL COOPERATIVE
EFFORTS OF LAW ENFORCEMENT IN THE AFTERMATH OF THE
BOMBING.
THE TREASURY DEPARTMENT PLAYS A CENTRAL ROLE IN
THE FIGHT AGAINST TERRORISM. OUR ENFORCEMENT BUREAUS
PROTECT THE MOST VISIBLE TERRORIST TARGETS IN THE U.S.,
ENFORCE LAWS DIRECTED AT THE MOST COMMON INSTRUMENTS
OF TERROR, PROTECT AGAINST THE SMUGGLING OF WEAPONS OF
MASS DESTRUCTION, AND ENFORCE ECONOMIC SANCTIONS
AGAINST COUNTRIES AND GROUPS THAT PROMOTE TERRORISM.
ALSO, I AM PLEASED TO TELL YOU THAT THERE IS
OUTSTANDING COOPERATION AND JOINT EFFORT AMONG
FEDERAL LAW ENFORCEMENT AGENCIES IN ATTACKING THE
DOMESTIC TERRORISM PROBLEM. ATF, FBI, SECRET SERVICE,
3
CUSTOMS, IRS, THE TREASURY DEPARTMENT, AND THE JUSTICE
DEPARTMENT ARE SHARING INFORMATION ABOUT THE CRIME
THREAT POSED BY CERTAIN ORGANIZED GROUPS.
DOMESTIC TERRORISM IS A BROAD CONCEPT WITHOUT A
PRECISE DEFINITION. WHEN I USE THAT TERM TODAY, I AM
REFERRING TO INDIVIDUALS OR GROUPS WITHIN THE UNITED
STATES WHO REJECT THE LEGITIMATE AUTHORITY OF THE
UNITED STATES GOVERNMENT, WHO DO NOT RECOGNIZE THE
VALIDITY OF FEDERAL LAW, OR WHO ADVOCATE THE
OVERTHROW OF THE UNITED STATES GOVERNMENT, AND WHO
USE OR PLAN TO USE VIOLENCE OR TO OTHERWISE VIOLATE
FEDERAL LAW IN FURTHERANCE OF THESE OBJECTIVES.
WE HAVE SEEN DOMESTIC TERRORISM IN THE FORM OF THE
UNABOMBER WHO HAS STRUCK 16 TIMES SINCE 1978, KILLING
THREE AND WOUNDING 23 OTHERS. A SAN FRANCISCO-BASED
TASK FORCE COMPRISED OF ATF, FBI, AND THE POSTAL
INSPECTION SERVICE IS INVESTIGATING THIS CASE. EXPLOSIVES
TECHNICIANS AND AGENTS IN ATF FIELD OFFICES NEAREST THE
4
SITE OF THE BOMBINGS (IN EIGHT STATES) ALSO HAVE BEEN
INVOLVED CLOSELY.
AFTER HIS MOST RECENT ATTACK WHICH
KILLED A MAN IN SACRAMENTO ON APRIL 25, 1995, LETTERS WERE
RECEIVED FROM THE UNABOMBER. THESE LETTERS AND OTHER
LEADS ARE BEING EXAMINED TO ADD TO THE BOMBER'S PROFILE
AND TO DETERMINE HIS MOTIVE; AND IT IS HOPED, LEAD TO HIS
ARREST.
TREASURY'S ENFORCEMENT AGENCIES BELIEVE THAT
DOMESTIC TERRORISM HAS BEEN GROWING STEADILY. WE HAVE
NOTED AN ESCALATION IN VIOLENT INCIDENTS DURING THE PAST
DECADE. BETWEEN 1983 AND 1993, THE NUMBER OF YEARLY
BOMBINGS IN THE UNITED STATES MORE THAN TRIPLED.
BOMBING DEATHS AND INJURIES WERE AT AN ALL TIME HIGH IN
1993 WITH 49 DEATHS AND 1,323 INJURED. THE OKLAHOMA CITY
BOMBING WILL MAKE 1995 THE MOST DEADLY YEAR, YET.
OUR BEST ESTIMATE IS THAT IN THE PAST FIVE YEARS , THE
VAST MAJORITY OF BOMBING INCIDENTS HAVE INVOLVED
CRIMINAL DESTRUCTION OF PROPERTY OR NON-TERRORIST
5
RELATED REVENGE. NEVERTHELESS, IT IS CLEAR THAT THERE IS
AN INCREASING TENDENCY AMONG SOME GROUPS TO ENGAGE IN
ANTI-GOVERNMENT AND ANTI-LAW ENFORCEMENT VIOLENCE.
CIVILIANS, AS WELL AS FEDERAL AND LOCAL LAW
ENFORCEMENT PERSONNEL, HAVE BEEN THREATENED,
HARASSED, SURVEILLED, ASSAULTED, AND MURDERED. FEDERAL
EMPLOYEES, SUCH AS IRS AUDITORS, EXERCISING THEIR LAWFUL
DUTIES HAVE BEEN CONFRONTED BY RESISTANCE, SOMETIMES
ARMED, BY GROUPS THAT CHALLENGE THE AUTHORITY OF THE
FEDERAL GOVERNMENT.
SCOPE OF THE PROBLEM
ACCORDING TO THE STATE DEPARTMENT, WHICH HAS
PRINCIPAL RESPONSIBILITY FOR INTERNATIONAL TERRORIST
MATTERS, THERE WERE 321 INTERNATIONAL TERRORIST ATTACKS
DURING 1994. SIXTY-SIX OF THEM WERE ANTI-U.S. ATTACKS. THE
NUMBER OF INTERNATIONAL AND ANTI-U.S. ATTACKS IN 1994 WAS
A 23-YEAR LOW AND IT WAS A DECREASE OF 25% FROM 1993.
6
NOTWITHSTANDING THOSE IMPROVED STATISTICS, WORLDWIDE
CASUALTIES WERE 314 PERSONS KILLED AND 663 WOUNDED.
NEVERTHELESS, TREASURY'S ENFORCEMENT AGENCIES SEE
NEW OPPORTUNITIES FOR INTERNATIONAL TERRORISM TO WIDEN
IN SCOPE. WITH THE DISSOLUTION OF THE SOVIET UNION, AND
THE END OF ITS CENTRALIZED CONTROL OVER NUCLEAR
MA TERIALS AND ASSOCIATED TECHNOLOGIES, WE ANTICIPATE
INCREASED TERRORIST PROBLEMS. WEAPONS PROCUREMENT
NETWORKS ARE BECOMING MORE ADVANCED AND CLANDESTINE.
TO COMBAT THESE PROBLEMS, TREASURY, THROUGH THE
U.S. CUSTOMS SERVICE HAS A LONGSTANDING TRADITION OF
OPERATING IN A FRAMEWORK OF INTERNATIONAL COOPERATION
WITH FOREIGN CUSTOMS AGENCIES IN 126 COUNTRIES. THROUGH
JOINT OPERATIONS, TACTICAL INTELLIGENCE, AND MUTUAL
ASSISTANCE TREATIES, CUSTOMS HAS THE ABILITY TO DETECT
AND DISMANTLE INTERNATIONAL SMUGGLING AND
PROLIFERATION NETWORKS.
THE ILLEGAL ACQUISITION
7
NETWORKS WHICH SUPPORT INTERNATIONAL TERRORISM ARE
BECOMING MORE SOPHISTICATED AND CLANDESTINE.
CUSTOMS RECENTLY HAS MADE A NOTABLE SHIFT IN IT'S
ENFORCEMENT MISSION TO EMPHASIZE THE DETECTION AND
DEVELOPMENT OF SYSTEMS WHICH WILL EXPOSE SUSPICIOUS
INDIVIDUALS AND CARGO (I.E., AUTOMATED EXPORT SYSTEM,
OUTBOUND STRATEGY). THIS CAPABILITY WILL WARN FEDERAL
AUTHORITIES OF TERRORIST ACTIVITIES BEFORE PEOPLE ARE
HURT OR BUILDINGS DESTROYED.
ATF ALSO IS CONTINUING ITS INTERNATIONAL TRAFFIC IN
ARMS (I.T.A.R.) PROGRAM,WHICH IS DESIGNED TO CURTAIL
INTERNATIONAL ARMS TRAFFICKING. THE I.T.A.R. PROGRAM WAS
DEVELOPED WHEN IT BECAME APPARENT THAT FIREARMS
ORIGINATING FROM THE UNITED STATES WERE BEING RECOVERED
WORLDWIDE IN SUCH CRIMINAL ACTS AS NARCOTICS
TRAFFICKING AND TERRORISM.
8
RESOURCES
THE ADMINISTRATION HAS SUBMITTED A FUNDING PACKAGE
TO YOU WHOSE PURPOSE IT IS TO ENSURE THAT THE FEDERAL
GOVERNMENT HAS ADEQUATE RESOURCES TO PROTECT OUR
COUNTRY FROM TERRORIST ACTIVITIES. ADDITIONAL FUNDING IS
BEING SOUGHT FOR EMERGENCY EXPENSES OF THE BOMBING OF
THE ALFRED P. MURRAH FEDERAL BUILDING IN OKLAHOMA CITY,
AND RELATED ANTI-TERRORISM EFFORTS, INCLUDING THE
PRESIDENT'S ANTI-TERRORISM INITIATIVE.
THE OVERALL PACKAGE SEEKS $150 MILLION FOR FY 1995, $500
MILLION FOR 1996, AND $1.5 BILLION FOR FY 1995-1999 (FIVE YEAR
TIME FRAME). THIS INCLUDES ALL INVOLVED FEDERAL
AGENCIES BUT PRINCIPALLY DOJ AND TREASURY.
THE
PROPOSAL REQUESTS $24 MILLION AND 200 POSITIONS FOR
TREASURY ENFORCEMENT IN FY 1995.
•
ATF: $16.2 MILLION AND 175 EMPLOYEES FOR A
PERMANENT NATIONAL RESPONSE TEAM, FORENSICS
LAB, EXPLOSIVES INSPECTIONS, COUNTERTERRORISM
ANAL YSTS, AND RELATED EQUIPMENT AND TRAVEL.
9
•
SECRET SERVICE: $3.8 MILLION TO UPGRADE AND
REPLACE EXISTING WEAPONRY AND PROTECTIVE GEAR
TO PROVIDE ENHANCED PROTECTION OF THE WHITE
HOUSE AND ENVIRONS, AND REPLACEMENT EQUIPMENT
AND TRAVEL ASSOCIATED WITH THE OKLAHOMA
INCIDENT.
•
CUSTOMS SERVICE: $1.2 MILLION TO PROVIDE
WORKING FACILITIES AND REPLACEMENT EQUIPMENT
FOR DISPLACED OKLAHOMA EMPLOYEES, INCLUDING
RELATED TRAVEL AND OVERTIME.
•
IRS/CID: $1 MILLION TO COVER EXPENSES RELATED TO
THE OKLAHOMA INCIDENT.
•
FINCEN: $.3 MILLION TO COVER EXPENSES RELATED
TO THE OKLAHOMA INCIDENT.
•
DEPARTMENTAL OFFICES: $.3 MILLION AND 10
EMPLOYEES FOR THE OFFICE OF ENFORCEMENT TO
10
ASSIST IN OVERSIGHT OF THE DEPARTMENT'S
ANTITERRORISM EFFORTS INCLUDING INCREASED
SANCTIONS ENFORCEMENT.
WE URGE YOU TO ADOPT THIS LEGISLATION WITHOUT
DIMINISHING IN ANY WAY OUR REQUEST.
TREASURY BUREAUS' ACTIVITIES
NEXT, I WOULD LIKE TO TELL YOU BRIEFLY WHAT EACH OF
OUR TREASURY ENFORCEMENT BUREAUS IS DOING TO COMBAT
TERRORISM.
•
ATF HAS LONG PLAYED A CRUCIAL ROLE INVESTIGATING
TERRORIST ACTS BOTH IN THE UNITED STATES AND ABROAD. ATF
HAS CLEAR RESPONSIBILITY IN THESE INVESTIGATIONS BECAUSE
ILLEGAL FIREARMS AND EXPLOSIVES, WHICH ATF HAS
STATUTORY JURISDICTION TO REGULATE, ARE THE TOOLS USED
TO COMMIT ACTS OF VIOLENCE AGAINST THE UNITED STATES
AND ITS CITIZENS.
DURING THE 1989-1993 PERIOD, THERE WERE
APPROXIMATELY 12,200 ACTUAL OR ATTEMPTED BOMBINGS IN
THE UNITED STATES. THE FBI ESTIMATES THAT 24 WERE
11
TERRORIST RELATED. THERE IS A MEMORANDUM OF
UNDERSTANDING BETWEEN THE FBI, ATF, AND THE POSTAL
INSPECTION SERVICE TO DETERMINE WHO HAS JURISDICTION
OVER A BOMBING INCIDENT. NINETY FIVE PERCENT OF THE
TOTAL BOMB INCIDENTS HAVE BEEN DETERMINED TO FALL
WITHIN ATF'S JURISDICTION. ATF INVESTIGATES MORE BOMBING
INCIDENTS THAN ANY OTHER U.S. LAW ENFORCEMENT AGENCY.
ATF HAS THE FOREMOST FEDERAL EXPERTISE IN EXPLOSIVES
AND ARSON. THEY WORK CLOSELY WITH THE FBI AND THE
POSTAL INSPECTION SERVICE.
FEDERAL, STATE, LOCAL AND
FOREIGN GOVERNMENTS ALIKE RECOGNIZE ATF AS BOMB
INVESTIGATION EXPERTS, AND FREQUENTLY RELY ON ATF'S
TECHNICAL AND INVESTIGATIVE EXPERTISE. FOR EXAMPLE,
ATP'S INTERNATIONAL RESPONSE TEAMS ASSISTED IN THE
INVESTIGATION OF THE 1992 BOMBING OF THE ISRAELI EMBASSY
IN BUENOS AIRES, ARGENTINA.
AS WE SIT HERE TODAY, OVER 130 ATF PERSONNEL ARE IN
OKLAHOMA CITY WORKING HAND-IN-HAND WITH THE FBI AND
12
ES TO
S~NCIES
TO SOLVE THE EVIL BOMBING COMMITTED
PROVIIrF IS PROVIDING THE TECHNICAL BOMBING EXPERTISE
OMA ClLAHOMA CITY BOMBING SITE. ATF'S FORENSIC'S
~NABLE[ES
ENABLED THEIR CHEMISTS TO IDENTIFY THE
THE BOl OF THE BOMB AND THE PROPORTIONATE PRESENCE OF
~TS.
~
Al~MENTS.
ATF ALSO BELIEVES IT HAS DETERMINED HOW
WAS I)SION WAS INITIATED, HOW MANY CONTAINERS OF
.TERIAL~
~ED
MATERIAL WERE USED, AND WHERE THE CONTAINERS
IN '[TIONED IN THE TRUCK. FURTHER, ATF HAS IDENTIFIED
ANUFA(Y MANUFACTURER OF THE BARRELS BELIEVED TO
IE EXPLD THE EXPLOSIVE MATERIALS.
~ET
~D
SERSECRET SERVICE IS CHARGED WITH PROTECTING, THE
OTHf, AND OTHER PROTECTEES WHO ARE PERHAPS THE
ILE TAPROFILE TARGETS OF POTENTIAL TERRORISTS ATTACKS
). AS SU)RLD. AS SUCH, THE SECRET SERVICE IS ACTIVELY
[DENTIF> IN IDENTIFYING INDIVIDUALS AND GROUPS, AS EARLY
NHO MlLE, WHO MAY POSE A RISK TO ITS PROTECTEES. IN
ENT EV:RECENT EVENTS, WE MUST MAKE SURE THAT THE
~T
ITS BAS AT ITS DISPOSAL THE INVESTIGATIVE AND
13
PROTECTIVE RESOURCES NECESSARY TO BE ABLETO BE
FOR THE SAFETY OF PROTECTEES, AS WELL AS n WELL
1
J
RELATIVE TO THE PRESIDENT'S COUNTERTE:OUNTI
INITIATIVE, THE SECRET SERVICE SIGNIFICANTL y\TIFICAl'
BY UTILIZING ITS INVESTIGATIVE AND FORENSIC
I)
FORE!'
THROUGHOUT THE WORLD, THE SECRET SERVICEET SER'
RESPECTED FOR ITS UNIQUE FORENSIC EXPERTISE EXPEl
INVESTIGATIVE SKILLS. IN FACT, THOSE SKILLS roSE SKU
SUCCESSFULL Y ARE EMPLOYED IN SUPPORT OF npPORT (
MISSIONS--PROTECTION OF OUR NATION'S
LEADE~N'S
FINANCIAL SYSTEMS, TO INCLUDE IDENTIFYING
LEi
P~NTIFYIl
TERRORIST THREATS AS THEY RELATE TO THOSE ~ TO TH
RESPONSIBILITIES.
•
THE CUSTOMS SERVICE, BY VIRTUE OF ITS EUE OF I'
AND SEARCH AUTHORITY, IS THE PRIMARY BORDMARY B(
ENFORCEMENT AGENCY. CUSTOMS MUST SUSTAIUST SU
EFFECTIVELY COORDINATE THEIR SYSTEMATIC INTEMAT
INTELLIGENCE, INTERDICTION, AND INVESTIGATI\JVESTIC
14
THESE PROGRAMS ARE CRITICAL REQUIREMENTS TO DETER
EFFECTIVELY THE USE OF AIR, SEA, AND LAND BORDERS AS
GLOBAL SMUGGLING ROUTES TO SUPPORT TERRORIST ACTIONS.
CUSTOMS HAS ACHIEVED NOTABLE SEIZURES THROUGH THE
IMPLEMENTATION OF PRO-ACTIVE INVESTIGATIONS, UNDERCOVER
OPERATIONS, AND INNOVATIVE INSPECTION TECHNIQUES.
SEIZURES INCLUDE SOPHISTICATED TECHNOLOGY AND CHEMICAL
PRECURSORS SUCH AS AMMONIUM PERCHLORATE, SODIUM
SULFIDE, ZIRCONIUM, LASER GUIDANCE DEVICES, ENCRYPTION
COMMUNICATIONS EQUIPMENT, NUCLEAR TRIGGERS, AND NONRADIOACTIVE ISOTOPES. THESE SEIZURES ARE WORTH MILLIONS
OF DOLLARS. DELIVERY OF ANY ONE OF THESE ITEMS INTO
TERRORIST HANDS WOULD HAVE DEV ASTATING EFFECTS TO
PERSONS AND PROPERTY.
•
THE OFFICE OF FOREIGN ASSETS CONTROL (OFAC)
ADMINISTERS OUR COUNTRY'S ECONOMIC SANCTIONS PROGRAMS
AGAINST SELECTED FOREIGN COUNTRIES AND GROUPS THAT
SUPPORT TERRORISM OR COMMIT TERRORIST ACTS. THESE
15
PROGRAMS INCLUDE $2.8 BILLION IN ASSET FREEZES AND TRADE
EMBARGOES AGAINST SEVERAL STATE SPONSORS OF TERRORISM,
INCLUDING LIBYA AND IRAQ; AND IMPORT AND PETROLEUM
DEVELOPMENT SANCTIONS AGAINST IRAN. OFAC SANCTIONS
ALSO TARGET DOMESTIC FUNDRAISING ACTIVITY BY MIDDLE
EAST TERRORIST GROUPS.
•
THE INTERNAL REVENUE SERVICE, ALTHOUGH NOT USUALLY
DIRECTLY INVOLVED IN COUNTER-TERRORISM INVESTIGATIONS,
CONDUCTS INVESTIGATIONS OF TAX PROTESTERS, MANY OF
WHOM ARE LINKED TO ORGANIZATIONS, SUCH AS MILITIAS, THAT
CHALLENGE THE LEGITIMATE AUTHORITY OF THE U.S.
GOVERNMENT.
•
THE FINANCIAL CRIMES ENFORCEMENT NETWORK (FINCEN)
PROVIDES VALUABLE INTELLIGENCE SUPPORT TO LAW
ENFORCEMENT AGENCIES CONDUCTING INVESTIGATIONS OF
TERRORISTS. IN THE PAST, FINCEN HAS PROVIDED ANALYTICAL
INTELLIGENCE IN SUPPORT OF INVESTIGATIONS OF MURDER AND
BOMBINGS CARRIED OUT BY SUSPECTED TERRORISTS.
16
SUCCESSFUL TERRORIST ORGANIZATIONS REQUIRE FINANCING
AND FINCEN FOLLOWS THE MONEY.
THROUGH RESEARCH AND ANALYSIS OF VARIOUS LAW
ENFORCEMENT AND COMMERCIAL DATABASES, FINCEN RAPIDLY
DEVELOPS INFORMATION CONCERNING RESIDENCES UTILIZED BY
SUSPECTS, DOMESTIC AND INTERNATIONAL FINANCIAL
TRANSACTIONS, FOREIGN TRAVEL, BUSINESS ACTIVITIES, NAMES
OF ASSOCIATES, AND ALIASES USED BY SUSPECTS. THIS
INFORMATION PROVIDES TIMELY INVESTIGATIVE LEADS THAT
CAN BE USED TO IDENTIFY TERRORISTS AND THEIR ASSETS.
FINALLY, ALL OF TREASURY ENFORCEMENT BUREAUS ARE
FOCUSED ON ATTACKING THE MEANS BY WHICH ORGANIZED
CRIMINAL GROUPS FUND THEIR OPERATIONS. WE HAVE FOUND
THAT CRIMES LIKE FINANCIAL FRAUD OR COUNTERFEITING
FREQUENTLY ARE USED TO FINANCE ACTS OF TERRORISM. WE
ARE DEDICATED TO USING OUR FINANCIAL CRIMES EXPERTISE TO
ATT ACK THESE FUNDING MECHANISMS.
17
RECENT PRESIDENTIAL INITIATIVES
ON JANUARY 23rd OF THIS YEAR, PRESIDENT CLINTON
SIGNED AN EXECUTIVE ORDER PROHIBITING TRANSACTIONS WITH
TERRORISTS WHO THREATEN TO DISRUPT THE MIDDLE EAST
PEACE PROCESS. THIS ORDER IS BEING ENFORCED BY OFAC. THE
ORDER BLOCKS THE MOVEMENT, SALE, PURCHASE, OR TRANSFER
OF PROPERTY OF CERTAIN TERRORIST ORGANIZATIONS, OR
PERSONS ACTING ON THEIR BEHALF, THAT THREATEN THE
MIDDLE EAST PEACE PROCESS. THE ORDER ALSO PROHIBITS THE
TRANSFERRING OF ANY CONTRIBUTION OF FUNDS, GOODS, OR
SERVICES TO OR FOR THE BENEFIT OF SUCH PERSONS. THE
ORDER PROVIDES A NEW TOOL TO COMBAT FUNDRAISING IN THIS
COUNTRY ON BEHALF OF ORGANIZATIONS THAT USE TERROR TO
UNDERMINE THE MIDDLE EAST PEACE PROCESS AND CUTS OFF
THEIR ACCESS TO SOURCES OF SUPPORT IN THE U.S. AND TO THE
U.S. FINANCIAL SYSTEM. SECTION 301 OF THE OMNIBUS
COUNTERTERRORISM ACT OF 1995, WHICH RECENTLY WAS
TRANSMITTED TO THE CONGRESS BY PRESIDENT CLINTON,
CONTAINS SIMILAR BLOCKING PROVISIONS AND PROHIBITIONS
AGAINST THE MAKING OR RECEIVING OF CERTAIN
18
CONTRIBUTIONS TO DESIGNATED TERRORISTS. YESTERDAY, THE
PRESIDENT ANNOUNCED HIS INTENTION TO IMPOSE ADDITIONAL
SANCTIONS AGAINST IRAN. HE IS EXPECTED TO SIGN AN
EXECUTIVE ORDER IMPLEMENTING HIS DECISION EARLY THIS
WEEK.
AMONG THE IMPORTANT STEPS TAKEN BY PRESIDENT
CLINTON IMMEDIATELY FOLLOWING THE NEWS OF THIS TRAGEDY
WAS TO DIRECT HIS CABINET TO REVIEW EXISTING LEGISLATION,
RESOURCES AND OPERATIONS TO DETERMINE WHAT ELSE
NEEDED TO BE DONE IMMEDIATELY. WE COMMENCED AN
INTENSE, COOPERATIVE REVIEW AND WITHIN A WEEK HAD
DEVELOPED A NEW LEGISLATIVE AND RESOURCE PACKAGE
WHICH IS SCHEDULED FOR SUBMISSION TO THE CONGRESS
TODA Y.
I WOULD LIKE TO PROVIDE AN OVERVIEW OF THE
PRESIDENT'S PACKAGE, INCLUDING THE NEW LEGISLATIVE
INITIA TIVES AND THE FY 1995 SUPPLEMENTAL. THE FY 1996
BUDGET AMENDMENT IS STILL BEING FINALIZED, BUT IT WILL BE
TRANSMITTED TO THE CONGRESS LATER THIS WEEK.
19
THERE WILL BE A NEW DOMESTIC ANTI-TERRORISM CENTER,
UNDER THE LEADERSHIP OF THE FBI. BECAUSE OF
TREASURY'S IMPORTANT JURISDICTION AND ENFORCEMENT
ACTIVITIES, TREASURY ENFORCEMENT WILL NECESSARILY
PLAY AN IMPORTANT ROLE IN THIS CENTER. THE
CONCEPTUAL FRAMEWORK OF THIS CENTER IS STILL BEING
DEVELOPED.
A NEW PRESIDENTIAL DECISION DIRECTIVE IS BEING
DEVELOPED ON BOTH FOREIGN AND DOMESTIC TERRORISM.
AGAIN, TREASURY ENFORCEMENT IS ACTIVE IN THE
DEVELOPMENT OF THE DIRECTIVE AND WILL PLAY AN
IMPORTANT ROLE IN CARRYING OUT ITS MANDATE.
NEW LEGISLATIVE INITIATIVES
FBI WILL HAVE ACCESS TO FINANCIAL AND CREDIT REPORTS
IN ANTI-TERRORISM CASES, ON THE SAME BASIS AS BANK
RECORDS ARE CURRENTLY PROVIDED, ALLOWING
20
ENFORCEMENT AGENCIES TO TRACK THE SOURCE AND USE
OF FUNDS BY SUSPECTED TERRORISTS.
THE SAME LEGAL STANDARD WILL BE APPLIED IN NATIONAL
SECURITY CASES THAT IS CURRENTLY USED IN OTHER
CRIMINAL CASES FOR OBTAINING PERMISSION TO TRACK
TELEPHONE TRAFFIC WITH "PEN REGISTERS" AND "TRAP AND
TRACE" DEVICES.
LAW ENFORCEMENT AGENCIES WILL BE ABLE TO UTILIZE
THE NATIONAL SECURITY LETTER PROCESS TO OBTAIN
RECORDS CRITICAL TO TERRORISM INVESTIGATIONS FROM
HOTELS, MOTELS, COMMON CARRIERS, STORAGE FACILITIES,
AND VEHICLE RENTAL AGENCIES.
LAW ENFORCEMENT WILL HAVE EXPANDED AUTHORITY TO
CONDUCT ELECTRONIC SURVEILLANCE, WITHIN
CONSTITUTIONAL SAFEGUARDS. THIS IS AN IMPORTANT
INVESTIGATIVE TOOL FOR ATF IN CARRYING OUT ITS
EXPLOSIVE ENFORCEMENT MISSION.
21
ATF WILL BE REQUIRED TO STUDY THREE ISSUES: (1) THE
INCLUSION OF TAGGANTS IN STANDARD EXPLOSIVE DEVICE
RAW MATERIALS TO PERMIT TRACING OF THE SOURCE OF
THOSE MATERIALS AFTER AN EXPLOSION; (2) WHETHER
COMMON CHEMICALS USED TO MANUFACTURE EXPLOSIVES
CAN BE RENDERED INERT; AND (3) WHETHER CONTROLS CAN
BE IMPOSED ON CERTAIN BASIC CHEMICALS USED TO
MANUFACTURE OTHER EXPLOSIVES.
TAGGANTS WILL BE REQUIRED IN STANDARD EXPLOSIVE
DEVICE RAW MATERIALS AFTER THE PUBLICATION OF
IMPLEMENTING REGULATIONS BY THE SECRETARY OF THE
TREASURY.
LAW ENFORCEMENT AGENCIES WILL BE ABLE TO CALL ON
THE TECHNICAL EXPERTISE OF THE DEPARTMENT OF
DEFENSE IN INVESTIGATING OFFENSES INVOLVING
CHEMICAL AND BIOLOGICAL WEAPONS.
22
WE WILL INCREASE MANDATORY MINIMUM PENALTIES FROM
5 TO 10 YEARS FOR TRANSFERRING A FIREARM OR
EXPLOSIVES WITH KNOWLEDGE THAT IT WILL BE USED TO
COMMIT A VIOLENT CRIME.
PENALTIES WILL BE ENHANCED FOR TERRORIST ATTACKS
AGAINST CURRENT AND FORMER FEDERAL EMPLOYEES AND
THEIR FAMILIES WHEN THE CRIME IS COMMITTED BECAUSE
OF THE EMPLOYEE'S OFFICIAL DOTIES.
000
THROUGH A SURCHARGE ON CIVIL FINES, FUNDING WILL BE
AVAILABLE FOR THE DIGITAL TELEPHONY BILL PASSED BY
CONGRESS LAST SESSION, ENSURING COURT -AUTHORIZED
LAW ENFORCEMENT ACCESS TO ELECTRONIC SURVEILLANCE
OF DIGITIZED COMMUNICATIONS.
THAT COMPLETES MY STATEMENT. AFTER SECRET
SERVICE'S DIRECTOR ELJAY BOWRON AND ATP'S ASSOCIATE
DIRECTOR CHARLIE THOMSON PRESENT THEIR STATEMENTS, WE
WILL BE GLAD TO RESPOND TO ANY QUESTIONS YOU MA Y HAVE.
TREASURY
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .~~8~9____
OmCE OFPUBUC AFFAIRS. 1500 PENNSYLVANIAAVENl,JE, N.W.• WASHINGTON, D.C .• 20220· (202) 622-2960
FOR RELEASE AT 3 p.m.
May L 1995
Contact:
Jon Murchinson
(202) 622-2960
TREASURY ANNOUNCES MARKET BORROWING ESTIMATES
The Treasury Department on Monday announced that its net market borrowing for the
April-June 1995 quarter is estimated to be $25.8 billion, with a $45.0 billion cash balance on
June 30. The Treasury also announced that its net market borrowing for the July-September
1995 quarter is estimated to be in a range of $40 billion to $45 billion, with a $30 billion cash
balance at the end of September. The estimates do not include new cash to be raised in the
September 2- and 5-year notes, which will be issued on
October 2.
In the quarterly announcement of its borrowing needs on January 30, 1995, the Treasury
estimated net market borrowing during the April-June quarter to be a paydown of $5 billion to
$10 billion, assuming a $35 billion cash balance on June 30. The increase in the borrowing
estimate is due to a shift of tax refunds from the prior quarter into the April-June quarter, higher
outlays, and an increase in the June 30 cash balance assumption.
Actual net market borrowing in the quarter ended March 31, 1995 was $74.5 billion,
while the end-of-quarter cash balance was $18.1 billion. On January 30, the Treasury had
estimated net market borrowing for the January-March quarter to be $93.7 billion, with a $20
billion cash balance on March 31. The lower-than-expected market borrowing reflected in part
the slow down in tax refund payments, compared with the Treasury estimate in January, and
lower outlays. The actual cash balance was little changed from the January 30 estimate.
-30-
RR-254
TREASURY FINANCING REQUIREMENTS
January - March 1995
$Bil. r - - - - - - - - - - - - - - , - . . = . . . . - - - - - - - - - - - - - - - - - . $ B i l .
Uses
Sources
175
175
150
150
+
Coupon Refunding
125
State and Local
125
Savings Bonds
•
100
-
•
100
1
75
50
Net Market.
Borrowing
25
-- 75
Decrease in.
Cash
Balance
•
o
50
25
o
~.
Includes budget deficit, changes In accnued Interest and checks
outstanding and miscellaneous debt transactlons_
Deoartmen1 of \he TrltUuty
OtIiee of Ma""'&t Flnancoe
May'. '995-1
TREASURY FINANCING REQUIREMENTS
$Bil...-_ _ _ _ _ _ _ _ _ _ _ _ _A,...:.p_ri_1_-J_u_n_e_1_9_9_5_ _ _ _ _ _ _ _ _ _ _ _--..
Uses
120
Sources
120
100
100
80
$Bil.
Coupon Maturities.
+
Coupon Refunding
80
60
60
Savings Bonds
•
State and Local
40
•
40
1'/2
4 j.
20
. . Increase
-..... in Cash Balance '-;
o
Cash
Surplus'/
•
20
4
0
'; Assumes a $45 billion cash balance June 30, 1995_
2; Includes budget surplus, changes in accrued interest and checks
outstanding and miscellaneous debt transactions.
Depanment of tho TraMury
Office 01 MarXa! Rnance
May 1. 199s·2
NET MARKET BORROWING
April - June 1995
(Billions of Dollars)
Total
25.8
Done.l!
Bills
Regular weekly
52 week
Cash management
-15.9
-16.3
2.3
-9.1
Notes
7 year note
2 year note
5 year note
-7.0
2.2
12.0
To Be Done
.Y
41.7
Issued or announced through April 28, 1995 ,
D-epar1rnent of Treasury
Office of ~Qfket Finanoo
1995-l
May~,
TREASURY OPERATING CASH BALANCE
Semi- Monthly
$81' 1 . , - - - - - - - - - - - - - - - - - - - - - ' - - - - - - - - - - - - - , . . . . - - - - ,
Without
-~~
W
Tax and Loan
Borrowing
!J
50
Total Operating
40
30
••
••
••
20
10
01------------· -----------...;.. . . .--.. .
~~
Federal Reserve Account
:
~
•• ••
•, •
,
·10
.••.
-20
·30
"•
_40L-~L-~-~-~-~--L--L--~--~--J---~--~--~--L-~
Apr
May
Jun
Jul
Aug Sep
1994
Oct
Nov
Dec
Jan
Feb
Mar Apr
1995
May
Jun
YAssumes refunding of maturing Issues,
Departmen1 0'1' tI1& Tr988l1,.,.
Officu of Mar1<.et FIMnc8
May1,1995-4
TREASURY NET MARKET BORROWING J!
$Bil. , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , $ B i I .
Coupons
103.5
DOver 10 yrs.
100
100
5 -10yrs. V
D
D
80
2 - under 5 yrs
80
•
Bills
60
60
40
40
20
20
o
-20
-20
-40~-----------~-------~------------L------------~--~-40
II
III
1991
IV
J!
V
II
III
1992
IV
II
III
1993
IV
II
III
1994
IV
I
1995
Excludes Federal Reserve and Government Account Transactions.
7 year note discontinued after Apnl 1993.
Department of tt'I6 Tntuury
Office of Mance1 FU'\l!II"t09
May 1,1995-5
AWARDS IN WEEKLY BILL AUCTIONS
(13- and 26-Week Bills Combined)
$Mil. . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
25,000
25,000
20,000
20,000
15,000
15,000
10,000
10,000
5,000
5,000
a
1994
1993
1995'
o
Calendar Year
'Data through April 24, 1995 Auction.
O&partmerrt d the
T(eaaury
Offk;u I;lf Market FInance
May 1. 100:'-6
AWARDS IN 52-WEEK BILL AUCTIONS
$Mil.r------------------------------=$Mil.
16,000
16,000
14,000
14,000
Federal Reserve and Foreign
12,000
10,000
8,000
6,000
4,000
2,000
o
Calendar Year
·Data through April 27, 1995 auct,on.
Department oj the Trel!Llury
Msy11996·7
0f1icEI of M8I'I<91 Finance
NET NEW CASH FROM NONCOMPETITIVE TENDERS IN
WEEKLY BILL AUCTIONSll
$Mil.
700
600
Discount Rate %
-
Net New Cash (left scale)
o 26 week
-
•
13 week
500 400 300
-
200
--.
.
Discount Rate (right scale)
......
.,. .. ,..
..... . '
26 week
...'
,r -••- ''e-_-....
6.0
' ....-.........
.:
.-.
.....
~ 5.5
,.... "J ./
-
-
13 week
..../
,"
...
'
." I
-
~
,. .'
I
II
o
-
4.0
-
3.5
il
w
I~
II
-100 -
1-
-
-
-300 -400
5.0
- 4.5
100
-200
6.5
I
I
Apr
May
I I jj
Jun
,I
I,
j
Jul
Aug
1994
Y
Department ol the TrellSlftY
Office 01 M.arXet FtnanOD
I
Sep
Oct
III I
,I
I
Nov
Dec
Jan
I
,I
I
Feb
Mar
AprP
1995
Excludes noncompetitive tenders from foreign official accounts and the Federal Reserve account.
p Preliminary
May 1, 1996-8
NONCOMPETITIVE TENDERS IN TREASURY NOTES AND BONDSJl
$Bil.
$Bi I.
3.5
_7Year
-
- 3.5
c::::J 2 & 5 Year
,,3,10 Be 30 Year
- 3.0
3.0
-
2.5
f--
-
2.0
f--
- 2.0
1.5 I 1.0 f-0.5
~I
0
A M J
J
A S 0
N D
J
F M A M J
J
A S 0
1994
1993
Y Excludes foreign add-ons from noncompetitive tenders
N D
J
2.5
;-
1.5
f-
1.0
-
0.5
F M AP
0
1995
:) Preliminary
Treasury Increased the maJ(lmum noncompetitive award 10 any noncompetitive bidder to $5 TlllllOn effectIVe November 5, 1991
Effective February 11. 1992. a noncompetitJVe bidder may not hold a position In WI trading. futures. or lorward contracts,
nor submi1 both competitive and noncompetitive bids for Its own account
Department of the Trea&ury
Office 01 Market
May 1, 1995-9
~lnanr;;:o
SECURITIES HELD IN STRIPS FORM 1993-1995
Privately Held
$ 8 i l . r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , $8il.
80
•
•
D
Strippable
Stripped
As of April 30, 1993: S646.9 billion, $17S.0 billion
80
As of April 30, 1994: $721.1 billion, $221.2 billion
As of April 21, 1995: snS.6 billion, $226.4 billion
60
60
40
40
20
20
o Less than 5 years
5-10 years
10-15 years
15-20 years
20-25 years
25-30 years
Years Remaining to Maturity
Note: The STRIPS program was established in February 1985. The 115/6% note of November 15,
1994, issued on November 15, 1984, was the first STRIPS-ehqlble secunty to mature.
o
SECURITIES HELD IN STRIPS FORM 1993-1995
Percent of Privately Held
Ok r-----------------------------------------------------------------.~o
50
40
•
As of April 30, 1993
D
III
As of April 30, 1994
50
As of April 21 ,1995
40
30
20
10
o
Less than 5 years
5-10 years
*
10-15 years
15-20 years
20-25 years
25-30 years
Years Remaining to Maturity
• The 11 3/4% bond of 11/15/09- 14 had $4.9 billion (pnvalely-held) available lor stnpP,ng, of which
76% was held ,n stnpped form.
[).&p&rtmoI:Inl 01
u-.. T nI&SUry
Note. The STRIPS program was established In February 1985. The 11 5!8% note of November 15,
1994, Issued on November 15, 1984, was the first STRIPS-eligible secunty to mature.
Office of Mar\.;&1 F1nru'109
May 1. 1995-11
TREASURY NET BORROWING FROM NONMARKETABLE ISSUES
$8il. . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , $8il.
8
6
4
2
0
-2
-4
-8
-10
-6
D
Savings Bonds
o
State and Local Series
•
Foreign Series
-4_7
-8
-8_9
-10
-12
-12
-14L----------~--------~-----~------~-~7 -14
II
III
1991
IV
II
III
IV
II
1992
e
n.. DAI1mam of the Tr~""
III
1993
estimate
IV
II
III
1994
IV
lie
1995
I
SALES OF UNITED STATES SAVINGS BONDS
1980 - 1995
$Bil.r-----------------..:....:...~------------___,
198019811982 1983 1984 1985 1986 1987 1988 1989 1990 19911992 1993 1994958
End of Qua rter
e esbmate
Dep.artment 01 the Treasury
Office of MQ1'k.et Fjn4nOO
May 1,1995-13
STATE & LOCAL GOVERNMENT SERIES
$Bil....--------------------------------,$Bil.
.".
•• •••
10
~
5
....-.
~.-
••
.....
:
. . ........-....:..
10
~
5
..... Gross Issues
•••
Redemptions
o
0
$Bil.
$Bil.
o
0
-5
-5
_10L-~
_
_L_~_L-~_~_~_~~
II
III
1991
IV
II
III
1 992
IV
_
_L_~_~~_~_~~_~_10
II
III
1 993
IV
II
III
1994
IV
I
1 995
De~loit7'lllJTrea.!luty
(')ffY,.nlUJlrkAtF,nMICI!I
Mavl
1~5-14
STATE AND LOCAL MATURITIES 1995-1997
$Bil
$Bil
14
14
13.6
12
12
10
10
B
B
6
6
4
4
2
2
0
0
III
II
II
IV
1995
IV
III
II
III
IV
1997
1996
Department of the T~8.8Uf)'
Office oi ~arK8t Flnan09
May 1,
1~5-15
QUARTERLY CHANGES IN FOREIGN AND INTERNATIONAL
HOLDINGS OF PUBLIC DEBT SECURITIES
$Bil. . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , $Bil.
Nonmarketable
35
o
30
o
25
35
33.1
Marketable
Net Auction Awards to Foreign .1.1
30
•
25
Other Transactions
20
20
15
15
10
10
5
5
o
0
-5
-5
_10L-------L-------L------~----------~-~
II
III
1991
IV
II
III
1992
IV
1\
III
1993
.11 Auction awards to foreign official purchasers netted against holdings of matunng secunMs.
zI Data through February 2B, 1995
Depar'tml9on1 afO'le Tru..stJr)'
....... ~~4U .. .c. .. C .. _ .........
I
1995
-10
NET AWARDS TO FOREIGN OFFICIAL ACCOUNTS v
$Bil.
$Bil.
8.8
6.1
6.4
4.7
8
6.1
6.0
3.6
6
B
3.8
3.0
6
4.5
4
4
2
2
0
0
-2
-2
Notes
-4
-6
-8
-4
c:::J 5 years and over
c:J 2-3 years
Bills
II
-6
-4.2
III IV
II
1991
II
III IV
1992
III IV
II
1993
III IV
-8
II 3.;
I
1995
1994
Quarterly Totals
y
Noncompetibve awards to foreign official accounts held in custody at the Federal ReselVe
e~cess of foreign custody account holdings of matunng secuntles.
_~ Through Apnl 28,1995.
Department oj the Trea.sury
OffIce c:A Mer1utt ~rnan09
In
May 1, 1995-17
SHORT TERM INTEREST RATES
Quarterly Averages
%~----------------------------------------------------------------,%
Prime Rate
12
12
Through
Apnl26
10
10
8
8
6
6
3 Month
Treasury Bill
4
4
2
2
1984
1985
Department of !he Tre8Sl.Jry
Otflat ot Mas'dt FlNlI'CD
1986
1987
1988
1989
1990
1991
1992
1993
1994 1995
M~
1. 1995-18
SHORT TERM INTEREST RATES
Weekly Averages
O~r-------------------------------------------
__________________________
~%
.------------1 9
9
Prime Rate
•
8
8
Through
7
Commercial
Paper
7
Apnl26
•
6
•
3 Month
Treasury Bill
5
Jul
Aug
Sep
Oct
Nov
Feb
Jan
Dec
1994
5
Mar
Apr
1995
Depertmel1l 01 \tie Tr&aSl..ry
Ot1ice of Mar1l.el Rnance
May1,19'95.19
LONG TERM MARKET RATES
Quarterly Averages
%,--------------------------------------------------------------------,%
14
14
13
13
12
-
...
12
New Aa Corporates
11
11
Through
April 26
10
9
9
-
8
--
7
Treasury
..
8
--- -
7
30-Year
Municipal Bonds
6
6
5~~-L--~~--~--------~--~----~--------~--~----~~5
1984
1985
Depurtrn&n101'U'l4r,.aalrJ'
Office of Marlc:et Anance
1986
1987
1988
1989
1990
1991
1992
1993
1994 1995
May 2, 1995·20
INTERMEDIATE TERM INTEREST RATES
Weekly Averages·
%.-----------------------------------------------------------, %
~
FHLMC 30-Year
Conventional
9
.". \ '"
~ ~~ ~ ~,
... ,~
_,,,
.,
4110_ ... -.
,,.
-
\
9
,Through
,. ,
... , , ". " \
April 2;
--~, ~
\
8
8
..
7
7
Treasury 5-Year
6
~
________________
Jul
Aug
~
__________________
Sep
Oct
Nov
~~
Dec
____________
Jan
Feb
Mar
1995
1994
• Salomon 10-yr. AA Industrial
Depa~nt
IS
6
_L~~
Apr
a Thursday rate.
of tie Treasury
Offiea of Malilel FInance
May 1 1995-21
MARKET YIELDS ON GOVERNMENTS
%
%
1
I.
January 30, 1995
7.5
-
7.0 -
6.5
6.0
~--
/
-~
~J
•
~
May 1,1995
%
"""""
5.5 65
rJIIII'"
"",.
., - '
3
4
IJo8partment 01 the Tr$A$uty
-
7.0
-
6.5
10
12
-
7.5
-
6.0
-
7.0
-
5.5
i
1
15
14
5
Years to Maturity
OtficeotM~e'FIF'IAn08
i
-
1
2
-
%
7.5 -
I
o
7.5
.........
7.0
5.0
-
18
20
1
6
7
22
24
26
28
30
65
5.0
1
B
9
10
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
BY MATURITY
D
Over 10 years
D
2-10 years
0
1-2 years
March 31, 1995
[I 1 year & under
•
Bills
As of December 31
0e08rtmen1 01 the TreuUI'Y
0t6ce of Maril.et Fu'lB.I'lce
May t, 1995-23
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
Percent Distribution By Maturity
Coupons
DOver 10 years
o 1-2 years
02-10 years
[I 1 year & under
•
Bills
100%
15
80
35
60
40,
20
o
1992
Oepe:.rt'rMnI of tie rrea&iry
1993
1994 Mar '95
As of December 31
Office of Ma~.t A~
May 1 1995-24
AVERAGE LENGTH OF THE MARKETABLE DEBT
Privately Held
yeaffi---------------------------------------------------------------,
...-- June 1947
Months ---------------------------,
10 Years
5 Months
10
March 31, 1995
5 Years,S Months
9
64
8
62
7
J
F M A M J
J
A SON
0
6
December 1975
2 Years
5 Months
5
4
3
2~~~~~~~~_L~~_L~~_L~~_L~~_L~~_L~~_L~~~
19454749 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93
Depe;~ntal!heTr&a8llry
O'mca 01 Manocot Rnanoa
MATURING COUPON ISSUES
May - September 1995
(in millions of dollars)
March 31, 1995
Held by
Maturing Coupons
5 7/8%
81/2%
111/4%
125/8%
103/8%
41/8%
41/8%
87/8%
41/4%
83/8%
101/2%
81/2%
4 5/8%
37/8%
37/8%
Note
Note
Note
Bond
Bond
Note
Note
Note
Note
Bond
Note
Note
Note
Note
Note
Totals
5/15/95
5/15/95
5/15/95
5/15/95
5/15/95
5/31/95
6/30/95
7115/95
7/31/95
8/15/95Y
8/15/95
8/15/95
8/15/95
8/31/95
9/30/95
Total
Federal Reserve
& Government
Accounts
Private
Investors
Foreign!!
Investors
19,152
8,293
7,127
1,503
1,504
17,527
18,164
6,805
17,183
4,612
7.956
8,877
18,038
17,577
17,904
3,829
273
798
417
126
1,227
1,392
300
562
2.219
1.097
866
2,911
725
961
15,323
8,020
6,329
1,086
1,378
16,300
16,772
6,505
16,621
2,393
6,859
8.011
15,127
16,852
16,943
999
286
55
4
201
2,275
1,934
415
1,650
46
437
953
922
2,592
172,222
17,703
154,519
14,975
~ F. R B. custody accounts for foreign official institutions; Included In Private Investors
Y
On April II, Treasury called for redemptIOn at par the 8 3/8% Bonds 1995-00, Issued
August 15, 1975
Department ot 1NI Tr9a8ury
Otfk;oofMarlWtFu1(I11011
2,206
TREASURY MARKETABLE MATURITIES
Privately held, Excluding Bills
$8d.
34
32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
3B
36
34
32
30
28.2
28.1
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
M
F
J
A
M
J
_
Securities Issued pnor to 1993
I!IilI!I!I
New Issues calendar year 1993
A
J
D
0
S
0
D
N
New Issues calendar year 1994
Issued or announced through April 28, 1995
Department of Ihe Treasury
May,. 1995-27
Office of Mat1le! Finance
TREASURY MARKETABLE MATURITIES
Privately held, Excluding Bills
S8il. r------------------r-----~$Bilr_--....:....--..,._-----------_,_-----_r_I
3 0.
2
27 9
27 7
29'
2" "27 7
1997
26 9
27 3
2001
32 30 -
~
m
aaMn-
'6
,. _
M
D
18
'I
20 -
~;
'6 -
'0
'4 -
8
'2 -
'~
6
=
'32
120
- I
'I
6~
~
~
1998
34
32
30
2'
34~
32
30
269
20
'8
'6
'4
'2
'20
~
12
'0
".
117
"6
122
93
e
6
4
I
'12
14
~
'26
2' 9
,,0 '4 i'2 i'0
I-
8i6i-
g~WULWL_~~~~~~~ua~~w.U&.u~~
12
2002
~
r26 I24 r22 r20 I," i'6 I28
26
24
22
113
10
41-
2i-
3g
2003
34132 30 -
277
a-
8
s
~-
4
M-
240
n-
2
o ~~~~=::~~~~~:;:~~=~~=:;~~~~::=~
20
,...
'8-
i~
11 9
'2'
2000
12'
i~ :::
10 7
10
8
6
'0 8 6 -
4
~ IIllJW&.l.J....J;.JJ~~-~----:-~~-:::S:-'--:::O......~N---:D~
•
~dtNTrea$J1)'
OI't'I¢t of Man<et FII\8nou
SeCUrities Issued prior to 1993
1\1 New Issues calendar year 1993
o
o
=J
F
M
A
•M
J
J
A
S
o N D
New Issues calendar year 1994
Issued or announced throug" Apnl 28, 1995
May 1 1995 28
TREASURY MARKETABLE MATURITIES
Privately held, Excluding Bills
'1
'1'[
2T "
I
II
i§:==::=::=:;::i::=::.=6=2~01~14~i~3~::=::=I::=::~II
~!
18
i!
~ 'f
:1
It~~~=====~\I 'I i
-
11
I[
11
i
40.
S
•
0
I
N
Secuntles issued pnor to 1993
III New Issues calendar year 1993
I
F M A M
J
0
J
II
II
i
I 2~18
I
I
II' I
2r 'I'
I 'I'
J
9.4
I
'12T
I
36
1
32
1
35
1
2T I
I
I
I
II
A SON
J
0
~ New Issues calendar year 1994
o
Issued or announced through April 28, 1995
Department ot tne Tma.surv
Office oj M8f"\(&t F(nance
7fr
TREASURY MARKETABLE MATURITIES
2019
$81 I
2'
22
20
'8
'6
,.
12
10
8
6
II-
f-
188
II-
12
10
8
6
2'
22
20
2020
32
30
28
26
2'
22
20
18
16
18
16
II-
l•2 I-
-
6
I
j
I
II
I
I-
2024
,. f--
2021
\6
l-
12
10
-
8
32.0
-
11.0
-
i
I-
ff-
22 l20 l 18 e-
II-
2025
I
,
16 t1.
12 l10 f8 l-
118
116
10.9
8 6
•2 ---
J
I
0
f-
0
10.2
2n°
174
20 t18 f-
II-
rI12
" 10 -
10.0
-
20.9
f-
--
2023
rrr-
I-
2
0
34
1
\. I12
10 f8 l-
•-
36
20 22
o
ff-
26 I2' f22 I-
,.••
I
f-
0
18
Bill'
18.9
II-
•2 II-
20
ng
Privately held,
110
6 t4
f-
2 I0
F
M
Depanm.nt oi the Trea"ury
ome:a 01 MarKs! Rn.ance
A
M
J
J
A
SON
•
SecunlieS Issued pnorto 1993
•
New issues calendar year 1993
D
o
o
J
F
M
A
M
J
J
A
SON
0
New Issues calendar year 1994
Issued or announced through Apnl 28, 1995
May 1 19Q5·)()
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
Contact: Pet~r Hollenbach
May 1, 1995
(202) 219-3302
TREASURY ANNOUNCES MARKET-BASED SAVINGS BOND RATES
FOR MAY - OCTOBER 1995
Treasury's Bureau of the Public Debt today announced the market-based rates for U.S. Savings
Bonds for May through October 1995. The new short-term rate is the first to apply since Treasury
announced that, beginning May 1, Series EE bonds would earn market-based rates right from the
start.
SHORT-TERM SAVINGS BOND RATE
5.25 %
Series EE bonds issued on or after May 1, 1995, earn short-term rates for the first five years. The
5.25 percent short-term rate is 85 percent of the average of six-month Treasury security yields for
the preceding three months. A new rate is announced each May 1 and November 1, and EE bonds
issued on or after May 1, 1995, earn the short-term rates for semi-annual interest accrual periods
beginning on or after each announcement date.
LONG-TERM SAVINGS BOND RATE
6.310/0
The 6.31 percent long-term rate is 85 percent of the average of five-year Treasury security yields
for the preceding six months. Series EE bonds issued on or after May 1, 1995, earn long-term rates
from five years through 17 years. Since none of the bonds issued under the new rate structure have
been outstanding for five years, the long-term rate in this announcement will not be used and is
provided only for reference.
Series EE and E bonds and savings notes that have been outstanding for five years or longer and
have not reached final maturity will continue to earn market-based variable investment yields. In
general, the market-based variable rate investment yield is 85 percent of the average of the average
five-year Treasury security yields for the applicable six-month periods.
Series E bonds issued May 1955 and prior have reached final maturity and no longer earn interest.
Bonds issued from June 1955 through October 1955 stop earning interest June 1 through
October 1, 1995, or forty years from the issue date.
Series Hand HH bonds issued or entering an extended maturity period since March 1, 1993, pay
interest semiannually at a fixed rate of 4 percent per annum.
The table on the reverse of this bulletin shows actual yields for Series EE bonds. The savings bond
regulations, 31 CFR Part 351, contain detailed information.
000
PA-181
(RR-255)
REDEMPTION VALUES AND YIELDS FOR
$100 SERIES EE BONDS - MAY 1995 THROUGH APRIL 1996
This table shows semiannual redemption values for $100 Series EE Bonds·. Values for other denominations are proportional
to the values shown. For example, the value of a $50 bond is one-half the amount shown and the value of a $500 bond is
five times the amount shown. The Earnings column shows the annual yield that the bonds will earn during the period indicated.
The Yield From Issue Date is the bond's yield from its issue date to the date shown or date adjusted as shown in the footnotes.
Additional information may be obtained from the Bureau of the Public Debt, 200 Third Street, Parkersburg, 'NV 26106-1328.
Series EE Bond
Issue Dates
5/95 thru 10/95
11/94 thru 4/95
5/94 thru 10/94
11/93 thru 4/94
5/93 thru 10/93
3/93 thru 4/93
11192 thru 2/93
5/92 thru 10/92
11/91 thru 4/92
5/91 thru 10/91
11/90 thru 4/91
5/90 thru 10/90
11/89 thru 4/90
5/89 thru 10/89
11/88 thru 4/89
5/88 thru 10/88
11/87 thru 4/88
5/87 thru 10/87
11/86 thru 4/87
5/86 thru 10/86
11/85 thru 4/86
5/85 thru 10/85
11/84 thru 4/85
5/84 thru 10/84
11/83 thru 4/84
5/83 thru 10/83
11/82 thru 4/83
5/82 thru 10/82
11/81 thru 4/82
5/81 thru 10/81
11/80 thru 4/81
5/80 thru 10/80
1/80 thru 4/80
Value as of
Date** Amount
50.00
51.00
52.04
53.08
54.16
55.24
56.32
58.00
59.96
62.12
64.56
67.20
69.24
71.40
73.44
76.96
79.36
81.84
84.40
97.00
100.64
104.44
106.56
108.68
110.84
115.00
121.36
135.92
140.00
144.20
152.12
164.40
167.64
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
9/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1195
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
7/1/95
Value and Yield From Issue Date
Earnings
Date**
Amount
Yield
Period beains** Yield***
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
9/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
7/1/95
5.28%
4.08%
4.00%
4.07%
3.99%
3.91%
5.97%
6.76%
7.20%
7.86%
8.18%
6.07%
6.01%
6.27%
9.59%
6.24%
6.25%
6.26%
6.26%
7.51%
7.55%
4.06%
3.98%
3.97%
5.05%
6.26%
6.20%
6.00%
6.00%
5.99%
6.00%
5.99%
6.01%
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
3/1/96
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
1111/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
11/1/95
1/1/96
51.32
52.04
53.08
54.16
55.24
56.32
58.00
59.96
62.12
64.56
67.20
69.24
71.32
73.64
76.96
79.36
81.84
84.40
87.04
100.64
104.44
106.56
108.68
110.84
113.64
118.60
125.12
140.00
144.20
148.52
156.68
169.32
172.68
5.28%
4.04%
4.03%
4.04%
4.03%
4.01%
5.01%
5.26%
5.50%
5.76%
6.00%
6.01%
6.01%
6.05%
6.26%
6.26%
6.26%
6.26%
6.26%
7.50%
7.50%
7.34%
7.18%
7.04%
6.96%
7.03%
7.18%
7.77%
7.71%
7.65%
7.76%
8.03%
7.90%
I
.. Monthly increases in value, applicable to some bonds issued prior to May 1995, are not shown in the table .
.. The dates shown are for the first issue date of the range in the first column. Add one month for each later issue month. For
example, a bond issued in 7/94 (two months after the first date in the range) would be worth the amount shown two months
after the date listed. The six-month earning period would begin two months later than the date shown .
.... Yields and savings bond rates may not agree due to rounding and due to the methodoiosy f,Q,r compllting macket-based yields
for bonds issued prior to May 1, 1995.
DEPARTMENT
OF
THE
TREASURY
NEWS
1REASURY
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
May 1, 1995
Contact: Hamilton Dix
(202) 622-2960
CURRENCY BEARING SECRETARY RUBIN'S SIGNATURE TO BE INTRODUCED
Treasury Secretary Robert E. Rubin will introduce the new Series 1995 United States
currency bearing his signature at 10 a.m, Friday, May 5, in the Visitors Center at the Bureau
of Engraving and Printing, Washington, D.C.
Secretary Rubin will be joined by U.S. Treasurer Mary Ellen Withrow, whose
signature also appears on the currency, and 25 fifth graders from Harrison Elementary School
in the District of Columbia.
A tour of the facility to view production of the new currency will follow.
For nine years the Bureau's police officers have served as mentors for Harrison
students and raised money to purchase educational materials such as computer software for
science classes.
The series year of 1995 reflects the year Secretary Rubin took office. Treasurer
Withrow was sworn into office March 1, 1994.
United States currency is printed in two places -- Washington, D.C. and Fort Worth,
Texas. The two plants together print about 35 million notes each day with a face value of
about $465 million.
Media should use the Visitors Center entrance on 15th Street, N.W. Cameras should
be in place by 9:45 a.m.
All journalists must provide name and organization by 4 p.m. Thursday, May 4, to
Dawn Haley, Bureau of Engraving and Printing Public Affairs (202-874-3913).
-30RR- 256
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
May 1, 1995
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $12,409 million of 13-week bills to be issued
May 4, 1995 and to mature August 3, 1995 were
accepted today (CUSIP: 912794U36).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.71%
5.74%
5.74%
Investment
Rate
5.89%
5.92%
5.92%
Price
98.557
98.549
98.549
Tenders at the high discount rate were allotted 23%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED ( in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.72 -- 98.554
RR-257
Received
$55,764,214
Acce:gted
$12,409,307
$50,499,946
1,377,953
$51,877,899
$7,145,039
1,377,953
$8,522,992
3,355,115
3,355,115
531,200
$55,764,214
531,200
$12,409,307
5.73 -- 98.552
UBLIC DEBT NEWS
Department of the Treasury • Bur,eau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
May 1, 1995
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $12,264 million of 26-week bills to be issued
May 4, 1995 and to mature November 2, 1995 were
accepted today (CUSIP: 912794V50).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.83%
5.84%
5.84%
Investment
Rate
6.11%
6.12%
6.12%
Price
97.053
97.048
97.048
Tenders at the high discount rate were allotted 63%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
RR-258
AND
ACCEPTED (in thousands)
Received
$46,489,303
AcceQted
$12,263,503
$39,073,760
1 , 295 , 643
$40,369,403
$4,847,960
1 , 295 , 643
$6,143,603
3,200,000
3,200,000
2,919,900
$46,489,303
2,919 , 900
$12,263,503
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.• 20220 - (202) 622-2960
Embargoed Until Delivery
Expected at 10:00 a.m. EST
Testimony of Under Secretary Lawrence H. Summers
Before The
Committee on Banking and Fmancial Services
Subcommittee on Domestic and
International Monetary Policy
U.S. House of Representatives
May 2, 1995
Mr. Chainnan, Members of the Committee, I welcome the opportunity to testify
before you this morning. We are requesting authorization for U.S. participation in the
International Development Association, the Enhanced Structural Adjustment Facility and the
Asian Development Bank.
Let me stress at the outset that this request is not about charity or foreign aid. It is
about the way these institutions serve core United States economic and security interests.
RR - 259
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
-
2 -
Nearly every developing nation that has prospered and become a major U.S. export market South Korea, Indonesia, Thailand, Chile, and over a dozen more -- has seen its economy
jump-started and bolstered by programs from at least one of these three institutions. These
institutions have worked in nearly every important region where the United States has sought
to anchor stability -- in Central America, in Southeast Asia, in Southern Africa, and now in
Eastern Europe and the former Soviet Union. And whether it is reducing infant mortality by
half, halting the spread of AIDS, or eradicating river blindness in Africa, these institutions
are at the frontlines in meeting every major challenge we face.
Perhaps the greatest economic imperative facing us today is the need to support the
historic shift to market-based economics around the world. This change has opened
enormous new opportunities for U.S. exports to developing countries, doubling their
purchases of U.S. exports over six years -- to $197 billion in 1993. In fact, developing
countries have become our fastest growing export market, taking 40 percent of U.S. exports,
and creating nearly 4 million U.S. jobs. A great deal of the credit for this development must
go to the development banks. All three of the programs for which we are requesting
authorization design their activities directly to encourage market-based reform.
The International Development Association
Let me turn first to the International Development Association, or IDA as it is
known, the largest element of OUf request. We are asking for the authOrity to participate in
-
3 -
the third and final year of the tenth replenishment of IDA. Our request is for $1,250
million.
IDA was established by President Eisenhower in 1960 as an affiliate of the World
Bank. Its role was to make loans to the poorest countries on concessional terms. Now, in
1995, we need to ask whether this program remains in our own national interest. I believe it
does, for three compelling reasons.
One, IDA provides the seed money for capitalism and free market reforms that
develop important new markets for U.S. exports. In effect, IDA is helping to remake
developing countries in the image of the United States and the other industrialized
democracies.
This type of reform does not come easily. There is no natural constituency
for market-oriented capitalism in many of the poorest countries. IDA's support is essential
in getting these nations to undertake reforms which will enable them to prosper, and can turn
them into important United States trading partners.
India provides an excellent example. The World Bank and IDA have provided about
$2.0 billion annually to India since 1991. That support has been conditioned on India's
opening its market to U.S. and other goods and investment, and pursuing other economic
reforms. A $500 million World Bank-IDA loan, conditioned on India's lowering its tariff
barriers, helped to bring those barriers down from 400 percent to 65 percent. Since then,
the United States has become India's largest foreign investor. OUf exports to India jumped
- 4 -
from $1.9 billion to $2.8 billion in just one year alone. Last year, Commerce Secretary Ron
Brown announced additional contracts for U.S. firms amounting to more than $7 billion.
India's achievements are but one example of IDA's market-friendly impact. Almost
all of the major emerging market success stories -- including South Korea, Indonesia,
Thailand and Turkey -- were once IDA recipients. All of these countries are now major
customers for U.S. exports and no longer require IDA assistance. In fact, IDA has 20
"graduates" which took $42 billion in U.S. exports in 1993 alone.
This pattern of IDA support for market reform followed by large increases in U.S.
exlXlrts repeats itself again and again - even in the poorest countries. Present IDA
borrowers, for example, took $20 billion in U.S. exports in 1993, up from $14 billion in
1988. The economic benefits to the United States have been clear: IDA-backed reforms
lead to higher U.S. exports, which produce more jobs in our domestic economy.
Second, the United States relies on IDA to advance our strategic and humanitarian
interests. IDA helps lay the foundation for stability in key regions, as it is doing by
supporting economic transition arid democracy in parts of the former Soviet Union. IDA
cements incipient peace processes, with programs such as emergency economic support for
Haiti. And IDA responds quickly to natural disasters, through efforts such as earthquake
reconstruction in Armenia or flood reconstruction in Pakistan. The scale of IDA's support
-
5 -
for this kind of lending could only be replicated by our bilateral programs at much higher
budgetary cost to the United States.
That brings me to the third reason IDA is so important. IDA is a very cost-effective
way for us to assist the poorest countries. Over thirty countries contribute to IDA. The
U.S. share of the funding has dropped dramatically -- from 42 percent to roughly 20 percent.
Repayments on past loans now finance 18 percent of all new lending. This means that IDA
is able to leverage $6 dollars for every dollar the United States contributes. That is a highly
effective way for us to invest our scarce resources.
Important Reforms
Two years ago, this Committee authorized participation in the first two years of the
tenth replenishment of IDA, leaving the third year unauthorized until certain reforms had
been undertaken at the World Bank. I am pleased to report to you today that those important
reforms are now in place.
Under U.S. leadership, -the Bank has implemented a new policy which makes
information about its operations available to the public. An independent inspection panel has
been created to ensure full compliance with Bank }X>licies in preparing and implementing
projects. Further, the Bank is undertaking a whole series of internal reforms to improve the
quality of its lending operations.
-
6 -
The Bank has put into place a rigorous set of policies on the environment.
Environmental considerations are now at the heart of project development, not a peripheral
consideration or afterthought. Finally, the Bank has responded to U.S. efforts to control
administrative costs. The Bank will be cutting its administrative budget by 12 percent in real
terms over the next two years. First class air travel has been eliminated and benefits have
been capped.
These measures have already produced a fundamental shift in the Bank's culture and
approach to development. We are very pleased with this progress. In our view, the reforms
address the concerns that have been expressed by this Committee in the past.
Mr. Chairman, IDA is doing essential work. It is promoting some of our country's
most basic values -- free markets, privatization, responsible governance, and economic
reform. It provides us with direct economic benefits. And it responds well to U.S.
leadership. For these reasons, we are requesting the support of this subcommittee for a full
authorization of the third year of IDA-IO.
Enhanced Structural Adjustment Facility
We are also requesting an authorization of $75 million for the Enhanced Structural
Adjustment Facility, known as the ESAF. This IMF-administered facility provides
concessional loans to the poorest countries -- more than two-thirds of which are in Sub-
- 7 -
Saharan Africa -- provided they undertake economic reforms to put them on a sustainable
growth path.
Let me offer four specific points about the ESAF:
First, the ESAF has proven very effective in promoting market-oriented reforms
essential to sustain growth and development. ESAF loans are on terms which the poorest
countries can afford, but on conditions that ensure that the countries enact and follow through
on the reforms to which they have agreed. The signs of progress are clear.
Ghana has
graduated from the ESAF. Uganda, Malawi, and Cote D'Ivoire are among the countries that
have achieved significant improvements in growth, exports and inflation under ESAF
programs.
Second, the U.S. pledge amounts to less than a nickel of every dollar that is
contributed to ESAF. For every dollar we contribute, nineteen dollars come from other
sources, including a significant portion from developing countries themselves. Ours is a
modest contribution from the world's largest economy, and it provides us with a strong voice
in the operation of the facility.
Third, our pledge to commit $100 million to the $2.1 billion subsidy account for the
facility was quite modest. Still, it was a necessary catalyst for other countries' contributions.
Our contribution was also designed to minimize pressures on the already overburdened
foreign assistance account. Therefore, the $100 million will be spent over a IS-year period,
-
8 -
with outlays to begin in FY97. The fact that the outlays do not begin until next year should
not be taken as a reason to delay authorization of the full amount, however. It is important
to authorize the full amount of our contribution to this highly effective program, to
demonstrate our support for reforms in the poorest countries of the world.
Fourth, we have made substantial progress in fulfilling the request put forward by
Congress last year in agreeing to partial authorization for the extended and expanded ESAF,
that the IMF provide greater disclosure of its activities. The IMF now publishes much more
information on countries. Moreover, at its April 26 meeting, the IMF's Interim Committee,
in its communique, "emphasized that timely publication by members of comprehensive data
would give greater transparency to (members') economic policies; it requested the Executive
Directors to work toward the establishment of standards to guide members in the provision of
data to the public, and to submit proposals for consideration by the Committee at its next
meeting. "
A review of countries that have recently enacted ESAF-backed reforms shows just
how effective ESAF is at promoting market-based development, while opening markets for
our products:
o
Ghana has benefitted from both a series of ESAF arrangements and IDA loans. These
have bolstered a decade of economic reforms that have given Ghana GDP growth of
about 5 percent per year since 1983. Ghana's exchange and trade regimes have been
-
9 -
liberalized, and social indicators are up. Ghana, in fact, graduated from the ESAF
program in 1991.
o
Uganda, now in its fourth year of ESAF reforms and a major recipient of IDA
funding, has introduced a market-determined exchange system and liberalized prices
and interest rates. Inflation has declined from 240 percent in the late 1980s to single
digits today. The civil service and military have been reduced in size. Real GOP
growth last year was 8 percent, and is expected to be at least as high this year.
o
Cote D'Ivoire and other African Franc zone members agreed to devalue their
currency by 50 percent in January 1994, with support from IDA lending and ESAF
finance. The result for the Cote D'Ivoire has been a strong boost in the
competitiveness of its goods, increased exports, and improved economic growth and
inflation.
o
Malawi has one of the longest sustained commitments to economic reform in Africa.
Economic growth exceeded 11 percent in 1993, and the exchange rate is fully marketdetermined.
Despite the successes that ESAF programs have so clearly achieved, many nations
continue to need backing for economic reform efforts -- especially in Sub-Saharan Africa.
-
10 -
We see continued U.S. participation in the ESAF as a vital element in meeting these
challenges.
The Asian Development Bank
Finally, we are requesting authorization of $66.6 million for U.S. participation in the
fourth general capital increase of the Asian Development Bank, or ADB.
The ADB has played a leading role in encouraging Asia's dynamic growth as a major
U.S. market. U.S. exports to developing Asia have more than doubled since 1986, from
$29.5 billion to $82.5 billion in 1993. In that time, U.S. exports to the Asian 'Bank's
"graduates" -- South Korea, Singapore, Taiwan, Hong Kong and Fiji -- have increased even
more rapidly, roughly tripling.
ADB lending benefits U.S. businesses and exporters in two ways. First, it makes
possible the economic development which allows U.S. exports to soar. But even more
directly, U.S. firms are major beneficiaries of Asian Development Bank procurement
contracts. AT&T is providing telephone equipment in the Philippines through an ADB
financed project. Offshore Pipelines of Houston is active in ADB-funded Indian work. ADB
finance represents an important point of entry for U.S. firms.
-
11 -
The ADB is an extremely cost-effective way for us to accomplish these goals. That
results from the ADB and other development banks' ability to lever the money we contribute
many times over, supporting programs which are far larger than we could support alone.
The Bank accomplishes that in three ways. First, it draws on money from other countries -over $5 for every dollar we will contribute to this capital increase. Second, the ADB raises
money on private capital markets. Third, the Bank has positive net income from its
investments, so it can finance new projects using these funds and the flow of repayments on
outstanding loans.
Because of the way we and other member countries subscribe to the ADB's regular
loan windows, its activities costs us pennies to the dollar. We subscribe in two basic ways.
First, we subscribe for paid-in capital -- meaning funds we and other member states must
contribute up front. This amounts to only a very small fraction of the United States' and
other member states' total subscription -- only 2 percent for this capital increase. Second,
member states subscribe to callable capital, which provides the financial backing for the Bank
to borrow in capital markets.
Because U.S. paid-in subscriptions are so small in relation to our callable capital
subscription, our ADB participation requires very low budget outlays, relative to the support
our subscription buys. For every dollar of U.S. paid-in capital provided since its inception,
the Asian Bank has lent a $80.
- 12 -
Last year, we concluded negotiations on a capital increase for the Bank. The Bank's
capital base was expanded to $48 billion, enabling it to resume lending activities while
strengthening its balance sheet. The new capital will provide support for market-oriented
reform, assist in the economic transition of the Asian Republics of the former Soviet Union,
and help to create economic opportunities for the poor.
The United States succeeded in negotiating the lowest annual cost ever on payments to
the Bank. Our payments average $11.1 million per year for an overall total of $66.6 million
paid-in capital. At the same time, we kept parity with the Japanese as the largest
shareholders of the Bank. Each U.S. taxpayer dollar invested in paid-in capital will allow
the Bank to lend over $300, and catalyze another $90 in private/commercial financing.
Objectives Accomplisbed
In addition, we accomplished all our major objectives regarding Bank programming
and organization. To cite just a few examples:
The Bank now has comprehensive policies on information disclosure and
transparency, to allow for far better monitOring of its activities.
-
13 -
Comprehensive new policies have been adopted for energy, population, and forestry
lending. The Bank is also establishing an independent inspection function to ensure
these policies are being followed.
The Bank is developing policies on resettlement and protection of indigenous
populations.
The Bank is implementing an action plan to improve project supervision and
implementation. It is providing for more public participation in its projects and
sharpening its country focus. This action plan has resulted in a major reorganization
of the Bank.
The Bank is increasing its support for market-based development through new
programs to catalyze private sector finance; by providing seed money for new
enterprises; and devoting a greater portion of its lending to helping countries establish
a market-friendly environment.
The Bank is further restraining administrative costs. First class travel has been
eliminated. The Board of Directors adopted a 1995 budget with zero real growth,
excluding one-time costs of an early retirement program for Bank staff.
- 14 -
Finally, the Bank will open an office in Washington later this year. The office will
serve a range of constituents in the United States and Canada: businesses, financial
institutions, consultants, the academic community which often provides consulting
services to the Bank, and non-governmental organizations.
The deadline for subscribing to the capital increase is December 1995. If we do not
subscribe, our shares could eventually be purchased by others and our voting power could be
cut from 16 percent to 8 percent. We expect that such a loss would be permanent. Other
members would inevitably perceive this as a withdrawal of the United States from the Asian
region, and acquiescence to reduced influence in the ADB. Our firms would find it more
difficult to expand into the Asian market in this environment. We would also find it more
difficult to press our agenda for change in the institution. For these reasons, it is important
that our partiCipation in the ADB capital increase be fully authorized.
Conclusion
Continued support for these important international institutions is in our national
interest. These institutions foster··economic liberalization and policy reforms. In doing so,
they open up vast new markets for United States goods and services, while anchoring
political and social stability. And they do all that for pennies to the dollar, leveraging the
money we provide by drawing on contributions from many other sources.
- 15 Mr. Chairman, these institutions have always had strong bipartisan support. That has
been based on one simple fact -- their effectiveness in supporting core U. S. interests. I urge
the members of this subcommittee to continue to provide such bipartisan support by fully
authorizing the Administration's request. Thank you.
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
STATEMENT OF EDWARD S. KNIGHT
GENERAL COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH,
NATURAL RESOURCES, AND REGULATORY AFFAIRS
OF THE
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
May 2, 1995
Mr. Chairman and members of the Subcommittee, I am pleased to
present the views of the Department of the Treasury on H.R. 994, the
"Regulatory Sunset and Review Act of 1995."
H.R. 994 would provide for the automatic termination of each
existing agency regulation at the end of 7 years, and each new
regulation at the end of 3 years.
A regulation would not terminate if
(1) the issuing agency solicits and considers public comment on
whether the regulation should be continued or terminated in light of
the 18 criteria specified in the bill,
in-depth review of the regulation,
(2) the agency conducts an
(3) the agency submits to the
President, OMB, and the Congress and publishes in the Federal Register
a preliminary report of that review,
(4) the agency considers comments
to the preliminary report received from Congress and OMB, and (5) the
agency submits to the Congress and publishes in the Federal Register a
final report together with a notice extending the regulation, with or
without modifications.
Thereafter, each regulation would continue to
terminate on a 7-year cycle unless the agency repeats this process.
As you know, on March 28, Sally Katzen, the Administrator of the
Office of Information and Regulatory Affairs at OMB, appeared before
the Subcommittee to present the Administration's views on H.R. 994.
The Department of the Treasury is in full agreement with those views.
Today, I would like to present you with a brief overview of the
regulatory responsibilities of the Department of the Treasury and
discuss how H.R. 994 could affect the Department and its regUlatory
programs.
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
RR-250
2
Treasury regulations are issued by a number of offices and
bureaus that have distinct and critical regulatory
responsibilities:
The Internal Revenue Service (IRS) issues regulations to
interpret and implement the Internal Revenue Code of 1986 and
related tax statutes, and to collect about $1 trillion in taxes
annually.
The IRS accounts for about 50 percent of Treasury's
informal rulemaking under the APA.
The Bureau of Alcohol, Tobacco, and Firearms (BATF) issues
regulations to fulfill its statutory mandates to enforce the
Federal laws relating to the manufacture, commerce and taxation
of alcohol products, tobacco products, firearms and explosives.
The United States customs Service issues regulations to
administer the laws concerning the importation of merchandise
into the United States, to collect over $25 billion in duties
annually, and to enforce the laws prohibiting smuggling and
trafficking in narcotics and other contraband.
The Office of the Comptroller of the Currency (OCC) and the
Office of Thrift Supervision (OTS) issue regulations necessary to
supervise and to ensure the safety and soundness of national
banks and savings associations.
Regulations of the Bureau of the Public Debt establish the terms
and conditions for the sale and redemption of savings bonds and
marketable Treasury securities, protect the integrity, liquidity
and efficiency of the government securities market and insure
investor protection.
Regulations of the Financial Management Service (FMS) are
designed to improve government financial management.
3
The Financial Crimes Enforcement Network (FinCEN) implements the
anti-money laundering and related authorities of the Secretary
under the Bank secrecy Act.
The Office of Foreign Assets Control (OFAC) issues regulations to
implement economic sanctions against foreign countries imposed
pursuant to Presidential order or mandated by legislation.
OFAC
regulations currently implement unilateral or multilateral trade
and financial sanctions against Cuba, Iran, Iraq, Libya, North
Korea, Serbia, UNITA (Angola) and terrorist groups threatening
the Middle East peace process.
Other components of the Department occasionally issue
regulations.
These include the United States Secret Service, the
Bureau of Engraving and Printing, the Office of the General
Counsel, and the offices of several assistant secretaries of the
Treasury.
In fact, terrorism is one of several areas where Treasury's
bureaus work in partnership towards a common policy goal.
Our
enforcement bureaus protect the most visible terrorist targets in the
United States, enforce laws directed at the most common instruments of
terror, protect against the smuggling of weapons of mass destruction,
and enforce economic sanctions against countries and groups that
promote terrorism.
We all agree that principles of good government and sound
regulatory policy demand that agencies periodically review their
existing regulations.
We must all work to ensure that they are
necessary and working as intended, reflect current statutory
authority, and impose the least burden on the public consistent with
legitimate regulatory objectives.
These principles are embodied in
the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), which requires
agencies to conduct a review every 10 years of regulations that have a
significant economic impact on a SUbstantial number of small
4
businesses, and the Paperwork Reduction Act (44 U.S.C. 3501 et seq.),
which requires agencies to review each reporting and recordkeeping
requirement - including those contained in regulations - not less
frequently than every 3 years.
This Administration is committed to these principles even if they
are not required by law.
The President took the additional step in
March of directing each agency to review its regulations to identify
requirements that can be eliminated or modified to make them less
burdensome, as well as statutory impediments to regulatory reform.
Not only does Treasury strongly support this initiative, but
regulatory review has been a practice at Treasury for many years.
Let
me review some recent history:
In 1994, the IRS completed revising its regulations concerning
nondiscrimination requirements for pension plans.
The resulting
regulations are significantly shorter and simpler, and enabled
the IRS to revoke over 80 revenue rulings based on the prior
regulations.
Also in 1994, the IRS issued revised regulations relating to the
definition of "activity" for purposes of the limitation on
deducting losses from passive activities.
The old regulations
consisted of over 100 rules in about 40 pages in the Code of
Federal Regulations (CFR)i the new regulations contain about 15
rules in less than 2 pages.
In the past two years, the IRS has simplified 15 major tax forms.
These changes have eliminated over 46 million hours of paperwork
for more than 134 million taxpayers.
The Bureau of the Public Debt recently repealed two obsolete CFR
parts.
5
The Office of the Comptroller of the currency has been reviewing
each of its 29 regulatory parts in the Code of Federal
Regulations.
When completed, this project will have simplified
dozens of regulatory and paperwork requirements affecting both
large and small financial institutions.
A similar project is
about to get underway at the Office of Thrift supervision.
The Financial Crimes Enforcement Network, working closely with
financial institutions, is engaged in a basic re-engineering of
its regulations implementing anti-money laundering objectives of
the Bank Secrecy Act.
Reporting requirements are being
eliminated or reduced for a wide range of banks and non-bank
financial institutions.
In addition, FinCEN recently withdrew
two final rules and two proposed rules after determining that
they were either unnecessary or imposed disproportionate burdens
on banks or other financial institutions.
The Customs Service is implementing the Customs Modernization
Act, which substantially revised the Tariff Act of 1930 to
reflect the changes in trade, transportation, and communication
and information technology that have occurred over the past 6
decades.
As a result of this legislation, Customs estimates that
about 90 percent of its regulations will be updated in the near
term.
BATF is nearing completion of a recodification and revision of
its regulations governing the tax credit on alcohol not used in
alcoholic beverages.
Among other things, the final regulation is
expected to reduce the amount of documentation that must be
submitted in support of a tax credit claim by 75 percent.
BATF has reduced reporting requirements for small brewers by over
70 percent, and for small wine producers by over 60 percent.
6
Regulatory review is but one component of Treasury's regulatory
reform program.
We are also actively engaged in implementing the
President's other regulatory reform initiatives:
We have just completed a series of 26 outreach meetings across
the country between our senior regulators and those subject to
Treasury regulations.
These meetings reconfirm Treasury's long-
standing practice of developing partnerships with the regulated
community.
And in the coming months, we expect to begin
developing more than 40 regulatory projects in partnership with
our regulated public.
We are developing policies to expand our programs that waive or
mitigate regulatory fines or penalties imposed on first time
small business violators, and to focus regulatory enforcement and
compliance personnel on results instead of process and red tape.
Also, we are working to reduce the frequency of regularly
scheduled reporting requirements.
H.R. 994's impact on Treasury must be viewed from this
background.
We have concluded that although H.R. 994's underlying
principle of periodic regulatory review is integral to sound
regulatory policy, the approach taken is seriously flawed.
First, the scope of the bill is so broad as to encompass
practically any agency activity - no matter what the significance
or insignificance - that affects the public in some manner.
Second, Treasury will have to divert an enormous amount of
resources in order to comply with the bill.
Third, the bill does not recognize the architecture of the
Federal rulemaking process and is likely to have unintended and
harmful consequences.
7
Finally, the ultimate potential consequence of the bill
- a regulatory death penalty in the form of the automatic
termination of agency regulations - is not in the best interests
of the public or consistent with sound public policy.
Let me explain each of these points.
As defined in the bill, the term regulation means "the whole or a
part of an agency statement of general or particular applicability and
future effect designed to implement, interpret, or prescribe law or
policy, other than such a statement to carry out a routine
administrative function of an agency."
what is not covered by this definition.
It is difficult to imagine
This definition encompasses
what most of us generally recognize as agency regulations:
Those
documents issued pursuant to the informal rulemaking procedures of the
APA (or under an APA exemption) that are published in the Federal
Register and codified in the Code of Federal Regulations. At
Treasury, these regulations range from the very simple (such as a BATF
regulation designating a particular geographic winegrape growing
region as a viticultural area) to the very complex (such as an IRS
regulation interpreting a complex provision of the Internal Revenue
Code or an acc or OTS regulation prescribing capital requirements for
financial institutions).
But H.R. 994's definition of "regulation" goes well beyond APA
rulemakings.
Other Treasury "statements" that implement,interpret or
prescribe law or policy include a wide range of agency activities such
as legal opinions and legal briefs prepared in support of a civil or
criminal enforcement action; IRS private letter rulings, revenue
rulings and revenue procedures; rulings and similar documents issued
by the customs Service; internal guidance and enforcement manuals
relied on by agency staff; agency enforcement actions; as well as
licenses, permits and other agency authorizations to engage in a
particular activity.
8
Under the bill, every agency internal legal opinion that ever
interpreted the scope of a statute or analyzed the applicability of a
statutory or regulatory requirement to a particular set of facts is
within the definition of "regulation."
Legal opinions form the very
foundation of virtually all of the operations, functions and programs
of Federal agencies.
Similarly, the definition is so broad as to
encompass pleadings, briefs and other documents prepared in the
context of civil and criminal litigation.
Under this legislation, taxpayers and the IRS would be
particularly affected.
Each year, taxpayers request guidance from the
IRS concerning the proper tax treatment of particular transactions.
In just the last three years the IRS issued over 7,000 private letter
rulings and technical advice memoranda that can be relied on by the
requesting taxpayer, as well as over 500 revenue rulings and revenue
procedures providing guidance on matters of interest to wide range of
taxpayers.
Each one of these rulings, which interprets how the tax
law applies to a specific transaction or a category of transactions,
is a regulation within the meaning of H.R. 994.
When an agency determines to take an enforcement action against a
particular person, that action is necessarily predicated on an agency
determination that there has been a violation of law or an agency
regulation having the force of law.
For example, a deficiency notice
issued to a taxpayer by the IRS is generally based on a determination
that a particular transaction was not entitled under law to the tax
treatment claimed by the taxpayer.
Under H.R. 994, such a deficiency
notice would be a "regulation" because it is an agency statement that
implements or interprets the law.
Like the IRS, the Customs Service receives requests for guidance.
In response, Customs issues approximately 9,500 ruling letters
annually that give the trade community guidance on issues relating to
imported merchandise.
9
Under the Customs laws, a domestic interested party may file a
petition requesting the customs Service to reconsider the tariff
classification of specific categories of imported merchandise.
customs responds to these petitions by publishing a notice in the
Federal Register and soliciting public comment on what are often
highly complex technical issues.
After reviewing the public comments,
customs publishes a final ruling in response to the petition.
Every
existing customs ruling on a domestic interested party petition is a
"regulation" subject to the provisions of H.R. 994.
In determining whether to grant a license, permit or other
authority, Federal agencies often must determine whether the applicant
is entitled by law to receive the license, permit or other authority.
In these cases, the issuance or denial of an application is a
"regulation" because it constitutes an agency statement that
interprets or implements law.
For example, the Federal Alcohol Administration Act provides that
no label can be placed on a container of distilled spirits, wine or
malt beverage unless the label is approved by BATF.
When reviewing a
request for a label approval, BATF determines whether the label
complies with the law and BATF's implementing regulations.
BATF has
approved about 1.5 million labels, each of which would be a
"regulation" subject to the procedures of H.R. 994.
Even the exemption in the bill for routine administrative
functions provides agencies with little assurance that such actions
will not become subject to the review required by the bill.
Coupled
with the explicit authorization of judicial review of agency
compliance with the procedures required by the bill, agencies will be
forced to review routine administrative actions to avoid the
possibility that a judge somewhere will decide that a particular
function is neither administrative nor routine.
10
Regardless of how simple or complex, or whether a serious
question has ever been raised about its necessity or burdens, H.R. 994
would apply to all of the activities I have just described.
This
one-size-fits-all approach to regulatory review only serves to divert
scarce agency resources away from the real regulatory priorities. We
are focused - and we should keep our focus - on reviewing and revising
those regulations that do impose significant costs or heavy regulatory
burdens and those new regulations that are needed to provide the
public with guidance on how to comply with the laws enacted by the
Congress.
For example:
Although BATF label approvals do not expire, each of the 1.5
million existing approvals would terminate at the end of 7 years
unless BATF followed the procedures prescribed by H.R. 994.
Under the bill, BATF would be required to review an average of
almost 215,000 existing label approvals every year.
This would
be in addition to processing the approximately 60,000 requests
for new label approvals received annually, and reviewing each
newly-granted label approval by the end of 3 years and thereafter
on a 7-year cycle.
Under the bill, each regulation that an agency ever issued in the
past to eliminate an existing regulation or to repeal an existing
regulatory requirement is itself an existing regulation subject
to periodic review.
The task of identifying each such regulation
would be an undertaking of SUbstantial proportions.
We seriously question whether diverting scarce staff resources to
tasks such as these is a wise use of taxpayer money_
H.R. 994 does not recognize the architecture of the Federal
rulemaking process and is likely to have unintended and harmful
consequences.
The bill fails to distinguish between regulations
published in the Federal Register and regulations codified in the CFR.
Other than perhaps the first time Treasury develops a regulation to
11
implement a new statute or provision of law, a Treasury regulation
published in the Federal Register rarely represents a complete
regulatory program.
The typical Treasury regulation appearing in the
Federal Register is not a free-standing regulation; instead, it
eliminates, amends or adds to one or more existing provisions of the
CFR.
These Federal Register documents are subsumed when they are
codified in the CFR.
The CFR consists of volumes, chapters, subchapters, parts,
subparts, sections, paragraphs, etc.
of a "regulation"
Which of these is the equivalent
for purposes of the review required by H.R. 994?
In other words, where does a particular regulation begin and
where does it end?
If one section contains a cross-reference to a
definition or a requirement in an otherwise unrelated section, would
the cross-referenced section and the regulation in which it is
embodied have to be reviewed at the same time as the cross-referencing
section and the regulation in which it is embodied?
Is an agency
review invalid if a court determines that the agency should have
included more (or fewer) CFR provisions within the review in order to
more fully assess the impact of the "regulation" with respect to the
18 review criteria listed in H.R. 994?
Suppose a regulatory provision already codified in the CFR on the
date of enactment of H.R. 994 is amended by a final rule published in
the Federal Register a year after the date of enactment.
Under the
bill, the regulation as it existed in the CFR on the date of enactment
must be reviewed within 7 years.
However, the bill also requires that
the final rule revising that regulation be reviewed within 3 years.
This puts different provisions in the same component of the CFR on
different review schedules, the practical effect of which is to
compress H.R. 994's review cycle from 7 years to 3 years after a CFR
component is revised.
12
Given the enormously broad scope of H.R. 994, we cannot assure
you that we will have sufficient resources to complete all of our
reviews within the prescribed time periods, that something will not be
inadvertently overlooked, or that a court might not find fault with
the procedures or substance of a particular review.
If anyone of
these situations were to occur, the bill provides that the affected
regulation would thereafter have no force or effect without any
consideration of the consequences.
While the automatic termination
of regulations sound appealing, it is contrary to sound public policy
and the best interests of the public.
For example:
Terminating IRS regulations, revenue rulings and private letter
rulings will remove the certainty taxpayers need to comply with
the law.
Even if a tax regulation terminates, the underlying
provision of the tax code remains in effect.
The absence of this
kind of guidance - which informs IRS revenue agents as well as
taxpayers - will result in individual revenue agents determining
whether a particular taxpayer has complied with the law and will
increase the likelihood that similarly situated taxpayers will be
treated differently.
What taxpayers need is certainty; H.R. 994
would remove the certainty provided by IRS regulations and
rulings.
Terminating IRS deficiency notices would have disastrous
implications for the administration of the tax code.
It would
provide a strong incentive for taxpayers to prolong disputes with
the IRS or refuse to enter into voluntary agreements to keep a
tax year "open lt pending resolution of a dispute.
Treasury's Bureau of the Public Debt issues regulations
establishing the terms and conditions of the sale and redemption
of marketable Treasury securities and savings bonds.
This
includes the 30-year Itbenchmark lt bond, intermediate term Treasury
notes, and bills.
These regulations govern the procedures for
Treasury auctions and set out the contract between the Government
13
and the investor.
By raising the mere possibility that these
regulations could terminate, H.R. 994 could raise questions about
whether Treasury auctions will be disrupted and how the united
states will meet its contractual commitments on the securities.
This uncertainty could seriously impair the liquidity of the
government securities market and could force the Federal
Government to pay higher interest rates to compensate investors.
Because many other interest rates are tied to Treasury borrowing
rates, consumers may well be faced with higher rates on home
mortgages and other loans.
Terminating private letter rulings issued by the customs Service
will remove the certainty demanded by the trade community for
sound business planning.
FinCEN regulations implementing the Bank Secrecy Act are the core
element of Treasury programs to fight money laundering and
financial crime. The information derived from these regulations
is utilized by Federal, State, local and international law
enforcement organizations.
Termination of these regulations
would produce a gap through which drug dealers, weapons
traffickers and terrorists could move funds with no fear of
detection.
The Office of Foreign Assets Control (OFAC) issues regulations
implementing economic sanctions against foreign countries or
terrorist groups imposed in response to threats to the u.s.
foreign policy, national security, or economy.
These regulations
constitute the direct exercise of the President's foreign policy
powers.
OFAC sanctions programs affect countries such as Cuba,
Iran, Iraq, Libya, North Korea, and Serbia, and Middle East
terrorist groups.
Any termination of an OFAC regulation would
seriously undermine the President's conduct of the foreign policy
of the united States.
14
Terminating regulations issued by OCC or OTS that govern the
safety and soundness of financial institutions will threaten the
integrity of federally insured financial institutions and put
Federal deposit insurance funds at risk.
More problematic is what could happen if a final rule that was
published in the Federal Register and that revised an existing CFR
provision terminates under the provisions of H.R. 994.
For example,
suppose the IRS issues a new regulation that revises an existing CFR
provision to simplify regulatory burdens or to provide a more
favorable tax treatment for certain transactions.
What happens if,
for some reason, that final rule ceases to have any force or effect by
operation of H.R. 994?
It is very likely that the more onerous
pre-revision regulatory provisions spring back into force.
The
potential for uncertainty and confusion on the part of the public is
real, particularly when highly technical or complex underlying
statutory provisions implemented or interpreted by a regulation
continue to have effect.
In closing, the Department of the Treasury strongly endorse the
concept that agencies should review their regulations to eliminate
unnecessary provisions and reduce paperwork and regulatory burdens
whenever that can be accomplished consistent with law and sound
regulatory policy.
broad in scope.
H.R. 994, however, is not the answer.
It is too
Its automatic termination provisions not only are
unnecessary to accomplish its intended purpose, but are likely to have
serious unintended consequences.
Far more public benefit will result
from allowing agencies and Departments like Treasury continue to focus
on and revise specific regulatory provisions that raise the problems
sought to be addressed by H.R. 994.
This concludes my formal statement.
I would be glad to answer
any questions you may have on how H.R. 994 would affect the Department
of the Treasury.
STRIKING A BETTER BALANCE
BETWEEN THE COSTS AND BENEFITS
OF REGULATION
Testimony of the Honorable Richard S. Carnell
Assistant Secretary of the Treasury
On S. 650
Before the Subcommittee on Financial Institutions
and Regulatory Relief
Committee on Banking, Housing, and Urban Affairs
United States Senate
May 2,1995
RR-261
SUMMARY
The Administration has a strong commitment to reducing the costs and
improving the quality of bank regulation. Over the past two years, we have taken
numerous steps to achieve that objective (see Appendix B). We can and we should
improve the regulatory environment for depository institutions. Accordingly, we
support, as drafted or with some modification, a large portion of S. 650's provisions.
We welcome the opportunity to participate in the Subcommittee's efforts to
identify and eliminate needless regulatory costs, consistent with our commitment to
promote efficiency and competition, keep federally insured depository institutions safe
and sound, and protect the interests of consumers.
Community Reinvestment Act
We have major concerns about provisions of the bill that would amend, or
otherwise impair the operation of, the Community Reinvestment Act (eRA). We
strongly oppose any weakening of the CRA, and urge the Subcommittee to keep the
CRA outside the scope of the bill.
Two years ago, responding to complaints about how the CRA has been
implemented over the years, the President called on the federal banking agencies to
rewrite their eRA rules to stress performance, not paperwork. Last month, after one
of the most comprehensive rulemaking proceedings in recent times, the agencies
promulgated final regulations, culminating a lengthy process in which they sought and
obtained the input of thousands of interested parties.
In the course of their rulemaking, the agencies considered and dealt effectively
with the problems of the old eRA system. There is thus no need for statutory
changes. The thoughtful, carefully balanced reforms adopted by the agencies fulfill
both the promise of the statute and the President's request. They provide real
incentives for depository institutions to serve all our communities, and a streamlined,
straightforward process for assessing their success.
The new rules deserve a chance to work, and we believe they should be
implemented as scheduled. To amend the eRA in any respect before the new rules'
effectiveness can be evaluated would be counterproductive, and the Administration
would firmly oppose it.
Banking laws have long required banks to obtain regulatory approval for such
transactions as establishing branches, acquiring new institutions, and merging
institutions. We believe the' process for reviewing such transactions can and should be
..
n
streamlined. To preserve current opportunities for review of an institution's record of
serving its community, we would: retain existing requirements to publish notice of
the transactions in question; give interested persons at least 30 days to comment on an
institution's CRA record; and specify that, for purposes of the CRA, institutions must
follow these procedures for a full application if regulators receive a substantial CRA
protest. This approach would provide a streamlined notice process in the
overwhelming majority of cases, while maintaining the integrity of the CRA.
Fair Lending
The bill rightly seeks to encourage institutions to test themselves for
discrimination. We want institutions to be able to self-test and to then take corrective
action, and we support incentives toward those ends. We would be glad to work with
the Subcommittee on appropriate language to encourage self-testing without hindering
appropriate enforcement action.
Truth in Lending; RESPA
We support simplifying the Truth in Lending Act and the Real Estate
Settlement Procedures Act (RESPA).
The Truth in Lending Act should not permit borrowers to avoid responsibility
altogether because of truly technical violations by a lender, and we support
appropriately drafted provisions to prevent them from doing so.
We support efforts to improve disclosures (e.g., about adjustable-rate
mortgages and the transfer of loan servicing).
We oppose exempting second mortgages from the protections of RESPA.
Safety and Soundness Safeguards
We oppose permitting small banks and thrifts to go two years between
examinations. Interest rates and local economic conditions can change dramatically
during such a period, and capital can erode very rapidly. A two-year examination
cycle would undercut the system of "prompt corrective action" enacted in 1991, under
which FDIC-insured depository institutions face progressively more stringent
supervisory safeguards as their capital declines. This system depends on timely and
accurate measurement of capital, including the results of examinations.
111
We generally oppose permitting an institution's managers to serve on its audit
committee. Such a committee is typically the principal point of contact between an
institution's board of directors and the institution's own internal audit function.
Internal auditors -- who are, of course, employees of the institution - must be able to
communicate their concerns and findings to the board without control by, or fear of
reprisal from, the very management whose actions they may be reviewing.
Conclusion
We look forward to working with the Subcommittee to craft legislation that
eliminates regulatory burdens while maintaining important and necessary public
benefits.
STRIKING A BETTER BALANCE
BETWEEN THE COSTS AND BENEFITS
OF REGULATION
OUTLINE
I.
THE NEED FOR BALANCE
II.
S. 650, THE ECONOMIC GROWTH AND REGULATORY PAPERWORK
REDUCTION ACT OF 1995
A.
COMMUNITY REINVESTMENT ACT
1.
2.
3.
B.
FAIR LENDING
C.
TRUTH IN LENDING ACT; RESPA
1.
2.
ID.
Amendments to CRA
Procedural Changes Affecting CRA
Small Business Lending Data
Coordinating RESP A and the Truth in Lending Act; Responsibility
for Administering RESP A
Specific Provisions
D.
TRUTH IN SAVINGS ACT
E.
SAFETY AND SOUNDNESS SAFEGUARDS
1.
Annual Examinations
2.
Independent Audit Committees
3.
Insider Lending
F.
THRIFr
G.
MISCELLANEOUS
CHARTER
CONCLUSION
APPENDIX A: SECTION-BY-SECTION COMMENTS ON S. 650
APPENDIX B: ADMINISTRATION'S ACHIEVEMENTS IN REDUCING THE
COSTS AND IMPROVING THE QUALITY OF REGULATION
STRIKING A BEITER BALANCE
BETWEEN THE COSTS AND BENEFITS
OF REGULATION
Testimony of the Honorable Richard S. Carnell
Assistant Secretary of the Treasury
On S. 650
Before the Subcommittee on FinanciallnstitutioDS
and Regulatory Relief
Committee on Banking, Housing, and Urban Affairs
United States Senate
May 2,1995
Mr. Chairman, Senator Bryan, Members of the Subcommittee. I am pleased to
be here today to present the Administration's views on S. 650, the Economic Growth
and Regulatory Paperwork Reduction Act of 1995.
I would like to commend you, Mr. Chairman, for holding this hearing and for
the role you, Senator Mack, and others have played in keeping attention focused on
improving the regulatory environment in which depository institutions operate. I also
want to thank Senators Sarbanes and Bryan for their constructive support in these
matters.
The Administration has a strong commitment to reducing the costs and
improving the quality of bank regulation. Over the past two years, we have taken
numerous steps to achieve that objective (some of which I summarize in appendix B).
We can and we should improve the regulatory environment for depository institutions.
Accordingly, we support, as drafted or with some modification, a large portion of S.
650' s provisions.
2
I. THE NEED FOR A BALANCED APPROACH
Banking regulation serves many goals: maintaining a safe and sound fmancial
system; protecting consumers; and assuring that communities' needs are served.
Congress enacted the provisions of existing law we are considering today in
furtherance of such goals -- to remedy some specific abuse in the marketplace, to
better protect taxpayers from the risks of bank failure, or to advance some particular
public policy. For example, it passed the Truth in Lending Act, Truth in Savings
Act, and Real Estate Settlement Procedures Act (RESPA) in response to complaints
about the practices of certain institutions. It intended the Community Reinvestment
Act, Home Mortgage Disclosure Act, and Bank Secrecy Act to advance well-defmed
policy objectives. And it sought, by limiting insider lending and requiring FDICinsured institutions to undergo annual examinations and have independent audit
committees, to assure that taxpayers need never again pick up the bill for bank
failures.
Why then do many see these laws today as presenting such burdens as to
warrant extensive amendment? There are a variety of answers, I submit:
First, in many cases the issues addressed by these laws have turned out, in the
implementation, to be far more complex than anyone imagined. This complexity is
generally reflected in the rules written by the agencies Congress has directed to carry
out its mandate.
3
Second, when violations of these laws carry significant penalties, the industry
itself has often sought considerable specificity and certainty about its obligations,
which makes the rules more detailed and difficult.
Third, market participants fmd ways to avoid restrictive statutes, prompting the
agencies to engage in repetitive loophole-plugging to shore up the statutes. This cycle
of evasion and stringency makes regulation more burdensome, particularly for those
careful about complying with the law.
In short, what we now see as burdens commonly result from the efforts of
highly capable people of good conscience, in Congress and in the agencies, to serve
the public interest.
For these reasons, it is appropriate and important to review the regulatory
framework and eliminate undue burdens that have crept into the process. We
welcome the opportunity to participate in this review. Indeed, this Administration has
committed itself to removing unwarranted barriers to efficiency in both government
and the private sector.
In the process of being vigilant about the emergence of costly burdens, it is
essential that we maintain a balanced approach. While needless burdens surely ought
to be lifted, we must also avoid impairing our ability to realize the original objectives
of the laws we address. Particularly when we deal with laws meant to cure abuses,
improve service, or protect taxpayers and consumers, we would disserve our public
trust by acting incautiously in the name of relieving burdens.
4
We must continually have in mind the need to ensure safety and soundness. to
promote more efficient and competitive service, and to protect the interests of
consumers. This means that we must focus on more than just gross compliance costs,
for if we do not keep firmly in mind the goals we started out to achieve, we will let
these objectives become the victims of scores of small and isolated cuts.
ll. S. 650, THE ECONOMIC GROWTH AND REGULATORY
PAPERWORK REDUCTION ACT OF 1995
Against this background, let me tum to some of the specifics of S. 650. I note
that Appendix A contains section-by-section comments on the bill.
A.
COMMUNITY REINVESTMENT ACT
We have major concerns about provisions of S. 650 that would amend, or
otherwise impair the operation of, the Community Reinvestment Act (CRA). We
strongly oppose any weakening of the CRA, and urge the Subcommittee to keep CRA
outside the scope of this bill.
The CRA is important to the Administration's objective of encouraging
depository institutions to look in all communities for good business opportunities. As
the President declared on April 19, 1995, "the CRA can create miracles in small
towns and big cities from coast to coast -- miracles like mortgage or business loans for
people who never thought they could own a house or business, multifamily housing
loans, and commercial development loans in low- to moderate-income communities."
5
1.
Amendments to eRA
Two years ago, responding to complaints about how the eRA has been
implemented over the years, the President called on the federal banking agencies to
rewrite their eRA rules to stress performance, not paperwork. Last month, after one
of the most comprehensIve rule-making proceedings in recent times, the agencies
promulgated fmal regulations, culminating a lengthy process in which they sought and
obtained the input of thousands of interested parties, including banks, savings
institutions, customers, and community groups. The agencies received over 6,700
comments in 1993, and over 7,200 comments in 1994.
In the course of their rulemaking, the agencies considered and dealt effectively
with the problems of the old eRA system. In other words, this extensive process has
already addressed the very problems that also prompted current legislative proposals to
amend the CRA. There is thus no need for statutory changes. The thoughtful,
carefully balanced reforms adopted by the agencies fulfill both the promise of the
statute and the President's request. They provide real incentives for depository
institutions to serve all our communities, and a streamlined, straightforward process
for assessing their success.
The banking industry itself has responded favorably to the new rules. For
example, the American Bankers Association hailed the new rules as a "regulatory
rightsizing of CRA" that was "long overdue" -- one that "slows the spiral of
paperwork for paperwork's sake and restores some sanity to the process." The
Independent Bankers Association of America declared that the new rules "should
alleviate the paperwork nightmare of eRA for community banks and allow them to
concentrate on what they do best - reinvest in their communities." And just last
6
week, joining a coalition of civic and community groups and mayors from around the
country, such leading fmancial institutions as Chemical Bank, Bank of America,
NationsBank, First National Bank of Chicago, American Savings Bank, and Home
Savings of America, jointly praised the rulemaking effort, saying that the new rules
strike "a balance between the banking industry's desire for reduced regulatory burden
and the need for all American communities to have access to better information . . . .
They represent a significant move in the right direction . ..
Now, we urge that they
be given a chance to work. "
The right approach, after all of this thoughtful work by the regulatory agencies
and the public, is for the regulators to implement the new regulation on schedule. To
amend the CRA in any respect before the new rules' effectiveness can be evaluated
would be counterproductive, and the Administration would frrmly oppose it.
2.
Procedural Changes Affecting
eRA
Banking laws have long required banks to obtain regulatory approval for such
transactions as establishing branches, acquiring new institutions, or merging
institutions. We believe the process for reviewing such transactions can and should be
.
streamlined. (Indeed, the OCC and OTS have already taken steps, within the limits of
their current statutory authority, to expedite and simplify that process.)
Thus we support the objectives of sections 201 (acquisition of banks by bank
holding companies), 202 (mergers of FDIC-insured depository institutions), 203
(Oakar transactions), and 204 (branch applications) of S. 650, which would revise the
procedure for reviewing such transactions. Under sections 201 and 204, wellcapitalized, well-managed institutions with satisfactory CRA records could generally
7
give regulators notice before a transaction and then proceed with the transaction unless
regulators acted within a specified time to require an application.
As currently drafted, these sections could insulate such transactions from
effective CRA review -- review which current law specifically requires, and which has
played an important role in assuring the CRA's effectiveness. No longer would
persons concerned about an institution'S record of meeting community needs receive
notice of, or have a meaningful opportunity to comment on, a proposed transaction.
These sections would thus, in effect, establish a safe harbor against CRA-based
challenges -- in addition to the explicit safe harbor proposed in section 133. Just as
we strongly oppose section 133, we would strongly oppose that result.
Our opposition to CRA safe harbors is in accord with the principles of the bill.
In section 201, for example, institutions with satisfactory CAMEL ratings would not
automatically receive approval for their transactions. The Federal Reserve would
evaluate the transaction to confmn that other considerations do not warrant a more
complete review despite the bank's rating. This same logic underlies our position on
CRA review: a satisfactory CRA rating does not mean that an opportunity to consider
other factors is unnecessary.
To reconcile our CRA-related concerns with the shared objective of
streamlining the application process, we would preserve existing requirements to
publish notice of the transactions in question; give interested persons at least 30 days
to comment on an institution's CRA record; and specify that, for purposes of CRA,
institutions must follow these procedures for a full application if regulators receive a
substantial CRA protest. This approach would provide a streamlined notice process in
the overwhelming majority of cases, while preserving the integrity of the CRA.
8
Section 201, which we have already discussed in the context of CRA, also
raises a question about the proper role of the Antitrust Division of the Department of
Justice in considering the competitive effects of bank acquisitions. As drafted, section
201 would allow an expedited I5-day prior notice process if certain preconditions
were satisfied. Among these would be a requirement that the proposal complies with
guidelines adopted by the Federal Reserve, in consultation with the Department of
Justice, to "identify proposals that are not likely to have a significantly adverse effect
on competition in any relevant fmancial services market. "
We support this approach, with a slight modification. The Department of
Justice has raised a procedural question about their ability to receive simultaneous
notice of a transaction. Giving the Department simultaneous notice of the transaction
would expedite the process if done in conjunction with an amendment to waive the
typical 30-day post-approval waiting period contained in 12 U.S.C.1948 (b), except
for those transactions where the Department has informed the Federal Reserve, within
the 15-day period contained in this section, that the affect of this transaction may be
substantially to lessen competition. This will enable the transactions to proceed
expeditiously.
3.
Small Business Lending Data
We also strongly oppose section 235, which would repeal the current
requirement that depository institutions report information on their lending to small
businesses and small farms. Such information is both useful and not otherwise
available. For example, the Justice Department's Antitrust Division uses this data in
dozens of bank merger cases each year in various local markets throughout the
country. This data is the only readily available source of information on banks' small
9
business lending, and is therefore of great importance in evaluating the anti competitive
effects of proposed mergers. The Small Business Administration also uses the data to
rank the small business lending of all the nation's commercial banks.
B.
FAIR LENDING
I think everyone would agree that discriminating against loan applicants based
on such characteristics as race or sex is reprehensible. The Equal Credit Opportunity
Act and the Fair Housing Act prohibit such discrimination, and this Administration is
fmnly committed to eJiminating such discrimination. When such discrimination
relates to home mortgage credit, it also contravenes the national policy of encouraging
home ownership, which this Committee has had a major role in formulating and
advancing.
Section 302 rightly seeks to encourage institutions to test themselves for
discrimination. We want institutions to be able to self-test and to then take corrective
action. We support incentives toward those ends. Section 302 as drafted is overly
broad, so we, the Department of Justice, and HUD would be happy to work with the
Subcommittee on appropriate language that encourages self-testing without hindering
appropriate enforcement action.
We cannot, however, support section 236' s proposed reduction in the. number
of institutions reporting under the Home Mortgage Disclosure Act, given the role
these reports play in identifying discrimination. These reports can serve to alert an
institution of possible discriminatory practices in its operations. They also assist the
regulators in detennining compliance with CRA and enforcing the fair lending laws.
10
While we recognize that this data must be handled carefully and used properly, it has
real value.
c.
TRum IN LENDING ACT; RESPA
1.
Coordinating RESPA and the Truth in Lending Act; Responsibility
for Administering RESPA
The Truth in Lending Act establishes a way of calculating and disclosing the
true cost of credit, i.e., the annual percentage rate (APR). The Truth in Lending
Act's APR disclosures must be delivered within three days of loan application, or
sooner if the loan is closed fIrst. RESPA requires that lenders provide borrowers,
within three days of loan application, with a Good Faith Estimate of all settlement
costs associated with a closing on a purchase money mortgage loan. Typically, the
Truth in Lending Act disclosures are provided separately but along with the Good
Faith Estimate and other RESPA disclosures. Additional disclosure are also required
under both statutes at the time of closing.
The Truth in Lending Act applies to most consumer credit transactions,
including, for example, credit cards, car loans, and home mortgages. RESPA applies
only to loans on residential real property. Both statutes apply to lenders, but RESPA
provisions also apply to: real estate agents and brokers; title agents and underwriters;
credit reporting companies; appraisers; attorneys; escrow or closing agents; and
mortgage, casualty and homeowners insurers, etc.
This brief recitation suggests the compliance difficulties lenders have faced in
dealing with these two laws. Action to harmonize the workings of the Truth in
11
Lending Act and RESPA is clearly appropriate. Eliminating duplicative and
needlessly burdensome disclosures and unworkable requirements in the home mortgage
lending process would reduce the cost of loan originations and relieve consumers from
information overload.
Indeed, we believe that simplifying, consolidating, and coordinating all the
disclosures required in the home purchase and fmance process (including, for
example, environmental disclosures) and eliminating needless requirements would best
serve the interests of consumers and the industry. We further believe that this
objective should be pursued through an interagency process rather than by giving a
mandate to the Federal Reserve simply to make the disclosures uniform. The problem
that creates the overlap is primarily statutory, not regulatory, and does not lend itself
to creating minor exemptions from one provision or another. We suggest that the
Federal Reserve, HUD, and Treasury be directed jointly to study the entire process as
it relates to home fInance and to develop recommendations for changes in all the
relevant laws that would simplify and coordinate this process, to ensure that
consumers receive the information and protection they need and to avoid needless
burdens on lenders and other participants.
S. 650 also provides for the transfer of all RESPA responsibilities to the
Federal Reserve. Recognizing that HUD is the only agency with comprehensive
expertise on the full scope of housing-related matters, we should leave rulemaking
authority under RESPA with HUD. In the meantime, we support the clarification that
the fmancial regulatory agencies have concurrent jurisdiction with HUD in enforcing
RESPA.
12
2.
Specific Provisions
We agree on the value of simplifying the Truth in Lending Act and RESPA.
We support most of the bill's amendments to those Acts, either as drafted or with
modifications .
The Truth in Lending Act should not permit borrowers to avoid responsibility
altogether because of truly technical violations. Accordingly, we support the
objectives of sections 113, 114, 115, 116, 117, and 119. We are concerned,
however, that some of these sections as drafted are overly broad. We would be glad
to work with the Subcommittee to develop appropriate language.
We would support a modified version of section 103, under which the Federal
Reserve may, by regulC:ltion, exempt transactions from the Truth in Lending Act if the
Fed found that coverage by the Act did not benefit consumers by providing useful
information or protection. Furthermore, the requirement that benefits be
"measurable" is overly restrictive, and should be deleted.
We support the efforts to improve disclosures. Section 104 would simplify
disclosure regarding the transfer of loan servicing. Section 112 simplifies disclosure
of how interest rates on an adjustable-rate mortgage may change. The current
regulatory requirement to provide a hypothetical example of how the annual
percentage rate and minimum payment would have changed during the past 15 years is
overly complex. But borrowers should be made clearly aware of how their monthly
payments can increase (e.g., by including a
worst-case~scenario).
13
We oppose section 104' s elimination of the RESPA protection for second
mortgages, which Congress extended in 1992 "because of the unfortunate potential for
fraud and abuse among the elderly and inner city homeowners."
We support section 118' s clarification of assignees' Truth in Lending liability.
D.
TRum IN SAVINGS ACT
Section 141 would largely repeal the Truth in Savings Act, retaining only those
provisions of the Act that require banks to pay interest on the full investable balance at
the disclosed rate. Although we agree that the Act warrants review, we do not
support its repeal. We note that the costs of compliance have, to a significant degree,
already been expended. We are concerned about repealing the Act's protections
against fraudulent and misleading statements, and against advertising minimum balance
accounts as free. We also see value in promoting clear and accurate disclosure of
account terms, annual percentage yield and applicable fees and penalties.
A better approach may be to identify and improve the aspects of the Truth in
Savings Act that cause problems, rather than repealing it. For example, institutions
without automated systems to calculate interests rates do have difficulty complying
with the Act, and appropriate exemptions could address these concerns. Any revisions
to the Act should retain the regulator's authority to act against misleading statements.
F.
SAFETY AND SOUNDNESS SAFEGUARDS
Several provisions of S. 650 directly affect the supervisory process and have
significant implications for safety and soundness. With memories of massive bank and
14
thrift failures still fresh in the public's memory, and with public confidence in bank
supervision still being restored, we think it especially important to move with great
caution in this area.
Three topics give us serious concern: the frequency of examinations, the
independence of audit committees, and insider lending.
1.
Annual Examinations
Current law generally requires an annual examination of every bank with assets
of $250 million or more. Regulators can examine smaller banks on an 18-month
cycle, depending on the institution's size and examination rating. Section 221 would
expand these exceptions so that regulators could examine the overwhelming majority
of FDIC-insured institutions only every two years.
We believe that two years is too long a period to forego examination of even
small banks. In two years, the local economy or interest rates can change
dramatically, or management could be replaced. To extend the annual examination
exception to two years would work to contravene the objectives that Congress sought
to achieve through the FDIC Improvement Act of 1991 (FDICIA).
In FDICIA Congress adopted "prompt corrective action" -- a new approach to
supervision in which depository institutions face progressively more stringent
supervisory safeguards as their capital declines. Two aspects of this new system are
of critical importance: timely and accurate measurement of capital levels, and prompt
intervention as capital falls.
15
The experience of the past decade has taught us that capital can erode with
amazing speed when an institution comes under stress. Frequent bank examinations
are crucial to maintaining the integrity of prompt corrective action. Two years is
simply too long, in our view, for a bank: of any size to go without examiner oversight,
and permitting a two-year cycle for small banks would simply increase the exposure of
the deposit insurance funds.
2.
Independent Audit Committees
The importance of an effective independent audit function in depository
institutions cannot, in our judgment, be overstated. It is an essential internal check and
balance. Weakening this important safeguard, in the name of reducing burdens,
would be misguided.
We are particularly concerned about a retreat from the current requirement that
audit committees consist entirely of outside directors. To permit management directors
to sit on the audit committee would, we believe, impair the committee's objectivity
and independence, and we believe there is substantial experience to bear this out.
This is particularly important because the audit committee is typically the
principal point of contact between an institution's board of directors and the
institution's own internal audit function. Internal auditors -- who are, of course,
employees of the institution -- must be able to communicate their concerns and
fmdings to the board without control by, or fear of reprisal from, the very
management whose actions they may be reviewing. Allowing management directors
to sit on audit committees would compromise the effectiveness of this process.
16
While we support giving regulators some limited discretionary flexibility to
grant hardship exemptions, under carefully dermed circumstances, for only a limited
number of positions on the audit committee, we oppose any change in the basic
requirement.
3.
Insider Lending
Ensuring not only a safe and sound, but also a fair, banking system demands
that loans to bank insiders face special scrutiny and that insiders not receive
preferential access to credit. Tracking loans to insiders helps protect against abuses.
Section 212 would amend several of the tracking rules.
While we support certain of these proposed changes, we would not eliminate
the requirement for reports of loans to officers by unafflliated banks where the loans
exceed the amount the officers could borrow at the employing banks. Nor would we
eliminate reports to the board of directors regarding correspondent bank loans to
executive officers and shareholders who control more than 10 percent of the bank's
voting securities. In each of these cases the potential for conflicts of interest is great,
and the required reports are an important safeguard.
F.
THRIFr CHARTER
Several sections of the bill relate specifically to thrift institutions. Section 303
would exempt from the QTL test savings associations at least 90 percent of whose
customers consist of current or former military personnel, or related persons . We can
accept this section.
17
We support amending the federal thrift charter to remove percentage-of-assets
limits on credit card loans and education loans, and permit institutions to invest an
additional 10 percent of their assets in small business loans, all as proposed in section
304.
Section 304 would also treat a savings association that meets the Internal
Revenue Code's defmition of "domestic building and loan association" as a qualified
thrift lender (QTL) for purposes of the Home Owners Loan Act. We generally
support this provision, but only for thrifts not controlled by commercial firms. We
oppose using this bill as a vehicle for impairing the separation between banking and
commerce. Accordingly, we believe that such thrifts should continue to comply with
the QTL test.
Permitting thrifts to satisfy either the QTL test or the tax test gives many thrifts
additional flexibility. We do not support going beyond that to let consumer, credit
card, educational, or other loans satisfy the QTL test without limit as if they were
residential mortgages. Such proposals -- which essentially amount to letting thrifts
become consumer banks -- beg the question of whether there is still any need for a
separate thrift charter.
A banking organization that owns both a bank and a savings association is both
a bank holding company and a savings and loan holding company, and is regulated by
both the Federal Reserve and the Office of Thrift Supervision. Section 205 would
eliminate OTS regulation in such instances. We do not object to the proposal, but we
want to ensure that the OTS retains its authority to address holding company matters
unique to savings associations. We therefore believe the OTS and the Federal Reserve
should be directed to work out necessary procedures for addressing these matters. For
18
example, the Federal Reserve should be directed to cooperate with the OTS on
enforcement matters, the OTS should receive access to inspection reports, and the
OTS should have the authority to comment on applications for the acquisition of a new
thrift. Examinations are already coordinated, so the OTS has that authority.
G.
NbSCELLANEOUS
There are several provisions of S. 650 that do not lend themselves to a more
general classification. I would like to touch upon several of these.
We support sections 201, 202, 203, and 204, which streamline regulatory
application procedures, with the modest changes discussed above to preserve the
effectiveness of the
eRA.
Section 206 would eliminate the per-branch capital rule for national and state
member banks, which modem consolidated capital requirements render unnecessary.
We support this section.
We also support section 207' s elimination of branch application requirements
for ATMs. ATMs differ qualitatively from brick and mortar buildings in the
availability of services and in the competitive advantage they provide to a particular
institution. The applications process should reflect this.
We support section 208, which would permit well-capitalized national and state
member banks with satisfactory CAMEL ratings to invest up to 150 percent of their
capital stock in bank premises without regulatory approval.
19
We believe section 210 goes too far by eliminating the requirement that
institutions ftle a notice at least 30 days before hiring new directors or senior
executive officers for newly chartered institutions, undercapitalized institutions, or
institutions that have recently undergone a change in control. E]iminating this notice
requirement would also eliminate the background check requirement. The quality of
management is very imPortant in these critical situations. However, we recognize that
the regulators may know individuals being considered for management positions,
making lengthy background checks unnecessary . We therefore believe regulators
should continue to receive notice of changes in management, but have authority to
waive the requirements for a background check.
Section 215 would amend the Foreign Bank Supervision Enhancement Act of
1991, which required the Federal Reserve Board to establish and implement standards
for foreign bank entry into the U. S. and established the Federal Reserve as the
primary Federal regulator for State-licensed offtces of foreign banks covered by this
section. We support the section's elimination of the duplicative examination
procedures for foreign banks. We support the current moratorium on imposing
examination fees on offices of foreign banks, as enacted in the Interstate Banking and
Branching Act of 1994, and therefore oppose section 215's override of the underlying
fee provision. In addition, we support alternative approaches (set forth in Appendix
A) for reducing delays in reviewing and acting on such foreign bank applications.
Finally, we oppose eliminating the Federal Reserve's authority to order the
termination of a State-licensed foreign bank, branch or agency. It is crucial to have a
Federa1 bank regulator cognizant of those entities' multi-State and international
activities, with access to Federal intelligence on such entities' international operations
and authority to assure their speedy termination should the public interest require.
20
We oppose using this bill as a vehicle for goals other than alleviating regulatory
burden, such as restructuring the FDIC board (section 243) or permitting nonbank
banks owned by commercial frrms to increase their assets without limit, free from the
7 percent annual growth limit Congress imposed in 1987 when it reaffumed the
separation of banking and commerce (section 308).
ill. CONCLUSION
We look forward to working with the Subcommittee and other Members of
Congress as this bill works its way through the legislative process. Working together,
we can eliminate regulatory burdens while maintaining important and necessary public
benefits.
I would be happy to respond to any questions the Subcommittee may have.
APPENDIX A
SECTION-BY-SECTION COMMENTS
ON S. 650
Sec. 101.
Coordination of the Truth in Lending Act and the Real Estate
Settlement Procedures Act (RESPA).
The Truth in Lending Act establishes a way of calculating and disclosing the
true cost of credit, e.g., the annual percentage rate (APR). The Truth in Lending
Act's APR disclosures must be delivered within three days of loan application, or
sooner if the loan is closed first. RESPA requires that lenders provide borrowers,
_ within three days of a loan application, with a "good faith estimate" of all settlement
costs associated with a closing a purchase money mortgage loan. Typically, the Truth
in Lending Act disclosures are provided separately, but along with the good faith
estimate and other RESPA disclosures. Additional disclosures are also required under
both statutes at the time of closing.
The Truth in Lending Act applies to most consumer credit transactions,
including, for example, credit cards, car loans, and home mortgages. RESPA applies
only to loans on residential real property. Both statutes apply to all types of lenders,
but other RESPA provisions also apply to other settlement service providers, including
real estate agents and brokers, title agents and underwriters, credit reporting
companies, appraisers, attorneys, escrow or closing agents, mortgage, casualty and
homeowner insurers, and so on.
Section 101 directs the Federal Reserve to make the disclosures required under
the Truth in Lending Act and RESPA consistent with each other and with other
disclosure laws. It would prohibit the Federal Reserve from imposing any disclosure
requirement unless the requirement would eliminate, modify, or simplify any
disclosure required by the Truth in Lending Act or RESPA.
Eliminating the duplicative or overwhelming disclosures in the home mortgage
finance origination process would reduce the cost of loan originations of lenders and
simplify the mystifying blizzard of paper that the consumer receives.
However, the problem does not lie primarily in RESPA and the Truth in
Lending Act regulations. The Truth in Lending Act specifies how to calculate and
disclose the cost of credit for all credit transactions. Typically, this information is
added to the "good faith estimate."
The Administration believes that simplification, consolidation, and coordination
of timing of all of the disclosures required in the home purchase and finance process
Appendix A -- Page 2
(including, for example, environmental disclosures) and the elimination of unnecessary
requirements would be in the best interest of consumers and the industry. However,
the manner in which this occurs requires important policy decisions.
We have concerns about granting this authority solely to the Federal Reserve,
because it has no experience with RESPA. Instead, we suggest that the Federal
Reserve, BUD, and the Treasury perform the coordination task. HUD and the
Federal Reserve administer these respective statutes, and the Treasury can provide an
objective and broadly-oriented perspective to this process. The three agencies would
study the lending process as it relates to home finance and develop recommendations
for changes in all the relevant laws that would simplify and coordinate this process, to
ensure that consumers receive the information and protection they need and to relieve
lenders and other participants of needless burdens.
Sec. 102.
Elimination of redundant regulators.
The authority of HUD to administer RESPA would be transferred to the
Federal Reserve under this section. Enforcement authority would be exercised by an
institution's primary federal regulator in the case of banks, thrifts, and other regulated
entities and the Federal Trade Commission when enforcement authority is not
provided to another agency.
It is important that the agency charged with developing regUlations under
RESPA has knowledge and expertise concerning the home purchase and finance
process and a mission that includes protection of the home-buying consumer. RESP A
covers not only lenders, but also many other settlement service providers, including
real estate agents and brokers, title agents and underwriters, credit reporting
companies, appraisers, attorneys, escrow or closing agents, mortgage, casualty, and
homeowner insurers, etc. BUD is the only agency with responsibilities and expertise
that include the full panoply of the housing and housing-finance system. We should
therefore leave rulemaking authority under RESPA with BUD after the Interagency
Task Force referred to under section 101 has completed its work.
The system of enforcement set forth in section 102 would not work well for
RESP A enforcement. First, there is a risk of dramatically different interpretations of
the same statute by different enforcing agencies. Second, many RESPA violations
concern two or more actors providing different settlement services who would be
under the jurisdiction of different agencies under this enforcement scheme. Finally,
much of the expertise and information used to develop informed regulations comes
from complaints and other enforcement activity. This valuable input would be lost
under this scheme.
Appendix A - Page 3
Consequently, pending the conclusion of the analysis called for under section
101, the Administration supports clarifying in legislation that the bank regulatory
agencies have concurrent enforcement authority along with HUD under RESPA.
Sec. 103.
General exemption authority for loans.
This section would require the Federal Reserve to exempt any class of credit
transactions from all or part of the Truth in Lending Act when the Board determines
that coverage under the Act fails to "measurably" benefit consumen. The bill directs
the Federal Reserve to base its determination on such factors as the amount of the
loan, whether such disclosures complicate this type of transaction, the sophistication of
the borrower, and the importance of credit to the borrower.
We can support this provision if the restrictive qualifier "measurable" is
deleted. This will clarify that the goals of the Truth in Lending Act must not be
undermined. It would also be consistent with Executive Order 12866, Regulatory
Planning and Review. Such exemptions should be granted only by rule to ensure
sufficient public comment and avoid ambiguity arising from the Federal Reserve's
inaction in a particular case.
Sec. 104.
Reductions in RESPA regulatory burdens.
Section 104 would require lenders to disclose to loan applicants whether loan
servicing may be assigned, sold, or transferred. Neither historic information nor an
applicant attestation would be required. It would also eliminate the application of
RESPA to second mortgages.
We do not object to simplifying the servicing disclosure, although we do not
believe the current requirement creates much of a burden. Last year, Congress
eliminated the most burdensome provision of the statute, which required that the
lender disclose the percentage of business over the last three years that it had sold,
assigned, or transferred. All that remains is that they must: (1) disclose that the loan
servicing may be assigned; (2) disclose that the lender has previously assigned
servicing; and (3) if the lender does not engage in loan servicing at all, indicate the
present intent to assign the servicing. This provision would go further, requiring only
item (1).
We oppose removing the application of RESP A in the second mortgage context.
In 1992, Congress amended RESPA to extend its provisions to subordinate liens,
finding:
Appendix A - Page 4
The Subcommittee included second mortgages within RESPA because of the
unfortunate potential for fraud and abuse among the elderly and inner city
homeowners. The Subcommittee heard disturbing testimony . . . that indicated
that some secondary mortgage lenders, home repair specialists and banks had
allegedly taken advantage of elderly and minority homeowners by making loans
with rates as high as 25 % with balloon payments due in three to five years . . .
The Subcommittee believes that some homeowners might have been spared
foreclosure and bankruptcy if comprehensive RESPA disclosures had been
required during the negotiation process and if the anti-kickback provisions had
been in place.
HUD's rule implementing this provision only went into effect on August 9,
1994. Nothing has changed to eliminate the concern that Congress expressed only a
few years ago.
Finally, section 104 would conform RESP A and the Truth in Lending Act
exemptions for business loans. Currently, the two exemptions are identical, except
that RESP A does not exempt individual financing 1-4 family properties for rental
purposes. Although these purchasers are not unlike to individuals purchasing their
own homes, we do not oppose this reconciliation of definitions.
Sec. Ill.
Exemption for certain borrowers.
This section would add a "sophisticated borrower" exemption to the Truth in
Lending Act. Loans to consumers with an earned annual income of more than
$200,000 or with net assets in excess of one million dollars would not be covered by
Truth in Lending Act.
While we question the assumption that such consumers do not need the Act's
protections, and while it appears that the need to confirm that borrowers meet the
requirements of the exemption will likely add burdens for the industry, we have no
objection to this proposal.
Sec. 112.
Alternative disclosures for adjustable rate mortgages.
The Truth in Lending Act requires lenders providing open-end credit secured
by the consumer's principal dwelling to disclose a hypothetical example of how the
annual percentage rate and minimum periodic payment would have changed during the
previous 15 years.
Appendix A - Page 5
The bill would grant lenders of open-end credit transactions the option of
providing the hypothetical example currently required, or stating that the monthly
payment may increase or decrease with the annual percentage rate. A new
requirement would grant lenders in a variable interest rate residential mortgage
transaction that is not open-end credit the same disclosure alternative.
We support simplifying this disclosure requirement. But the simpler alternative
proposed offers consumers no substantive information. We suggest requiring
disclosure only of the highest payment possible under the terms of the loan, or some
other characterization of a borrower's "worst case scenario."
Sec. 113.
Treatment of certain charges.
The Truth in Lending Act defines "finance charge" to include fees paid to third
parties, such as courier services that deliver documents necessary for closing. In a
recent court case, a borrower was able to rescind an entire transaction because a
lender included such third-party charges in the "amount financed," rather than as part
of the finance charge.
This section would retroactively and specifically exclude from the Truth in
Lending Act definition of finance charge fees and amounts imposed by third-party
closing agents if the creditor does not expressly require the charge and does not retain
the charge. In addition, this section would exclude from the "finance charge" certain
taxes and fees for preparing documents in certain transactions.
We agree that lenders honestly attempting to comply with the Truth in Lending
Act's rules may suffer unduly harsh penalties for merely technical violations. The
language of this section, however, is overbroad. We are happy to work with the
Subcommittee on appropriate language.
Sec. 114.
Exemptions from rescission.
Under the Truth in Lending Act, consumers may rescind a transaction at any
time within three days of closing for any reason, or for three years if material
disclosures were not provided. This section would exclude refinancings, other than
high cost refinancings, from those transactions subject to this right of rescission.
We believe consumers need to know the terms under which credit is being
granted, whether the loan is a first mortgage or a refinancing. This especially applies
when offers to refinance come from disreputable contractors who urge consumers to
Appendix A -- Page 6
pay for services with new funds that become available through a refinancing.
However, we can support this provision if applied only to those refinancings where
the loan amount is not increased, except to cover transaction costs related to the new
loan.
Sec. 115. Tolerances; basis of disclosures.
The Truth in Lending Act contains no tolerance for even small errors in
disclosing the finance charge. This section would create a statutory tolerance for
errors in the disclosed finance charge of up to $100 for transactions that are not openend credit plans. It would also provide that a disclosure with respect to a portion of
interest determined on a per diem basis and payable at closing would be considered
accurate under the Truth in Lending Act if based on reasonably available information
at the time.
We agree that the Truth in Lending Act should accommodate reasonable
estimates and bonafide errors. Lenders, for example, cannot always disclose
completely accurately the amount of interest due at closing when based on a daily
charge, given the frequency with which closing dates change. However, a flat $100
tolerance may be too large on a small loan.
Sec. 116.
Limitation on liability.
This section exempts lenders from civil, criminal, or administrative
enforcement under the Truth in Lending Act and from the three-year rescission period
for Truth in Lending Act violations for disclosures, such as: (1) taxes incurred as a
precondition for recording a security interest; (2) third-party fees neither required nor
retained by the lender; (3) fees for preparing settlement documents, such as deeds and
appraisals; and (4) creditor-imposed delivery charges.
As with the other Truth in Lending Act amendments, we support the goal.
However, we do not believe section 116' s broad liability exemption best addresses the
problems raised by the court case discussed under section 113. We are happy to work
with the Subcommittee on appropriate language.
Appendix A - Page 7
Sec. 117. Limitation on rescission period.
Section 135 of the Truth in Lending Act grants a right of rescission to a
consumer in a credit transaction in which a security interest is retained or acquired in
the consumer's principal dwelling. If required material disclosures are made to the
consumer, the right to rescind expires three days after the transaction is consummated.
If required material disclosures are not made, the right to rescind expires on the
earlier of (1) three years after the date the transaction is consummated, or (2) upon the
sale of the property.
The Truth in Lending Act would be amended by this section to expressly
provide that the expiration of the right of rescission is absolute, and no consumer may
assert rescission affirmatively or as a defense in any action brought under the Truth in
Lending Act in any state or federal court. Any state law that is inconsistent with the
limitations on the rescission right contained in the Truth in Lending would be
overridden.
The proposal appears to address state court decisions that have permitted
consumers to rescind transactions after the expiration of the three-year limitation .
period when rescission is raised as a defense in the nature of recoupment or as a
counterclaim.
We support the goals of the provision, but the language should be clarified to
ensure that the focus is on state court interpretations of federal law. As drafted, it
may preempt state laws.
Sec. 118.
Assignee liability.
Assignees may be liable for violations of the Truth in Lending Act when such
violations are apparent. The Truth in Lending Act includes two non-exclusive
examples of apparent violations: (1) when the disclosure can be determined to be
inaccurate on the face of the disclosure statement; and (2) when a disclosure fails to
use the terms required by Truth in Lending Act.
Section 118 would limit the liability of assignees under Truth in Lending Act
(essentially defining apparent violation to only mean the two examples currently in the
statute). Such modification seems appropriate since assignee liability to date has never
been found on any other grounds. Furthermore, such standards are sufficiently broad
to cover most, if not all, anticipated circumstances. We support this provision as
written.
Appendix A -- Page 8
Sec. 119.
Modification of waiver of right of rescission.
The Truth in Lending Act permits borrowers to rescind a consumer credit
transaction in which the consumer's principal dwelling is retained or acquired as
security during the three-day period following the transaction's consummation. Loan
funds may not be disbursed until after such three-day period has expired. Borrowers
may waive their right of rescission, and thereby obtain the loan funds immediately,
only in the case of a bona fide personal financial emergency.
Section 119 would delete the bona fide personal financial emergency limitation
on the Federal Reserve's authority to permit waivers of the rescission right.
We can support this section if Congress provides the Federal Reserve with
appropriate guidance, which includes limiting its application to insured depository
institutions. Insured depository institutions are closely regulated, so there is more
opportunity to discover the type of unscrupulous behavior for which the protections of
the Truth in Lending Act were designed.
Sec. 131.
Expression of congressional intent.
This section would amend the purposes provisions of the Community"
Reinvestment Act (eRA) to state that the federal banking agencies shall not impose
any recordkeeping or reporting requirements, unless they eliminate, streamline, or
reduce burden.
"
We strongly oppose any amendments to CRA. The regulators have just
released their final regulations. After a two-year rulemaking process, the new
regulations completely overhauled the compliance process, and the passage of any new
legislation now would simply serve to create new uncertainties.
Sec. 132.
Small bank exemption.
Banks with total assets of $250 million or less would be exempt from
under this section.
eRA
We strongly oppose amendments to CRA for the reasons discussed under
section 131. The new regulations recognizes that the costs of eRA compliance may
be more burdensome for smaller banks. Consequently, the new rules apply a
streamlined examination process to them and exempt them from data collection
requirements, while retaining their ultimate obligation to serve their communities.
Appendix A - Page 9
Sec. 133.
Community input and conclusive rating.
An institution's compliance with CRA is reviewed through two processes.
First, CRA compliance is reviewed through periodic examinations. Second, it is
reviewed as part of the formal application process by the institution for a deposit
facility.
Section 133 would provide that the rating received following an examination
and completion of any request for reconsideration of a rating would be conclusive
until the next examination. CRA protests to an application would not be permitted.
We strongly oppose amendments to CRA for the reasons discussed under
section 131. Also, the process proposed is unwieldy. Community groups would have
an incentive to appeal ratings, knowing that they would be precluded later. Moreover,
CRA ratings should not be considered conclusive because circumstances can change,
and change rapidly.
Sec. 134.
Special purpose banks.
This section would create, for CRA purposes, a "special purpose bank"
category, which would be defined as a bank that does' not generally accept deposits of
less than $100,000 from the public Regulators would be required to consider the
nature of the business in which a special purpose bank is engaged in determining
compliance with the CRA. The regulators also would be required to develop
compliance standards that are consistent with the nature of these businesses.
We strongly oppose amendments to CRA for the reasons discussed under
section 131. The new CRA rules already addresses this issue by providing for a
tailored assessment process for limited purpose and wholesale banks. It also exempts
specific special purpose banks from the rule altogether.
Sec. 135.
Increased incentives to lending to low- and moderate-income
communities.
This section would direct the regulators to "give positive consideration" in
determining compliance with CRA to investments and loans that provide benefits to
distressed communities located outside of an institution's service area.
We strongly oppose amendments to CRA for the reasons discussed under
section 131. The new CRA rule addresses this concern. Under the new rules, retail
institutions can get credit for community development lending and qualified
Appendix A -- Page 10
investments outside their immediate assessment area, provided they benefits a broader
statewide or regional area that includes their assessment area. For wholesale or
limited purpose banks, as long as an institution has adequately severed the needs of its
assessment area, qualified investments, community development service, and
community development lending outside the institution's assessment area will receive
full consideration.
Sec. 141.
Payment of Interest Act.
This section would largely repeal the Truth in Savings Act, retaining only those
provisions of the Act that require banks to pay interest on the full investable balance at
the disclosed rate. Although we agree that the Act warrants review, we do not
support its repeal. We note that the costs of compliance have, to a significant degree,
already been expended. We are concerned about repealing the Act's protections
against fraudulent and misleading statements, and against advertising minimum balance
accounts as free. We also see value in promoting clear and accurate disclosure of
account tenns, annual percentage yield and applicable fees and penalties.
A better approach may be to identify and improve the aspects of the Truth in
Savings Act that cause problems, rather than repealing it. For example, institutions
without automated systems to calculate interests rates do have difficulty complying
with the Act, and appropriate exemptions could address these concerns. Any revisions
to the Act should retain the regulator's authority to act against misleading statements.
Sec. 201.
Streamlining of prior approval requirement for certain acquisitions.
Current law requires all bank: holding companies submit an application to, and
obtain the approval of, the Federal Reserve before acquiring a bank.
This section would replace the application requirement with a 15..<fay notice
requirement for certain bank holding companies. To be eligible to use this notice
process a bank holding company must: (1) be well-capitalized; (2) be well-managed;
(3) have a lead insured depository institution that is well-capitalized, have well
capita]jzed insured depository institution subsidiaries that control at least 80 percent of
the total risk-weighed assets of all the company's insured depository institution
subsidiaries and have no undercapitalized insured depository institution subsidiaries;
(4) have bank subsidiaries that all have at least a "satisfactory" eRA rating (except for
institutions acquired within the previous 12 months); and (5) be limited in size. In
addition, the acquisition must not be prohibited by interstate requirements and it must
have no adverse affect on competition.
Appendix A - Page 11
We support streamlining the acquisition process for bank holding companies.
However, we strongly oppose section 201 as drafted because it insulates transactions
from effective CRA review. Moreover, the exception for recently acquired banks
with an acceptable CRA rating requirement creates a large loophole to reconcile.
To reconcile the CRA-related concern~ with the shared objective of streamlining
the applications process, we propose publishing a notice of such applications (e.g., in
a newspaper of general circulation). Consumer groups must be given sufficient time
after publication to comment on the application (no less than 30 days). If a substantial
CRA protest arises, the notice application process should be transformed into a full
application process, but only with regard to the CRA issue. The regulators should be
directed to define what constitutes a substantial CRA protest. If no such protest
arises, the application would be deemed approved if all other relevant conditions of
this section are satisfied. The section should clarify the rights of an institution that
believes it has satisfied the requirements for the notice process, but the Federal
Reserve does not agree.
Section 201 also has implications for the Justice Department's review of bank
acquisitions. As drafted, the 15-day notice procedures in section 201 would be
available if the proposed transaction satisfied guidelines, worked out between the
Federal Reserve and the Department of Justice, under which it could be concluded that
no significantly adverse effect on competition would be presented. Under present law,
the Department has 30 days after a transactio~ is approved in which to decide whether
to file an antitrust action against it. We suggest that section 201 be amended to
require that the Attorney General be given simultaneous notice of a proposed
acquisition, and to provide further that the 30-day waiting period is waived unless
during the 15-day notice period, the Department notifies the Federal Reserve that it
believes the effect of the transaction may be substantially to lessen competition.
Sec. 202.
Elimination of certain riling and approval requirements for certain
insured depository institutions.
This section would exclude mergers between subsidiary banks of the same bank
holding company from the filing and approval requirements of the Bank Merger Act,
if certain conditions are met, including a 10-day prior notice to the appropriate
Federal banking agency. The Bank Holding Company Act would continue to apply to
the mergers.
We support streamlining the approval process for these mergers. However, we
believe that, consistent with the current operation of the Bank Holding Company Act,
retaining the Bank Merger Act approval, which is done by the resulting appropriate
Appendix A - Page 12
federal regulator, rather than the Bank Holding Company Act approval, is appropriate.
We further recognize that merging subsidiaries of the same holding company presents
no competitive issues. We therefore recommend Congress eliminate the portions of
the Bank Merger Act relating to competitive analysis of these mergers.
Sec. 203.
Elimination of redundant approval requirement for Oakar
transactions.
Certain transactions involving both a BIF-insured institution and a SAIF-insured
institution are excluded from the moratorium on conversions, provided the transaction
is approved under both the "~akar Amendment," and the Bank Merger Act and
certain conditions are met. This section would streamline the approval process.
We oppose the provision as drafted. Although we support eliminating
unnecessary applications, we believe that, as drafted, this amendment creates
ambiguity regarding the conditions imposed on these transactions, including the
application of the Bank Merger Act, the prohibition against transferring deposits from
SAIF to BIF insurance, and the ability of the regulator to consider what they deem
appropriate. Consequently, this amendment should be recast in the affirmative to
reaffirm the need to file a Bank Merger Act application and to maintain the condition
that an Dakar transaction shall not be construed as authorizing transactions that result
in a transfer of any deposit from one insurance fund to the other.
Sec. 204.
Elimination of unnecessary branch application.
Bank branching applications would be eliminated for those institutions that are:
(1) well-capitalized; (2) rated CAMEL 1 or 2; (3) have at least a "satisfactory" CRA
rating; and (4) seek to operate in an area that satisfies all applicable geographic
limitations.
We support streamlining the branch application process. However, we strongly
oppose this provision as drafted because it also insulates the transactions from
effective CRA review. We also note that with the advent of interstate branching, such
applications may become very important. Therefore, the CRA procedures discussed
under section 201 should apply equally in these cases
Sec. 205.
Elimination of duplicative requirements imposed upon bank holding
companies under the Home Owners' Loan Act.
A banking organization that owns both a bank and a savings association is both
a bank holding company and a savings and loan holding company, and is regulated by
Appendix A -- Page 13
both the Federal Reserve and the Office of Thrift Supervision (OTS). This provision
would eliminate OTS regulation of the holding company in such instances.
We do not object to the proposal, but we want to ensure that the OTS retains
its authority -to address holding company matters unique to savings associations. We
therefore believe the OTS and the Federal Reserve should be directed to work out
necessary procedures for addressing these matters. For example, the Federal Reserve
should be directed to cooperate with the OTS on enforcement matters, the OTS should
be allowed access to inspection reports, and the OTS should have the authority to
comment on applications for the acquisition of a new thrift. Examinations are already
coordinated, so the OTS has that authority.
Sec. 206.
Elimination of per branch capital requirement for national banks
and State member banks.
Under this section, national and state member banks would no longer be
required to maintain capital for their branches as if each branch was a separately
chartered bank under this section.
We support this section. Recent laws requiring banks to maintain consolidated
capital render this unnecessary and ensure that the bank as a whole has adequate
capital for safety and soundness purposes.
Sec. 207.
Elimination of branch application requirements for automatic teUer
machines.
We also support section 207's elimination of branch application requirements
for ATMs. ATMs differ qualitatively from brick and mortar buildings in the
availability of services. The applications process should recognize this.
Sec. 208.
Elimination of requirement for approval of investments in bank
premises for well capitalized and well managed banks.
Current law requires national and state member banks to obtain regulatory
approval to invest in bank premises in an amount exceeding the bank's capital stock.
This provision eliminates the prior approval requirement for well-capitalized
institutions with a CAMEL 1 or 2 rating, provided the investment does not exceed 150
percent of the bank's capital stock.
We support this provision. Benefits should accrue to well-capitalized
institutions as an incentive .to maintain or attain that status. Moreover, this change
Appendix A -- Page 14
raises no safety and soundness concerns because such investments are included in the
call report and considered in examinations.
Sec. 209.
Elimination of approval requirement for divestitures.
Current law requires a bank holding company to obtain the Federal Reserve's
agreement that a subsidiary's sale truly changes the ownership of the subsidiary when
an affiliate financed the sale or an officer or director interlock remains after the sale.
We support eliminating this approval requirement, given the ability of the
Federal Reserve to prevent sham divestiture transactions under other authority.
Sec. 210.
Elimination of unnecessary riling for officer and director
appointments.
Current law requires depository institution holding companies to file with their
regulators a notice at least 30 days prior to hiring new directors or senior executive
officers: (1) if the institution has been chartered or has undergone a change in control
within the past two years; or (2) if the institution does not comply with the applicable
minimum capital requirements. In these instances, the new hires would have to
undergo background checks.
Section 210 would eliminate the notice and background check requirements in
the fonner case, but retain it in the latter case, provided the regulator affirmatively
determines that notice is appropriate.
Institution managers are very important for newly chartered or undercapitalized
institutions or those that have recently undergone a change in control. Notice of
management changes should continue to be provided to the regulators. However, we
would support granting the regulators the authority to waive the background check
requirements in appropriate situations, such as when the individual is known to the
regulator because of a prior position.
Sec. 211.
Amendments to the Depository Institutions Management Interlocks
Act.
Currently, banks or bank holding companies with more than $1 billion in assets
may. not have a management interlock or interlocking boards anywhere in the country
with another bank or bank holding company with assets greater than $500 million.
This provision would raise these thresholds to $2.5 billion and $1.5 billion,
respectively. The provisioQ would also grant regulators the authority to increase these
Appendix A - Page 15
amounts annually to reflect inflation or market changes. Finally, grandfathered
interlocks would be permitted to serve indefinitely, and the exemptive authority of the
regulators would be restored to its pre-1994 level.
We support these amendments as a proper balancing of the need to prevent an
undue concentration of economic power among large institutions while permitting
smaller institutions to draw on the limited pool of qualified managers and directors.
Sec. 212.
Elimination or recordkeepiog and reporting requirements for
officers.
Section 212 amends several insider lender provisions. We have concerns about
portions of the section.
First, this section would exempt company-wide benefits plans from the insider
lending restrictions. We share the goal, but believe the section should identify the
specific benefits to be provided to senior management. The statute should clarify that
in order to be widely available, the benefits cannot be structured to benefit only senior
management. The section also permits the Federal Reserve to exclude executive
officers, directors, and principal shareholders of a bank holding company or nonbank
affiliates from the prohibition on preferential terms being provided to senior executive
officers. We do not support those exclusions.
Second, this section directs the Federal Reserve to prescribe the insider lending
reports bankS must complete and provides that an auditor has met its responsibility if
the bank has completed the required reports. We do not support this change. Section
301 of the bill would eliminate the auditor's attestation requirement, which has been
the focus of many of the complaints regarding auditors. Repeal of this section would
eliminate the requirement for any auditor reports.
Third, this section would eliminate reports by banks of loans made to officers
of unaffiliated banks exceeding the amount the officer could borrow at the employing
bank and reports of new insider loans made in the previous quarter as a supplement to
the call report. We oppose eliminating the former reporting requirement, because
examiners need to review such loans because they· could indicate a conflict of interest
and should be monitored. We do not object to eliminating the call report supplement,
although such data must still be maintained to ensure compliance with the restrictions
on aggregate insider lending.
.
Fourth, this section repeals the regulators' authority to require reporting and
public disclosure of insider lending. We oppose this provision because only the
Appendix A -- Page 16
Federal Reserve would retain similar authority under other provisions of law. We
believe that all of the regulators should have this authority, rather than only one of
them.
Finally, this section would eliminate reports to the board of directors regarding
correspondent bank loans to executive officers and shareholders who control more
than 10 percent of the bank's voting securities. We oppose eliminating information
that is useful to both boards of directors and bank examiners.
Sec. 213.
Abolition of Appraisal Subcommittee; transfer of functions.
A 1989 statute established a subcommittee within the Federal Financial
Institutions Examination Council (FFIEC) to monitor states in establishing procedures
for licensing and regulating real estate appraisers. This section would abolish the
subcommittee. The FFIEC would continue to oversee the states and report to
Congress.
We do not object to this provision. The states are in compliance with the Title
XI requirements. There are, however, issues that continue to require mediating
presence to ensure consistency (e.g., ensuring consistency in state temporary practice
policies). Consequently, the transfer back to the FFIEC of the subcommittee's
authority, and the extent of such authority, should be clearly stated. Furthermore, the
need for the continuation of such FFIEC oversight should be reviewed in three years
in light of the progress of the states at that time.
Sec. 214.
Branch closures.
The provision would eliminate the requirement that institutions provide notice to
their customers when branches close as a result of (1) mergers, (2) relocations, or (3)
emergency or assisted acquisitions. Also excluded from the notice requirement would
be the closing of ATMs. The regulators would be granted the authority to issue
additional exemptions. We support this provision, but would amend it to require
regulations to define "local market area" by regulation to amend the exemption would
apply only when service is not affected.
Sec. 21S.
Foreign banks.
Section 215 would substantially amend the Foreign Bank Supervision
Enhancement Act of 1991 (FBSEA), enacted following the Banca Nazionale di Lavoro
and BCCI scandals that highlighted certain inadequacies in the domestic and
international supervision of foreign banks. FBSEA strengthened the Federal Reserve
Appendix A - Page 17
role in tenninating, examining, and approving the establishment of U.S. branches and
agencies of foreign banks.
Section 215 would eliminate the Federal Reserve's ability to "order" the
tennination of a state licensed foreign bank or branch, provided in FBSEA, and would
allow the Federal Reserve only to "recommend" termination to the appropriate state
bank: supervisor. Thus, there would be no federal bank regulator able to tenninate a
state licensed office in a timely manner consistent with the public interest. The OCC
fulfills this role for federal branches and agencies of foreign banks.
Section 215 would require the Federal Reserve to rely "to the maximum extent
practicable" on the examination reports of the DCC or the appropriate state bank:
supervisor and would require the Federal Reserve to assure its exam schedules are
comparable to those normally applicable to domestic banks. The Federal Reserve
would continue to be able to conduct examinations of foreign bank branches, agencies,
and affiliates in the U.S. where appropriate. The provision on examinations also
permits the Federal Reserve to collect fees for examining foreign banks to the extent it
collects similar fees from domestic banks. We support the present moratorium on the
Federal Reserve's authority to impose fees for examining the branches and agencies
and other offices of foreign banks, as provided in the Riegle-Neal Interstate Banking
and Branching Efficiency Act, and therefore oppose the Section 215 provision on the
collection of fees by the Federal Reserve.
Section 215 would impose a statutory 60-day deadline for the Federal Reserve
to review and deny or approve a foreign bank application to establish a branch or
agency. It also would restrict the Federal Reserve to evaluating foreign bank
applications solely on the basis of whether "approval of any application would place at
risk the safe and sound operation of the United States banking system." This would
eliminate the current mandatory prudential requirement that all new branches and
agencies of foreign banks be subject to comprehensive consolidated supervision by
home country supervisors and would eliminate other reasonable statutory factors to be
considered in evaluating foreign bank applications.
We oppose the provisions of Section 215 dealing with termination of foreign
bank branches and agencies in the U.S. We support the two provisions dealing with
eliminating duplicate examinations. In addition, we would support the effort to
streamline review of foreign bank applications, with substantial modifications, to
ensure a set of reasonable criteria for the review and approval of all foreign bank
applications by a federal regulator and the imposition of practicable deadlines that take
into account the unique problems regulators face in collecting and evaluating crucial
information from foreign bank and government sources.
Appendix A -- Page 18
To assure a reasonable set of standards for review of all foreign bank
applications, we propose to pennit federal bank regulators to exempt certain banks
from the current statutory requirement that they be subject to comprehensive
consolidated supervision (CCS). The mandatory CCS standard for all foreign bank
applicants has been a major source of delay in approving foreign bank applications. It
imposes a standard that is more stringent than current minimum international standards
agreed to by the Basle Committee on Banking Supervision and the practice in a
number of countries that, nonetheless, may have well supervised and well run banks.
The CCS standard as implemented does not permit the federal bank regulator to take
into account an individual foreign bank's current record of sound and prudent
operation, even if the bank already has U.S. operations.
Such exemptions would be conditioned upon the foreign bank's ability to
demonstrate that it is not subject to a U.S. regulatory enforcement action, will make
adequate financial resources available to support the proposed office, and is subject to
substantial consolidated supervision and continues to make progress toward full CCS.
We support retention of other statutory factors that may be considered in reviewing
applications, such as financial resources and managerial competence, compliance with
U.S. law, the consent of the home country to establishment of the U.S. office, and the
provision of adequate assurances that the foreign bank will provide infonnation on the
worldwide activities of the bank as necessary to ensure compliance with federal law.
To encourage prompt review and action on all relevant foreign bank
applications, we propose that following receipt of an application already approved by
the DCC or an appropriate state bank supervisor, the Federal Reserve be subject to a
statutory 6O-day deadline for review and denial or approval of the application. The
60-day deadline would be subject to a 60-day extension upon Federal Reserve notice
and explanation. To address the duplicate federal review process for relevant federal
offices, we propose that the Federal Reserve "recommend" to the DCC the approval
or denial of a foreign bank application to establish a federal branch or agency.
Sec. 221.
Small bank exam cycle.
Current law requires annual examinations for banks with $250 million or more
in assets and permits examinations every 18 months for CAMEL 1 banks with less
than $250 million in assets and for CAMEL 2 banks with less than S100 million in
assets. The regulators may increase the CAMEL 2 threshold to $175 million after
September 1996.
This section would permit examinations every 24, rather than 18, months for
CAMEL 1 institutions that are well-capitalized and have less than $250 million in
Appendix A - Page 19
assets and for CAMEL 2 institutions that are well capitalized and have less than $175
million in assets. It would also permit the regulators to raise the CAMEL 2 asset
threshold to $250 million after September 1996.
We do not object to raising the asset thresholds because it allows the regulators
to focus more closely on those larger institutions that require greater scrutiny without
jeopardizing safety and soundness.
We oppose strongly extending the examination cycle to 24 months. The lesson
of recent years is that the condition of a bank can deteriorate rapidly.
The FDIC Improvement Act of 1991 (FDICIA) adopted an entirely new
approach to capital regulation, and a mandate for prompt corrective action, that was
intended to guard against such consequences. Adopting this section contravenes the
objections of Congress under FDICIA.
Sec. 222.
Reimbursement for corporate records.
The Right to Financial Privacy Act requires the government to reimburse a
financial institution for assembling and providing financial records relating to
individuals. This section would extend the reimbursement authority to cover corporate
customers.
We. oppose this provision. It could cost the federal government at least $30
million a year, according to a Department of Justice report, and thus raises pay-go
problems. In addition, this provision would establish an undesirable precedent of
expanded government reimbursements to the private sector for supplying non-protected
records to law enforcement, which could ultimately lead to greatly increased costs for
the government. The Administration recognizes that government records requests can
sometimes be burdensome; we do not make such requests lightly. The agencies that
make the bulk of the requests for the kinds of records addressed by the ~ction have
procedures in place to ensure that records requests are necessary and are as limited in
scope as possible.
Sec. 223.
Required regulatory review of regulations.
The regulators and the Federal Financial Institutions Examination Council
would be required under this section to review their regulations at least once every 10
years to identify outdated or otherwise unnecessary regulatory requirements imposed
on insured depository institutions. We support this provision.
Appendix A -- Page 20
Sec. 231.
Prohibition on additional reporting under Community Reinvestment
Act of 1977.
The CRA would be amended to limit the regulators' authority to issue
additional recordkeeping requirements, unless they eliminate regulatory burden. This
provision also prohibits the collection of loan data and does not allow any federal
financial supervisory agency to make such information public.
We strongly oppose amending CRA for the reasons discussed under section
131.
Sec. 232.
Exemption from community support requirements of the Federal
Home Loan Bank Act for institutions meeting certain criteria.
Under current law, financial institutions that are members of the Federal Home
Loan Bank System (FHLBank System) must meet community support requirements to
ensure access to long-term advances. In some cases, these requirements overlap with
those of the CRA.
The bill would exempt from these community support requirements institutions
that have either been chartered for less than two years and have not received a rating
from their primary regulator or that have a CRA rating of "satisfactory" or better. If
a member does not qualify for the exemption, member's first time homebuyers record
will be considered.
We oppose piecemeal amendments to the FHLBank System. We are preparing
comprehensive legislation to reform the System and view such discrete and piecemeal
amendments as counterproductive. The issues presented by this section will be
addressed on comprehensive reform package.
Sec. 233.
Recording requirements.
Current law requires financial institutions issuing a bank check, cashier's check,
traveler's check, or money order to an individual in an amount of S3,OOO or more for
coin or currency to: (1) verify that the individual has a transaction account with the
institution and record the method of verification; or (2) obtain identification from the
individual and verify and record that information according to Treasury regulations.
This section would eliminate the requirements that financial institutions (1) record the
method of verifying that a purchaser has an account with the institution, and (2)
obtain, verify, and record such information in accordance with Treasury regulations
from a purchaser without an account with the institution.
Appendix A - Page 21
We oppose this section because as drafted. The section eliminates the authority
of banks to issue monetary instruments in amounts of $3,000 or more to non-account
holders and non-banks to sell such instruments in excess of $3,000 to anyone. If such
income-producing opportunities are to be retained, for' enforcement purposes, the
requirement for contemporaneous recordkeeping must be maintained. Because
Treasury has withdrawn its controversial "$3,000 log" regulations, the maintenance of
the barebones records now required by Treasury regulation should not be troublesome.
Sec. 234.
Identification of nonbank rmancial institutions customers.
This section would repeal the requirement mandating that the Treasury issue
regulations directing financial institutions to identify their nonbank financial
institutions customers.
We support the repeal, provided that the Treasury retains the discretionary
authority to register money transmitters under section 408 of the Riegle Community
Development and Regulatory Improvement Act of 1994, and the authority to require
the identification of foreign non-bank financial institutions customers.
Sec. 235.
Repeal of commercial loan reporting requirements.
We strongly oppose the repeal of the current requirement that depository
institutions report information on their lending to small business and small farms,
contained in section 235. Such information is both useful and not otherwise available.
For example, the Justice Department uses the data for antitrust purposes when
evaluating bank mergers and examining small business customers and the commercial
loan middle market. This commercial loan data is the only practically available source
of information on small business lending for many banks. As the banking industry
consolidates and moves into interstate branching, this data will become even more
valuable to the Justice Department.
The Small Business Administration also uses the data for ranking all 10,000
commercial banks with respect to their lending to small businesses. Both banks and
small business have found this information useful. Small businesses can use the
information in determining which banks to approach for loans. Banks can use the
information for marketing.
Appendix A -- Page 22
Sec. 236.
Increase in Home Mortgage Disclosure Act; disclosure exemption.
The Home Mortgage Disclosure Act (HMDA) requires financial institutions
with $10 million or more in assets to compile and report data related to home
mortgage loans.
Under this section: (1) the $10 million threshold would be increased to $50
million; (2) the Federal Reserve would receive the authority to exempt larger
institutions from HMDA if the cost of complying outweighs the usefulness of the data;
and (3) depository institutions will be in compliance with the public availability
requirement if the information is kept at the home office and if the branch office
provides notice that the information is available upon written request.
The effect of section 234 would be to reduce by one-third the number of
companies covered by HMDA. Given the importance of HMDA data in determining
compliance with CRA and its importance in fighting discrimination generally, we
strongly oppose reducing the number of reporting institutions under HMDA. These
reports also serve to alert an institution of possible discriminatory practices in their
operations. While we recognize that this data must be handled carefully and used
properly, its value should not be questioned. This Administration consistently favors
disclosure over prescribed results. The HMDA approach bear this out.
Sec. 237.
Elimination of stock loan reporting requirement.
This provision would eliminate the requirement the financial institutions and
their affiliates report extensions of credit by the financial institutions and their
affiliates that are in aggregate, secured directly or indirectly, by 25 percent or more of
any class of shares of the same insured depository institution.
We support this provision. The change in control rules would apply if the
institution had to take control of ownership collateral.
Sec. 241.
National bank directors.
Under current rules, the directors of a national bank must be United States
citizens, and a majority of them must live in the bank's state or within 100 miles of an
office of the bank.
This section would grant the acc the authority to waive the citizenship
requirement for a minority of the directors and to waive the residency requirement
altogether. We support this proposal.
Appendix A - Page 23
Sec. 242.
Paperwork reduction review.
The bill directs the regulators to review within six months regulations requiring
depository institutions and credit unions to establish internal written policies and to
eliminate any unnecessary requirements.
We oppose this provision as unnecessary. Section 223 already calls for a full
review of regulations at least every 10 years, which would include these policies.
Also, section 303 of the Riegle Community Development and Regulatory Improvement
Act of 1994 directed the regulators to conduct a two-year regulatory review, which
includes these policies. Moreover, the President's regulatory review directive includes
these policies. Thus, the section is redundant with on-going efforts and could slow
down rather than increase the pace of regulatory reform. Thus, the section is
redundant with on-going efforts, and could slow down, rather than increase, the pace
of regulatory reform. Finally, a six-month timeframe is too short for any such
revIew.
Sec. 243.
State bank representation on the Board of Directors of the FDIC.
This provision would add a sixth voting member to the FDIC's board of
directors who must be a state bank supervisor or commissioner and would require that
the Chair and Vice-Chair if the FDIC Board be appointed from among the four
independent members of the board.
We oppose this section as unnecessary and inappropriate. In addition, it may
be unconsitutional. In addition, it may be unconstitutional. It is unnecessary because
the President already has the authority to appoint individuals who can represent state
banks. It is inappropriate because it assumes FDIC board members represent the
interests of the banking industry and its various segments, rather than the integrity of
the deposit insurance funds. The United States stands behind the deposit insurance
funds, which requires the FDIC, as a federal regulator of state banks, to represent that
federal interest. Furthermore, this provision raises serious conflict of interest
concerns because the FDIC is the federal regulator for state-chartered institutions.
Finally, there is no evidence that state banks are disadvantaged by not having a state
bank supervisor on the FDIC board.
Most importantly, section 243 impermissibly infringes upon the President's
constitutional authority .By narrowly limiting the pool of candidates from which the
President would be permitted to appoint the additional board member to those
currently serving as a state bank commissioner. It is long-established that, in vesting
the President with the power to appoint all principal federal officers, the Constitution
Appendix A - Page 24
requires that the President be afforded a sufficiently broad scope within which to
exercise his judgment.
Moreover, because the section provides that the state bank commissioner must
be removed automatically upon ceasing to hold the position of state bank
commissioner, this provision effectively gives whatever state official.that has the
authority to remove the state bank commissioner from that post the practical authority
to remove a federal officer. This, too, raises serious constitutional questions.
Finally, the bill would forbid the President from making successive
appointments of state bank commissioners from the same state. Establishing
qualifications for an office necessarily restrains the President's constitutional
appointment power. Whatever authority Congress may have to enact reasonable and
relevant qualifications as a prerequisite for appointment to a permit Congress, we do
not believe that it extends so far as to permit Congress to adopt geographic
requirements.
Sec. 301.
Audit costs.
This section would amend the independent auditor requirements in several
ways. First, it would eliminate the requirement that an independent auditor determine
an institution's compliance with laws and regulations designated by the FDIC. We
support this because this responsibility overlaps with that of the examiners. It is also
impossible for an auditor to attest to an institution's compliance with all safety and
soundness laws.
Second, this section would change the requirement that an institution's audit
committee consist entirely of outside directors to requiring that a majority of its
members be outside directors. We oppose weakening the current requirement as a
general matter. The importance of an effective independent audit function cannot, in
our judgment, be overstated. Experience shows that all-independent committees better
protect the safety and soundness of institutions. Legislation that would weaken the
effectiveness of this important safeguard would be seriously misguided, we would
support, however, granting regulators discretionary authority to allow a minority of
the members of the audit committee to be insiders where an institution has experienced
hardship in getting a full complement of outsiders to serve.
Sec. 302.
Incentives for self-testing.
Section 302 provides that reports or results of self-testing may not be used in
enforcement actions. In addition, the Equal Credit Opportunity Act (ECOA) would be
Appendix A - Page 25
amended to provide that the existence of a self-test does not limit that ability of an
agency to refer matters for enforcement to the proper agencies. This section is
designed to encourage creditors to self-test for compliance with the ECOA and the
Fair Housing Act.
We support the goals of section 302 but believe it is far too broad and would
have the effect of protecting discriminating institutions which have no intention of
correcting problems discovered during a self-test. We want institutions to be able to
self-test and to then take corrective action without fearing an enforcement action.
Current law has a chilling effect ori this goal because it requires such tests to be
referred for enforcement purpose in some cases, even if corrective action is being
taken.
Although the provision attempts to remedy this problem, we believe its solution
is far too broad and we cannot support it as drafted. For example, we believe that the
term "self-test" should be defined. We do not want underlying data subject to the
disclosure exemption because an institution looked at its files, called that a test, and
claimed that the files were thereby privileged. To avoid this, self-tests could be
defined as arranging for "testers" to pose as clients to ascertain how the lender's
employees would treat clients. Also, such tests should be available if used as a
defense, voluntary disclosure should be permitted, and any confidentiality should end
upon an independent finding of a violation.
The Justice Department and HUD have been examining these issues closely.
We recommend you solicit their views. We would all be happy to work with the
Subcommittee on appropriate language to achieve the balance that encourages selftesting without unnecessarily hindering enforcement.
Sec. 303.
Exemption for savings institutions serving military personnel.
This section would exempt from the restrictions imposed on savings
associations that do not meet the qualified thrift lender (QTL) test those savings
associations where at least 90 percent of their customer consists of active or former
military personnel, or individuals related to military personnel.
We do not object to this provision.
Sec. 304.
Qualified thrift investment amendments.
This section would permit a federal savings association to invest in credit card
loans and education loans without imposing a limit as to a percentage of the
Appendix A - Page 26
associations assets. In addition, it would permit a federal savings association to have
up to an additional 10 percent of its assets in small business loans. We support these
provisions.
This section also provides that if a savings association qualifies as a domestic
building and loan association, as defined in the Internal Revenue Code, the association
will be a qualified thrift lender (QTL) under the Home Owners Loan Act. We
support this provision, but only for thrifts not controlled by commercial firms. We
oppose using this bill as a vehicle for impairing the separation between banking and
commerce. Accordingly, we believe that such thrifts should continue to comply with
the QTL test.
Permitting thrifts to satisfy either the QTL test or the tax test gives many thrifts
additional flexibility. We do not support going beyond that to let consumer, credit
card, educational, and other loans satisfy the QTL test without limit as if they were
residential mortgages. Such proposals - when essentially account to letting thrifts
become consumer banks -- begs the question of whether there is still any need for a
separate thrift charter.
Sec. 305.
Daylight overdrafts incurred by Federal home loan banks.
Generally, the Federal Reserve permits some level of overdrafts to its members
without cost because members hold reserves with the Federal Reserve Banks that
could ultimately cover such overdrafts. However, the Federal Home Loan Banks hold
no such reserves. Section 305 would amend the Federal Reserve Act to provide that
any Federal Reserve Board policy or regulation governing payment system risk or
intra-day credit exempt the Federal Home Loan Banks or include net debit caps
appropriate to the credit quality of each Federal Home Loan Bank and impose daylight
overdraft fees calculated in the same manner as fees for other users.
We have not yet concluded our analysis of the issues presented by this section.
However, we do not support piecemeal amendments to the Federal Home Loan Bank
Act. In addition to the possible concerns of exposing the payment system to risk
because of the lack of reserves, this provision raises the question of what is a proper
function of the FHLBank System. Providing such overdraft protection permits the
Banks to engage in other activities, such as correspondent banking.
While the provision of such services to small institutions that cannot otherwise
obtain them may after careful analysis prove to be an appropriate function for the
System, in granting such access we must ensure such access is not used by the
Appendix A - Page 27
FHLBanks to generally expand their purpose beyond that of providing liquidity or as a
means to substitute their credit for the poorer credit of their members.
We understand these problems. However, we do not support any amendments
to the Federal Home Loan Bank Act. The Administration has been preparing a
comprehensive legislative reform package. Discrete, individual amendments will not
best serve needed reform of the FHLBank System.
Sec. 306.
Application for membership in the Federal home loan bank system.
This section would amend section 4 of the Federal Home Loan Bank Act that
provides for an institution to become a member of only, and secure advances only
from, the Federal Home Loan Bank for the district in which the institution's principal
place of business is located. If" demanded by convenience" and approved by the
FHFB, an eligible institution may become a member of the adjoining district.
Section 306 would provide an application process for an institution to become a
member and set criteria for a Federal Home Loan Bank to approve applications. A
Federal Home Loan Bank would be required to approve an application in their district
if the institution meet all the eligible requirements for membership. Membership in an
adjacent district would be permitted if the FHFB determines it is necessary for the
convenience of the member institution.
We have serious policy concerns about making membership automatic upon
satisfying fixed criteria if it will undermine the ten-year lock-out provision in current
law. Certain institutions which have left that FHLBank System are prohibited from
rejoining for a ten-year period. This provision should not weaken the lock-out
because it provides incentives for stability of the System. In any case, we do not
support any amendments to the Federal Home Loan Bank Act for the reasons
discussed under section 305. The Administration is drafting a comprehensive
legislative reform package where this issue can be addressed.
Sec. 307.
Authority for Federal home loan banks to select external auditors.
Section 307 provides that: (1) the FHLBanks shall contract annually with a
single auditor for their annual audits; and (2) the Finance Board shall not participate in
any FHLBank audit, or in the audit contracting process, except to establish
requirements for the audit contracts and accounting standards to be used in connection
with the audits.
Appendix A -- Page 28
With regard to audits, it is necessary to retain the provision requiring all the
FHLBanks to use a single audit provider. Producing the combined System financial
statements requires a consistent application of accounting principles and uniformity in
disclosures. In areas where GAAP is subject to interpretation, different auditors could
have different interpretations making a combined statement problematic. The Finance
Board currently requires (and the FHLBanks have concurred) that the FHLBanks use a
single auditor for individual FHLBank and System financial statements.
We also understand that there is some concern about permitting the Finance
Board to set accounting standards. We agree that GAAP should be followed to the
extent possible. However, some GAAP provisions are open to interpretation, and the
Finance Board needs the authority to ensure consistent interpretation to make
combined financial statements meaningful.
Although we understand these concerns, we do not support any piecemeal
amendments to the Federal Home Loan Bank Act for the reasons discussed under
section 305. Our comprehensive reform package will address this issue.
Sec. 308.
Limited purpose bank growth cap relief.
Nonbank banks are prohibited by a 1987 statute from growing at an annual rate
in excess of seven percent. This growth cap on limited purpose banks would be
removed by this section.
Most companies that control FDIC-insured banks must comply with the Bank
Holding Company Act, which generally does not permit them to affiliate with
commercial firms. Nonbank banks, although FDIC-insured, escaped the Act's limits
through a loophole that Congress closed in 1987 under the Competitive Equality
Banking Act (CEBA). CEBA prohibited the creation of new nonbank banks and,
among other things, limited their asset growth to seven percent annually.
In opting for grandfathering rather than strict conformity with the Act,
Congress "placed considerable weight on the fact that . . . nonbank banks ... are
generally quite small." It sought to prevent what the legislative history described as
"the abuse of grandfathered privileges that would occur if grandfathered companies
changed the character of the institutions involved through aggressive asset growth."
The asset growth restriction was designed to "help prevent existing nonbank banks
from changing their basic character ... ; from drastically eroding the separating of
banking and commerce; and from increasing the potential for unfair competition . . .
and other adverse effects." It also sought to "give the owners of nonbank banks an
incentive to support, rather, than obstruct, additional legislation. "
Appendix A -- Page 29
Allowing unlimited asset growth by nonbank banks would disrupt the balance
struck in CEBA. It would erode the bank Holding Company Act's separation of
banking and commerce, allow nonbank banks to significantly increase their share of
total bank assets, and increase the competitive advantages nonbank banks and their
parent companies have over other FDIC-insured banks and regulated bank holding
.
comparues.
And this fundamental change in CEBA would occur through an isolated,
amendment -- rather than, as CEBA contemplated, through comprehensive legislation,
allowing "all banks or bank holding companies to compete on a more equal basis"
with companies controlling nonbank banks.
This change would, moreover, provide a windfall to a limited group of
companies that already have special privileges -- the two dozen firms with grandfather
rights under CEBA.
We oppose this amendment. The issue of nonbank banks should be considered
in the context of broader financial modernization legislation.
Sec. 311.
Due process protections.
The this section requires a court to apply the Federal Rules of Civil Procedure
Rule 65 standard of "irreparable and immediate harm" to requests by the FDIC when
acting as receiver/conservator or by other conservators appointed by the acc or OTS
for the attachment of assets and for other injunctive relief. Additionally, the provision
permits a banking agency in a permanent or temporary cease-and-desist proceeding to
issue an order prohibiting a person from withdrawing, transferring, removing,
dissipating, or disposing of any funds, assets or other property where injury, loss or
damage to such property is irreparable and immediate. The Rule 65 standard of
"irreparable and immediate harm" must also be applied to prejudgment attachment
orders in termination of insurance proceedings or in any administrative or other civil
action for money damages, restitution, or civil money penalties brought by a federal
banking agency.
We oppose this provision as likely to hamper important enforcement actions,
especially when one considers that certain courts have held the loss of money does not
constitute irreparable harm. The authority is used infrequently, but is necessary in
those limited cases to prevent the dissipation of assets. Moreover, as drafted, the
"immediate and irreparable harm" standard would apply to final cease-and-desist
orders, which does not make sense, because those orders are only issued after an
impartial hearing by an administrative law judge.
Appendix A -- Page 30
Sec. 321.
Liability for unauthorized use of credit cards.
The Truth in Lending Act limits to $50 a consumer's liability for unauthorized
use of a credit card. This section would require cardholders whose statements show
unauthorized uses to notify the issuer within 60 days of receiving the statement, in the
absence of such extenuating circumstances as extended travel or hospitalization.
Cardholders failing to notify the issuer could be liable for more than $50. The
Electronic Fund Transfer Act already contains a similar notification requirement.
We believe it is reasonable to expect cardholders to examine their statements
within 60 days, in the absence of extenuating circumstances. We accordingly support
the thrust of this section, and encourage Congress to require issuers to clearly and
conspicuously call cardholders' attention to this new requirement.
Sec. 322.
Unauthorized electronic fund transfers.
The Electronic Fund Transfer Act limits to $50 a consumer's liability for
unauthorized transfers. The provision would increase the maximum liability to $500 if
the cardholder has "substantially contributed" to the transfer.
We support the objective of this section. We are concerned, however, about
the breadth of the term "substantially contributed," and believe additional legislative
and regulatory clarification would be in order. This section could, for example,
require the Federal Reserve to prescribe regulations specifying what actions meet the
"substantially contributed" standard (e.g., writing one's personal identification number
on the envelope in which one keeps an ATM card).
APPENDIX B:
THE AD:MINISTRATION'S ACHIEVEMENTS IN REDUCING
THE COSTS AND IMPROVING THE QUALITY OF REGULATION
The Administration has taken substantial steps to reduce regulatory costs and
improve the quality of regulation. These actions may be grouped under the following
headings: (1) the Credit Availability Program; (2) Bank Secrecy Act compliance; (3)
reviewing, rethinking, and revising banking regulations; (4) refocused supervision; and
(5) reduced administrative costs of supervision resulting from greater interagency
cooperation.
A.
CREDIT
AV All...ABILITY PROGRAM
In March 1993, soon after taking office, the President took steps to address the
need to create a better climate for bank lending. The Program addressed (1) real
estate lending and appraisals; (2) appeals of examination decisions and complaint
handling; and (3) examination processes and procedures.
The concern about appraisals was that in some cases costly formal appraisals
may render otherwise sound loans uneconomical. Three significant changes resulted.
First, the agencies increased from $100,000 to $250,000 the threshold level at or
below which certified or licensed appraisals would not be required for a real estaterelated transaction. They identified additional circumstances, particularly for small
business lending, in which appraisals are not required. Finally, they permitted
renewals and refinancings without an appraisal if there had been no deterioration in
market conditions.
The agencies also revamped their appeals processes to ensure bankers had a fair
and prompt review of examination disagreements. The OCC and OTS have each
created an Office of the Ombudsman, which manages the appeals process. The OCC
has also revamped its procedures for handling the nearly 15,000 general complaints it
receives annually. For example, it has established a toll-free number and improved its
complaint tracking system.
Third, the regulators have begun to coordinate many of their interactions with
the industry. For example, they have determined that examinations will be conducted
by the primary federal regulator. Moreover, the acc and FDIC share examination
schedules to better coordinate the supervision of holding companies with both national
and state-chartered banks, and coordinate enforcement actions.
Appendix B -- 2
B.
STREAMLINING COMPLIANCE WITH THE BANK SECRECY ACT
A key to our "partnership program" for improving the BSA process is
Treasury's Bank Secrecy Advisory Group, composed of 30 representatives of fmancial
institutions and federal and state regulatory and enforcement officials. Working with
the Advisory Group, Treasury has eliminated the requirement that institutions record
and retain for five years special records of all cash purchases of travelers checks, bank
checks, and cashier's checks over $3,000 in cash. Proposed regulations that would
have required mandatory electronic fuing of currency transaction reports, and would
have established a mandatory system to "aggregate" cash transactions, were
withdrawn.
Treasury also streamlined the currency transaction report (eTR), a form long
criticized as too cumbersome by bankers, by 30 percent. The new form should be
introduced in October. Treasury fmalized long-pending rules relating to casinos and
to wire transfers in a way that responded to industry calls for burden reduction, and it
plans such further actions as reducing the number of eTRs filed by banks by at least
30 percent (which amounts to three million forms per year). According to the
American Bankers Association (ABA), the last reform could save banks more than $40
million. Overall, the ABA has applauded the Administration's reform efforts on the
BSA; "The banking industry is very pleased at the direction of the Treasury's Bank
Secrecy Act efforts. We appreciate the good faith efforts of this Administration to see
to it that banks report and retain only information ~t helps curtail money
laundering." (October 14, 1994 ABA Press Release)
C.
A-TO-Z REVIEW OF REGULATIONS
The President has directed each agency to undertake a line-by-line review of
their regulations with the goal of eliminating redundant unnecessary requirements,
streamlining procedures, and rewriting the rules to be more easily understood.
The oee has been conducting this type of review for nearly two years. To
date, all of their regulations have been reviewed, three major parts have become or
will soon become fmal, and 11 parts have been published for comment. The OTS is
doing a similar review.
There are concrete examples of the burden-reducing benefits resulting from this
intense review. The oee and ors reduced, by six times, the number of lending
limit calculations institutions must perform, requiring quarterly, rather than daily,
analyses. The oee has also reduced some of its fees and its national bank assessment
Appendix B -- 3
rate, which covers the costs of examination and supervision. For example, the fee for
establishing a shared ATM will be reduced from $1,500 to zero, corporate application
fees have been reduced by 50 percent, and the national bank assessment rate has been
reduced by six percent. In addition, to these concrete examples, the ace and the
OTS are putting their rules in clearer language, and making the rules more user
friendly, which should reduce the time and costs associated with interpreting and
complying with rules.
D.
REFOCUSED SUPERVISION
Our nation's thousands of depository institutions vary greatly in size,
complexity, and fmancial strength. Yet regulations often ignore these differences by
treating all institutions alike and relying on generally-applicable procedures. This
provides institutions with little regulatory incentive to reduce risk or increase their
capacity to manage risk. It also creates needless regulatory burden and costs when
rules are inappropriate, irrelevant, or even counterproductive as applied in certain
instances.
The oee and OTS have been diligently working to make appropriate
differentiations in their regulations. For example, both bureaus have streamlined the
examinations process for smaller, well-capitalized, well-managed institutions.
Materials requested for noncomplex small national bank examinations have been
reduced by nearly 600 percent, from some 200 items (or more at the examiner's
discretion) to 35 standardized items. Moreover, the streamlined nature of such
examinations is evidenced from the oee small bank examination handbook, which
has been reduced from 1,216 pages to just over 30 pages. In addition, small, wellcapitalized, well-managed savings associations need no longer automatically obtain a
costly annual independent audit.
The difficulty of supervising a diverse banking industry has also led regulators
to focus on eliminating and streamlining procedures. The Administration has worked
to refocus supervision on results instead, and to thereby provide institutions with the
incentive to perform well, rather than simply to avoid criticism or follow needless
procedures. In this vein, the oee's new examination guidelines emphasize
operational results, such as default rates, rather than operational procedures, such as
loan underwriting. Moreover, all of the banking agencies worked on the recently
released fmal rules on the Community Reinvestment Act, which emphasizes results
over process.
Appendix B -- 4
E..
REDuCING ADMINISTRATIVE OVERHEAD COSTS
The Administration's efforts to reduce the expense of regulation have focused
on both direct and indirect costs. By controlling a regulator's overhead costs, the cost
of regulation declines when those savings are passed through in the form of reduced
assessments: the OCC and OTS have done just that.
One of the primary means of reducing overhead has been an increase in jointly
issued or coordinated regulations, such as the appraisal regulations and the real estate
lending guidelines.
Another way in which overhead costs are being reduced has been through
coordinated examinations. The banking agencies, the Securities and Exchange
Commission (SEC), and the National Association of Securities Dealers (NASD) have
agreed that the banking agencies and NASD will coordinate the examination of bank
brokerage units. The OCC and SEC plan joint examinations of bank and bank-advised
mutual funds. Finally, the regulators will use securities industry qualification tests for
bank-employed brokers. Not only has this coordination indirectly reduced the cost of
regulation, but it has also directly reduced the burden of multiple examinations.
OFFlCE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
Text as prepared for delivery
May 2, 1995
REMARKS TO THE TREASURY BORROWING ADVISORY COMMITIEE
OF THE PUBLIC SECURITIES ASSOCIATION
BY ASSISTANT SECRETAR Y OF THE TREASUR Y
ALICIA H. MUNNELL
I am delighted to have the opportunity to meet with you again this morning.
Three months ago, the question was whether the economy could move to a sustainable
long-run growth path without disrupting the expansion. Since the economy is operating
more or less at capacity, maintaining last year's pace of activity simply was not possible
without igniting intlationary pressures. On the other hand, engineering a soft landing is a
tricky business. There is always the danger that an economic slowdown can cumulate
and turn into a recession. They have done so in the past.
Beginning late last year, we started to see a string of softer statistics which
continued into this year.
•
•
•
•
Retail sales slowed abruptly in February signalling a pause in consumer spending.
Housing sales and starts fell rather sharply in response to last year's
interest rate increases.
Auto and light truck sales eased down in January and February from their
expansion high in December of last year.
There were signs in the monthly numbers -- now confirmed -- of increased
inventory accumulation, some of it possibly involuntary.
To be candid, for a while the list of negative statistics was a little longer than I
thought necessary. So the nice performance of the economy in March was welcome
news. We have seen some good numbers mixed in with the signs of deceleration. Retail
sales bounced back in March. Housing is soft but may respond to lower interest rates.
Orders for durable equipment have been strong throughout. With the exception of auto
sales, there seems to be a firmer tone to some of our numbers.
(More)
RR-262
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-2-
This better halance was evident in the first quarter's real GDP estimate last
Friday. Real growth at a :2.S percent annual rate was hroadly in line with expectations
and fully consistent \vith a continued recovery. Friday's report suggests that it will
indeed be possible to achieve a smooth transition from last year's 4 percent real growth
to something closer to 2-1/2 percent this year.
Some might be a little concerned about the composition of first-quarter growth.
Real final sales (GDP less inventory investment) fell sharply from a 5.7 percent annual
rate of increase in the fourth quarter to 1.X percent in the first. An increased rate of
inventory accumulation--equivalent to 1 percentage point at an annual rate--hoosted
growth in the first quarter, but may imply the need for some dowl1\vard production
adjustments in the period ahead.
Interestingly, this pattern is not unlike \vhat we saw last year. The burst of
spending in the fourth quarter of 199:1 -- \vhen real final sales increased at a h.4 percent
annual rate -- \vas even stronger than that experienced at the end of last year. This was
followed hy two successive quarters in 1994 during which real final sales averaged less
than:2 percent annual rate and growth was sustained by an inventory buildup. By the
middle of last Year, gloomy forecasts were a dime a dozen. Yet, the economy grew
strongly in the second half of the year, absorhing the seeming excess of inventories
without difficulty.
Of course, things are a little different this year than last. The Fed has made
several moves to tighten and the full effecb of this tightening may not yet have heen
fully felt. On the other hand, lower long-term rates have led to a slight decline in
mortgage rates and this may offset some of that impact. Similarly, my hest guess is that
the inventory situation may prove this year, as it did last, to be a suhsidiary theme rather
than a dominating consideration.
:-"1ore fundamentally, this economy is rohust. It is powered hy the twin engines of
job creation and investment and these engines provide the greatest reason for optimism.
One engine is pO\\'ering a jobs machine that has created 0..3 million jobs since
January, 1993. E\'en in the first quarter, payroll employment rose by more than 7()(),OOO
-- nearly 24(),OO() per month. Since Federal government employment is declining, almost
all the jobs (9:1 percent) are in the private sector, with state and local governments
accounting for the remainder of joh growth. Of course, the soft landing now apparently
in process \\'ill eventually necessitate some moderation in the rate of employment gains.
But e\'en at that more moderate pace, we should continue to enjoy a reinforcing
:-.equence of more johs. more income, more purchasing po\',:cr. and more consumer
spending. Thi" spending in turn \\,ill lead to more jobs in the future. Consumers cut
-3-
hack in the first quarter after a hurst of spending late last year, hut consumer confidence
is high and the outlook is hright. so long as the joh machine keeps running smoothly.
The other engine is powering an investment machine. This machine has raised
producers durahle equipment in real terms to a postwar record as a share of national
output. This level of investment has generated its own reinforcing sequence ()f increased
capacity, enhanced productivity, and slow growth in costs per unit of output. Investment
in structures has also hegun to pick up recently and the investment engine seems to he
hitting on all cylinders.
Good intlation performance is another major reason for optimism. The fixedweighted GDP price index is still staying close to a 3 percent annual rate of increase-edging up only to a 3.1 percent annual rate in the first quarter. A very subdued pace of
growth in employment costs is an underlying factor. Frankly, this has come as something
of a surprise with the economy entering its fifth year of expansion and the unemployment
rate less than 6 percent for seven straight months. Many econ()mists would have
predicted much more intlationary pressure than has, in fact, emerged.
The employment cost index rose by 2.Y percent in n()minal terms over the past 12
months-- the smallest increase in the history of the series dating hack to the early Il)~()'s.
This record small increase in compensation costs results from:
-- relatively stahle growth in nominal wages and salaries near 3 percent for
almost 3 years, and
-- henefit costs that have slowed dramatically from grO\vth of roughly 7 percent
annual Iv from 1Y~~ through 1Yl)() to less than 3 percent ()ver the latest 12 months.
In short, the economic outlook is very favorahle. Intlation remains in a stable
range. The economy has made a necessary downshift toward cruising speed with the job
and investment engines running smoothly. While the full transition to steady growth has
not yet heen made, the progress during the first quarter was very encouraging.
-30-
DEPARTMENT
OF
THE
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE;N~W.·. WASHINGTON, D.C. - 20220 - (202) 622-2960
ADV 3:15 P.M. EDT
Text as prepared for delivery
May 2, 1995
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
SOCIETY OF AMERICAN BUSINESS EDITORS AND WRITERS.
Before I get started, I thought it would be useful for context to focus for just one
moment on the current state of our economy, which is healthier in terms of the current
conditions that at any time that I can remember: steady growth, low inflation, the lowest
unemployment rate in decades, falling deficits and a falling deficit-to-GDP ratio,
outdated programs being terminated and a process that will lead to having the federal
civilian workforce at the lowest level since JFK was president.
Many measures have been taken aimed at preparing our economy for the future.
Having said that, there is much more to be done, both domestically and internationally,
and my opinion of the critical need for that preparation was reinforced in the past three
weeks by meetings I have held with finance ministers of the world's major economies -developed and developing countries.
I started those three weeks with a meeting in Bali with the 17 other APEC
Finance Ministers, including Japan's and China's; then visited India, after which I
stopped briefly in Egypt and Ireland; and then I finally returned to Washington to chair
the G-7 Finance Ministers and to attend the IMF and World Bank Interim Committee
meetings.
After that intense immersion in the global economy, two closely related ideas
remain absolutely clear to me. First, we must frame all of our economic decisions with
the understanding that the global economy is changing with great rapidity. Those
changes, such as the rise of once impoverished nations into vigorous economic
competitors and huge potential markets, the speed and overpowering size of the global
capital market flows, and the interconnectedness of all our economies, all deeply affect -as problems and opportunities -- the ability of our country to achieve rising living
standards for all Americans.
RR-263
(MORE)
2
And second, as a result, we must vigorously pursue a forward looking domestic
and international economic strategy that positions the country effectively for the new
global economy, if we are to be economically successful in the years and decades ahead.
It is these two ideas that drove the President's economic strategy from the
beginning of this Administration. Speaking for myself, [ developed a similar view from
my immersion in the trading and investment banking businesses as they truly globalized
beginning in the early 1980s. It was an eye-opening experience that cast light on the
competitive effects in the global economy of our deteriorating public school system, our
ever increasing inner city problems, and our massive fiscal and current account deficits,
and so on.
As an aside, even after being immersed in the global economy for roughly 15
years, some examples of the enormity of the changes that [ heard in the past three weeks
were striking.
In India, I heard about a major American financial services firm that is working
on having much of its back office processing done in India -- which has computer
software capability second only to the United States -- using the new methodologies of
communication to the tie together the front office and back office as effectively as once
occurred through locating both in the same building.
And a senior government official of one large non-Latin American country of vital
interest to the United States told me of how -- during the Mexican currency crisis in
December -- capital flows to his country dried up temporarily, until our intended
intervention gave the markets some breathing time to adjust and sort matters out.
The global economy is real, and the American economy, though the largest
member, is inextricably an integral part of the global economy and will be highly
sensitive to events and circumstances elsewhere.
For the President, his economic vision has been clear from the very beginning: a
broad based strategy to create and now sustain recovery, to position the economy for the
long term, and to increase the incomes of working Americans. Every budget the
President has submitted, and every economic measure he has advanced, has been
directed toward these purposes.
When the President took office, the immediate objective was to start, and then
sustain economic recovery, The critical initial step was our powerful multi-year deficit
reduction program enacted in 1993. There is no question in my mind that that program
was the principal factor in bringing interest rates down in 1993, and those lower rates
drove the recovery. Though rates have now come back up -- a rise that reflects growth -long term rates are still lower with 30/0 growth and 5.5% unemployment than they were
at the end of the prior Administration with 1-1/20/0 growth and 7% unemployment.
3
The key is that real and significant deficit reduction has largely taken the deficit
premium out of long term rates, an artificial impediment to growth, so that the real rates
can rise and fall with growth -- which is how the system should work -- and thus provide
the private sector with the interest rate framework it needs for long-term growth.
To focus further in on the fiscal deficit, when we got here, the federal deficit was
4.90/0 of GDP. This fiscal year we project the percentage will be down to 2.7%. And the
budget the President has submitted would bring the deficit-to-GDP ratio down to 2.1 %
by the year 2000 and to 1.6% by 2005. We haven't seen numbers like that in over two
decades.
Moreover, among all the G-7 countries, counting deficits at all levels, state, local,
federal, we are tied with Japan at 2% for having the lowest deficit to GDP ratio.
One more word about deficits: Although the federal budget is in deficit, with the
deficit reduction accomplished in the past two years and carried forward in the
President's 1996 budget submission, the money we raise is more than sufficient to pay for
the cost of operating the Government.
This year government spending excluding interest payments is projected at $1.3
trillion, but revenues are forecast at $1.35 billion -- a surplus of $50 billion. That
surplus, plus our entire deficit are going to pay the interest on the national debt, the vast
majority of which was incurred in the 1980s and early 90s. I believe -- and believed then
-- that the fiscal policy of that period was one of the great policy failures of American
economic history, and we are now paying the price.
We must continue working toward a balanced budget, but with practical and
sensible weighing of the trade-offs of the economic effects of specific cuts, as in
education, for example, versus the economic effects of the related deficit reduction, and
not simply arbitrary dates and arbitrary cuts. The President's budget carries forward
fiscal discipline by adding $81 billion of additional deficit reduction to the more than
$500 billion in deficit reduction put n place in 1993. And, as he has so often said, the
next major step must be getting federal health care costs under control, because that is
the major driver in the deficit, but within the context of thoughtful health care reforms to
avoid cost shifting and other distortions.
At the same time, while we continue down a thoughtful path of fiscal discipline,
we must have a vigorous and sufficient program of investment in the areas essential to
future productivity and competitiveness, especially in education, training and the
problems of the inner cities.
4
When you look at the amazing economic story of Asia -- the many countries at
our APEC conference that twenty years ago were impoverished and today are growing
rapidly and have vastly increased living standards -- education is a key common
denominator. These countries, including the highly education oriented nations of China
and India, will be our competition in the decades ahead, and we must be sure that our
work force is prepared and ready.
And that's why budgeting cannot be arbitrary, but must be a thoughtful process of
weighing tradeoffs.
For example, you can look at a great many programs -- Head Start, Job Corps,
the Women, Infants and Children program, Goals 2000, School to Work, the President's
proposal skills initiative and proposed education tax deductions -- as social programs.
Or, you can view them as I do, and more importantly, the way the President does, from a
very pragmatic, hard headed business point of view, as crucial long term investment in
the better educated and more productive work force that is absolutely critical to future
economic growth and to establishing an economy which works for all working Americans.
I want to focus for just a moment on this issue of the incomes of working
Americans. This isn't some catchy political phrase but rather is a serious national
problem. In the 1950s, 60s and through the mid-70s, all quintiles grew at roughly the
same rates; since then, the upper 40 percent have prospered, and the bottom 60 percent
have had falling real incomes. That is a terrible threat to our social fabric, undermines
support for forward looking economic policies like free trade and flexible labor markets,
and is at odds with the traditional American view that the economy should work for
everyone who works.
The tax provisions of the budget we submitted are aimed at promoting economic
growth and reversing the income trend I mentioned. They include a credit for families
with young children, so those families have more money to invest in their children; a
deduction for education costs, so Americans will be more willing to invest in themselves;
and changes in the Individual Retirement Account law that will encourage savings. A<;
an aside, I don't have time to focus on savings today, but what is striking and troubling is
how low our private savings rate is compared to virtually every other functioning
economy in the world, developed or developing.
More generally, as to tax cuts, we made our judgments based on four criteria that
can be applied to any tax cut proposal: how substantial is the economic effect, both
absolutely and relative to the economic benefits of the program spending foregone to pay
for the tax cut; how does it affect tax fairness; and is it fully paid for with no budget
gimmicks?
Now, lets turn briefly to the international side of economic strategy:
5
Before my trip to the APEC meeting I was thinking that 20 years ago, or even 10
years ago, the capitals where a Treasury Secretary needed to pay close attention because
of the potential to affect our economy, could just about be listed on one hand -- London,
Paris, Bonn, Tokyo. Today, that list is almost indefinite: New Delhi, Beijing, Moscow,
Jakarta, Johannesburg, Hong Kong, Singapore, Buenos Aires, Mexico City, and so on.
This is why I went to Asia, India, Egypt and Ireland, and that's why I'll be in Moscow
and Kiev next week with the President.
To the extent that Russia and the Ukraine transform their economies to successful
market-based systems, we have new avenues for trade in goods and services, as well as
enhanced national security, and if we invest in assisting that transformation, it is money
well spent.
What is true in the former Soviet Union is equally true around the world. Our
national economic interest requires that we engage with the global economy to expand
market opening around the world, to promote growth and economic reform in
developing countries, and to provide leadership when problems like Mexico's occur and
threaten systemic effects and our national interests.
There are those who would turn our backs on the global economy and on global
engagement, but that neo-economic isolationism is directly contrary to our national
economic interest.
Developing countries, to expand on that point, buy 40% of our exports. Our
contributions to the World Bank and other multi-lateral development banks are an
excellent investment in promoting the growth and reform that will increase our export
opportunities. This money is highly leveraged, and the returns
-- when viewed as a long term investment -- are significant.
In all my meetings with finance ministers, it was clear that in today's world only
the United States can provide the necessary leadership when trouble develops in the
global economy. But, it is also clear that the response must be multilateral, as when the
IMF contributed so heavily to dealing with Mexico. And that is why we are focusing on
providing the international financial institutions with a mission and capabilities as
modern as the global financial market and the global economy. Towards that end, we
are providing energy and leadership with regard to the Halifax G-7 leaders meeting,
which itself will be one step in an on-going process.
Before I take your questions I have two things I want to say in closing.
6
I believe as you write about business and economic issues, though obviously the
specifics of the matter at hand will dominate, you can provide another and deeper
dimension by relating back to this context; how does each matter at hand relate to
preparing the American economy for success in the rapidly changing global economy.
That is the standard to which we should be held, and to which others should be held -does what we propose prepare the American economy for success?
I believe this administration has a program to make this nation more productive
and more competitive, and to bring the benefits of global engagement to the American
worker. It is a program that takes the long view, that is fully paid for, and which has, as
I mentioned at the outset, already paid enormous dividends in terms of restoring our
economic health.
And second, whether we like it or not, the United States is no longer a largely
autonomous economic giant, but is now, though still the largest economy in the world, an
integral part of the global economy. The opportunities in this global economy are
enormous, but there are also problems. Our future prosperity depends on fully engaging
within the global economy, leading where that is needed, and on preparing ourselves
domestically to be productive and competitive.
Thank you.
-30-
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622·2960
FOR RELEASE UPON DELIVERY
Expected at 10:30 a.m. EDT
May 4,1995
STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN
BEFORE THE COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON FOREIGN OPERATIONS
EXPORT FINANCING AND RELATED PROGRAMS
U.S. SENATE
Mr. Chairman. Members of the Committee. I am pleased to present the
Administration's FY 1996 appropriations request for the multilateral development banks.
Our request of $2.3 billion includes $1.9 billion in regularly scheduled payments and just
over $400 million for the payment of arrears.
In addition, there is $25 million for the enhanced structural adjustment facility of the
International Monetary Fund; $56 million for the North American Development Bank;
and $42 million for debt restructuring and buy-backs. Details of these programs are set
out in a separate table at the end of my written statement.
Almost 60 percent of our request for the development banks is for the U.S. contribution
to IDA 10, an agreement negotiated under President Bush in 1992. In fact, 88 percent
of this year's request is to fulfill pledges made under the Reagan and Bush
Administrations. Our administration is fully committed to meeting all of those
obligations. (Chart 1)
Meeting those obligations is important. U.S. participation in the development banks
serves U.S. political and security interests. It helps to increase U.S. exports and creates
U.S. jobs. This request is not about charity or foreign aid.
We live in an increasingly interconnected world of more than 5.5 billion people.
Because of the development banks, a great many of these people are increasing their
incomes and becoming better customers for the goods and services we produce.
RR-264
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
2
Let me begin by emphasizing the stake that our country has in the multilateral
development banks. These institutions are at the heart of the international economic
system. The United States took the lead in creating that system just after the end of
World War II. The banks have always had broad bipartisan support and have served our
national interests well for more than 50 years.
This year proposals have been made to greatly reduce or even eliminate U.S.
participation in the development banks. Some people say we should not proceed with
negotiations for the next replenishment of IDA, the International Development
Association. Those proposals are directly contrary to our national self-interest. It would
be a grave mistake to tum our backs on the banks or walk away from our international
obligations.
Cost-Effective Internationalism
This request is not a request for straight-line funding on a business as usual basis. We
understand there is a new budgetary environment; that calls are being made for cuts in
many other programs. We also know that the request for the development banks is costeffective, that it responds to the need for substantial savings in budget authority this year
and in coming years.
Over the past two years Treasury negotiated a 50 percent reduction in the annual costs
of U.S. contributions to the Inter-American Bank, and cut back on the annual costs of
our contribution to the Asian Bank. We will continue these cost-cutting measures in
future negotiations, including those for IDA 11.
Moreover, the money we contribute to the development banks is very highly leveraged.
The banks are cost-effective internationalism. First, they are able to draw in
contributions from other countries -- four dollars for each dollar we contribute -- mostly
from Europe and Japan. Second, they raise nearly all their funds for regular lending -non-concessional lending -- from private capital markets. That lowers the budgetary cost
of our participation in the banks by substantial amounts every year. (Chart 2)
This ability to get results at a much lower cost is a unique advantage of our participation
in the development banks. We are able to multiply scarce budgetary resources and
remain engaged internationally -- pursuing our objectives and acting effectively in our
own national interest.
3
Our Stake in the International Economic System
With the world's largest economy, the United States has an enormous stake in
maintaining the stability of the international economic and financial system. Our own
economic health and vitality, as well as our prospects for future growth, are intertwined
with those of other nations. We need an international system that functions effectively
and allows for continued growth of international trade and investment.
All of the multilateral development banks have a part in strengthening the international
economic system. Their policy reform loans increase global growth by lowering trade
and investment barriers in developing countries. Their economic advice and marketbuilding loans help Eastern Europe and the Former Soviet Union to become full-fledged
participants in international trade.
At the beginning of the year, strong backing from the IMF enabled the President to
react swiftly and decisively in providing support to the Mexican peso. The World Bank
has also been a key player in Mexico -- nearly $9 billion in active loans and an additional
$4.5 billion in the pipeline.
The World Bank responded vel)' quickly in providing advice to Mexico's banking
supervisors. This is a good example of how these institutions help countries cope with
problems that stretch their capabilities in this area.
I discussed the future role of the institutions with my G-7 counterparts in Washington
last week, and the heads of state will be paying close attention to this issue at the
Halifax summit. We are working to assure more effective coordination between the IMF
and the development banks and equip them with the tools they need to respond to new
problems.
Supporting Foreign Poli9' and National Security
Let me focus in a little more closely on how the MDBs promote our national interests.
The MDBs are exceedingly valuable assets in the conduct of U.S. foreign and national
security policy. Their ability to mobilize financial resources -- to react rapidly when
there is need -- gives us greater scope than we would have on our own to take action in
times of international crisis.
The banks also help us respond to natural disasters and other emergencies through relief
efforts. IDA is providing support following earthquakes in India and Armenia and
flooding in Pakistan. Rwanda, Burundi, and Haiti are receiving emergency assistance
from IDA to reopen primal)' schools and fund emergency health care.
4
Through the multilateral development banks, we have promoted our interests in areas
vital to our national security interests. For example, Russia is receiving substantial
assistance in putting its economy on a market basis, and the banks are undertaking new
projects in other countries in the region: privatizing state-owned corporations in Ukraine
and lending money to small entrepreneurs in Georgia and Belarus.
At the end of 1994, the World Bank and the European Bank had lent more than $24
billion in Central and Eastern Europe and the former Soviet Union. Some $18 billion in
additional projects are in the pipeline and should be committed over the next three
years. (Chart 3)
The World Bank has taken the lead in providing financial support for the Middle East
peace process. Last year it began an emergency assistance program for Gaza and the
West Bank and is following up this year with a loan that focuses on health and education
problems. Support is also going to Egypt and Jordan.
Economic Benefits to the U.S.
The MDBs provide substantial benefits to the U.S. economy. Caterpillar of Peoria,
Illinois estimates that it gets $250 million each year from contracts funded through the
MDBs. These contracts help the economy in Illinois and have a ripple effect elsewhere
through sub-contractors and suppliers.
Other U.S. corporations also get major contracts from the MDBs. AT&T is providing
telephone equipment in the Philippines. McDermott International of New Orleans is
doing electric power work in China with turbines supplied by Westinghouse. Offshore
Pipelines of Houston is active in India.
Small and medium-sized firms also benefit. Morrison Textile Machinery Corp. employs
135 people in Fort Lawn, S.C. It is providing equipment for industrial projects in India
funded through the World Bank and IDA. M&W Pump Corp. employs 200 people in
Deerfield Beach, Fla. It is providing fluid pumps and motors for development bankfunded projects in Latin America and Asia.
Engineering and consulting firms write feasibility studies, prepare final designs, and
oversee implementation of projects. Their work often leads to large-scale contracts for
U.S. firms downstream.
Developing countries are our most rapidly expanding export market, going from $91
billion in 1987 to $197 billion in 1993. That's 40 percent of our total exports. Those
exports to developing countries sustain nearly four million jobs and benefit our whole
economy. We know that a great deal of the credit for this increase must go to the
multilateral development banks for their work in economic reform.
5
The most important commercial benefits we get from the MOBs come from the work
they do in creating more open and market-oriented economies in developing countries.
Nothing is more important than promoting the private sector in these economies. This is
where 85 percent of the world's people live.
Most of the world's economic growth is taking place in developing countries. Asian
economies will grow by 7 percent this year, and Latin American economies by 4-5
percent. A great deal of the impetus for greater growth in our own economy will come
from developing countries.
The MDBs contribute to creating market-oriented economies by encouraging lowering
tariffs, liberalizing investment regimes, reorganizing the financial sector, changing the tax
system, providing incentives for investment, and creating a new legal and regulatory
framework to spark private initiative.
The Importance of IDA
In particular, I would like to emphasize our economic interests in supporting IDA. IDA
plays an extremely important role in promoting growth in the poorer countries, those
with the least capacity to fund public and private investment, and IDA promotes the
private sector. In the mid-1980s, it was given a new job: engineering economic reforms
that emphasize market mechanisms and the private sector. IDA provides seed money
for capitalism and free market reform, which does not come easily. It takes time and is
a difficult and painful process. Developing countries have too little natural constituency
for international capitalism and free markets. It must be built from the bottom up and
against strong resistance from the status quo. IDA support is essential in getting poorer
countries through that process.
This is a large part of what IDA does today. It helps remake developing countries in the
image of the United States and the other industrialized democracies. One of it's biggest
success stories is India, which also shows how these programs have benefitted the United
States.
Under IDA lending, beginning in 1991, India cut its tariffs and liberalized investment
rules. Since then, the U.S. has become India's largest foreign investor. Our exports
jumped from $1.9 billion to $2.8 billion in one year and Secretary Brown recently
announced new contracts for U.S firms of more than $7 billion.
We're also seeing-ebange in the economies of sub-Saharan African countries, which are
now experiencing higher rates of growth under IDA economic reform programs.
IDA has 20 graduates, including big emerging export markets for the United States like
Korea, Indonesia, Thailand, and Turkey. In 1993, these 20 countries took $42 billion in
U.S. exports and current IDA borrowers took an additional $20 billion.
6
IDA sets the stage for engagement by our bilateral export agencies like Eximbank, OPIC
and IDA What IDA and the other development banks do is an essential complement
and support to our export agencies. All of the banks are used by U.S. firms to establish
a toehold in new and emerging markets.
The development banks also promote the export of U.S. values: our commitment to
democracy and political freedom, capitalism and free markets, privatization and
economic reform, and a greater commitment to protection of the environment. All of
the development banks are focussed on promoting good governance and public
participation.
I want to add just a personal note here. I was in India two weeks ago and saw first-hand
a watershed preservation project supported by the World Bank and IDA. I met people
who were poor almost beyond description. But they told me their living standards are
being increased because this project is allowing them to increase livestock production,
and to capture and use sparse rainfall that used to run off and be wasted. Women told
me how they are gaining more control over their lives and their families' futures because
their circumstances are improving and they are having a say in how the project operates.
Men told me how farming has become more productive. I saw soil that wasn't going to
be washed away in the monsoons, and a rising water table in an area that's almost a
desert. And it all came from simple low-cost soil conservation techniques the villagers
were applying themselves.
Mr. Chairman -- development works. It improves lives in developing countries, and as
those lives improve, it will have a direct impact on our economy, on the jobs and living
standards of Americans. It is, simply put, money well spent.
Protecting the Environment
Let me tum now to a new binational financial institution that we are jointly establishing
with Mexico -- the North American Development Bank or NADBANK. For decades,
communities along both sides of the border with Mexico have been plagued by the
problems of raw sewage dumped in boundary waters, unsafe drinking water, and
inadequate municipal waste disposal.
These are international problems which have had a strong impact on U.S. citizens. As
part of NAFfA, the United States and Mexico have agreed to address these problems
through the creation of NADBANK and its sister institution, the Border Environment
Cooperation Commission or BECC.
When NADBANK is fully capitalized, each dollar in U.S. contributions will result in at
least $10 in new financing for border environmental infrastructure projects and
community adjustment programs that will provide significant benefits to U.S. citizens and
firms. NADBANK, which has its top management in place, will be ready in the coming
7
months to look at projects along with the BECC. Its U.S. community adjustment window
will soon be up and running too.
Along with our request for funds for the development banks, we are requesting $42
million to reduce debts owed to the U.S. Government. Joining other creditor countries
in providing up to two-thirds debt reduction for the poorest countries, particularly in
Sub-Saharan Africa, we are seeking to help those whose debt is worth very little but
which continues to weigh heavily on them. Building on the Summit of the Americas, we
are also proposing a buy-back and swap program for lower income countries in this
hemisphere which will generate local resources for the environment and child
development.
Another of our requests is for the Global Environment Facility or GEF, which is
enlisting developing countries in the job of protecting the global environment. We
cannot do this by ourselves. The GEF targets ozone depletion, pollution of international
waterways and protection of biological diversity, and is low-cost insurance against the
possibility of global warming.
Improving Performance IReducing Arrears
We have also been working very successfully to make the MDBs more effective at what
they do: improving project quality; adopting open information policies; making their
operations more transparent; establishing independent inspection panels; improving their
poverty programs; and strengthening their environmental performance. (Chart 4)
The development banks have greatly increased their lending for health, education and
nutrition. Their work in the area of education for young women is particularly
important. It results in smaller and healthier families and in higher family incomes. The
World Bank has also become the largest lender for programs to combat AIDS. More
than 17 million people have been infected with the HIV virus and the number is
expected to reach 29 million by the year 2000.
On the administrative side, the banks are making their managers more accountable,
cutting back on budgets and reducing travel costs. These actions have been taken as a
result of U.S. initiatives. They demonstrate how responsive the banks have been to our
interests and concerns.
And that is a critical point. We have enormous influence in the MDBs -- I can attest to
that from my own experience working with the MDBs as Secretary of the Treasury -- and
that enormous influence is critical in helping keep the MDBs working in the directions
I've already described. But that influence is at risk, if do not meet our existing
commitments and continue to contribute fairly to future replenishments.
8
Yet following FY 1995 rescissions, we are now around $900 million behind in meeting
our commitments to the banks. We are the world's largest economy and the only nation
that has such arrears. (Chart 5)
Mr. Chairman, I cannot emphasize too strongly how important these institutions are to
our national interests. They are the most cost-effective way I know to assist economic
growth and economic, political and social reform. At our urging, the institutions are
changing their culture and adapting to evolving challenges. And with this request, we
are following through on the international commitments made by prior administrations,
obligations we are expected to keep, and it is in our interest to keep.
Thank you.
-30-
Table: The Elements of the Request
The Administration's request includes the following:
$28.2 million for paid-in capital to the World Bank (lBRD). This will clear U.S.
arrears to the 1988 general capital increase, which is currently supporting about $17
billion in annual lending to about 78 eligible countries.
$1,386.2 million to the International DevelQPment Association (IDAl. Of this,
$1,250 million is for the third and final installment of the U.S. contribution to the
tenth IDA replenishment. The remainder would clear $118.2 million in arrears.
$67.6 million to the International Finance Conx>ration oPC). This includes $47.5
million for the fifth and final installment to the IFC 1991 general capital increase, and
$20 million for payments due in prior years. This will support IFe's projected $2.8
billion in loan and equity investments in private sector projects which could total
investments of $18 billion. For every dollar the IFC invests for its own account,
other lenders and investors invest about $5.4.
$110 million to the Global Environment Facility (GOO: $100 million for the second
installment of the u.s. contribution to the restructured facility to provide financing to
developing countries for projects which will benefit the global environment, and $10
million for the shortfall in appropriations from the FY95 request.
$26 million for the Inter-American DevelOllment Bank @B): $25.6 million for the
second installment of the U.S. contribution to eighth replenishment of the IDB, and
$0.3 million to clear arrears.
$20.8 million for the Fund for Special Operations (fSQ): $20.5 million for the
second installment of the U.S. contribution to eighth replenishment, and $0.3 million
to clear arrears.
$100 million for the Multilateral Investment Fund (MIF) for the fourth scheduled
installment of the u.S. contribution, which will assist Latin American and Caribbean
countries in securing necessary investment reforms to stimulate both domestic and
foreign investment in the region.
$13.2 million for paid-in capital to the Asian Development Bank (ADB) for the first
of six installments to the fourth general capital increase.
$304.5 million to the Asian DevelQPment Fund (ADF): S170 million for the fourth
and final installment to the fifth replenishment, and $134.5 million to clear arrears.
$127 million to the African Development Fund (AFDFl for a seventh replenishment.
$81.9 million to the Euro.pean Bank for Reconstruction and Development CEBRDl to
clear arrears.
$56.3 million to the North American Development Bank CNADBANKl for the second
installment of the U.S. payment to the NADBANK's capitalization.
$27 million to continue a multilateral program for Debt Restructurin~ for the heavily
indebted, poorest countries that have a sustained record of economic reform.
$15 million for a pilot buyback and swap program for environmental and child
development programs in Latin America.
Chart 1
u.s. Support for the MDBs has been Bipartisan
Appropriations for the MOBs
The Bulk of the President's FY 96 Request
is to Fulfill Reagan & Bush Administration Pledges
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1981
1983 1985 1987 1989 1991
1993
1995
• Carter IJ Reagan; :; Bush ~ Clinton
Constant 1995 Dollars
rn Clinton Pledges. Reagan/Bush Pledges
Composition of FY 96 Request
Chart 3
The MDBs are Globally Active
$ Billion
200
150
100
50
o
K
-
Africa
Asia
Latin America
EuropelFSU
II Last 3 Years, II Projected Lending 0 Cumulative Lending
Chart 4
Recent Contributions have Generated Major Reforms
The Clinton Administration has:
e
Cut administrative costs
e
Strengthened role of private sector
e
Increased access to information
e
Enhanced protection of the environment
e
Increased lending to health, education & nutrition
Chart 5
Arrears in the Multilateral Development Banks
U. S. Millions
3,000
2,500
I
Bush Administration agrees to IDA 10: Obligations rise, but the 103rd Congress
does not appropriate the requiredfunds-- arrears rise.
2,000
1,500
1,000
500
o
Outstanding Arrears
Appropriations
Payments Due
0
...•
1988
405.0
1,205.6
1,610.6
1989
414.7
1,314.6
1,729.3
1990
268.3
1,469.2
1,737.5
1991
187.5
1,586.3
1,773.8
1992
168.6
1,548.9
1,717.5
1993
373.7
1,583.4
1,957.1
1994
846.9
1,479.9
2,326.8
1995
825.2
1,959.1
2,784.3
1996
409.6
2,303.9
2,713.5
GUARANTEE AGREEMENT
Dated as of February 21, 1995
among
The United States Department of the Treasury,
and
The Government of the United Mexican States
2
TABLE OF CONTENTS
Article I:
Definitions
Article II:
Guaranteed Debt Securities
section 2.01
Article III:
Commitment Conditions
section 3.01
section 3.02
Article IV:
Section
Section
section
Section
4.01
4.02
4.03
4.04
section 4.06
Assessment of Basic Fee
Calculation of Amount of Basic Fee
Means of Payment of Basic Fee
Disbursement and Use of Proceeds
section 6.01
section 6.02
section 6.03
Article VII:
Use of Proceeds from Debt securities
Payment of Amounts Due on Debt Securities
Delivery of Offering Document
Material Change in Law, Act, Fact or
Circumstance
Information; Consultation;
Annual Budget
Certain Notices
Fees
section 5.01
section 5.02
section 5.03
Article VI:
Conditions Precedent to the
Initial Issuance of Securities
Guarantees
Conditions Precedent to the
Issuance of Each Securities Guarantee
Covenants
section 4.05
Article V:
Guaranteed Debt Securities
Use of Proceeds
Investment of Proceeds
Disbursement of Proceeds
Reimbursement Obligation, Subrogation
and Indemnification
section 7.01
section 7.02
section 7.03
Reimbursement Obligation
Subrogation
Indemnification
3
Article VIII:
Late Payment Charqes
Section 8.01
Article IX:
Remedies
section 9.01
section 9.02
Section 9.03
Article X:
Redemption/Defeasance
Rebate of Basic Fee
Miscellaneous
section
section
section
section
11.01
11.02
11.03
11.04
section
section
section
section
section
11.05
11.06
11.07
11.08
11.09
Article XII:
Remedies
Rebate
No Waiver; Cumulative Remedies
Redemption/Defeasance
Section 10.01
section 10.02
Article XI:
Late Payment Charges
communications
Representation
Amendments
Term of Commitment to Issue Securities
Guarantees
Expenses
Survival of Covenants
Governing Law; Submission to Jurisdiction
service of Process
Counterparts
Entry Into Force
AGREEMENT
This Agreement, dated as of February 21, 1995 (the
"Guarantee Agreement"), is a commercial agreement among the
UNITED STATES DEPARTMENT OF THE TREASURY (the "Treasury
Department") and the GOVERNMENT OF THE UNITED MEXICAN STATES,
acting through the Ministry of Finance and Public Credit
("Mexico") (together, the "Members").
WHEREAS, monetary and financial cooperation between the
united States of America and Mexico is an important factor in
carrying out the objectives of the International Monetary Fund,
of which both countries are members, consistent with their
obligations, as members, on orderly exchange arrangements and a
stable system of exchange rates; and
WHEREAS, stabilization arrangements have been in effect
between the two countries since 1941, and have proved beneficial
to the financial relationship between the two countries; and
WHEREAS, the Members entered into the U.S.- Mexico
Framework Agreement for Mexican Economic Stabilization on
February 21, 1995, which provides for (i) Mexico to make and use
medium-term purchases under the Medium-Term Exchange
stabilization Agreement, dated February 21, 1995 among the
Treasury Department and Mexico, with the Federal Reserve Bank of
New York ("FRBNY") acting as fiscal agent for the Treasury
Department (the "Medium-Term Agreement") and (ii) Mexico to issue
debt securities which will be guaranteed by the Treasury
Department under this Guarantee Agreement, utilizing the United
States Treasury Exchange Stabilization Fundi and
WHEREAS, the Members have entered into the North American
Framework Agreement, dated April 26, 1994, among Mexico, the
Banco de Mexico (the "Bank"), the Treasury Department, the FRBNY
acting at the direction of the Federal Open Market Committee, and
the Bank of Canada, as amended from time to time,
(the "NAFA"),
the Exchange Stabilization Agreement, dated April 26, 1994, as
amended, and the Temporary Exchange Stabilization Agreement,
dated January 4, 1995, as amended, to provide short-term swap
facilities; and
WHEREAS, the Treasury Department and Mexico have entered
into the Medium-Term Agreement; and
WHEREAS, the Treasury Department, the FRBNY, Mexico, the
Bank, acting on its own account and as fiscal agent of Mexico,
Petr6leos Mexicanos, P.M.I. Comercio Internacional S.A. de C.V.
1
and P.M.I. Trading Limited have entered into the oil Proceeds
Facility Agreement (the "Oil Agreement") dated as of February 21,
1995 providing for certain proceeds of Mexican oil sales to be
available as an assured source of repayment for any amounts that
the Treasury Department (i) may pay under the securities
Guarantees (as defined below) provided hereunder, (ii) has
provided Mexico under the Medium-Term Agreement or the NAFA, and
(iii) may claim against the Bank or Mexico as a result of the
assignment to the Treasury Department of certain claims in
respect of short-term swaps provided by the FRBNY, acting at the
direction of the Federal Open Market committee, against the Bank
or Mexico.
NOW THEREFORE, in order to further such objectives and in
consideration of the mutual covenants contained herein, it is
agreed as follows:
ARTICLE I
DEFINITIONS
"Basic Fee" shall have the meaning set forth in Section 5.01
of this Guarantee Agreement.
"Business Day" shall mean a day on which the Treasury
Department and the Federal Reserve Bank of New York are both open
for business.
"Calculated Guarantee Amount" shall mean, as calculated by
the Treasury Department at the time of the delivery of any
Request for Issuance of Guarantees relating to a proposed issue
of Debt Securities, the sum of (i) the present value, as of the
proposed Settlement Date specified in such Request, of the
portion of the principal and interest payments on the Debt
Securities proposed to be issued that is to be guaranteed
pursuant to a Securities Guarantee issued by the Treasury
Department under this Guarantee Agreement and (ii) the present
value, that was calculated as of the respective Settlement Date
of each other issue of Debt Securities then outstanding, of the
portion of the principal and interest payments on such
outstanding Debt Securities that is covered by Securities
Guarantees that have been issued by the Treasury Department under
this Guarantee Agreement. The present values referred to in
clauses (i) and (ii) above shall be determined by discounting
each payment by the applicable United States Government Risk-Free
Rate from the date on which such payment is due.
"contract of Guarantee" shall mean the Mexican Securities
Guarantee Standard Terms and Conditions and a legend endorsed on
each Debt Security incorporating such Mexican Securities
Guarantee Standard Terms and Conditions.
3
"Debt securities" shall mean the debt securities denominated
in united States dollars to be issued by, and subject to the full
faith and credit of, Mexico to investors and guaranteed by the
Treasury Department pursuant to this Guarantee Agreement.
"Defease" shall mean, with respect to the guaranteed portion
of any Debt Securities, (i) the irrevocable deposit with the
applicable Fiscal Agent, in trust, or (ii) the irrevocable
deposit with the Treasury Department or the FRBNY, as fiscal
agent for the United States, in trust, of Government Securities
in an amount sufficient, together with the earnings thereon, or
cash equal to the present value to pay the portion of the amounts
due or to become due on such Debt Securities subject to a
Securities Guarantee.
Such present value is to be determined by
the Treasury Department.
"ESF" shall mean the United States Treasury Exchange
Stabilization Fund.
"1995 Framework Agreement" shall mean the U.S.- Mexico
Framework Agreement for Mexican Economic Stabilization dated the
date hereof, among the Treasury Department, Mexico and the Bank.
"Fiscal Agent" shall mean, with respect to any issue of Debt
Securities, the fiscal agent under the Fiscal Agency Agreement
with respect thereto.
"Fiscal Agency Agreement" shall mean, with respect to any
issue of Debt Securities, the fiscal agency agreement among the
united Mexican States, the Treasury Department and the FRBNY or
another financial institution appointed as fiscal agent by Mexico
with the consent of the Treasury Department.
"FRBNY" shall mean the Federal Reserve Bank of New York.
"Government Agency" shall mean any ministry, department,
authority or statutory corporation of, or any corporation or
other entity (including a trust) owned or controlled directly or
indirectly by, Mexico or any of the foregoing (including, without
limitation, the Bank).
"Government Securities" shall mean any security or other
debt obligation which is issued by or guaranteed by the United
states of America or any other agency or instrumentality of the
united states of America, the obligations of which are backed by
the full faith and credit of the United States of America.
"Medium-Term Agreement" shall have the meaning set forth in
the Recitals hereof.
4
"Mexican Securities Guarantee Standard Terms and Conditiona"
shall mean the Mexican securities Guarantee Standard Terms and
Conditions to be promulgated by the Treasury Department.
"NAFA" shall have the meaning set forth in the Recitals
hereof.
"Offering Document" shall mean any offering circular,
prospectus- or similar document used in connection with the offer
or sale of any Debt securities and any amendments or supplements
thereto.
"oil Agreement" shall mean the oil Proceeds Facility
Agreement, dated February 21, 1995, among the Treasury
Department, the FRBNY, Mexico, the Bank, acting on its own
account and as fiscal agent of Mexico, Petroleos Mexicanos,
P.M.I. Comercio Internacional S.A. de C.V., P.M.I. Trading
Limited.
"outstanding Medium-Term Swap Amount" shall mean at any date
the aggregate principal amount outstanding of united States
Dollars sold to Mexico by the Treasury Department under the
Medium-Term Agreement.
"outstanding NAFA Swap Amount" shall mean at any date the
aggregate principal amount of outstanding drawings made by Mexico
or Banco de Mexico from the U.S. Monetary Authorities under the
NAFA.
"Premium" shall have the meaning set forth in Section
5.02 of this Guarantee Agreement.
"Request for Issuance of Guarantees" shall mean a
certificate and Request for Issuance of Securities Guarantees
signed by an authorized signatory and delivered in accordance
with sections 3.02B and 6.01B.
"Securities Agreements" shall mean, with respect to any
issue of Debt Securities, collectively this Guarantee Agreement,
the applicable Fiscal Agency Agreement and the applicable
Underwriting Agreement (if any).
"Securities Guarantees" shall mean the guarantees of the
Debt Securities issued by the Treasury Department pursuant to
this Guarantee Agreement.
"Total outstanding Amount" shall mean at any time the sum of
the outstanding NAFA Swap Amount, the outstanding Medium-Term
Amount and the Calculated Guarantee Amount.
5
"Onderwritinq Aqreement" shall mean, with respect to any
issue of Debt Securities, the agreement pursuant to which such
Debt Securities are sold by Mexico to investors, or to
underwriters, agents or dealers, as principal or agent, for their
own account or for resale to investors, and, in the case of Debt
Securities sold pursuant to an auction, tender offer or exchange
offer, the agreement, if any, between Mexico and any agent of
Mexico therefor.
"onited states Government Risk-Free Rate" shall mean the
interest rate for the appropriate maturity as reported in
"Interest Rates for the Credit Reform Act" as determined by the
Treasury Department.
"O.S. Monetary Authorities" shall have the meaning ascribed
to such term in the NAFA.
ARTICLE II
COMMITMENT
Section 2.01.
Guaranteed Debt Securities.
A.
Subject to the terms and conditions set forth in the
1995 Framework Agreement, this Guarantee Agreement, and in any
Contract of Guarantee, the Treasury Department, through the ESF,
will guarantee the payment of all or part of the principal of,
interest on, or principal of and interest on, Debt Securities;
provided that the Calculated Guarantee Amount, when added to the
outstanding NAFA Swap Amount and the Outstanding Medium-Term Swap
Amount, will not exceed twenty billion United States Dollars
(U.S. $20,000,000,000).
B. The Treasury Department will
Guarantees through the ESF.
~ssue
the Securities
C.
The Debt Securities shall be issued by Mexico in such
amounts, and at such times, as may be requested by Mexico and
approved by the Treasury Department.
D.
The terms and conditions of the Debt Securities and of
the Securities Agreements shall be approved by the Treasury
Department.
Each Debt Security shall be issued in registered
form and not in bearer form, and no Securities Guarantee may be
issued in respect of payments of principal or interest due more
than 10 years after the date of issuance of the Debt Securities.
The Treasury Department may require that Debt Securities be
subject to redemption.
6
ARTICLE III
COMMITMENT CONDITIONS
section 3.01.
Conditions Precedent to the Initial Issuance
of securities Guarantees. The Treasury Department shall be
under no obligation to issue any securities Guarantees hereunder
(i) if the Treasury Department has made a determination pursuant
to Article VI of the 1995 Framework Agreement, or (ii) until
Mexico shall have obtained all authorizations and approvals
required for it to issue Debt Securities, and (iii) until Mexico
has satisfied the following additional conditions or the Treasury
Department has waived such conditions in writing:
A.
Mexico shall have delivered to the Treasury Department
a legal opinion, substantially in the form to be agreed to by the
Members hereto and to be set forth as an exhibit to this
Guarantee Agreement, of the Fiscal Attorney of Mexico acting as
counsel to the Ministry of Finance and Public Credit of Mexico;
and
B.
Mexico shall have delivered to the Treasury
Department, a legal opinion, substantially in the form to be
agreed to by the Members hereto and to be set forth as an exhibit
to this Guarantee Agreement, of the New York counsel for Mexico;
section 3.02. Conditions Precedent to the Issuance of Each
Securities Guarantee. The Treasury Department shall be
under no obligation to issue any securities Guarantees under
section 2.01 of this Guarantee Agreement (i) if the Treasury
Department has made a determination pursuant to Article VI of the
1995 Framework Agreement, or (ii) until Mexico complies with the
condition set forth in paragraph 2 of Article V of the 1995
Framework Agreement, and (iii) until Mexico has satisfied the
following additional conditions or the Treasury Department has
waived such conditions in writing with respect to each issuance
of a Securities Guarantee:
A.
at the time of, and after giving effect to, the
proposed issuance of such Securities Guarantee, the Total
outstanding Amount shall not exceed twenty billion united States
Dollars (U.S. $20,000,OOO,OOO).
B.
Mexico shall have delivered to the Treasury Department
and the FRBNY an executed Request for Issuance of Guarantees with
respect to such Securities Guarantee not less than 16 Business
Days prior to the Settlement Date proposed in such Request, after
having engaged in previous consultations with the Treasury
Department, which Request for Issuance of Guarantees may be
amended with the consent of the Treasury Department and shall
have been accepted by the Treasury Department by affixing an
authorized signature to such document;
7
C. Mexico shall have paid the Basic Fee applicable to such
Securities Guarantee as provided in Article V of this Guarantee
Agreement;
D.
there shall have been consultation and agreement among
the Treasury Department and Mexico, that the issuance of such
Securities Guarantee is consistent with the terms and conditions
of the 1995 Framework Agreement, including that the use of
proceeds of the Debt Securities to which such Securities
Guarantee will apply complies with such terms and conditions, and
that adequate and assured sources of repayment exist for any
amount of such Debt Securities to be guaranteed by the Treasury
Department;
E.
copies of each of the applicable Fiscal Agency Agreement
and the applicable Underwriting Agreement (if any), which shall
have been approved by the Treasury Department, shall have been
duly executed and delivered to the Treasury Department and each
such agreement shall be in full force and effect;
F. Mexico shall have delivered to the Treasury Department a
legal opinion, substantially in the form to be agreed to by the
Members hereto and to be set forth as an exhibit to this
Guarantee Agreement, of the Fiscal Attorney of Mexico, acting as
counsel to the Ministry of Finance and Public Credit of Mexico;
G. Mexico shall have delivered to the Treasury Department a
legal opinion, substantially in the form to be agreed to by the
Members hereto and to be set forth as an exhibit to this
Guarantee Agreement, of New York counsel for Mexico;
H. Mexico shall have delivered to the Treasury Department a
certificate signed by the Minister of Finance, or an authorized
delegee in form and substance satisfactory to the Treasury
Department, stating that (i) the representations and warranties
made by Mexico in the Securities Agreements shall be true and
correct on and as of the date of issuance of the applicable Debt
Securities, (ii) Mexico shall have observed or performed all of
the covenants, conditions, and agreements contained in this
Guarantee Agreement, the Securities Agreements and the oil
Agreement to be observed or performed by it on or before the date
of issuance of the applicable Debt Securities; and (iii) since
the date of the Offering Document, no change in fact or
circumstance has occurred that might have a material adverse
effect on the ability of Mexico to perform its obligations under
this Guarantee Agreement, the outstanding Debt Securities or
those being issued, the Securities Agreements or the oil
Agreement;
I. Mexico shall have delivered to the Treasury Department
all documents required by the terms of the Securities Agreements
to satisfy any and all conditions precedent contained therein and
8
such conditions shall have been satisfied or waived as provided
therein; and
J. Mexico shall have delivered to the Treasury Department
such other certificates, opinions, and assurances, in form and
substance satisfactory to the Treasury Department, as the
Treasury Department may reasonably request, including, without
limitation, opinions of counsel concerning compliance as to form,
if applicable, and the absence of material misstatement or
omission from any Offering Document.
ARTICLE IV
COVENANTS
Mexico covenants and agrees that, so long as the Treasury
Department shall be obligated to issue securities Guarantees
hereunder and so long as any securities Guarantee shall be
outstanding and until the payment in full of all amounts owed to
the Treasury Department hereunder and the performance of all
other obligations of Mexico hereunder, Mexico will duly perform
and observe each and all of the covenants and agreements
hereinafter set forth.
section 4.01. Use of Proceeds from Debt securities. Mexico
agrees that the proceeds from the issuance of any Debt Securities
shall be used only (i) to assist Mexico in stabilizing its
exchange and financial markets by providing resources to be used
in such a manner as to facilitate the redemption, refinancing or
restructuring of Mexico's short-term debt obligations and such
other purposes consistent with the obligations of the United
states and Mexico, as members of the International Monetary Fund,
on orderly exchange arrangements and a stable system of exchange
rates; and (ii) in accordance with the purposes set forth in the
Request for Issuance of Guarantees relating to such Debt
Securities.
Section 4.02.
Payment of Amounts Due on Debt Securities.
Mexico shall duly and punctually pay the principal of, and
interest on, the Debt Securities in accordance with the terms of
such Debt securities and the securities Agreements.
section 4.03.
Delivery of Offering Document. Mexico shall
deliver to the Treasury Department drafts of any Offering
Document a reasonable time before the first use thereof and shall
use no Offering Document to which the Treasury Department shall
reasonably object.
section 4.04. Material Change of Law, Act, Fact or
Circumstance.
In the event there is any change in law, act or
other change of fact or circumstance as a result of which Mexico
is not able to make the warranties in, or to perform its
9
obligations under, this Guarantee Agreement, the Debt Securities,
the Securities Agreements, the 1995 Framework Agreement or the
oil Agreement, Mexico shall inform the Treasury Department of
such change in law, act or other change of fact or circumstance
promptly after such change in law, act or other change of fact or
circumstance and of the steps that Mexico plans to take in
response to remedy its inability to make such warranties or
perform its obligations hereunder.
section 4.05.
Information; Consultation; Annual Budget.
Mexico agrees that it will:
A.
furnish to the Treasury Department the information
required under the 1995 Framework Agreement;
B.
furnish, or cause to be furnished, to the Treasury
Department such information relating to the Debt Securities, the
securities Guarantees and the Securities Agreements as the
Treasury Department shall reasonably request;
C. afford authorized representatives of the Treasury
Department opportunity during reasonable business hours to
discuss with officials of Mexico, the Debt Securities,
the securities Guarantees, and the Securities Agreements; and
D.
include in its Federal Budget for each fiscal year
amounts sufficient to pay all principal, interest and other
amounts due during such year on all Debt Securities and all
amounts payable to the Treasury Department hereunder.
Section 4.06.
certain No~ices.
Immediately upon
obtaining actual knowledge thereof, Mexico shall deliver to the
Treasury Department written notice of (i) any representation or
warranty made in this Guarantee Agreement, any Underwriting
Agreement, or the oil Agreement, or in any certificate delivered
pursuant to such documents, that shall prove to have been
incorrect or untrue in any material respect when made, and (ii)
any failure by Mexico or any Government Agency to observe,
perform or fulfill any covenant, condition or agreement contained
in this Guarantee Agreement, any Fiscal Agency Agreement, any
Underwriting Agreement or the Oil Agreement on the part of Mexico
to be observed, performed or fulfilled.
ARTICLE V
FEES
Section 5.01. Assessment of Basic Fee.
Upon the issuance of
any Securities Guarantee pursuant to section 2.01 of this
Guarantee Agreement, Mexico shall pay to the Treasury Department
the basic fee in united States Dollars assessed by the Treasury
Department (the "Basic Fee"), calculated in accordance with
10
section 5.02 of this Guarantee Agreement.
Section 5.02. Calculation of Amount of Basic Fee.
The
amount of the Basic Fee shall be determined by the Treasury
Department and shall be equal to the difference between:
(i) the present value as of the date of issuance of the
portion of the principal and interest payments on the Debt
securities to be guaranteed pursuant to a Securities Guarantee to
be issued by the Treasury Department under this Guarantee
Agreement, discounted at a rate equal to the appropriate United
states Government Risk-Free Rate at the time of issuance of such
Debt Securities, and
(ii) the present value as of the date of issuance of the
portion of the principal and interest payments on the Debt
Securities to be guaranteed pursuant to a Securities Guarantee to
be issued by the Treasury Department under this Guarantee
Agreement, discounted at a rate equal to the sum·· of (x) the
appropriate United States Government Risk-Free Rate at the time
of issuance of such Debt Securities and (y) the Premium, as
defined below.
The Premium, with respect to any Securities Guarantee, shall be
the greater of (x) the risk premium that would be set, in
accordance with the Interagency Credit Risk Assessment System on
a loan from the united States to Mexico, having the same term as
the Securities Guarantees and (y) 225 basis points, if, upon
issuance of such Securities Guarantee pursuant to section 2.01 of
this Guarantee Agreement, the Total outstanding Amount is
$5,000,000,000 or less; 275 basis points, if, upon issuance of
such Securities Guarantee pursuant to Section 2.01 of this
Guarantee Agreement, the Total outstanding Amount is greater than
$5,000,000,000, but less than $10,000,000,000; 325 basis points,
if, upon issuance of such Securities Guarantee pursuant to
section 2.01 of this Guarantee Agreement, the Total Outstanding
Amount is equal to or greater than $10,000,000,000 and less than
$15,000,000,000, or 375 basis points, if, upon issuance of such
securities Guarantee pursuant to Section 2.01 of this Guarantee
Agreement, the Total outstanding Amount is equal to
$15,000,000,000 or in excess thereof.
Section 5.03. Means of Payment of Basic Fee. The Basic
Fee shall be payable by electronic funds transfer at FRBNY when
required to be paid pursuant to Section 5.01 of this Guarantee
Agreement by specifying "for credit to the account of the
Treasury in the name of "U.S. Department of the Treasury -Mexican Securities Guarantee Fees."
11
ARTICLE VI
DISBURSEMENT AND INVESTMENT OF PROCEEDS
section 6.01.
Use of Proceeds.
A.
The net proceeds of each issuance of Debt Securities
shall be used in accordance with the purposes set forth in
Article I of the 1995 Framework Agreement and consistently with
the most recent Financial Plan (as defined in the 1995 Framework
Agreement) delivered by Mexico pursuant thereto.
B.
Each Request for Issuance of Guarantees delivered
pursuant to Section 3.02B hereof shall state:
(i)
the proposed date on which the terms of the Debt
Securities will be determined (the "Pricing Date") and the
proposed date on which such Debt Securities will be issued
(the "Settlement Date"), which shall be a Business Day;
(ii)
an outline of the proposed terms (including, but
not limited to, the aggregate principal amount, purchase
price, interest rate and maturity) of such Debt Securities,
or a description of the method by which such terms will be
determined;
(iii) an outline of the procedure for the sale of such
Debt Securities, including the procedures for underwriters
or agent selection (if any);
(iv)
the approximate dollar amount of the net proceeds
of the issuance of such Debt Securities;
(v)
that Mexico has separately furnished to the
Treasury Department, prior to the date of such Request for
Issuance of Guarantees, the information required pursuant to
paragraph 2 of Article V of the 1995 Framework Agreement;
(vi)
the intended use or uses of the net proceeds of
the issuance of the Debt Securities, and the approximate
date or dates on which each portion of such net proceeds is
anticipated to be so used; and,
(vii)
whether Mexico intends to invest all or any of
such net proceeds in accordance with Section 6.02 herein.
c. In the event that the Treasury Department shall approve
a proposed issuance of Debt Securities requested pursuant to a
Request for Issuance of Guarantees, (i) the Treasury Department
shall forward to Mexico and the FRBNY, not later than six
Business Days prior to the proposed date of issuance of such Debt
12
Securities, a copy of such Request for Issuance of Guarantees
countersigned on behalf of the Treasury Department by an
authorized signatory and (ii) Mexico shall send to the Treasury
Department and the FRBNY, in a form acceptable to the FRBNY and
the Treasury Department, not later than three Business Days prior
to the date of issuance of such Debt Securities a notice stating:
(i)
the actual Settlement Date, which shall be not
more than ten Business Days after the proposed Settlement
Date specified in the related Request for Issuance of
Guarantees;
(ii)
the terms (including, but not limited to, the
aggregate principal amount, purchase price, interest rate
and maturity) of such Debt Securities, which terms may not,
without the written consent of the Treasury Department, be
inconsistent in any material respect with the terms or
method of determining such terms set forth in the related
Request for Issuance of Guarantees;
(iii)
the net proceeds of the issuance of such Debt
Securities;
(iv)
if different from the information furnished in the
related Request for Issuance of Guarantees, the intended use
or uses of the net proceeds of the issuance of the Debt
Securities;
(v)
if different from the information furnished in the
related Request for Issuance of Guarantees, the approximate
date or dates on which each portion of such net proceeds
will be used; and,
(vi)
whether Mexico intends to invest all or any of
such net proceeds in accordance with Section 6.02 herein.
In the event that the information set forth in the
notice delivered by Mexico pursuant to this Section 6.01C shall
vary in material respects from the information contained in the
related Request for Issuance of Guarantees, then the Treasury
Department shall not be obligated to issue the Securities
Guarantees contemplated by such notice unless it shall approve
such variations by countersigning such notice with an authorized
signature.
section 6.02.
Investment of Proceeds.
In the event that
Mexico does not intend promptly to apply the full amount of the
net proceeds of the issuance of any Debt Securities for the
purposes set forth in the applicable Request for Issuance of
Guarantees, then all or any portion of such net proceeds may be
invested or reinvested by the FRBNY, at the written direction of
Mexico pursuant to procedures separately agreed with the FRBNY.
13
It shall be the sole responsibility of Mexico to ensure that any
investments made pursuant to this Section 6.02 are liquidated as
necessary to meet Mexico's requirements for the use of such net
proceeds, and the FRBNY shall have no responsibility in this
regard.
At maturity or upon early liquidation of any investments
provided for herein, the proceeds of such investments shall,
until disbursed in accordance with section 6.03, be deposited
into, and held by Mexico in an account of the Bank, acting as
fiscal agent of Mexico, at the FRBNY, and such proceeds may be
withdrawn by Mexico from time to time, upon notice to the FRBNY,
for purposes not materially inconsistent with the use of such
proceeds contained in the related Request for Issuance of
Guarantees. Mexico may, with the consent of the Treasury
Department change the use of proceeds specified in the Request
for Issuance of Debt to another purpose consistent with its
Financial Plan.
section 6.03.
Disbursement of Proceeds.
In the event that
all or any portion of the net proceeds of any issuance of Debt
Securities is invested in accordance with Section 6.02, no less
frequently than once each week after the Settlement Date for such
Debt Securities, Mexico shall provide the Treasury Department
with a statement executed by an authorized official stating:
(i)
the amount of such net proceeds to be applied
during the following calendar week, and the purposes for
which such net proceeds shall be applied during such week;
(ii)
the amount of such net proceeds applied on each
day during the preceding calendar week, and the purposes for
which such net proceeds were applied on each such day; and
(iii) the changes in use of the proceeds previously
specified in a Request for Issuance of Guarantee.
ARTICLE VII
REIMBURSEMENT OBLIGATION, SUBROGATION AND INDEMNIFICATION
section 7.01. Reimbursement Obligation. Mexico covenants
and agrees that it shall immediately reimburse the Treasury
Department in United States Dollars in the United States for any
amounts paid by the Treasury Department pursuant to any
securities Guarantee and for any costs incurred directly or
indirectly in connection with making payments on any Securities
Guarantee.
The obligation of Mexico to reimburse the Treasury
Department pursuant to this section 7.01 shall be backed by the
full faith and credit of Mexico and shall be absolute,
unconditional and irrevocable and shall not be subject to any
14
right of set-off, counterclaim, recoupment, defense, abatement,
deferment or reduction, whether with respect to the investors in
the Debt Securities, the Treasury Department or any other person.
Section 7.02. Subrogation.
In the event that the Treasury
Department makes any payment under any Securities Guarantee, the
Treasury Department shall, by operation of this Guarantee
Agreement and any applicable laws as may exist, be subrogated to
all of the rights and remedies of the respective holders of the
applicable Debt Securities who received such payment against
Mexico.
Section 7.03.
Indemnification. Mexico shall indemnify,
save and hold harmless the Treasury Department and any of its
agents, officers or employees at all times during the term of and
after termination of this Guarantee Agreement from and against:
A.
any and all liabilities, claims, charges, judgments,
damages, losses, expenses or payments asserted against, imposed
on, or incurred or made by the Treasury Department or any agent,
officer or employee (other than those resulting from the gross
negligence or willful misconduct of the Treasury Department or of
any such agent, officer or employee of the Treasury Department or
the inaccuracy or alleged inaccuracy of the Treasury Department's
representation in Section 11.02 herein) that may hereafter arise
out of the Treasury Department having guaranteed the Debt
Securities;
B.
any and all liabilities, claims, charges, judgments,
damages, losses, expenses or payments asserted against, imposed
on, or incurred or made by the Treasury Department or any such
agent, officer or employee that may hereafter arise out of
Mexico's performance under this Guarantee Agreement, the Debt
Securities, any securities Agreement, or Contract of Guarantee in
which the Treasury Department or any such agent, officer or
employee is joined as a party sought to be held liable, including
all liabilities, claims, charges, judgments, damages, losses,
expenses or payments in connection with any misstatement or
alleged misstatement or omission or alleged omission in any
Offering Document; and
C.
any and all liabilities, damages, losses or
deficiencies resulting from any misrepresentation, breach of
warranty or breach of any agreement on the part of Mexico with
respect to this Guarantee Agreement, the Debt Securities, any
Securities Agreement, or Contract of Guarantee.
15
ARTICLE VIII
LATE PAYMENT CHARGES
section 8.01. Late Payment Charges.
In the event that (i)
payment of any amount is not made when and as due under this
Guarantee Agreement, and (ii) there remains an amount due and
payable hereunder by Mexico to the Treasury Department (any such
amount being an "Overdue Amount"), the amount payable shall
thereafter be that Overdue Amount plus, to the extent permitted
by law, interest thereon (that interest being the "Late Charge")
computed in accordance with this Section 8.01. The Late Charge
shall accrue from the date the payment was due (the "Due Date")
to the actual date on which payment is made. The Late Charge
shall be computed on the basis of (x) actual days elapsed from
(but not including) the Due Date to the actual date on which
payment is made, and (y) the number of days occurring in the oneyear period beginning on the Due Oat-e. The--I..ate Charge shall
accrue at a rate (the "Late Charge Rate") established by the
Treasury Department equal to 500 basis points over the average
investment rate for 91-day (13-week) united States Treasury bills
auctioned immediately preceding the Due Date. The initial Late
Charge Rate shall be in effect until either the actual date of
payment or that date which is 91 days after the Due Date,
whichever occurs first.
If the Overdue Amount and the amount of
accrued Late Charge are not paid on or before that date which is
91 days after the Due Date, then an amount equal to the amount of
accrued Late Charge shall be added to the Overdue Amount, and the
amount then payable shall be the sum of the Overdue Amount and
the amount of the accrued Late Charge (the sum being the "New
Overdue Amount"), plus a Late Charge to be then determined in
accordance with the principles of the second preceding sentence
(but using the investment rate from the auction of 91-day (13week) united states Treasury bills immediately preceding that
date rather than such auction preceding the Due Date). For so
long as any Overdue Amount, or, if applicable, any New Overdue
Amount, remains unpaid, the Late Charge Rate shall be
redetermined in accordance with the principles of the third
preceding sentence at 91-day intervals from the scheduled date of
payment (using the investment rate from the most recently
auctioned 91-day (13-week) United states Treasury bills), and
shall be applied to the Overdue Amount, or if applicable, the New
Overdue Amount, and all amounts of accrued Late Charge to the
actual date of payment. The obligation of Mexico to pay any Late
Charge pursuant to this Section 8.01 shall be backed by the full
faith and credit of Mexico and shall be absolute, unconditional
and irrevocable and shall not be subject to any right of set-off,
counterclaim, recoupment, defense, abatement, deferment or
reduction, whether with respect to the investors in the Debt
Securities, the Treasury Department or any other person.
16
ARTICLE IX
REMEDIES
section 9.01. Remedies.
If the Treasury Department
determines that an event specified in paragraph 1 of Article VII
of the 1995 Framework Agreement shall have occurred and be
continuing, then, in each and every such event, the Treasury
Department may, upon notice to Mexico, require Mexico either to
(i) Defease the guaranteed portion of any or all of the
outstanding Debt securities or (ii) redeem any or all of such
Debt Securities as may be redeemed pursuant to the terms and
conditions of such Debt Securities (or, if permitted by the terms
of such Debt Securities, the guaranteed portion thereof).
section 9.02. Rebate.
In the event of any redemption or
defeasance pursuant to section 9.01, the Basic Fee relating to
such redeemed or defeased Debt securities shall be recalculated
on the basis of those principal and interest payments guaranteed
by the Treasury Department until the date of redemption or
defeasance and the difference shall be refunded to Mexico
provided Mexico has paid to the Treasury Department all amounts
payable under this Agreement, including costs.
section 9.03 No Waiver: Cumulative Remedies.
No failure,
delay, or refrainment by the Treasury Department in the exercise
of any right or remedy accruing to the Treasury Department under
this Guarantee Agreement, any Securities Agreement or any
contract of Guarantee shall operate as a waiver by the Treasury
Department of such right, power or remedy thereof, nor shall any
single or partial exercise of any such right, power or remedy
preclude any other or further exercise thereof or the exercise of
any other right, power or remedy. The rights, powers and
remedies provided herein are cumulative and not exclusive of any
rights, powers or remedies provided by law.
ARTICLE X
REDEMPTION; DEFEASANCE
section 10.01.
Redemption/Defeasance.
A. Upon its determination, after consultation with Mexico,
that Mexico has well-established access to funds on reasonable
market terms, the Treasury Department may require Mexico to
secure resources in the international markets and apply such
resources:
(i) to repurchase pesos for dollars under any or all of
17
the Medium-Term Swaps, Treasury Short-Term Swaps or other
short-term swaps with Treasury Backing; and/or
(ii) either to (I) defease the guaranteed portion of
any or all debt securities for which Securities Guarantees
have been issued or (II) redeem any such debt securities
that are subject to early redemption (or, if permitted by
the terms of such debt securit'ies, the guaranteed portion
thereof);
unless Mexico is unable, using its best efforts, to identify
replacement resources (in addition to funds needed to be raised
in the market pursuant to the Financial Plan) on reasonable
market terms with maturities at least as long as the remaining
maturities of the Primary Resources being replaced within 90 days
following notification by the Treasury Department to Mexico of
its intention to require such prepayment.
B.
If an event described in paragraph (13) (b) of Annex A
of the Framework Agreement shall have occurred, and if the
consultation contemplated by such paragraph does not result in
agreement between Mexico and the Treasury Department as to a
SUbstitute assured source of repayment or other solution
satisfactory to the Treasury Department, then the Treasury
Department, if such event is continuing may require Mexico upon
not less than 7 days notice thereof:
(i) to repurchase pesos for dollars under any or all of
the Medium-Term Swaps, Treasury Short-Term Swaps or other
short-term swaps with Treasury Backing; and
(ii) either to (I) defease the guaranteed portion of
any or all debt securities for which Securities Guarantees
have been issued or (II) redeem any such debt securities
that are subject to early redemption (or, if permitted by
the terms of such debt securities, the guaranteed portion
thereof) .
C.
In addition, Mexico may at any time redeem or defease
any or all of the outstanding Debt Securities as may be redeemed
pursuant to the terms and conditions of such Debt Securities.
section 10.02. Rebate of Basic Fee.
In the event of any
redemption or defeasance pursuant to Section 10.01, the Basic Fee
relating to such redeemed or defeased Debt Securities shall be
recalculated on the basis of those principal and interest
payments guaranteed by the Treasury Department until the date of
redemption or defeasance and the difference shall be refunded to
Mexico.
18
ARTICLE XI
MISCELLANEOOS
section 11.01. Communications. All communications shall be
in English, unless the Parties otherwise agree in writing. Any
notice, request, document or other communication submitted by any
Party under this Guarantee Agreement shall be in writing, by
mail, telecopier, tested telex or personal delivery, shall refer
to the applicable Mexico/Treasury Department securities Guarantee
number, and shall be deemed duly given or sent when delivered to
such Party at the following addresses:
To Mexico
Mail Address: Director General of Public Credit
Ministry of Finance and Public Credit
Insurgentes Sur 826, pi so 9
Colonia del Valle
Mexico, D.F.
03100, Mexico
Telephone:
525-682-2799
Facsimile:
525-543-3446
Copy To:
To Department of the Treasury
Mail Address: Office of the Assistant Secretary
for International Affairs
u.s. Department of the Treasury
Room 3430
Washington, D.C.
20220
Telephone:
(202) 622-0417
(202) 622-0060
Copy To:
To the Federal Reserve Bank of New York
Mail Address:
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
Telephone:
(212) 720-5222
Facsimile:
(212) 720-7621
These addresses may be changed by a Party upon written
notice to all other Parties.
section 11.02. Representation.
Each of the Treasury
Department and Mexico warrants that it has full power and
authority to enter into and perform its obligations under this
Guarantee Agreement (Except for any authorizations and approvals
required by Mexico in connection with the issuance of Debt
19
Securities), and has taken and will take all necessary or other
actions to authorize the performance of the terms and conditions
of this Guarantee Agreement.
section 11.03. Amendments. This Guarantee Agreement may be
amended by the mutual agreement of the parties hereto; provided,
however, that no provision of this Guarantee Agreement may be
amended, modified, supplemented, waived, discharged or terminated
orally but only by an instrument in writing.
section 11.04. Term of commitment to Issue Securities
Guarantees. This commitment by the Treasury Department to issue
securities Guarantees under this Guarantee Agreement (but not the
Securities Guarantees themselves) shall expire on February 21,
1996, unless extended pursuant to paragraph 8 of Article III of
the 1995 Framework Agreement. This commitment by the Treasury
Department to issue Securities Guarantees under this Guarantee
Agreement may also be terminated at any time by mutual agreement
of the Parties.
section 11.05. Expenses. All out of pocket expenses
reasonably incurred in connection with complying with this
Guarantee Agreement shall be for the account of Mexico.
section 11.06. Survival of Covenants. All covenants,
agreements and warranties made herein shall survive the execution
and delivery of this Guarantee Agreement and shall remain in full
force and effect until repayment in full of the guaranteed
portion of the Debt securities and of all amounts owed to the
Treasury Department pursuant to this Guarantee Agreement.
section 11.07. Governing Law; Submission to Jurisdiction;
This Guarantee Agreement shall be governed by and construed in
accordance with the laws of the State of New York, to the extent
not inconsistent with Federal law of the United States. Mexico
hereby irrevocably submits for all purposes of or in connection
with this Guarantee Agreement to the exclusive jurisdiction of
the United states District Court located in the Borough of
Manhattan in New York City. The United states hereby irrevocably
submits for all purposes of or in connection with this Guarantee
Agreement to the exclusive jurisdiction of the Federal courts of
the united states. Mexico and the United States each hereby
irrevocably waive, to the fullest extent, the defense of an
inconvenient forum to the maintenance of an action or proceeding
brought pursuant to this section 11.08.
In light of the fact
that the Financing Arrangements, including this Agreement,
constitute commercial activities, and in accordance with normal
practices, Mexico waives immunity from (i) attachment in aid of
execution, (ii) execution, or (iii) attachment prior to the entry
of judgment, for all purposes of Title 28 united States Code
sections 1610 and 1611 in respect of their obligations under the
Financing Arrangements, including this Agreement.
20
Section 11.08. Service of Process. Mexico hereby
irrevocably appoints the person for the time being and from time
to time acting as or discharging the function of the Consul
General of Mexico in New York, New York (the "Process Agent"),
with an office, on the date hereof, at 8 East 41st Street, New
York, New York, 10017, united states, as its agent to receive on
behalf of Mexico and its property, service of copies of the
summons and complaint and any other process which may be served
in any such action or proceeding brought in a Federal court
sitting in New York City. Such service may be made by mailing or
delivering a copy of such process to Mexico in care of the
Process Agent at the address specified above for such Process
Agent, and Mexico hereby irrevocably authorizes and directs such
Process Agent to accept such service on its behalf.
section 11.09. Counterparts. This Guarantee Agreement may
be executed in separate counterparts, each of which when so
executed and delivered shall be an original, but all of which
together shall constitute but one and the same instrument.
ARTICLE XII
ENTRY INTO FORCE
This Guarantee Agreement may be executed in counterparts and
shall enter into force on the date of the last signature hereto.
IN WITNESS WHEREOF, this Guarantee Agreement is signed and
executed by the authorized representatives of Mexico and the
Treasury Department.
DONE at Washington, this 21st day of February, 1995,
duplicate.
FOR THE GOVERNMENT OF THE
UNITED STATES OF AMERICA
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FOR THE GOVERNMENT OF THE
UNITED -MEXICAN STATE§...
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Department of the Treasury
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Minis~~y
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of Finance
Public Credit-----___
MEDIUM-TERM EXCHANGE STABILIZATION AGREEMENT
This Medium-Term Exchange Stabilization Aqreement
("Medium-Term Agreement"), dated as of February 21,
1995, is between the United States Department of the
Treasury (the "Treasury") and the Government of the
United Mexican States, acting through the Ministry of
Finance and Public Credit ("Mexico") (together,
"Parties"), with the Banco de Mexico acting as fiscal
agent for Mexico (the "Bank").
WHEREAS, monetary and financial cooperation between the
United States of America and Mexico is an important factor in
carrying out the objectives of the International Monetary Fund,
of which both countries are members, consistent with their
obligations, as members, on orderly exchange arrangements and a
stable system of exchange rates;
WHEREAS, stabilization arrangements have been in effect
between the two countries since 1941, and have proved beneficial
to the financial relationship between the two countries;
WHEREAS, the Parties have entered into the North American
Framework Agreement, dated April 26, 1994, among the Government
of the United Mexican States, the Bank, the Treasury, the Feder.~l
Reserve Bank ot New York acting at the direction of the Federal
Open Market Committee, and the Bank of Canada, as amended from
time to time (the "NAFA"), the Exchange Stabilization Agreement,
dated April 26, 1994, as amended from time to time (the "ESA"),
and the Temporary Exchange Stabilization Agreement, dated
January 4, 1995, as amended from time to time (the ItTESA"), to
provide short-term swap facilities;
WHEREAS, the Parties and the Bank have entered into a U.S.Mexico Framework Agreement for Mexican Economic Stabilization
(the "1995 Framework Agreement"), dated as of February 21, 1995,
which provides for Mexico'S ability to (x) make and use mediumterm purchases under this Medium-Term Agreement and (y) issue
debt securities to be guaranteed by the Exchange Stabilization
Fund of the Treasury (the "ESF") under the terms and conditions
set forth in the Guarantee Agreement between the Treasury and
Mexico, dated as of February 21, 1995 (the "Guarantee
Agreement") ;
WHEREAS, the Parties have entered into the oil Proceeds
Facility Agreement, dated as-9f February 21, 1995, among Mexico,
the Bank, Petroleos Mexicanos~ P.M.I. Comercio Internacional S.A.
de C.V., P.M.I, Trading Limited, the Treasury, and the Federal
Reserve Bank of New York (the "oil Proceeds Facility Agreement");
WHEREAS, the Parties have entered into the Guarantee
Aqreement;
2
NO., THEREFORE, in order to further such objectives and in
consideration of the mutual covenants contained herein and in the
1995 Framework Agreement, the Parties agree as follows:
1. commitments by the Parties to Purchase and Repurchase
CUrrency.
Subject to the terms and conditions of this Medium-Term
Agreement and the 1995 Framework Agreement, the Treasury, through
the ESF, and Mexico agree to purchase and subsequently repurchase
Mexican pesos and U.S. dollars. The purchases and the subsequent
repurchases under this Medium-Term Agreement shall be referred
to, collectively, as "Medium-Term Swap Transactions" and,
individually, as a "Medium-Term Swap Transaction." The Parties
agree that Medium-Term Swap Transactions shall be commercial
trC'.nsactions.
2.
Terms of NAFA, ESA, and TESA-Are-Not-Applicable.
Except as otherwise provided in the 1995 Framework
ACireement, Medium-Term Swap Transactions are not subject to the
terms and conditions for any drawing pursuant to the NAFA, the
ESA, and the TESA. Any Medium-Term Swap Transaction will be
governed solely by the terms of this Medium-Term Agreement and
the 1995 Framework Agreement.
1.
Conditions to the Treasury Commitment.
The Treasury shall be under no obligation to sell any U.s.
dollars to Mexico under this Medium-Term Agreement unless and
until it determines that the following conditions precedent have
been satisfied in connection with each request by Mexico to
purchase U.s. dollars.
Ca)
Maximum Commitment Amount. At the time of such request
by Mexico to purchase U.S. dollars, the amount of U.S. dollars
which Mexico requests to purchase under this Medium-Term
Agreement, when added to the sum of (x) the aggregate amount of
u.s. dollars purchased by Mexico under this Medium-Term Agreement
that are outstanding at the time of such request, (y) the
Outstanding NAFA Swap Amount (as such term is defined in the
Guarantee Agreement), and (z) the Calculated Guarantee Amount (as
such term is defined in the Guarantee Agreement) (the sum of (y)
and (z) being the "Other Facilities Amount"), shall not exceed in
the aggregate twenty billion u.s. dollars (U.S.$20,000,000,000).
(b)
Advance Notice Requirement. Mexico shall, through the
Bank, provide notice of such request to purchase U.s. dollars to
the Treasury and by authenticated telecommunication to the
Federal Reserve Bank of New York, acting as Fiscal Agent for the
Treasury (the "FRBNytl), in a form acceptable to each, no later
3
than seven FRBNY Business Days (an "FRBNY Business Day" being any
day on which the FRBNY is open for business) in advance of the
proposed purchase date, which specifies:
(i) the date that Mexico proposes for Mexico's purchase
of u.s. dollars from the Treasury and the Treasury's related
purchase of Mexican pesos from Mexico, which date shall be
an FRBNY Business Day and a Mexico City Business Day (a
"Mexico City Business Day" being any day on which the Bank
is open for business);
(ii) the amount of u.s. dollars that Mexico requests to
purchase;
(iii) the date or dates on which Mexico proposes that
the Treasury repurchase from Mexico all or any installment
of the u.s. dollars sold to Mexico and that Mexico
repurchase from the Treasury all or any installment of the
Mexican pesos sold the Treasury, each of which dates shall
be (A) a Calendar Quarter Date (a "Calendar Quarter Date"
being March 31, June 30, September 30, and December 31 of
each year, or, if such date is not an FRBNY Business Day and
a Mexico city Business Day, the first day thereafter that is
both an FRBNY Business Day and a Mexico City Business Day),
and (B) not later than five years from the proposed purchase
date;
(iv) if Mexico's repurchase is to occur in two or more
installments (collectively, "Installments" and,
individually, an "Installment"), the u.s. dollar amount of
each Installment;
(v) whether Mexico will invest all or any portion of
the purchased u.S. dollars in a Treasury Certificate (as
such term is defined in paragraph 5(b) below) and, if so,
the amount of such investment;
(vi) whether Mexico proposes to redeem all or any part
of the Treasury Certificate on or before the maturity of the
Treasury Certificate, and, if so, a schedule of the date and
amount of each such early redemption of the Treasury
Certificate; and
(vii) that Mexico has separately furnished to the
Treasury, prior to the date of such request, the information
required to be submitted in advance of any such purchase, as
set forth in paragraph 2 of Article V of the 1995 Framework
Agreement.
(e)
Consultation and Aareement. The Parties shall have
consulted and agreed on whether such purchase is consistent with,
and the Treasury shall have been satisfied that such purchase is
4
consistent with, the terms and conditions of the 1995 Framework
Agreement and the Financial Plan (as such term is defined in the
1995 Framework Agreement) in effect at such time.
(d) Agreement and Notice by the Treasury. The FRBNY must
receive, no later than two FRBNY Business Days in advance of the
Value Date (as such term is defined below), an instruction from
the Treasury, in an authenticated telecommunication in a form
acceptable to the FRBNY, that sets forth Treasury's and Mexico's
agreement to these terms:
(i) the agreed-upon date (the "Value Date") for
Mexico's purchase of u.s. dollars and the Treasury's related
purchase of Mexican pesos;
(ii) the amount of
u.s.
dollars to be purchased;
(iii) the date or dates (collectively, the "Maturity
Dates" and, individually, a "Maturity Daten) on which the
Treasury will repurchase all or any Installment of the u.s.
dollars sold to Mexico and Mexico will repurchase all or any
Installment of the related Mexican pesos sold to the
Treasury, and, if the repurchase is to occur in
Installments, the amount, in u.s. dollars, of each
Installment; and
(iv) the amount of u.s. dollars to be invested in a
Treasury Certificate, and the schedule specifying the dates
and amounts of any early redemptions of the Treasury
Certificate.
Each Maturity Date shall be a Calendar Quarter Date. The
Treasury shall be under no obligation to send such authenticated
telecommunication to the FRBNY unless and until the Treasury
determines that the conditions precedent set forth in paragraphs
3(a) through (c) above and in the 1995 Framework Agreement,
including those in Article V, have been met.
4.
Exchange Rate Determinations.
The u.s. dollar/Mexican peso exchange rate (the "Exchange
Rate") that shall apply to (i) each purchase of u.s. dollars and
Mexican pesos under this Medium-Term Agreement, (ii) each payment
of accrued interest on each Mexico Certificate (as such t~rm is
defined in paragraph 6(b) below), and (iii) each repurchase of
Mexican pesos under this Medium-Term Agreement, shall be
determined as provided in this paragraph. The Exchange Rate for
any Exchange Rate Determination Date (as such term is defined
below) shall be determined jointly by the FRBNY and the Bank by
reference to rates of that date (the "Reference Date") which is
both at least two FRBNY Business Days and two Mexico City
Business Days before, and closest to, that Exchange Rate
5
Determination Date. The Exchange Rate determination shall be
based on three quotations of the U.S. dollar/Mexican peso
exchange rate, obtained on the Reference Date for the Exchange
Rate Determination Date by FRBNY and the Bank from banks acting
in the Mexico City foreign exchange market. With respect to each
Medium-Term Swap Transaction, the Treasury shall request the
FRBNY, and Mexico shall request the Bank, to determine jointly
the Exchange Rate as of the Value Date of such Medium-Term Swap
Transaction. Thereafter, and so long as such Medium-Term Swap
Transaction remains outstanding, the Treasury shall request the
FRBNY, and Mexico shall request the Bank, to determine jointly a
new Exchange Rate for such Medium-Term Swap Transaction for each
succeeding Calendar Quarter Date (each Value Date and Calendar
Quarter Date being an "Exchange Rate Determination Date"). The
Exchange Rate determined for a given Exchange Rate Determination
Date shall apply from that date until the following Calendar
Quarter Date.
5.
Application of U.S. Dollars Purchased by Mexico.
The following provisions shall apply to each purchase of
u.s. dollars by Mexico made in accordance with paragraph 3.
(a)
Deposit of U.S. Dollars. The Treasury shall instruct
the FRBNY to credit, on the Value Date, the amount of u.S.
dollars purchased by Mexico to the account at the FRBNY in the
name of "Banco de Mexico as Fiscal Agent for Mexico -- MediumTerm Funds Account" (the "Bank's MTF Account").
(b)
Investment of u.s. Dollars in Treasurv Certificates of
Indebtedness. To the extent that u.s. dollars credited to the
Bank's MTF Account are not required immediately for use in
accordance with Article V of the 1995 Framework Agreement, and
subject to the Treasury's prior consent in the authenticated
telecommunication referred to in paragraph 3(d) above, Mexico
shall cause the Bank to authorize the FRBNY to debit the Bank's
MTF Account by the amount not so required and invest this amount
in a non-transferable United States Treasury Certificate of
Indebtedness (the "Treasury Certificate"), which the Treasury,
through the FRBNY, is prepared to issue to Mexico, at par, to
mature on a date which is no later than 91 days after the Value
Date of the related u.S. dollar purchase. The Treasury
Certificate will be held in the securities custody account at the
FRBNY in the name of "Banco de Mexico as Fiscal Agent for
Mexico -- Medium-Term Custody Account" (the "Bank's MTC
Account") .
(c)
Early Redemptions of Treasury Certificates. The
Treasury Certificate may be redeemed, in whole or in part, prior
to its maturity, upon two FRBNY Business Days' prior notice from
the Bank to the FRBNY by authenticated telecommunication and the
Treasury, at par plus accrued interest, provided that (x) Mexico
6
shall have delivered to the Treasury, through the Bank, a
schedule specifying the dates and amounts of all early
redemptions of the Treasury certificate, as provided in paragraph
3(b) (vi) above, and (y) the Treasury shall have notified the
FRBNY, by authenticated telecommunication, of its consent to the
early redemption requested. Mexico shall notify the Treasury, by
authenticated telecommunication from the Bank to the FRBNY, of
any proposed change in the date or amount of any scheduled early
redemption at least two FRBNY Business Days in advance of such
change.
(d)
Interest Payable to Mexico on Treasury certificates.
Each Treasury Certificate will bear interest at a rate (the
"Treasury certificate Interest Rate") which is equal to either
(x) the average investment rate for 91-day (13-week) United
States Treasury bills auctioned immediately preceding the date of
issuance of the Treasury Certificate, or (y) if such average
investment rate, stated in terms of percentage carried to two
decimal places, is not a multiple of 0.05, then that rate which
is the next higher multiple of 0.05.
Interest will be computed
on the basis of (x) the actual number of days elapsed from (but
not including) the date of issuance of the Treasury Certificate
to (and including) the actual date on which the Treasury
certificate is redeemed, and (y) the number of days occurring in
the one-year period beginning on the date of issuance of the
Treasury certificate.
6.
Application of Mexican Pesos Purchased by the Treasury.
(a)
Initial Deposit of Mexican Pesos. Using the Exchange
Rate determined under paragraph 4 above, Mexico shall instruct
the Bank to credit, on the Value Date of each Medium-Term Swap
Transaction, the amount of Mexican pesos purchased by the
Treasury in exchange for the amount of u.s. dollars purchased by
Mexico under such Medium-Term Swap Transaction (the "Base Peso
Purchase") to an account on the books of the Bank in the name of
"Federal Reserve Bank of New York as Fiscal Agent of the United
States, Special Account No.3" ("Treasury's Special Account No.
3") in accordance with instructions delivered by the FRBNY to the
Bank by authenticated telecommunication.
(b)
Investment of Mexican Pesos in Mexico certificate ot
DeDosit.
Immediately upon crediting the Treasury's Special
Account No. 3 with the amount of Base Peso Purchase in accordance
with paragraph 6(a) above, the Bank shall debit such account in
the amount of such Base Peso Purchase and invest such amount in a
non-transferable Mexico Certificate of Indebtedness (the "Mexico
Certificate") which Mexico, through the Bank, shall issue to the
Treasury, at par, to mature on any date on or before the Maturity
Date of the U.S. dollar purchase. The Bank shall promptly
confirm such investment to the FRBNY by authenticated
telecommunication.
If the U.S. dollar purchase is to be repaid
7
in Installments, Mexico shall issue through the Bank a Mexico
certificate for each Installment, at par, to mature on or before
the Maturity Date of that Installment. The Mexico certificate
shall be held in a securities custody account in the name of
"Federal Reserve Bank of New York as Fiscal Agent of the Treasury
-- Mexico CUstody Account" at the Bank (the "Treasury's CUstody
Account").
(c)
Early Redemptions ot Mexico certificates. The Treasury
may redeem any Mexico Certificate (the par value of which will be
adjusted from time to time under paragraph 6(f) below) or
withdraw any amount of pesos deposited in the Treasury's Special
Account No. 3 (the amount of which will be adjusted from time to
time under paragraph 6(f) below), in whole or in part, at any
time, upon two Mexico City Business Days' prior notice, by
authenticated telecommunication from the FRBNY to the Bank.
In
the event of such withdrawal, Mexico agrees to pay the Treasury,
on the withdrawal date, the unpaid and accrued interest on the
amount of Mexican pesos being withdrawn, in U.S. dollars in the
amount determined pursuant to paragraphs 6(d) and 6(e) below.
(d)
Interest Payable to the Treasury on Mexico
certificates.
Each Mexico Certificate shall earn interest at a
rate calculated as provided in this paragraph 6(d), which rate is
intended to be at least sufficient to cover the current U.S.
Government credit risk cost for Mexico. This rate (the "Mexico
certificate Interest Rate") shall be calculated by the Treasury
on the Value Date and, thereafter, on the last day of the
preceding Interest Period (as such term is defined below) for
each Mexico certificate outstanding and shall equal the sum of
the following components:
(i) a rate per annum, which shall equal either (x) the
average investment rate (the "Yield") for 91-day (13-week)
United States Treasury bills auctioned on the auction date
immediately preceding the f~rst day of such Interest Period
or (y) if such Yield, stated in terms of percentage carried
to two decimal places, is not a multiple of 0.05, then that
rate which is the next higher multiple of 0.05; and
(ii) a spread (the "Credit Risk Premium"), determined
as of the Value Date of such Base Peso Purchase, and
remaining fixed until the last Maturity Date for such Base
Peso Purchase, which spread shall be computed by the
Treasury and shall equal the greater of:
(A) the appropriate credit risk premium which
would be set, in accordance with the Interagency Credit
Risk Assessment System ("ICRAS") on a loan from the
united States to Mexico, having the same Maturity
Date(s) as the related U.S. dollar purchase, and with
8
accrued interest payable every Interest Payment Date,
as defined below; or
(B) the sum, in u.s. dollars, of (x) the aggregate
amount of all outstanding Medium-Term Swap Transaction
purchases of u.S. dollars as of the Value Date of such
Base Peso Purchase, and (y) the Other Facilities'
Amount outstanding (the sum of (x) and (y) being the
"Total Outstanding Amount"), which spread shall be
computed by the Treasury as follows:
(1) 225 basis points if the Total Outstanding
Amount is less than or equal to U.S.$5 billion;
(2) 275 basis points if the Total Outstanding
Amount is greater than U.S.$5 billion and less
that or equal to U.S.$10 billion;
(3) 325 basis points if the Total Outstanding
Amount is greater than U.S.$10 billion and less
than or equal to U.S.$15 billion; or
(4) 375 basis points if the Total Outstanding
Amount is greater than U.S.$15 billion.
Interest will be computed on the basis of (x) the actual number
of days elapse from (but not including) the Value Date of the
related Base Peso Purchase to (and including) the actual date on
which the Mexico Certificate is redeemed, and (y) the number of
days occurring in the one-year period beginning on the Value Date
of the related Base Peso Purchase.
For so long as each Mexico
Certificate shall remain outstanding, a new Mexico Certificate
Interest Rate for such Mexico Certificate shall be redetermined
and reset by the Treasury on the last day of the preceding
Interest Period in accordance with the principles of this
paragraph 6(d). Thereupon, the Treasury shall notify the FRBNY
of the new Mexico Certificate Interest Rate, and the FRBNY shall
promptly notify the Bank, by authenticated telecommunication, of
such new Mexico Certificate Interest Rate.
As used herein,
"Interest Period" means, for each Base Peso Purchase, (x)
initially the period from (but not including) the Value Date of
such Base Peso Purchase to (and including) the first Calendar
Quarter Date to occur after such Value Date and (y) thereafter,
the period from (but not including) the last day of the preceding
Interest Period to (and including) the first Calendar Quarter
Date to occur thereafter. As used herein, "Interest Payment
Date" means the last day of each Interest Period.
9
ee)
Payment of ouarterly Interest in
u.s.
Dollars.
(i) Time of Payment.
Interest accrued in any Interest
Period on the amount of each Base Peso Purchase that is
represented by a Mexico Certificate held in the Treasury's
Custody Account shall be payable on each Interest Payment
Date. On each Interest Payment Date, Mexico shall convert
the amount of accrued and unpaid interest on the Mexico
certificate at the rate of exchange referred to in paragraph
6(e) (ii) below and transfer the resulting U.S. dollars (the
"Interest Amount") to the FRBNY for credit to the account on
the books of the FRBNY in the name of "Treasury's Special
Funds Account No.1" (the "Treasury Account") .
(ii) Exchange Rate for Interest Payments. The Treasury
will bear no exchange rate risk for any unpaid and accrued
interest on any outstanding Medium-Term Swap Transaction.
On each Interest Payment Date, Mexico shall use the Exchange
Rate determined under paragraph 4 above for the immediately
preceding Exchange Rate Determination Date to calculate the
U.S. dollar amount of interest accrued and unpaid with
respect to the Interest Period ending on such Interest
Payment Date or part thereof.
(f)
Maintenance of ValUe. Mexico shall maintain the value
of pesos that remain on deposit in the Secretary's Special
Account No.3, or are represented by any Mexico Certificate in
the Treasury's Custody Account, relative to the U.S. dollar in
the following manner. On each Exchange Rate Determination Date,
(i) the Bank shall, acting on behalf of Mexico, credit or, upon
instruction by the FRBNY in an authenticated telecommunication
debit, as the case may be, the Treasury's Special Account No.3
using the Exchange Rate calculated for that date, and (ii) Mexico
shall, through the Bank, adjust the par value of each Mexico
Certificate in the Treasury's Custody Account, so that the United
States dollar value of such peso deposit(s) and Mexico
Certificate(s), as calculated on that date using the Exchange
Rate for that date, is the same as the United States dollar value
of such peso deposit(s) and Mexico Certificate(s) calculated on
the same Exchange Rate Determination Date using the Exchange Rate
for the preceding Exchange Rate Determination Date. Mexico and
the Treasury will separately agree on Mexico's obligation to
maintain the value of such peso deposit(s) and Mexico
Certificate(s) in the event of withdrawals or redemptions by the
Treasury on dates other than an Exchange Rate Determination
Dates.
until such agreement is reached, the Treasury agrees that
it will withdraw such peso deposit(s), or request redemption of
Mexico certificate(s) for value, on dates that are Exchange Rate
Determination Date.
10
7.
obligation or the Parties To Repurchase Said currencies and
Pay Accrued Interest.
(a)
Obliqation to Repurchase. On or before the Maturity
Date for each U.S. dollar purchase or Installment, the Treasury
and Mexico shall repurchase and repay, respectively, the U.S.
dollars and Mexican pesos that correspond to such purchase or
Installment.
(b)
Applicable Exchanqe Rate. The Treasury will bear no
exchange rate risk for any purchase which has not been repaid.
Mexico agrees to pay the Treasury in U.S. dollars the full amount
of any Installment or U.S. dollar purchase outstanding on the
Maturity Date of such Installment or U.S. dollar purchase. On
the Maturity Date of such Installment or U.S. dollar purchase,
the Treasury shall resell to Mexico the amount of the Base Peso
Purchase that corresponds to such Installment or U.S. dollar
purchase, calculated at the Exchange Rate for the Exchange Rate
Determination Date immediately preceding the Maturity Date of
such Installment or U.S. dollar purchase.
(c)
Payment of Accrued Interest. In addition to the
obligation to repurchase Mexican pesos sold to the Treasury,
Mexico shall pay, on the Maturity Date for each U.S. dollar
purchase or Installment, all accrued and unpaid interest on the
Mexican pesos being repurchased as provided in paragraphs 6(d)
and 6(e) above.
8.
Nonpayments.
(a)
RedemDtion of Treasury Certificates. With respect to
any outstanding purchase of U.S. dollars, in the event that
Mexico has not, by 1:00 p.m. (New York time) (x) on any Interest
Payment Date, paid the Interest Amount due on that Interest
Payment Date in accordance with paragraph 6(e), or (y) on the
Maturity Date of any U.S. dollar. purchase or any Installment,
repaid in full the amount of that purchase or Installment then
due, and paid all accrued and unpaid interest thereon, in
accordance with paragraph 7 (each Interest Payment Date and the
Maturity Date being a "Due Date"), Mexico hereby irrevocably
authorizes and instructs the FRBNY to redeem, on such Due Date,
any Treasury Certificate that was purchased with the U.S. dollar
proceeds of that outstanding purchase or Installment, and to
transfer all of the proceeds of such redemption to the Treasury
Account to, first, pay any Interest Amount then due, and,· second,
repay the u.S. dollar purchase or Installment outstanding then
due.
(b)
Redemption of Other Treasury Certificates. Thereafter,
in the event that Mexico still has due and unpaid obligations to
pay interest or other amounts to the Treasury under this MediumTerm Agreement, Mexico hereby irrevocably authorizes and
11
instructs the FRBNY to redeem in advance of maturity any other
Treasury Certificates and to transfer all of the proceeds of such
redemption to the Treasury Account until the Treasury receives
payment in full of all obligations due to it under this MediumTerm Agreement, including any late payment charges determined
under paragraph S(c) below.
(c)
Late Payment Charges. Thereafter, in the event that
Mexico still has due and unpaid obligations to pay interest or
other amounts to the Treasury under this Medium-Term Agreement
(any such remaining amount in the aggregate being then an
"Overdue Amount"), the amount payable shall be that Overdue
Amount plus, to the extent permitted by law, interest thereon
(that interest being the "Late Charge") computed in accordance
with this paragraph.
The Late Charge for an Overdue Amount shall
accrue from the Due Date of the Overdue Amount to the actual date
on which payment is made.
The Late Charge shall be computed on
the basis of (x) actual number of days elapsed from (but not
including) the Due Date-of-the-Overdue Amount to (and-including)
the actual date on which payment is made, and (y) the number of
days occurring in the one-year period beginning on the Due Date
of the Overdue Amount. The Late Charge shall accrue at a rate
(the "Late Charge Rate") equal to 500 basis points over the
average investment rate for 91-day (13-week) United states
Treasury bills auctioned immediately preceding the Due Date. The
initial Late Charge Rate shall be in effect until either the
actual date of payment or the next Interest Payment Date,
whichever occurs first.
If the Overdue Amount and the amount of
accrued Late Charge are not paid on or before the next Interest
Payment Date, then an amount equal to the amount of accrued Late
Charge shall be added to the Overdue Amount, and the amount then
payable shall be the sum of the Overdue Amount and the amount of
the accrued Late Charge (the sum being the "New Overdue Amount"),
plus a new Late Charge on the New Overdue Amount accruing at a
new Late Charge Rate to be then determined in accordance with the
principles of the second preceding sentence (but using the
investment rate from the auction immediately preceding such
Interest Payment Date rather than the auction preceding the Due
Date).
For so long as any Overdue Amount, or, if applicable, any
New Overdue Amount, remains unpaid, the Late Charge Rate shall be
redetermined in accordance with the principles of the third
preceding sentence on each succeeding Interest Payment Date
(using the investment rate from the auction immediately preceding
such Interest Payment Date), and shall be applied to the Overdue
Amount, or if applicable, the New Overdue Amount, and all amounts
of accrued Late Charge to the actual date of payment. Any funds
received from Mexico after the Due Date shall be applied first to
the payment of any accrued and unpaid Late Charge and then to the
payment of any Overdue Amount or, if applicable, the New Overdue
Amount.
12
9.
Authority ot the FRBNY.
In carrying out its functions as provided in this MediumTerm Agreement, the FRBNY shall have the authority to interpret
and act under (x) the terms of this Medium-Term Agreement, and,
if applicable, the 1995 Framework Agreement, (y) any irrevocable
authorizations and instructions received by it hereunder, and (z)
any notifications or other communications that the parties hereto
shall send or transmit to the FRBNY, in such manner as the FRBNY,
in its sale judgement, deems reasonable.
In making any
calculations of the purchases and repayments provided for under
this Medium-Term Agreement, the FRBNY shall have the authority to
make rounding adjustments to any amounts.
Except for
reimbursement of FRBNY's costs and expenses, no compensation
shall be due from Mexico for services rendered by the FRBNY under
the authorizations and instructions in this Medium-Term
Agreement.
In carrying out its functions under this Medium-Term
Agreement, the FRBNY shall be liable only for its failure to
exercise reasonable care.
10
Warranties.
(a) Authority.
Each of the Treasury and Mexico warrants
that it has full power and authority to enter into and perform
its obligations under this Medium-Term Agreement and has taken
and will take all necessary actions to authorize the performance
of the terms and conditions of this Medium-Term Agreement.
(b)
covenant to Inform.
In the event there is any change
in law, act or other Change of fact or circumstance as a result
of which Mexico is not able to make the warranties in, or perform
its obligations under, this Medium-Term Agreement or the 1995
Framework Agreement, Mexico shall inform the Treasury of such
change in law, act, or other change of fact or circumstance and
the steps that Mexico plans to take in response.
11.
Indemnity.
Mexico hereby indemnifies and hold harmless the Treasury and
the FRBNY and any of their agents, directors, officers, or
employees (each such indemnified person, an "Indemnified Party")
from and against any and all liabilities, obligations, losses,
damages, penalties, judgments, costs, expenses or disbursements
of any kind whatsoever that may be imposed on or incurred by, or
asserted against, such Indemnified Party in any way relating to
or arising out of this Medium-Term Agreement, or any action taken
or omitted to be taken by such Indemnified Party in connection
with this Medium-Term Agreement (including, without limitation,
any action taken or omitted to be taken before the effective date
of this Medium-Term Agreement by such Indemnified Party in
preparation for acting hereunder) i provided that Mexico shall not
13
be liable for any portion of any such amount resulting from gross
negligence or willful misconduct of such Indemnified Party.
12.
Governing Law and Submission to Jurisdiction.
This Medium-Term Agreement shall be governed by and
construed in accordance with the law of the State of New York, to
the extent not inconsistent with the federal law of the United
States. Mexico hereby irrevocably submits for all purposes of or
in connection with this Guarantee Agreement to the exclusive
jurisdiction of the United States District Court located in the
Borough of Manhattan in New York City. The United States hereby
irrevocably submits for all purposes of or in connection with
this Guarantee Agreement to the exclusive jurisdiction of the
Federal courts of the united States. Mexico and the United
States each hereby irrevocably waive, to the fullest extent, the
defense of an inconvenient forum to the maintenance of an action
or proceeding brought pursuant to this paragraph.
In light of the fact that Medium-Term Swap Transactions
hereunder constitute commercial activities, and in accordance
with normal practices, Mexico waives immunity from (i) attachment
in aid of execution, (ii) execution, or (iii) attachment prior to
the entry of judgment, for all purposes of Title 28 United States
Code Sections 1610 and 1611 in respect of its obligations under
this Medium-Term Agreement.
13.
Service of Process.
Mexico hereby irrevocably appoints the person for the time
being and from time to time acting as or discharging the function
of the Consul General of Mexico in New York, New York (the
"Process Agent"), with an office, on the date hereof, at 8 East
41st Street, New York, New York, 10017, United States, as its
agent to receive on behalf of each of them and its property,
service of copies of the summons ~nd complaint and any other
process which may be served in any such action or proceeding
brought in a Federal court sitting in New York city.
such
service may be made by mailing or delivering a copy of such
process to Mexico in care of the Process Agent at the address
specified above for such Process Agent, and Mexico hereby
irrevocably authorizes and directs such Process Agent to accept
such service of its behalf.
14.
No Waiver and cumulative Remedies.
No failure, delay, or refrainment by the Treasury in the
exercise of any right or remedy accruing to the Treasury under
this Medium-Term Agreement shall operate as a waiver by the
Treasury of such right, power, or remedy thereof, nor shall any
single or partial exercise of any other right, power, or remedy.
The rights, powers, and remedies provided herein are cumulative,
14
and not exclusive of any rights, powers, or remedies provided by
law.
15.
Communications.
All communications shall be in English, unless the Parties
otherwise agree in writing. Any notice, request, document or
other communication submitted by one Party to the other Party
under this Medium-Term Agreement shall be in writing, by mail,
telecopier, tested telex or personal delivery, shall refer to
this Medium-Term Agreement, and shall be deemed fully given or
sent when delivered to such Party.
The channel of communications for the Treasury for all
communications under this Medium-Term Agreement shall be:
Office of the Assistant Secretary
for International Affairs
U.S. Department of the Treasury
Room 3430
Washington, D.C.
20220
Telephone:
(202) 622-0060
Facsimile:
(202) 622-0417.
The channel of communication for Mexico under this MediumTerm Agreement shall be the same as in the 1995 Framework
Agreement.
The channel of communication for the Bank under this MediumTerm Agreement shall be the same as in the 1995 Framework
Agreement, and also by SWIFT: BDEMMXMM.
The channel of communication for the FRBNY for all
communications under this Medium-Term Agreement shall be:
Federal Reserve Bank of New York
Central Bank Services
33 Liberty Street
New York, New York 10045
Telephone:
(212) 720-5222
Facsimile:
(212) 720-7621
SWIFT:
FRNYUS33.
16.
Amendments.
This Medium-Term Agreement may be amended by the mutual
agreement of the Parties hereto; provided, however, that no
provision of this Medium-Term Agreement may be amended, modified,
supplemented, waived, discharged or terminated orally but only in
writing.
15
17.
Termination.
The commitment of the Treasury to sell u.s. dollars under
this Medium-Term Agreement will terminate on a date which is one
year after the effective date of the 1995 Framework Agreement,
provided that such commitment may be extended for an additional
six-month period in accordance with Article III(7) of the 1995
Framework Agreement. In any event, the terms and conditions of
this Medium-Term Agreement will continue to apply until all
amounts owed to the Treasury under this Medium-Term Agreement
have been repaid in full.
18.
survival of Covenants.
All covenants, agreements and warranties made herein shall
survive the execution and delivery of this Medium-Term Agreement
and shall remain in full force and effect until repayment in full
of all amounts owed to the Treasury pursuant to this Medium-Term
Agreement.
19.
Counterparts.
This Medium-Term Agreement may be executed in counterparts
and shall enter into force on the date of the last signature
hereto.
IN WITNESS WHEREOF, the undersigned, being duly authorized,
have signed this Medium-Term Agreement.
DONE at Washington, this 21st day of February, 1995, 1n
duplicate.
FOR THE GOVERNMENT OF THE
UNITED MEXICAN STATES
FOR THE GOVERNMENT OF THE
UNITED STATES OF AMERICA
~------------~~---=----------
.
Department of the Treasury
----
MjniPtry of Fin
e
and pu"1:ni-e--Cr~
o • S. - MEXICO FRAHEWO~ AGREEMENT
FOR MEXICAN ECONOMIC STABILIZATION
WHEREAS, Mexico has achieved a remarkable economic
transformation over the last several years on the basis of an
effective stabilization program and far-reaching structural
reforms; and
WHEREAS, these policies and reforms resulted in a correction
in fiscal imbalances, a rationalization in the role of the state
in the economy, a significant decrease in inflation, and a
greater integration of Mexico into the global economy; and
WHEREAS, there was a sharp increase in Mexico's external
current account deficit and, until recently, a significant real
appreciation of the peso; and
WHEREAS, in 1994, investors' concerns about the
sustainability of the current account deficit began to increase,
against the background of adverse political events in Mexico,
competition for foreign investment in other emerging markets, and
higher interest rates abroad; and
WHEREAS, in 1994, as part of its efforts to maintain and
attract foreign investment, Mexico substituted short-term
indebtedness denominated in foreign currency fo~ short-term local
currency denominated debt; and
WHEREAS, investors' increasing concerns put further
pressures on Mexico's foreign exchange and financlal markets and
precipitated the present financial crisis, which has had
repercussions In other emerging markets in Latin America and
elsewhere; and
WHEREAS, it lS In the interest of the people of the united
States and Mexico to restore financial stability to Mexico; and
WHEREAS, the international community and international
institutions, particularly the International Monetary Fund
("IMF"), have recognized the gravity and potential global impact
of Mexico's financial crisis and have committed to take
extraordinary measures to restore financial stability to Mexico;
and
WHEREAS, monetary and financial cooperation between the
United States and Mexico is an important factor in carrying out
the objectives of the IMF, of which both countries are members,
consistent with their obligations, as members, on orderly
exchange arrangements and a stable system of exchange rates, and
WHEREAS, stabilization arrangements have been in effect
between the two countries since 1941, and have proved beneficial
to the financial relationship between the two countries;
2
NOW, THEREFORE, the Parties, as described in Article II,
agree as follows:
I
Purpose
The purpose of this agreement ("Agreement") is to assist
Mexico in stabilizing its exchange and financial markets by
providing resources to be used in such manner as to facilitate
the redemption, refinancing or restructuring of Mexico's shortterm debt obligations, and such other purposes consistent with
the obligations of the United States and Mexico, as members of
the IMF, on orderly exchange arrangements and a stable system of
exchange rates.
II
Parties
This Agreement sets forth the mutual understandings of the
Government of the united states of America ("United States"),
acting through the United States Department of the Treasury
("Treasury Department"), and the Government of the United Mexican
States ("Mexico"), acting through the Ministry of Finance and
Public Credit, and the Banco de Mexico.
III
Availability and Use of Resources
1.
Subject to the terms and conditions contained in this
Agreement and the Financing Agreements referred to in Article VI,
the United States shall make available to Mexico and the Banco de
Mexico, or furnish for their benefit, resources (valued in
accordance with such Financing Agreements) in the amount of not
more than $20,000,000,000.
2.
These resources shall be in the form of:
(i)
medium-term swap transactions ("Medium-Term
Swaps") provided through the Exchange Stabilization
Fund ("ESF") at the Treasury Department;
(ii)
securities guarantees ("Securities
Guarantees") provided through the ESF;
3
(iii)
backing by the Treasury Department for
short-term swap transactions in an amount not to exceed
$6,000,000,000 that have been or will be provided under
the North American Framework Agreement of April 26,
1994, as amended from time to time ("NAFA"), by the
Federal Reserve Bank of New York, acting at the
direction of the Federal Open Market committee
("FRBNY"), under which the rights and obligations of
the FRBNY related to such short-term swap transactions
may be assigned to the Treasury Department under
certain circumstances ("Treasury Backing"); and
(iv)
short-term swap transactions that have been
or will be provided by the Treasury Department under
the NAFA ("Treasury Short-Term Swaps").
3.
The following shall be referred to herein collectively
as the "Primary Resources:"
(i)
(ii)
the Medium-Term Swaps;
the Securities Guarantees;
(iii)
the Treasury Backing with respect to shortterm swaps not already outstanding on the date of entry
into force of this Agreement; and
(iv)
the Treasury Short-Term Swaps not already
outstanding on the date of entry into force of this
Agreement.
4.
The Medium-Term Swaps shall be made available pursuant
to a medium-term exchange stabilization agreement ("Medium-Term
Agreement"), which shall not be inconsistent with this Agreement.
The Medium-Term Agreement shall provide that:
(i)
maturities for the Medium-Term Swaps shall
be up to 5 years; and
(ii)
the Medium-Term Swaps shall be payable prior
to maturity as provided herein and in the Medium-Term
Agreement.
5.
The Securities Guarantees shall be made available
pursuant to a guarantee agreement ("Guarantee Agreement"), which
shall not be inconsistent with this Agreement.
The Guarantee
Agreement shall provide that:
(i) no Securities Guarantees may be issued in
respect of payments of principal or interest due more
than 10 years after issuance of the guaranteed debt
securities; and
4
(ii)
the debt securities for which Securities
Guarantees are issued may be structured to allow for
redemption prior to maturity under specified
circumstances as provided herein and in the Guarantee
Agreement.
6.
The Treasury Backing shall be made available pursuant
to the terms of a separate agreement between the Treasury
Department and FRBNY ("Backing Agreement").
It is understood
that, pursuant to the Backing Agreement and the NAFA, the FRBNY
may enter into further short-term swap transactions with the
Banco de Mexico that are subject to the Backing Agreement only
with the written consent of the Treasury Department.
7.
The Medium-Term Swaps may be entered into during the
period that begins on the first date on which both this Agreement
and the Medium-Term Agreement have entered into force and ends on
the first anniversary of the date of entry into force of this
Agreement ("Swaps Implementation Period").
If Mexico so
requests, and with the written agreement of the Treasury
Department, the Swaps Implementation Period may be extended for
one additional six-month period.
8.
The Securities Guarantees may be entered into during
the period that begins on the first date on which both this
Agreement and the Guarantee Agreement have entered into force and
ends on the first anniversary of the date of entry into force of
this Agreement ("Guarantee Implementation Period").
If Mexico so
requests, and with the written agreement of the Treasury
Department, the Guarantee Implementation Period may be extended
for one additional six-month period.
9.
The interest rates on the Medium-Term Swaps and the
fees charged for the Securities Guarantees shall be designed to
compensate the ESF for the risk of providing such Medium-Term
Swaps and issuing such Securities Guarantees, and to provide an
incentive to Mexico to rely on private capital markets for its
financing needs.
10. The use of Primary Resources made available to or
furnished for the benefit of Mexico or the Banco de Mexico shall
be consistent with the purpose of this Agreement as set forth in
Article I.
IV
Assured Sources of Repayment
1.
No Primary Resources shall be provided to Mexico or the
Banco de Mexico, directly or indirectly, unless the Treasury
Department determines that:
5
ei)
the resources of Mexico, including proceeds
from the sale of Mexican oil and oil products to
customers outside of Mexico as described in Annex A
hereto, afford adequate, assured sources of repayment
with respect to such Primary Resources; and
(ii)
all instructions and other documents to be
given or delivered pursuant to Annex A have been given
or delivered within the time periods provided therein.
2.
Mexico shall furnish, or cause to be furnished, all
information reasonably requested by the Treasury Department in
order that the Treasury Department might make the determinations
required under this article. At the request of the Treasury
Department, Mexico shall, at its expense, provide the Treasury
Department with confirmation by independent public accountants
that the information furnished to the Treasury Department is not
inconsistent with the books and records of PEMEX and its
subsidiaries.
v
Financial Plan
1.
Mexico has made available to the Treasury Department a
copy of its comprehensive and detailed financial plan ("Financial
Plan") that includes, inter alia, a description of the intended
uses of Primary Resources to be made available pursuant to this
Agreement, and how such uses relate to the use of other funds to
be made available to Mexico or the Banco de Mexico by other
entities, and the Treasury Department has advised Mexico of its
concurrence with the Financial Plan.
2.
Prior to each request for Primary Resources by Mexico
or the Banco de Mexico, Mexico shall submit to the Treasury
Department a written description of Mexico's financial
developments as they relate to the Financial Plan, the intended
use or uses to which the Primary Resources will be put, and how
such use or uses are consistent with the Financial Plan.
3.
Mexico shall update its Financial Plan at least
annually, as long as any Primary Resources are outstanding.
4.
Mexico shall notify the Treasury Department in writing
of any intended material changes in the Financial Plan.
6
VI:
Conditionality
1.
No Primary Resources shall be provided to Mexico or the
Banco de Mexico directly or indirectly if the Treasury Department
determines that Mexico's and the Banco de Mexico's economic
policies are not in accordance with the Letter of Intent and
Memorandum of Economic Policies (attached hereto as Annex B)
relating to the stand-by credit for Mexico approved by the IMF on
February 1, 1995 ("IMF Program"), or any other economic policies
subsequently required under the IMF Program.
In making such
determinations, the Treasury Department shall take into
consideration the IMF's reviews of the implementation of Mexico's
economic objectives and policies.
2.
No Primary Resources shall be provided to Mexico or the
Banco de Mexico directly or indirectly if the Treasury Department
determines that Mexico has failed in any material respect to
implement the economic policies announced by Mexico on February
21, 1995, a summary of which is attached hereto as Annex C.
3.
No Primary Resources shall be provided to Mexico or the
Banco de Mexico directly or indirectly if the Treasury Department
determines, following each request for Primary Resources and
prior to the provision of such Primary Resources, that:
(i)
Mexico or the Banco de Mexico has taken actions
that are materially inconsistent with the Financial Plan;
(ii)
Mexico's Financial Plan is materially
inconsistent with prevailing conditions;
(iii)
the intended use or uses of the Primary
Resources are inconsistent with Mexico's Financial Plan;
(iv)
the Treasury Department does not concur with any
material changes made by Mexico to its Financial Plan; or
(v)
Mexico or the Banco de Mexico has failed in
material respects to comply with its obligations under
Article IX.
4.
No Primary Resources shall be provided to Mexico or the
Banco de Mexico directly or indirectly if Mexico or the Banco de
Mexico fails to make any payment when due, and has not remedied
such failure within 7 days after notice thereof from the Treasury
Department to Mexico or the Banco de Mexico, under the MediumTerm Agreement, the Guarantee Agreement, the NAFA, the Exchange
Stabilization Agreement of April 26, 1994, as amended from time
to time, or the Temporary Exchange stabilization Agreement of
January 4, 1995, as amended from time to time (collectively,
"Financing Agreements") .
7
VII
Acceleration, Early Redemption, Defeasance
1.
If at any time the Treasury Department determines that:
(i)
Mexico or the Banco de Mexico has failed to comply
in any material respect with the agreement set forth in
Annex A and has not remedied such failure within 30 days
after notice thereof from the Treasury Department to Mexico;
or
(ii)
Mexico or the Banco de Mexico has failed to
comply in any material respect with Article IX and has not
remedied such failure within 60 days after notice thereof
from the Treasury Department to Mexico or the Banco de
Mexico; or
(iii)
Mexico or the Banco de Mexico has used any
Primary Resources provided under the Financing Agreements in
a manner materially inconsistent with the purpose of this
Agreement as set forth in Article I; or
(iv)
Mexico or the Banco de Mexico has failed to make
any payment when due under any of the Financing Agreements,
and has not remedied such failure within 7 days after notice
thereof from the Treasury Department to Mexico; or
(v)
Mexico or the Banco de Mexico has failed in any
material respect to follow the economic policies
incorporated in the IMF Program, or any economic policies
subsequently incorporated in the IMF Program and:
(A)
such event shall have continued without cure
for a period of 90 days after notice thereof from the
Treasury Department to Mexico, and the Treasury
Department shall have determined and so advised Mexico
in writing that the continuance of such event may
constitute grounds for acceleration; and
(B)
such event shall have continued without cure
for an addi~ional period of 180 days, and the Treasury
Department shall have determined and so advised Mexico
in writing that in its reasonable judgment, the
occurence and continuance of such event materially
impairs the ability of Mexico to service on a timely
basis the Medium-Term Swaps and the debt securities for
which Securities Guarantees have been issued; or
(vi)
Mexico or the Banco de Mexico has taken actions
materially inconsistent with its Financial Plan and:
8
(A)
such event shall have continued without cure
for a period of 90 days after notice thereof from the
Treasury Department to Mexico, and the Treasury
Department shall have determined and so advised Mexico
in writing that the continuance of such event may
constitute grounds for acceleration; and
(B)
such event shall have continued without cure
for an additional period of 180 days, and the Treasury
Department shall have determined and so advised Mexico
in writing that in its reasonable judgment, the
occurence and continuance of such event materially
impairs the ability of Mexico to service on a timely
basis the Medium-Term Swaps and the debt securities for
which Securities Guarantees have been issued; or
(vii)
Mexico or the Banco de Mexico has failed to
implement the policies described in Annex C hereto and:
(A)
such event shall have continued without cure
for a period of 90 days after notice thereof from the
Treasury Department to Mexico, and the Treasury
Department shall have determined and so advised Mexico
in writing that the continuance of such event may
constitute grounds for acceleration; and
(B)
such event shall have continued without cure
for an additional period of 180 days, and the Treasury
Department shall have determined and so advised Mexico
in writing ·that in its reasonable judgment, the
occurence and continuance of such event materially
impairs the ability of Mexico to service on a timely
basis the Medium-Term Swaps and the debt securities for
which Securities Guarantees have been issued;
the Treasury Department may, upon notice to Mexico or the Banco
de Mexico (in addition to the exercise of any other remedies set
forth in the Financing Agreements):
(a) declare any or all obligations of Mexico or the
Banco de Mexico to repurchase pesos for dollars under any or
all of the Medium-Term Swaps, Treasury Short-Term Swaps or
other short-term swaps with Treasury Backing immediately due
and payable, whereupon the entire unpaid amount of such
repurchase obligations, and all other amounts payable with
respect to such obligations, shall become and forthwith be
payable, without demand or further notice of any kind, all
of which are expressly waived by Mexico and the Banco de
Mexico; and
9
(b) require Mexico either to (I) defease the guaranteed
portion of any or all debt securities for which Securities
Guarantees have been issued or (II) redeem any such debt
securities that are subject to early redemption (or, if
permitted by the terms of such debt securities, the
guaranteed portion thereof), whereupon Mexico shall, without
demand or further notice of any kind, all of which are
expressly waived by Mexico, either (at Mexico's option)
defease the guaranteed portion of such debt securities or
redeem such debt securities;
provided, however, that in the case of an event described in
clause (iii) above, the remedies set forth in this paragraph 1
shall apply only to the Primary Resources applied inconsistently
with Article I.
2.
After any such declaration or requirement, if all
amounts then due with respect to any or all obligations of Mexico
or the Banco de Mexico under any or all of the Financing
Agreements are paid (other than amounts due solely because of
such declaration) and all other defaults with respect to such
obligations are cured, the Treasury Department may annul and
rescind such declaration or requirement.
3.
In the event of an acceleration, early redemption, or
defeasance pursuant to paragraph 1 above, the Treasury Department
shall have the right to distribute, in such manner and in such
order of priority as it deems appropriate, funds received by the
Treasury Department pursuant to any Financing Agreement or the
agreement set forth in Annex A for payment of the obligations of
Mexico or the Banco de Mexico under any or all of the Financing
Agreements.
VIII
Prepayment
1.
Mexico or the Banco de Mexico may at any time prepay
any or all of its obligations under any or all of the Financing
Agreements.
2.
Upon its determination, after consultation with Mexico,
that Mexico has well-established access to funds on reasonable
market terms, the Treasury Department may require Mexico or the
Banco de Mexico to secure resources in the international ~arkets
and apply such resources:
(i)
to repurchase pesos for dollars under any or all
of the Medium-Term Swaps, Treasury Short-Term Swaps or other
short-term swaps with Treasury Backing; and/or
10
(ii) either to (1) defease the guaranteed portion of
any or all debt securities for which securities Guarantees
have been issued or (II) redeem any such debt securities
that are subject to early redemption (or, if permitted by
the terms of such debt securities, the guaranteed portion
thereof) ;
unless Mexico or the Banco de Mexico is unable, using its best
efforts, to identify replacement resources (in addition to funds
needed to be raised in the market pursuant to the Financial Plan)
on reasonable market terms with maturities at least as long as
the remaining maturities of the Primary Resources' being replaced
within 90 days following notification by the Treasury Department
to Mexico of its intention to require such prepayment.
3.
If an event described in paragraph (12) (b) of Annex A
shall have occurred, and if the consultation contemplated by such
paragraph does not result in agreement between Mex~co and the
Treasury Department as to a substitute assured source of
repayment or other solution satisfactory to the Treasury
Department, then the Treasury Department, if such event is
continuing may require Mexico or the Banco de Mexico, as
applicable, upon not less than 7 days' notice thereof:
(i)
to repurchase pesos for dollars under any or all
of the Medium-Term Swaps, Treasury Short-Term Swaps or other
short-term swaps with Treasury Backing; and
(ii)
either to (I) defease the guaranteed portion of
any or all debt securities for which Securities Guarantees
have been issued or (II) redeem any such debt securities
that are subject to early redemption (or, if permitted by
the terms of such debt securities, the guaranteed portion
thereof) .
IX
Access to Monetary Data and other Information
Mexico and the Banco de Mexico shall provide to the Treasury
Department all information reasonably requested by the Treasury
Department that the Treasury Department deems necessary to review
the Financial Plan referred to in Article V and to make the
determinations referred to in Articles VI and VII. This
information shall include, but shall not be limited to,
information that Mexico has announced it will make available
publicly as described Annex D hereto.
11
X
Consultations
1.
The Parties shall consult with one another concerning
the interpretation or implementation of this Agreement or any of
the Financing Agreements at any time upon the request of any
Party.
2.
The Parties shall engage in periodic consultations with
respect to Mexico's intended changes in the Financial Plan, and,
as contemplated by the North American Free Trade Agreement, with
respect to monetary, fiscal, and structural policies.
XI
Power and Authority
Each Party warrants that it has full power and authority to
enter into and perform its obligations under this Agreement and
has taken all necessary actions to authorize its performance.
XII
Channel of Communication
The channel of communication for the Treasury
Department for all communications under this Agreement shall be:
1.
Office of the Assistant Secretary
for International Affairs
u.s. Department of the Treasury
Room 3430
Washington, D.C.
20220
Telephone:
(202) 622-0060
Facsimile:
(202) 622-0417
2.
The channel of communication for Mexico for all
communications under this Agreement shall be:
Director General of Public Credit
Ministry of Finance and Public Credit
Insurgentes Sur 826, Piso 9
Colonia del Valle
Mexico, D.F.
03100, Mexico
Telephone:
525-682-2799
Facsimile:
525-543-3446
3.
The channel of communication for the Banco de Mexico
for all communications under this Agreement shall be:
12
Director General of Central Banking Operations
Banco de Mexico
Avenida 5 de Mayo, No.6, Piso 1
Mexico, D.F.
06059, Mexico
Telephone:
525-227-8821
Facsimile:
525-227-8803
XIII
Amendment
This Agreement may be amended by the consent of all Parties
in writing, including consent by authenticated telecommunication.
XIV
No Waiver; Cumulative Remedies
No failure, delay, or refrainment by the Treasury Department
in the exercise of any right or remedy accruing to the Treasury
Department under this Agreement shall operate as a waiver by the
Treasury Department of such right, power or remedy, nor shall any
single or partial exercise of any other right, power or remedy.
The rights, powers and remedies provided herein are cumulative
and not exclusive of any rights, powers or remedies provided by
law.
xv
Governing Law; Submission to Jurisdiction
This Agreement shall be governed by and construed in
accordance with the laws of the state of New York, to the extent
not inconsistent with the federal law of the United States.
Mexico and the Banco de Mexico hereby irrevocably submit for all
purposes of or in connection with this Agreement to the exclusive
jurisdiction of the United States District Court located in the
Borough of Manhattan in New York City.
The United states hereby
irrevocably submits for all purposes of or in connection with
this Agreement to the exclusive jurisdiction of the Federal
courts of the United States.
Mexico, the Banco de Mexico and the
United States hereby irrevocably waive, to the fullest extent,
the defense of an inconvenient forum to the maintenance of an
action or proceeding brought pursuant to this paragraph.
XVI
Commercial Activities
The obligations to be performed by the parties under this
Agreement, the Medium-Term Agreement, and the Guarantee
Agreement, and the Treasury Short-Term Swaps and other short-term
swaps with Treasury Backing, shall constitute commercial
activities within the meaning of 28 U.S.C. 1602 et seq.
13
XVII
Service of Process
Mexico and the Banco de Mexico hereby irrevocably appoint
the person for the time being and from time to time acting as or
discharging the function of the Consul General of Mexico in New
York, New York ("Process Agent"), with an office, on the date
hereof, at 8 East 41st Street, New York, New York, 10017, United
States, as their agent to receive on behalf of Mexico and the
Banco de Mexico and their property, service of copies of the
summons and complaint and any other process which may be served
in any such action or proceeding brought in a Federal court
sitting in New York City.
Such service may be made by mailing or
delivering a copy of such process, in the case of Mexico, to
Mexico, and, in the case of the Banco de Mexico, to the Banco de
Mexico, in care of the Process Agent at the address specified
above for such Process Agent, and Mexico and the Banco de Mexico
hereby irrevocably authorize and direct such Process Agent to
accept such service on their behalf.
XVIII
Entry into Force
This Agreement may be executed in counterparts and shall
enter into force on the date of the last signature hereto.
IN WITNESS WHEREOF, the undersigned, being duly authorized,
have signed this Agreement.
DONE at Washington, this 21st day of February, 1995, in
triplicate.
~
THE GOVERNMENT OF THE
l.JNVrE~ S~ES".o~ AMERICA
\,L~AL \ll~
Department of the Treasury
FOR THE BANCO DE MEXICO
4) //~' / ~
//'
C:...
1.,
t,~ '-_
ANNEX A
OIL PROCEEDS FACILITY AGREEMENT
(1)
Introduction
(a)
Parties and Purpose.
This oil Proceeds Facility
Agreement (the "Agreement"), dated as of February 21, 1995,
sets forth the rights and obligations of (i) the Government of
the United Mexican States, acting through the Ministry of Finance
and Public Credit (the "Government"),
(ii) the Banco de Mexico,
acting on its own account and as fiscal agent of the Government
(the "Banco de Mexico") (the Government and the Banco de Mexico
shall be collectively referred to as "Mexico"),
Mexicanos,
( "PMI ") ,
(iii) Petroleos
"
(iv) P.M.I. Comercio Internacional S.A. de C.V.
(v) P.M.I. Trading Limited ("PMI Trading")
,-
(Petroleos
Mexicanos, PMI, PMI Trading, and any other subsidiary of
Petroleos Mexicanos subsequently added as a party hereto being
collectively referred to as "PEMEX" and individually as a "PEMEX
Entity"),
(vi) the United states Department of the Treasury (the
"Treasury"), and (vii) the Federal Reserve Bank of New York (the
"FRBNY") as to the use of proceeds from the Export of crude oil
and Oil Derivatives, other than Excluded Exports (as such terms
are defined in subparagraph 12(a) below) by PEMEX, and other
certain sources, as a source of repayment for support by (A) the
united states Monetary Authorities under the North American
Framework Agreement, dated April 26, 1994, and as amended from
time to time (the "NAFA"), and (B) the Treasury under the U.5.-
2
Mexico Framework Agreement for Mexican Economic Stabilization,
dated as of February 21, 1995 (the "Framework"), the Medium-Term
Agreement and the Guarantee Agreement (as each such term is
defined in the Framework).
The NAFA (with respect to the U.S.
Monetary Authorities) and the Separate Agreements of the U.S.
Monetary Authorities, as such terms are defined in the NAFA, the
Framework, the Medium-Term Agreement, and the Guarantee Agreement
are referred to collectively as the "Financing Arrangements" and
individually as a "Financing Arrangement."
(b)
Defined Terms; Schedules.
Unless otherwise defined
herein, terms used herein have the same meaning as they do in the
appropriate Financing Arrangement.
The schedules referred to in
this Agreement shall be agreed to by the parties and attached
hereto.
(c)
January 16 MOU.
This Agreement will supersede the
terms and conditions of the Memorandum of Understanding (the
"MOU"), dated January 16, 1995, among the Banco de Mexico, the
Treasury, the FRBNY and the Bank of Canada, which MOU shall be
terminated by its parties on the Effective Date of this
Agreement.
(d)
Obligations Backed by this Agreement.
Mexico agrees
that this Agreement will remain in place until all of its payment
obligations under the Financing Arrangements have been fully
satisfied or, if the Treasury, the FRBNY and Mexico enter into an
agreement described in paragraph 17 below, until all of the
Government's obligations under the Financing Arrangements and any
3
Other Financing Agreements referred to 1n paragraph 17 below have
been fully satisfied.
(2)
Implementation of Oil Proceeds Arrangements
(a)
Conditions for Effectiveness.
The following conditions
shall be satisfied by either Mexico or PEMEX, as set forth below,
on or prior to the Effective Date, as defined in paragraph 22
below.
(i)
Legal Opinions and Instructions.
Mexico and PEMEX
shall obtain, and shall provide to the Treasury and the
FRBNY, copies of the legal opinions and other documents
as required by the Treasury, substantially in the form
set out in Schedules A through F.
(ii)
Banco de Mexico Account.
Mexico shall complete
all the necessary arrangements to provide for the
transfer by PEMEX to the account of the Banco de Mexico
(acting on its own account and as fiscal agent of the
Government) at the FRBNY established for purposes of
this Agreement (the "Special Funds Account") of
proceeds from the Export of crude oil and oil
Derivatives (other than Excluded Exports (as such term
is defined in subparagraph 12(a) below) and amounts
payable to third parties under Specified Agreements, as
defined in subparagraph 2(b) (v) below), the amounts so
transferred and credited to the Special Funds Account
becoming part of the property held by the Banco de
4
Mexico on its own account and as fiscal agent of the
Government, with no PEMEX Entity having any rights to
the funds in the Special Funds Account.
Such funds
will be transferred over Fedwire to the FRBNY by Swiss
Bank Corporation, New York Branch (tlSBC") for credit to
the Special Funds Account.
Upon advice of credit to
the Special Funds Account from the FRBNY, the Banco de
Mexico will credit a corresponding amount to the
account of PEMEX or the respective PEMEX Entity on the
books of the Banco de Mexico.
Such arrangements are
consistent with the regulatory practice of the Banco de
Mexico.
(iii) PEMEX customer Instructions.
PEMEX shall, with
respect to all Exports (other than Excluded Exports) by
PEMEX of crude oil or Oil Derivatives pursuant to longterm contracts under which payments are to be made
directly from the respective customer to PEMEX,
irrevocably instruct, substantially in the form of
Schedules K-l or K-2,
(A) all existing customers of each PEMEX Entity
(collectively "Buyers") to make all payments for
the delivery or purchase of crude oil or oil
Derivatives due to that PEMEX Entity to an account
of that PEMEX Entity at SBC; and
(B) the parties listed in Schedule G to make all
payments due to any PEMEX Entity under the
5
agreements described in Schedule H (the "Existing
Agreements"), net of amounts payable to other
parties under the Existing Agreements (the other
parties' amounts, together with amounts payable to
other parties under the Specified Agreements, as
defined in subparagraph 2(b) (v) below, being the
"Specified Payments") to an account of a PEMEX
Entity at SBC (all payments referred to in
subparagraph 2(a) (iii) (A) above, subparagraphs
2(b} (i), 2(b} (ii), and 2(b) (iv) below, and this
subparagraph 2(a) (iii) (B) net of the Specified
Payments being defined as the "Payments"); and
(iv) PEMEX SBC Instructions.
PEMEX shall:
(A) execute and deliver to SBC letters of
instructions, in the form of Schedules 1-1, 1-2
and 1-3, whereby each PEMEX Entity unconditionally
and irrevocably authorizes and directs SBC,
beginning on the first FRBNY Business Day (any day
the FRBNY is open for business shall be a "FRBNY
Business Day") after the Effective Date, to credit
to the FRBNY for credit to the Special Funds
Account at the FRBNY, promptly, but in any event
within one FRBNY Business Day of receipt by SBC,
all Payments, until receipt of the release from
the FRBNY referred to in subparagraph (f) below;
and
6
(B) deliver to the Treasury and the FRBNY the
irrevocable written consent of the SBC to the
foregoing instructions of each PEMEX Entity,
substantially in the form of Schedule J, and an
opinion from in-house counsel of SBC in a form
satisfactory to the Treasury.
(b)
Continuing Obligations.
(i)
New Customers.
For so long as this Agreement is in
effect, payments from export sales of crude oil and oil
Derivatives, other than Excluded Exports, to new
customers of PEMEX after the Effective Date (the "New
Buyersll) will be subject to the terms of this
Agreement, and PEMEX shall irrevocably instruct New
Buyers to make payments 1n accordance with subparagraph
2(a) (iii)
(ii)
above;
Letter of Credit Contracts.
In the event that
payments under any of the long-term contracts referred
to above are to be made pursuant to a letter of credit,
PEMEX shall irrevocably instruct, substantially in the
form of Schedule K-J, the bank confirming such letter
of credit to make all payments due to each PEMEX Entity
pursuant to such letter of credit in respect of such
long-term contract to an account of a PEMEX Entity at
SBC;
(iii)
Acknowledgments.
PEMEX shall take all steps
necessary to ensure that each instruction is
7
acknowledged, in the case of existing Buyers with longterm contracts, within three months after the Effective
Date, in the case of confirming letter of credit banks,
within one month of the receipt of the instructions,
and, in the case of New Buyers, within three months
after entering into a long-term contract with any PEMEX
Entity.
In the case of existing Buyers under long-term
contracts, at the option of the Treasury, an additional
three months may be extended for PEMEX to secure such
acknowledgments.
Copies of all acknowledged
instructions shall be furnished to the FRBNY;
(iv) Other Instructions.
With respect to all Exports
by PEMEX of crude oil and oil Derivatives (other than
Excluded Exports) that are not made pursuant to 10ngterm contracts,
(A) in the event that payment is to be made
directly from the respective Buyer to PEMEX, PEMEX
shall irrevocably instruct such Buyer to make
payment for the delivery or purchase of such crude
oil or Oil Derivatives to an account of a PEMEX
Entity at SBC, or
(B)
in the event that payment for such sale is to
be made pursuant to a letter of credit, PEMEX
shall irrevocably instruct, substantially in the
form of Schedule K-3, the bank confirming such
letter of credit to make all payments due pursuant
8
to such letter of credit to an account of a PEMEX
Entity at SBC; and
(v) Liens.
PEMEX shall not sell or otherwise dispose
of or create or permit or suffer to be created or exist
any lien, pledge, mortgage, charge or other encumbrance
or security interest whatsoever with respect to its
rights to receive Payments nor to enter into any other
arrangements, including sales of receivables or other
rights to receive payments, with respect to such
Payments which gives any person an interest therein
other than as contemplated (A) by the Existing
Agreements or (B) other agreements approved in advance
by the Treasury, including agreements which either
replace or refinance the Existing Agreements on terms
that are substantially similar to those of the Existing
Agreements (collectively, the "Specified Agreements");
and,
(vi) Notices. PEMEX shall notify the FRBNY of (A) any
sale of receivables under the Purchase and Sale
Agreement referred to in Paragraph 1 of Schedule H,
(B)
any payment by the Ministry of International Trade and
Industry of Japan under the insurance policy referred
to in Paragraph 2 of Schedule H,
(C) any set-off by The
Bank of Toyko, Ltd. in connection with the agreement
referred to in paragraph 4 of Schedule H or (O) any
comparable event under the Specified Agreements.
9
(c)
Government support.
The Government will take whatever
actions, and provide any other support, necessary to facilitate
the performance of the Banco de Mexico or any PEMEX Entity under
this Agreement.
(d)
Absence of Liens on Special Funds Account.
Mexico
agrees that it will not sell or otherwise dispose of or create or
permit or suffer to be created or exist any lien, pledge,
mortgage, charge or other encumbrance or security interest
whatsoever on any funds credited to the Special Funds Account,
nor enter into any other arrangements with respect to such funds
which give any person an interest therein, other than the
arrangements specified in this Agreement.
(e)
Accounts.
Use of Funds in the Special Funds Account and Other
The Banco de Mexico, acting on its own account and as
fiscal agent of the Government, irrevocably authorizes and
instructs the FRBNY to use the funds deposited in the Special
Funds Account to repay all amounts due and payable under the
Financing Arrangements.
The FRBNY shall hold any amounts
standing to the credit of the Special Funds Account for the
benefit of the Treasury to the extent that any amounts payable
under the Financing Arrangements are not paid when due.
Any
amount standing to the credit of the Special Funds Account may be
withdrawn from time to time by the Banco de Mexico, acting on its
own account or as fiscal agent of the Government, when and to the
extent that there are no amounts due and unpaid under the
Financing Arrangements.
10
In the event that the FRBNY receives an authenticated
telecommunication from the Treasury, notifying it that Mexico
failed to make any payment under any Financing Arrangement or
under any other Financing Agreement as defined in paragraph
17(a), then:
(i)
the Banco de Mexico hereby irrevocably authorizes
the FRBNY immediately to debit any account of the Banco
de Mexico, including any fiscal agency account and any
special funds account held by the Banco de Mexico on
its own account and as fiscal agent for the Government,
other than a collateral pledge account of the
Government or of the Banco de Mexico, with the FRBNY,
and, if necessary, to liquidate investments, other than
collateral pledge investments, which the FRBNY holds
for the Government or the Banco de Mexico, and to
transfer all proceeds of such debit or liquidation to
"Treasury's Special Funds Accounts No.1" on the books
of the FRBNY (the "Treasury Account") and as additional
funds or investments are received by the FRBNY from any
source for the Banco de Mexico on its own account or as
fiscal agent for the Government, to continue to debit
such accounts and liquidate such investments and to
transfer all proceeds of such debit or liquidation to
the Treasury Accounti and
(ii)
the Government hereby irrevocably authorizes and
instructs the FRBNY immediately to debit any account of
11
the Government, including any account held by the Banco
de Mexico as fiscal agent of the Government, other than
a collateral pledge account of the Government, with the
FRBNY and, if necessary, to liquidate investments,
other than collateral pledge investments, which the
FRBNY holds for the Government, and to transfer all
proceeds of such debit or liquidation to the Treasury
Account and as additional funds or investments are
received by the FRBNY from any source for the
Government or the Banco de Mexico as fiscal agent of
the Government, to continue to debit such accounts and
liquidate such investments and to transfer all proceeds
of such debit or liquidation to the Treasury Account
until the FRBNY receives a notice from the Treasury by
authenticated telecommunication that the Treasury has
received payment in full of all obligations due to it
under the applicable Financing Arrangement(s) ,
including any late payment charges determined under the
applicable Financing Arrangement(s).
The Treasury
shall apply the amounts credited by the FRBNY to the
Treasury Account under this subparagraph 2(e) to reduce
any such payments due and unpaid by Mexico under the
applicable Financing Arrangement(s), following the
order of priority for payment and repayment as set
forth in such Financing Arrangement(s).
The FRBNY
shall promptly inform the Banco de Mexico of any debits
12
to the account of the Banco de Mexico or the Government
on the books of the FRBNY pursuant to this subparagraph
2 (e) •
(f)
Final Release. Upon satisfaction in full of all payment
obligations, including accrued and unpaid interest thereon, under
the Financing Arrangements, and subject to paragraphs 4 and 17
below, the Treasury shall give written confirmation to that
effect to the FRBNY which shall (i) promptly release SBC from its
obligations undertaken in accordance with Schedules I-1, I-2 and
I-3, and deliver to the Banco de Mexico and to PEMEX through the
Banco de Mexico a copy of such confirmation to the FRBNY, and
(ii) transfer any funds remaining in the Special Funds Account as
directed by the Banco de Mexico and close the Special Funds
Account.
Upon receipt of the confirmation referred to in the
preceding sentence, PEMEX may revoke the instructions delivered
by it under subparagraphs 2(a) and 2(b) above.
(3)
Implementation Arrangements
(a)
FRBNY Efforts.
The FRBNY will use its best endeavors
to assist Mexico in the implementation of the arrangements under
paragraph 2 above for the benefit of the Treasury.
shall, to the extent feasible,
The FRBNY
(i) set-off against the Special
Funds Account and any other account of the Banco de Mexico,
including any fiscal agency accounts, with the FRBNY, other than
a collateral pledge account of the Government or the Banco de
Mexico, any amounts due and unpaid by the Banco de Mexico under
13
any Financing Arrangement, and (ii) set-off against the Special
Funds Account and any other account of the Government, including
any fiscal agency account held by the Banco de Mexico, with the
FRBNY, other than a collateral pledge account of the Government,
any amounts due and unpaid by the Government under any Financing
Arrangement.
If the FRBNY has exercised any right of set-off
under this subparagraph 3(a), the FRBNY shall promptly inform the
Banco de Mexico, by authenticated telecommunication, of such setoff and the amount set-off.
Notwithstanding
any~hing
to the
contrary in this Agreement, the FRBNY shall not assume any
liability whatsoever to the Treasury for, nor bear any risk in
connection with, the establishment or proper implementation of
the arrangements described under subparagraph 2(e) above or the
exercise of set-off rights under this paragraph J.
Moreover,
the Treasury agrees to indemnify the FRBNY for all and any loss
or damage, costs, or expenses, including attorneys' fees and
expenses of litigation, it may incur as a result of the
application of such arrangements,
including any set-off under
this paragraph J.
(b)
Assignment of Claims.
In order to carry out its duties
under subparagraph (a) of this paragraph, the FRBNY may request,
at any time beginning on the Effective Date, the assignment to
the FRBNY of any of the then-outstanding claims of the Treasury
under the Financing Arrangements.
If at any time beginning on
the Effective Date any sum is due and unpaid to the Treasury, the
Treasury shall have the right to assign its claims or a portion
14
thereof arising under the Financing Arrangements to the FRBNY.
Any such assignment shall be required to occur simultaneously
with the exercise of the right of set-off described in
subparagraph (a) of this paragraph.
Any claims so assigned to
the FRBNY shall be free from any pledge, encumbrance, or other
similar right in favor of third parties, and the FRBNY shall have
the right to decline to accept the assignment of any particular
claim if, in its reasonable judgment, it believes such rights do
or may exist.
Upon acceptance of such an assignment from the
Treasury, the FRBNY shall immediately set-off the amount of the
claim assigned under the Financing Arrangements against any funds
in any account specified in subparagraph (a) above.
To the
extent that assignment of any claim does not result In payment In
full of such claim, the FRBNY shall promptly re-assign the
unsatisfied part of any such assigned claim back to the Treasury,
and the Treasury shall accept such reassignment.
Immediately
upon exercising a right of set-off, the FRBNY shall credit the
Treasury's account on the books of the FRBNY in the amount to
which it is entitled by virtue of its assignment of its claim to
the FRBNY.
The Treasury shall apply the amounts so credited to
the Treasury Account to reduce any such payments due and unpaid
by Mexico under the applicable Financing Arrangement(s),
following the order of priority for payment and repayment as set
forth in such Financing Arrangement(s).
(4)
FRBNY's Authority to Take Additional Steps
15
In carrying out its duties in connection with the
arrangements referred to in paragraphs 2 and 3 above, the FRBNY
may, in its sole discretion, take such steps as it considers
reasonable and appropriate in the circumstances to protect the
interests of the Treasury.
(5)
Authority
Each party to this Agreement individually warrants that it
has full power and authority to enter into and perform its
obligations under this Agreement, and has taken all necessary
actions to authorize the performance of the terms and conditions
thereof.
(6)
Rules Applicable to the FRBNY
In carrying out its functions under this Agreement, the
FRBNY shall have the authority to interpret and act under the
irrevocable authorizations and instructions received by it
hereunder and any notifications or other communications that the
parties hereto shall send or transmit to the FRBNY, in such
manner as the FRBNY, In its sole judgment, deems reasonable.
In
making any calculations of the payments provided for under this
Agreement or the Financing Arrangements, the FRBNY shall have the
authority to make rounding adjustments to any amounts.
Except
for reimbursement of FRBNY costs and expenses by the Banco de
Mexico, which costs and expenses shall be paid by debit to the
general account of the Banco de Mexico on the books of the FRBNY,
16
no compensation shall be due from the Government or the Banco de
Mexico for services rendered by the FRBNY under the
authorizations and instructions in this Agreement.
In carrying
out its functions under this Agreement, the FRBNY shall be liable
only for failure to exercise reasonable care, unless otherwise
provided herein.
(7)
Information for FRBNY
The FRBNY may require any party to provide it with any
information necessary to make calculations or payments under this
Agreement.
The FRBNY shall, promptly on receipt thereof, provide
the Treasury with a copy of each of the schedules received by it
under this Agreement.
(8)
Legal Action
(a)
Mexico Notice.
Mexico hereby covenants to gIve prompt
written notice to the Treasury of all litigation or
administrative or arbitration proceedings of or before any court
or governmental authority or agency or tribunal against the
Government, the Banco de Mexico, acting on its own account or as
fiscal agent of the Government, or any of their respective
assets, which would or might have a material adverse effect on
the economic or financial conditions of Mexico.
(b)
PEMEX Notice.
PEMEX hereby covenants to give prompt
17
notice in writing to the Treasury of all litigation or
administrative or arbitration proceedings of or before any court
or governmental authority or agency or tribunal against PEMEX, or
any of its respective assets, which would or might have a
material adverse effect on the financial conditions of PEMEX.
(c)
Mexico.
Litigation Affecting the Financing Arrangements:
Mexico hereby covenants to give prompt notice in writing
to the Treasury of any litigation or administrative or
arbitration proceedings of or before any court or governmental
authority or agency or tribunal to enjoin or restrain the
execution or performance by Mexico of this Agreement or the
Financing Arrangements, or in any manner to question, repeal,
revoke, or rescind, in whole or in part, the laws and proceedings
under which this Agreement or the Financing Arrangements have
been or are to be executed, performed, or enforced.
(d)
Litigation Affecting the Financing Arrangements: PEMEX.
PEMEX hereby covenants to give prompt notice In writing to the
Treasury of any litigation or administrative or arbitration
proceedings of or before any court or governmental authority or
agency or tribunal to enjoin or restrain the execution or
performance by any PEMEX Entity of this Agreement, or in any
manner to question, repeal, revoke, or rescind,
In whole or in
part, the laws and proceedings under which this Agreement has
been or is to be executed, performed, or enforced.
(e)
Avoidance of Litigation: Mexico.
Mexico agrees to
undertake no legal actions or proceedings which could (i) in any
18
manner question, repeal, revoke, or rescind, in whole or in part,
the laws and proceedings under which this Agreement or the
Financing Arrangements have been or are to be executed,
performed, or enforced, or (ii) enjoin or restrain the execution
or performance by any PEMEX Entity of its obligations under this
Agreement or (iii) in any manner impair or interfere with the
reasonable exercise by Treasury or the FRBNY of their respective
rights under this Agreement or the Financing Arrangements.
(f)
Avoidance of Litigation: PEMEX.
PEMEX agrees to
undertake no legal actions or proceedings which could (i)
in any
manner question, repeal, revoke, or rescind in whole or in part
the laws and proceedings under which this Agreement has been or
is to be executed, performed, or enforced, or (ii) enjoin or
restrain the execution or performance by any PEMEX Entity of its
obligations under this Agreement, or (iii) 1n any manner impair
or interfere with the reasonable exercise by Treasury or the
FRBNY of their respective rights under this Agreement or the
Financing Arrangements.
(g)
Indemnity by Mexico.
Mexico shall indemnify, save, and
hold harmless the Treasury and the FRBNY and any of their agents,
directors, officers, or employees (each such indemnified person,
an "Indemnified Party") at all times during the term of and after
termination of this Agreement from and against any and all
liabilities, claims, charges,
judgments, damages,
losses,
expenses, or payments asserted against, imposed on, or incurred
or made by the Treasury or any Indemnified Party in any way
19
relating to or arising out of this Agreement, or any action taken
or omitted to be taken by such Indemnified Party in connection
with this Agreement (other than those resulting from the gross
negligence or willful misconduct of the Treasury and the FRBNY,
of any such agent, director, officer or employee) .
(9)
Duties and Covenants of PEMEX
(a)
Each PEMEX Entity.
Each PEMEX Entity shall follow its
customary standards, policies, and procedures in extending credit
to any of the Buyers and shall make diligent efforts to collect
all Payments as they become due.
In addition, each PEMEX Entity
shall take all steps necessary to enforce the payment
instructions and acknowledgments delivered pursuant to
subparagraphs 2(a) and 2(b) above.
In the case of every shipment
to any of the Buyers under long-term contracts, the relevant
PEMEX Entity shall send out an invoice before the date on which
payment is due according to the terms of the contract.
In the
event that any Payment or potential payment is made otherwise
than to one of the PEMEX Entity accounts at SBC, such PEMEX
Entity shall remit such Payment immediately to SBC.
(b)
Attachment of SBC Account.
In the event of legal
action against a PEMEX Entity or against an SBC account to which
payments are to be made, PEMEX will make all efforts to take such
steps as the Treasury may reasonably request to protect the
Payments.
20
(10) Statements, Reports, and Notices
Pursuant to the information-sharing provisions in the
Framework, PEMEX hereby agrees that, so long as this Agreement
shall remain in effect or any payment obligation of Mexico or
PEMEX remains outstanding under the Financing Arrangements:
(a)
Audited Financial Statements.
PEMEX will deliver to
the Treasury as soon as available, and 1n any case within 180
days after the end of each fiscal year of PEMEX, consolidated
financial statements for such fiscal year of Petr6leos Mexicanos
and its subsidiaries, including therein its annual audited
consolidated balance sheet and the related consolidated
statements of income, changes in equity, and changes in financial
position, together with consolidating schedules, in each case
prepared in accordance with Mexican Generally Accepted Accounting
Principles (GAAP) , consistently applied (except as otherwise
discussed in the notes to such statements), 1n each case
certified by independent public accountants of recognized
standing;
(b)
Accompanying Documents.
Concurrent with the delivery
of the financial statements referred to in subparagraph lOCal
above:
(i)
Accountants' Statement.
PEMEX will furnish to the
Treasury a letter from the independent public
accountants of PEMEX reporting on such financial
statements stating that in making the examination
necessary to express their opinion on such financial
21
statements no knowledge was obtained of the occurrence
of an event described in subparagraph 12(b) below; and
(ii) Certificate of Financial Officer.
PEMEX will
furnish to the Treasury a certificate of a senior
financial officer of Petr6leas Mexicanos, stating that,
to the best of such officer's knowledge, after due
inquiry, each PEMEX Entity has during the relevant
period observed or performed in all material respects
all of its covenants and other agreements, and
satisfied
~n
all material respects every condition
contained in this Agreement, and that such officer has
no knowledge of (a) any failure by PEMEX to pay any
debt under any foreign financing agreement,
(b) any
failure by PEMEX to perform or observe in any material
respect any provision of this Agreement,
(c) the
commencement of liquidation or bankruptcy proceedings
by PMI or PMI Trading or involuntary bankruptcy
proceedings affecting PMI or PMI Trading, and (d) the
occurrence of an event described in subparagraph 12(b)
below, except as specified in such certificate;
(c)
Reconciliation.
PEMEX will furnish to the Treasury as
soon as available, but no later than 180 days after the end of
I
.
each fiscal year of Petroleos Mexlcanos,
.
.
~nformat~on
necessary to
reconcile the income and equity items in the financial statements
delivered in accordance with subparagraph (a) of this paragraph
10 with the amounts for such items under
u.s.
GAAP;
22
(d)
SEC Reports.
PEMEX will furnish to the Treasury,
promptly after the filing thereof, copies of all periodic and
other reports filed by PEMEX with the united States securities
and Exchange Commission, and the delivery of such reports to the
Treasury shall satisfy any separate requirement to furnish the
same materials provided elsewhere in this paragraph 10;
(e)
Notice.
PEMEX will promptly furnish to the Treasury,
after any executive officer of PEMEX obtains knowledge of (i)
failure by PEMEX to pay any debt under any foreign financing
agreement,
(ii) failure by PEMEX to perform or observe in any
material respect any provision of this Agreement,
(iii) the
commencement of liquidation or bankruptcy proceedings by PMI or
PMI Trading or involuntary bankruptcy proceedings affecting PMI
or PMI Trading, and (iv) the occurrence of an event described in
subparagraph 12(b) below, a written notice signed by such officer
describing such failure or event and the steps that PEMEX
proposes to take in connection therewith;
(f)
Quarterly statements.
No later than one month after
the end of each calendar quarter, PMI shall furnish to the
Treasury a statement setting forth
(i) projections of the volumes
of crude oil and Oil Derivatives Exports for the next quarter,
and the values in dollars of such crude oil and Oil Derivatives
Exports, using prices prevailing at the time of such certificate,
(ii) volumes of crude oil and oil Derivatives exported during the
calendar quarter most recently ended and the values of such
Exports,
(iii) the amount of Payments received during the
23
calendar quarter most recently ended with respect to such Exports
plus payments received with respect to Excluded Exports, and (iv)
a statement that the person furnishing such certificate has
reviewed or caused to be reviewed the records of PMI and PMI
Trading with respect to Payments payable during the calendar
quarter most recently ended, and that no errors or irregularities
were detected with respect to the collection of such Payments and
that such collections were conducted in compliance with this
Agreement, such statement to be certified by the president or
chief financial officer of PMI or PMI Trading as being true and
correct; and
(g)
Additional Information.
PEMEX will promptly furnish to
the Treasury, and will use reasonable efforts to facilitate
Treasury's obtaining, such information as the Treasury determines
to be reasonably necessary to confirm that PEMEX has observed or
performed its covenants and agreements contained in this
Agreement, or such further information regarding its ability to
perform its obligations under this Agreement.
the Treasury, PEMEX shall, at its expense,
At the request of
(i) provide the
Treasury with confirmation by independent public auditors (who
may, absent a specific request by the Treasury setting forth the
reasons therefor, be the independent public accountants of PEMEX
reporting on the financial statements most recently delivered
pursuant to subparagraph (a) of this paragraph 10) that the
information furnished to the Treasury is not inconsistent with
the books and records of PEMEX and (ii) provide such independent
24
public accountants an opportunity to review all invoices with
respect to all Exports of crude oil and Oil Derivatives by PEMEX
occurring within the two years preceding the date of such
request.
(11) Treasury Costs
Mexico agrees to reimburse the Treasury promptly for any
out-of-pocket fees and expenses reasonably incurred by the
Treasury in connection with this Agreement.
(12) Proceeds Covered and Threshhold Levels
(a)
Exports.
Mexico agrees that all Proceeds from exports
of crude oil and Oil Derivatives by PEMEX (other than Excluded
Exports described below) will be subject to the terms of this
Agreement.
An "Export" for purposes of this Agreement means any
conveyance (which does not include shipment of crude oil for
storage purposes) of crude oil or oil Derivatives by PEMEX or by
any other subsidiary of any PEMEX Entity that may now or in the
future export oil or oil Derivatives, from Mexico (including
locations outside of Mexico where crude oil may be stored on
PEMEX's behalf) to points outside of the borders of Mexico.
Derivatives" means (i) natural gas,
"Oil
(ii) products derived from
the processing or refining of crude oil or natural gas,
including, but not limited to, gasoline, jet fuel, diesel and
fuel oil, and (iii) to the extent manufactured and exported by an
entity controlled by the Government, petrochemicals.
"Excluded
25
Exports" means, during any calendar year,
(i) Exports of natural
gas, except to the extent that the dollar value of such Exports
during such calendar year exceeds $75 million,
(ii) Exports of
crude oil and Oil Derivatives, to the extent that the value of
such Excluded Exports during any calendar year does not exceed 4%
of the total value of all Exports of crude oil and Oil
Derivatives by PEMEX during such calendar year, and (iii) those
crude oil or oil Derivatives Exports as mutually agreed between
the Treasury and Mexico.
(b)
Threshhold Levels.
Mexico agrees to notify and consult
promptly with the Treasury in the event that:
(i) during any twelve-month period ending at the end of
any calendar quarter occurring during the first five
years following the Effective Date (A) the volume of
crude oil Exports is less than 85% and (B) the dollar
value of the total amount of crude oil Exports and oil
Derivatives Exports is less than 80% of, respectively,
the volume and dollar value of crude oil Exports during
the twelve-month period ending at the end of the
corresponding calendar quarter ln 1994, such base 1994
volumes and dollar values for such calendar quarters
being provided to the Treasury as soon as practicable,
or,
(ii) during any twelve-month period ending at the end
of any calendar quarter occurring after the fifth
anniversary of the Effective Date (A) the volume of
26
crude oil Exports is less than 75% and (B) the dollar
value of the total amount of crude oil Exports and Oil
Derivatives Exports is less than 75% of, respectively,
the volume and dollar value of crude oil Exports during
the twelve-month period ending at the end of the
corresponding calendar quarter in 1994;
(c)
Mandatory Prepayment.
If the consultation provided
pursuant to the subparagraph 12(b) immediately above does not
result in agreement between Mexico and Treasury as to a
sUbstitute assured source of repayment or other solution
satisfactory to the Treasury, the provisions of paragraph 3 of
Article VIII of the Framework will apply.
(13) Crude Oil and oil Derivatives Exports
PEMEX will not export Mexican crude oil or Oil Derivatives
directly or indirectly other than through a PEMEX Entity.
(14) Successors and Assigns; Additional Parties
This Agreement shall apply to and bind the parties hereto
and their successors and assigns.
Neither this Agreement nor any
interest herein nor any obligation hereunder shall be assigned or
transferred (whether by operation of law or otherwise) without
the prior written consent of the Treasury.
PEMEX shall cause any of its subsidiaries who shall in the
future export crude oil or Oil Derivatives and who are not now a
party to this Agreement to become a party hereto promptly upon
27
such subsidiary's beginning to export such crude oil or oil
Derivatives.
(15) Insurance
PEMEX shall maintain adequate insurance for the businesses
in which all PEMEX Entities are engaged and for the properties
which they own or operate.
The Treasury shall have the right to
inspect any and all applicable certificates or other evidence of
insurance.
(16) Disputes
The parties agree that they will in good faith negotiate to
resolve through mutual consultation any dispute arising out of or
in connection with this Agreement.
(17) Use of Proceeds to Pay Claims Under Other Financing
Agreements
(a)
Other Foreign Participants.
Subject to prior agreement
between the Treasury, the FRBNY, and Mexico, after debit or setoff against any funds in the Special Funds Account, such funds
may be distributed to other countries, central banks, and
international financial institutions, such as the Bank for
International Settlements (each such country, central bank or
institution being a "Foreign Participant") which enter into
financing agreements with the Government or the Banco de Mexico
("Other Financing Agreements").
28
(b)
Claims Payment.
Upon (a) receipt by the FRBNY from a
Foreign Participant of the agreements, representations and
indemnities comparable to those made or extended pursuant to
paragraph 3 above in a form satisfactory to the FRBNY, and
agreement by the Foreign participant to provide any notices the
FRBNY may reasonably require (the "Foreign Undertaking"), and (b)
subsequent notice by the FRBNY to the Treasury and the Banco de
Mexico that it has received the Foreign Undertaking, claims of
the Foreign Participant under the Other Financing Agreement shall
be treated in the same fashion as those of the Treasury above,
provided that the Foreign Participant, the Treasury, and the
Banco de Mexico may separately agree as to the order and priority
of payment of their claims from any set-off amounts from the
Special Funds Account.
(18) Governing Law and Jurisdiction
(a)
New York Law and Waiver of Immunity.
The Agreement
shall be governed by and construed in accordance with the law of
the State of New York, to the extent not inconsistent with the
Federal law of the United States.
Each of Mexico and PEMEX
hereby irrevocably submits for all purposes of or
~n
connection
with this Agreement to the exclusive jurisdiction of the United
States District Court located in the Borough of Manhattan in New
York City.
The United states hereby irrevocably submits for all
purposes or in connection with this Agreement to the exclusive
jurisdiction of the Federal courts of the United States.
Each of
29
Mexico, PEMEX, and the United States hereby irrevocably waives,
to the fullest extent, the defense of an inconvenient forum to
the maintenance of an action or proceeding brought pursuant to
this paragraph.
In light of the fact that the Financing Arrangements
constitute commercial activities, and in accordance with normal
practices, the Government, the Banco de Mexico and each PEMEX
Entity waive immunity from (i) attachment in aid of execution,
(ii) execution, or (iii) attachment prior to the e.1try of
judgment, for all purposes of Title 28 United States Code
sections 1610 and 1611 in respect of their obligations under the
Financing Arrangements.
(b)
Service of Process.
Mexico and PEMEX each hereby
irrevocably appoints the person for the time being and from time
to time acting as or discharging the function of the Consul
General of Mexico in New York, New York (the "Process Agent"),
with an office, on the date hereof, at 8 East 41st Street, New
York, New York
10017, United States, as its agent to receive on
its behalf or service of copies of the summons and complaint and
any other process which may be served in any such action or
proceeding brought in the Federal District Court sitting in the
Borough of Manhattan in New York City.
Such service may be made
by mailing or delivering a copy of such process to Mexico or
PEMEX in care of the Process Agent at the address specified above
for such Process Agent, and each of Mexico and PEMEX hereby
irrevocably authorizes and directs such Process Agent to accept
30
such service on its behalf.
(19) Rights and Remedies Cumulative.
No right or remedy herein conferred upon or reserved to the
Treasury is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted
by law, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in
equity or otherwise.
The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
(20) Amendment
This Agreement may be amended by the consent in writing,
including consent by authorized telecommunication, of all the
parties to the Agreement.
(21) Channel of Communications
(a) The channel of communications for the Treasury
Department for all communications under this Agreement shall be:
Office of the Assistant Secretary
for International Affairs
U.S. Department of the Treasury
Room 3430
Washington, D.C.
20220
31
Telephone:
(202)
622-0060
Facsimile:
(202)
622-0417
(b) The channel of communication for the Banco de Mexico and
the Government shall be the same as in the Framework.
(c) The channel of communication for PEMEX for all
communications under this Agreement shall be:
Chief Financial Officer
.
Petro'1 eos MeX1canos
Avenida Marina Nacional 329
Torre Ejecutiva piso 31
Mexico, D.F., Mexico
(d)
11311
Telephone:
(525)
726-1386
Facsimile:
(525)
545-5247
The channel of communication for the FRBNY for all
communications under this Agreement shall be:
Federal Reserve Bank of New York
Central Bank Services
33 Liberty street
New York, New York
Telephone:
(212)
10045
720-5222
32
Facsimile:
(212) 720-7621
(22) Entry into Effect
(a)
Effective Date.
This Agreement shall take effect on
the date (the "Effective Date") when (i) all the parties hereto
have properly executed this Agreement,
(ii) the MOU has been
terminated, and (iii) the conditions set forth in paragraph 2(a)
above have been met, at which time the FRBNY shall promptly give
notice to the Banco de Mexico that the Agreement has taken
effect.
(b)
Execution. This Agreement may be executed by separate
parties in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together
shall constitute but one and the same Agreement.
33
IN WITNESS WHEREOF, the undersigned, being duly authorized,
have signed this Agreement.
DONE at Washington, this 21st day of February, 1995, in
quadruplicate.
FOR THE GOVERNMENT OF THE
FOR THE GOVERNMENT OF THE
UNITED STATES
UNITED MEXICAN STATES
Public Credit
34
FOR THE BANCO DE
~CO,
ON
ITs OWN BEHALF AN%) AS FISCAL
POR THE FEDERAL RESERVE
BANlC OF NEW YOJU(
AGENT OF THE GOVERNMENT OF THE
•
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FOR PMI COMERCIO
INTERNACIONAL
ANNEX B
£bS/95/l4
- 1 -
January 30, 1995
Mexico D. F., Mexico
January 26 , 1995
Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431
Dear Mr. Camdessus:
i.
The attached Memorandum of Economic Policies outlines the program
that the Government of Mexico and the Bank of Mexico intend to implement during
1995 to address the fundamental causes of the current financial crisis, to minimize its
inflationary consequences and 10 quickly return the economy to a path of sustainable
growth with low inflation. In support of this program, Mexico hereby requests an 18·
month stand-by arrangement from the Intemational Monetary Fund in an amount
equivalent to SDR 5,259 million or 300 percent of Mexico's quota.
The program
provides for three revIews to be completed before the end of July 1995, November
1995, and May 1996. The reviews will focus, in particular, on the progress achieved
in stabilizing the exchange and financial markets, price developments, and the
evolution of the public finances.
The second review also will focus on the 1996
budget and the establishment of performance criteria for March and June 1996.
2.
We strongly believe that the pursuit of the policies set forth in this letter,
combined with the large support from the intemational financial community, will soon
re-establrsh market confidence in Mexjco's macroeconomic policies.
We recognize
that the provision of substantial financing from the Fund and the frontloading of such
financing requires an appeal to exceptional circumstances. Accordingly, in the event
the situation stabilizes soon, as we expect it will, Mexico would forego some of the
subsequent purchases and, if reserves permit. would make early repurchases from
the Fund.
Should the aforementioned policies, however, not rapidly stabilize the
situation, Mexico would stand ready to strengthen further its poHcies.
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3.
The Govemment and the Bank of Mexico believe that the policies set
forth in this letter are adequate to achieve the objedives of their program, but will
take further measures that may become appropriate for this purpose.
During the
period of the stand-by arrangement, Mexico will consutt with the Managing Diredor of
the Fund on the adoption of any measures that may be appropriate, at the initiative of
either the Govemment and the Bank of Mexico or the Managing Diredor. It also will
provide the Fund with such information as the Fund requests on the progress made in
policy implementation and the achievement of the program's objectives.
4.
Moreover, after the period of the arrangement and while Mexico has
outstanding purchases in the upper credit tranches, the Government and the Bank of
Mexico will consult with the Fund from time to time, at the initiatIve of the Govemment
and the Bank of Mexico or whenever the Managing Director requests consultation, on
Mexico's balance of payments policies.
Sincerely yours,
____________1s 1____________
_ _ _ _ _ _ /5/ _______
Guiliermo Ortiz Martinez
Secretary of Finance and
Public Credit of Mexico
Attachment: Memorandum of Economic Policies
Miguel Mancera Aguayo
Governor
Bank of Mexico
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Mexico-Memorandum of Economic Policies
1.
Over the past several years, Mexico has been ,mplementing far-
reaching macroeconomic and strudural reforms which have succeeded in raising the
living standards of the population and fostering conditions for sustainable economic
growth.
In recent years, however, the improvement in economic performance has
been accompanied by a decline in private savings and a steady rise in the external
current account deficit even as the public finances remained strong.
VVhile export
growth, particularly of manufa~ures, has been remarkable, there has been a sharp
increase in imports induced by buoyant private capital inflows, the real appreciation'
of the currency, the increase in real incomes, and trade liberalization.
2.
In early 1994, adverse political events, coupled with rising interest rates
in the United State5 and investors' concerns aboufthe sustainability of the exchange
rate regime and of the external current account deficit, began to create pressures in
financial and foreign exchan"ge markets. To contain these pressures the authorities
increased interest rates and the use of do.1lar-lndexed bonds (Tesobonos). exercised
greater exchange rate flexibility within the e:tchange rate band. and made use of
internatIonal reserves.
However. these actions calmed the markets only through
early November. By the middle of the month, renewed market pressures and political
events produced a sharp decline in international reserves which culminated in an
exchange crisIs that led to the floating of the new peso on December 22.
3.
The change in the exchange regime did not restore confidence. Foreign
investors in the Mexican market began to sell their holdings of new pesodenominated instruments as well as Tesobonos. Moreover. in the context of a run
against the new peso, concems developed over Mexico's ability to amortize short-
term foreign liabilities that were faliing due.
Under normal circumstances. these
liabilities would have been rolled over, but. given the market uncertainties: the
Government began to experience difficulties in placing new securities while foreign
exchange liabilities of some commercial banks were being called. Foreign short-term
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liabilities falling due in 1995 include Tesobonos held by foreigners in an amount close
to US$17 billion and foreign currency liabilities of local commercial banks amounting
to U 55 18 billion.
The latter are largely certificates of deposit. interbank loans,
commercial paper and Eurobonds issued by commercial banks. By end-December.
the new peso had depreciated by 44 percent in local currency terms and treasury bill
rates reached over 30 percent.
4.
On January 3, 1995, the Govemment, the Bank of Mexico, and the
labor, farm, and business sectors signed the Agreement of Unity to Overcome the
Economic Emergency.
This agreement provides a comprehensive strategy for
stabilizing the financial and exchange markets, restoring investors' confidence, and
returning the economy to a path of sustained growth with low inflation. The strategy
involves a strengthening of Mexico's economic policies, to be supported by a sizable
pool of external resources that would be available for stabilizIng the exchange market
in the face of pressures derived from the inability to roll-over dollar-denominated
~
obligations.
~.
The authorities believe that these two elements-adjustment and
financing--taken together will restore private sector confidence and encourage the
roll-over of a large part of the maturing liabilities, reducing the need to draw on these
resources
5.
The economic program seeks to achieve a reduction of the external
current account deficit by more than one-half to about USS14 billion (4.3 percent of
GDP, a level sustainable over the medium term), and to contain the inflationary
effects of the recent sharp depreciation.' Regarding the latter, the aim would be to
lower inflation from a cumulative 7-8 percent in the first quarter of 1995, to a
cumulatIve 3 percent in the last quarter of the year. On this basis, the twelve-month
rate of inflation In 1995 would be around 19 percent.
The reduction of domestic
demand can be expected to result in a decline in economic activity in the first half of
the year, but real GDP is expected to recover strongly in the second half bringing the
growth rate for 1995 as a whole to around 1.5 percent.
6.
The program's objectives are to be achieved through a wage-pnce
policy aimed at containing the inflationary effects of the devaluation as established in
the context of the above-mentioned Agreement, fiscal stre~gthening, and credit
restraint, including a sharp curtailment of credit expansion by the development banks
and trust funds. In addition, the Govemment plans to deepen its already extensive
privatization program with a view to increasing the efficiency of domestic production
and strengthening the ability of domestic producers to compete in wortd markets.
7.
To underpin the program and to ensure orderly conditions in foreign
exchange markets, the authorities are completing the assembly of an Exchange
Stabilization Fund in an amount of US$1 a billion to support the new peso as needed,
especially in light of the potential amortization of foreign currency debt obligations.
The Exchange Stabilization Fund includes resources from the United States and
Canada under the North American Financial Agreement. from monetary authorities of
several countries coordinated by the Bank of International Settlements (SIS), and
from private commercial banks
Also, the World Bank and the Inter-American
Development Bank are accelerating disbursements on existing loans to Mexico.
Furthermore, on January 12, the U.S. Gove!l")rnent announced its intention to provide
Mexico with guarantees on the issuance of Mexican debt in international financial
.
markets for up to USS40 billion. This support will give the MeXican Govemment the
opportunity to improve the structure of its debt. while curtailing its interest costs.
8.
In order to help minimize the inflationary impact of the exchange rate
adjustment, wage policy under the Agreement provides for an increase in minimum
and public sector wages of 7 percent, and an additional 3 percent through an income
tax credit for workers with incomes of up to twice the minimum wage.
Contractual
wage negotiations a/so will adhere to these guidelines and, in addition, will include
productivity bonuses freely negotiated between labor and business.
9.
The Govemment is committed to carrying out a realistic public sector
pricing policy so
as to avoid distortions.
However, in current conditions it has become
necessary to have an orderly and gradual correction in these prices.
Accordingly,
public sector prices will be adjusted on a monthly basis by somewhat less than the
projected rate of inflation. The limited price adjustments will generate a revenue loss,
but this is being compensated by other fiscal measures. The Government intends to
take action in due course to correct price distortions that may result.
Private
businesses have been requested to make an extraordinary effort to contain price
increases to the extent possible by reducing profit margins and, on a temporary basis,
the Govemment has intensified the surveillance of prices of the 35 items in the basic
consumption basket.
10.
The Bank of Mexico will pursue its main objective, namely. the stability
of the purchasing power of the currency, by establishing a limit to the growth of its net
domestic credit for 1995.
According to the commitments on wages, prices and
government expenditures, subscribed under the Agreement to Overcome the
Economic Emergency, and on the basis of an expected average exchange rate of
NMexS4.50 per U.S. dollar, the inflation rate for this year should not exceed 19
percent for the DecemberlDecember period.
To attain this objective, the Bank of
Mexico has established a limit of 10,000 million new pesos on the expansion of its net
domestic credit in 1995. This amount is equivalent to 17.5 percent of currency issue
at end-1994 and is consistent with an expected increase in money velocity of
Should the Bank consider th~t, in light of developments, the credit
.,
expansion required to meet its inflation target is less than the stated ceiling, it will
circulation.
...
reduce the growth of its net domestic credit acco-rdingly.
Monetary control will be
exercised through open market operations and by adjusting the interest rate charged
to commercial banks for resources to meet clearing deficiencies. In accordance with
the new Bank of Mexico Act, which went into effect In April 1994, the Bank of Mexico
will no longer extend credit to development banks and trust funds.
11.
Existing_ regulations on banks' foreign currency exposure, borrowing
abroad and portfolio provisioning limited the direct impact of the sharp increase in
interest rates and the depreciation of the new peso on the financial situation of
commercial banks.
While banks did not experience significant foreign exchange
losses, some of them might soon face net capital shortages resulting from the higher
new peso value of their foreign-currency denominated loan portfolio.
In current
circumstances, non-perforrrung loans may increase thus requiring commercial banks
to raise their reserves. In early January. the Savings Protection Fund (FOBAPROA)
established a program to acquire subordinated debt issued by banks unable to obtain
suffiCient additional capital on a timely basis.
If deemed necessary, the Bank of
Mexico will grant credit to FOBAPROA for this purpose within its net domestic credit
target.
- ., 12.
In 1994 the rapid expansion of credit by the development banks
(equivalent to about 4.4 I'ercent of GOP) contributed to demand pressures. The 1995
program provides for a reduction in the rate of credit expansion by these banks by
more than one-haff (to 2.1 percent of GOP). The development banks and trust funds
will continue to provide net financing to priority sectors including exports and
agriculture.
13.
The Govemment has tightened fiscal policy to achieve an overall public
sector surplus for 1995 of 0.5 percent of GDP compared with overall balance in 1994.
Within the overall fiscal plan, the program provides for a very strong fiscal effort in the
first half of the year to produce a primary surplus of 4.4 percent of GOP and an
overall surplus of 1.6 percent of GOP on an annual basis.
This is to be achieved
through the containment of non-interest expenditures which, in real terms, would be
about 9 percent lower than in the corresponding period of 1994.
In addition, the
.,.~
Government is prepared to introduce contingency measures in the second half of the
year if the evolution of key economic parameters is· not consistent with the attainment
of the objectives of the program.
14.
The 1995 budget provides for a reduction in government revenue of
about O.S percentage points of GDP (compared with 1994), mainly refiecting direct
and indirect revenue losses from the less than full adjustment of public sector prices.
Government expendi.ture is to be reduced by 1.3 percent of GDP after taking into
account hIgher interest payments of about 0.2 percent of GOP.
The public sector
current expenditures are projected to decline by 0.8 percentage pOints of GOP and
capital expenditures will be cut by 0.5 percentage pornts of GDP by postponing new
projects. The Govemment, however, will seek to preserve as much as possible the
level of expenditure on social programs, in order to protect the poorer segments of
the Mexican population.
, 5.
The authorities are firmly committed to avoiding any measures that
would limit exchange market convertibility. During the early weeks of 1995. there was
a degree of over-shooting in the exchange market triggered by uncertainty and a lack
of confidence.
In this connection, under the existing floating exchange rate regime.
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sound monetary and fi.scal policies under the program. together with the support
provided by the Exchange Stabilization Fund and the loan guarantee program being
worked out by the U. S. Govemment, are expeded to restore confidence in the new
peso permitting a recovery in the exchange rate.
The Bank of Mexico plans to
remove regulatory obstacles to help provide investors with hedging opportunities
(without government intervention) in the context of the existing exchange rate regime.
Drawings on Exchange Stabilization Fund resources will be limited to counterad
foreign exchange market pressures deriving from the difficulties in rolling over
Tesobonos and banks' foreign liabilities. The Exchange Stabilization Fund is not
envisaged as a substitute for conventional balance of payments financing or to take
the place of appropriate policy adjustments.
16.
The targeted reduction in the extemal current account deficit (from 8.0
percent of GDP in 1994 to 4.3 percent of GDP in 1995) reflects an expected surge in
manufacturing exports and a decline of 7 ~~:cent in the value of imports (excluding
those of in-bond industries). The deficit of around US$14 billion is expected to be
covered by public sedor borrowing (USS5 billion)". direct foreIgn investment (USSe
billion) and other private flows (USS1 billion). The program assumes no change in
net international reserves in ·1995.
17.
The Government of Mexico has decided to accelerate structural reforms
In the transportation. telecommunications and banking sectors. These are crucial for
increasing efficiency. and productivity in the Mexican economy.
Accordingly. the
Executive has proposed to Congress constitutional amendments to allow private
Investment in railroad and satellite communications. Also, the Government will open
up telecommunications to local and foreign competition, allow for privatization of
electricity generation facilities, and has proposed legislation to permit greater foreign
partiCipation in the banking system than envisaged under the NAFTA arrangements.
Steps to privatize ether state facilities currently underway (including ports. airports.
and petrochemical plants) will be accelerated.
tn this context, the authorities are
committed to undertake privatization and concession operations that are estimated to
yield about USS6 billion in 1995, and an additional USS6ea billion in the following two
years.
- 9 -
18.
White all sedors of the Mexican society will share the burden of the
sharp adjustment that must take place, the Government has taken specific steps to
ensure that the poorest segments of the population are protected. As noted above,
the decline in real income for workers eaming less than twice the minimum wage will
be contained through the use of an income tax credit; the slowdown in the rate of
credit expansion by the development banks has been designed so as not to curtail
credit availability to the agricultural sector, and the planned reduction in public
spending will keep virtually untouched the level of real resources channeled to social
programs. The Govemment acknowledges the urgent need to reduce poverty and
improve the living standards of the Mexican population and stands by its commitment
to increase substantially expenditures on social programs once financial stability is
restored.
19.
With the aid of debt restructuring operations, and through the use of
privatization proceeds, total gross public ,.debt (excluding the Bank of Mexico)
0#
..
declined from about 90 percent of GDP at end·1986 to about 35 percent of GOP at
end-1994. The large-scale substitution of dollar-indexed debt (Tesobonos) for new
peso-denominated treasury bills (Cetes) during 1994 complicated debt management
and contributed to the present eXChange-market problems
The Government will
continue to exercise prudence in contracting new external debt and will seek to
extend the maturities and improve the terms of outstanding short-term debt.
20.
On the .basis of the strategy outlined above, the economy should
stabilize sufficiently during the year to permit the full restoration of private sector
confidence and resumption of capital inflows.
With continued strong gro'Nth in
exports and the expected recovery in investment, a resumption in real GDP growth to
around 4 percent would be feasible in 1996. To strengthen the basis for this recovery
and to help reduce annual inflation to single digits, the Govemment and the Bank of
Mexico are committed to the continued pursuit of prudent financial poliCies, incJuding
the maintenance of a fiscal surplus in 1996. In order to finance an increase in public
sector investment and social sector spending, revenue consolidation efforts will be
strengthened through further improvements in tax administration and new revenue
measures. Such measures would take into consideration the need to increase private
savings so as to achieve an extemal current account deficit in the range of 3.0-3.5
percent of GOP. The specific policies to be introduced in 1996 would be discussed in
the context of the budget exercise.
21.
Early in 1995, a Fiscal Advisory Commission will be created to advise
the Govemment on matters of tax policy and administration.
The Commission will
have the basic purposes of analyzing the tax system and proposing modifications in
order to strengthen fiscal federalism, simplify administrative procedures, improve
legal safeguards, and increase the equity of the system.
The proposals will be
designed to increase tax fairness and the enforcement of tax obligations, as well as to
strengthen tax revenues.
The proposals will be ready before the opening of the
congressional session in September 1995, so as to allow the Federal Govemment to
include actions in the budget fpr 1996.
Efforts will continue in 1996 to rationalize
current expenditures in the public sector.
22.
To sum up, Mexico is facing ~ short term financial crisis set off by the
devaluation of the new peso. The Government's program contains steps to stabilize
financIal markets as well as measures to ensure that the devaluation succeeds in
reducmg the external imbalance and t6 reinforce the already solid fundamentals of
the Mexican economy. The Government is confident that market stabilization will be
quickly achieved and that Mexico will soon resume the path of strong non-inflationary
economic growth with a steady improvement in welfare and social justice for all
Mexicans.
Annex c:
Economic Policy
Memoran~um
1.
This memorandum describes the economic policy actions that the
Government of Mexico and the Bank of Mexico intend to take in
1995 to address the present financial crisis.
In support of
these actions, Mexico hereby requests from the United states
Government the activation of the U5$20 billion emergency
support package as detailed in the U.s. -Mexico Framework
Agreement.
2.
The economic policies of the Government of Mexico for 1995
have been described in detail in the Memorandum of Economic
Policies presented to the IMF in our request for a stand-by
arrangement. These include policies of fiscal strengthening,
credit restraint, a deepening of privatization, and debt
restructuring.
We believe that our comprehensive economic
program provides the basis for overcoming the present
financial crisis.
We reiterate our commitment to implement
the policy steps described in that memorandum and to fulfill
all the commitments we have undertaken with the IMF in
connection with the stand-by arrangement.
3.
In light of the severity and persistence of the present
financial crisis, we have become convinced of the need for
certain additional policy steps, described below, to bolster
our 1995 economic program and to bring about more stable
financial and exchange markets. We believe that these policy
steps, implemented in conjunction with the activation of the
support embodied in the U.S.-Mexico Framework Agreement and
the other substantial external financial assistance, will
provide the basis for stabilization, the full restoration of
confidence, and the resumption of capital inflows sufficient
to permit an orderly and timely fulfillment of all of Mexico's
debt service obligations.
4.
Our most immediate objective is to create economic and
financial conditions that would stabilize the currency. We aim
to strengthen the peso, which has become substantially
undervalued, and reverse the capital outflows that have led to
a depletion of the international reserves of the Bank of
Mexico. Once the immediate price increases brought about by
the recent peso depreciation have passed, we aim to bring
inflation down to low levels. We consider stabilization the
key to returning the economy quickly to a path of sustainable
growth.
Monetary and credit policy will bear much of the
weight of achieving this objective. The principal objective
of the Bank of Mexico, as stated in the law which establishes
its full independence as an institution, is to procure the
stability of the purchasing power of the peso.
5.
Monetary policy will be directed at the overriding objectives
2
of reducing inflation, strengthening the peso, and encouraging
the restoration of normal, spontaneous capital inflows.
To
anchor this policy firmly, the Bank of Mexico has adopted an
upper limit for net domestic credit expansion of NPIO billion
for all of 1995.
These credit operations will raise base
money by significantly less than the rate of inflation, and
will lead to a decline in the real stock of base money backed
by domestic credit. Any further rise in base money would come
about only as a result of an accumulation of central bank net
international reserves. The Bank of Mexico is committed to a
forceful tightening of credit policy in response to any
further net capital outflows.
6.
The uncertainties regarding Mexico I s financial system that
have prevailed in recent months have complicated the
management of money and credit policy.
Now, wi th the
activation of the U.S.-Mexico Framework Agreement, there is a
good prospect for a reduction_oL_these pressures_ The Bank of
Mexico has tightened monetary conditions to guarantee the
substantially positive real interest rates that are essential
to a successful stabilization.
As stabilization takes hold
and confidence is restored, interest rates should decline.
7.
The financial crisis has placed strains on the banking sector.
Restoring financial stability and confidence is essential to
easing those strains. In the meantime, the Government and the
Bank of Mexico are implementing actions to cope both with
liquidity and solvency problems in the banking sector.
Liquidity problems will be handled without relaxing the credit
program established by the Bank of Mexico, and will be
supported by the funds available under the U.S.-Mexico
Framework Agreement. Solvency problems will be handled using
the procedures established under law for the operations of the
Savings Protection Fund (FOBAPROA).
The Government is
determined to protect depositors, but will take actions in a
timely, forceful, and open manner, including interventions, to
deal effectively and efficiently with cases of insolvency. To
cover the fiscal costs that could arise from such actions, the
Government will adopt appropriate fiscal measures.
In
addition, we intend to request assistance from the World Bank
and other experts in strengthening our supervisory procedures.
8~
The Mexican financial authorities believe that the peso has
been substantially undervalued at the levels prevailing in the
exchange market in recent trading sessions.
A fundamental
objective of monetary policy is to assure that the peso
appreciates from the levels of its recent trading range. The
funds available to Mexico from the IMF and other international
authorities will be available for intervention to prevent
inappropr iate fluctuations.
Any use of these funds will
trigger a quick adjustment of credit and interest rate
policies to reverse rapidly the intervention and any
3
accompanying credit expansion.
In addition, we intend to
improve the functioning of the foreign exchange market,
including the development of futures and forward foreign
exchange markets.
9.
We set a goal, announced in the context of our IMF stand-by
arrangement, to achieve a public sector surplus for 1995 of
0.5 percent of GDP, compared with a deficit of 0.3 percent in
1994, and to cut development bank lending in comparison with
1994. To that end, non-interest expenditures will be reduced
by 1.3 percent of GOP.
In order to strengthen our economic
program, we committed to introduce additional measures if
necessary.
10.
The Mexican Congress has approved legislation that will enable
the Government to accelerate structural reforms in the
transportation,
telecommunications, and banking sectors.
These are crucial to improve the efficiency and productivity
of the economy as a whole.
The Government will open up
telecommunications to local and foreign competition, allow for
privatization of electricity generation facilities, and will
permit greater foreign participation in the banking system
than envisaged under the NAFTA.
In this context, the
Government is committed to undertake privatization and
concession operations that are estimated to yield US$12-14
billion in the next three years.
11.
The Government and the Bank of Mexico believe that their
policies must be transparent in order to be effective.
To
that end, the Bank of Mexico will begin new weekly and monthly
publications that present financial data on a timely basis,
including money and credit aggregates and international
reserves (see Annex B). The data will also be made available
on Internet in the near future. The Ministry of Finance will
begin a new publication presenting key fiscal data on a more
timely basis, including the evolution of public sector
expenditures, revenue, and debt.
The data to be published
will provide a clear basis for an analysis of the conduct of
economic policy.
12.
To underpin the economic program, ensure orderly debt service
on public debt, and support orderly conditions in foreign
exchange markets, the Mexican authorities have requested and
received substantial support from the international financial
community. Under the U.S.-Mexico Framework Agreement, U5$20
billion will be available for short-term and medium-term swaps
and for long-term guarantees with maturities of up to 10
years.
The utilization of the guarantees will follow
consideration by the Mexican Congress.
Further support has
been committed by the IMF and the international financial
community.
The Government will make every effort to access
private capital markets as early and as fully as possible as
4
it goes ahead with the process of improving the maturity
structure of its debt. The U.S. support will facilitate this
process of enlarg ing Mexico I s access to the markets.
The
Government aims to continue to make tenders for outstanding
Tesobonos.
The external finance will also be available to
support orderly foreign exchange market conditions. With the
policies described above and the large-scale external
financial support, the Government and Bank of Mexico are
confident their economic objectives can be achieved.
Annex D: Public Availability of Gov.rnment and
Bank of Mexico Statistical InformatioD
Consistent with its commitment to the transparent disclosure of
information on a timely basis, including data on its operations
and monetary statistics, the Governing Board of the Bank of
Mexico recently announced the following decision:
1.
The Bank of Mexico, as of mid-March 1995, will publish a
summary balance sheet based on gross assets and liabilities on a
weekly basis (with a reporting lag of two to three days)
substantially in the form set forth below:
ASSETS
International Assets
Credit to Government
Credit to Financial
Intermediaries
Holdings of Government
Securities */
LIABILITIES
International Liabilities **/
International financial
institutions
Foreign financial
authorities
Other liabilities
Monetary Base
Bills and coins in
circulation
Bank deposits
Other
Government Deposits in Current
Account
Other
*/
Net of Government
deposits for monetary
regulation.
**/ Off-balance sheet items
will be included as a
memorandum item on a quarterly
basis.
2.
The Bank of Mexico will continue its policy of publishing
its balance sheet on a monthly basis in the Mexican press.
3.
The Bank of Mexico will expand its new practice of releasing
key monthly data to include data on government securities in
circulation and operations of FOBAPROA. These data will be
released a few days after the end of the month.
4.
At present, the Bank of Mexico releases preliminary monthly
monetary statistics with an approximate lag of 25 days.
Every effort will be made to shorten this lag to two weeks
by June 1995.
5.
The Bank of Mexico will present changes in net foreign
assets, the monetary base, and net domestic assets according
to IMF methodology on a quarterly basis with a reporting lag
of one week.
6.
At the same time, efforts are being made to shorten
reporting lags for key data series contained in the Bank of
Mexico's Government's monthly publication Indicadores
Economicos. That publication includes final information on
broad monetary aggregates, fiscal revenues and expenditures,
public sector borrowing operations, operations of
development banks, and trade and balance of payments
statistics. Subscribers to this publication have access to
the information on computer diskettes.
In addition, the
information will be made available on INTERNET in the near
future.
7.
By March lOth, the Bank of Mexico will announce a timetable
setting forth regularly scheduled dates and times at which
specified information will be released throughout the year.
8.
The Ministry of Finance and Public Credit will publish
preliminary data on fiscal revenues and expenditures, public
sector borrowing operations, and operations of developmenmt
banks with a 45-day lag.
J)
EPA R T :\1 E N T
0 F
THE
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'IREASURY (.)
T REA SUR Y
NEW S
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE. N.W .• WASHINGTON. D.C.. 20220. (202) 622·2960
FOR IMMEDIATE RELEASE
May 3, 1995
REMARKS BY DARCY BRADBURY
DEPUTY ASSISTANT SECRETARY (FEDERAL FINANCE)
TREASURY QUARTERLY REFUNDING PRESS CONFERENCE
Today, we are announcing the terms of the regular Treasury
May midquarter refunding.
I will also discuss Treasury financing
requirements for the balance of the current calendar quarter and
our estimated cash needs for the July-September 1995 quarter.
1.
We are offering $30.0 billion of notes to refund $32.1
billion of privately held notes and bonds maturing on May 15.
The securities are:
First, a 3-year note in the amount of $17.5 billion,
maturing on May 15, 1998.
This note is scheduled to be
auctioned on a yield basis at 1:00 p.m. Eastern time on
Tuesday, May 9, 1995.
The minimum purchase amount will
be $5,000 and purchases above $5,000 may be made in
multiples of $1,000.
Second, a 10-year note in the amount of $12.5 billion,
maturing on May 15, 2005.
This note is scheduled to be
auctioned on a yield basis at 1:00 p.m. Eastern time on
RR-265
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
(
-..
(
2
Wednesday, May 10.
The minimum purchase amount will be
$1,000.
2.
We are also announcing a $17 billion 38-day cash
management bill, which will be issued on May 15 and mature on
June 22, 1995.
This bill is scheduled to be auctioned on a
discount rate basis at 1:00 p.m. Eastern time on Thursday, May
11.
Noncompetitive tenders will be accepted up to $1 million.
The minimum purchase amount will be $10,000 and purchases above
$10,000 must be in multiples of $1,000.
3.
As announced on Monday, May 1, 1995, we estimate a net
market borrowing need of $25.8 billion for the April-June 1995
quarter.
The estimate assumes a $45 billion cash balance at the
end of June.
Including the notes in this refunding, we have paid
down $19.7 billion of cash from the sale of marketable
securities.
This was accomplished as follows:
raised $2.2 billion from the 2-year note that settled
May 1;
raised $12.1 billion from the 5-year note that settled
May 1;
raised $2.3 billion from the 52-week bills;
paid down $18.1 in the regular weekly bills, including
those announced yesterday, May 2;
paid down $9.1 billion in cash management bills which
matured April 20;
3
paid down $7.0 billion in the 7-year note that
matured April 15; and
will pay down $2.1 billion ln the notes announced for
the refunding today.
4.
The Treasury will need to raise $45.5 billion in market
borrowing during the rest of the April-June quarter.
We have
taken into account the fact that the $17 billion cash management
bill to be issued on May 15 will mature on June 22, before the
end of the quarter.
The financing remaining to be done before
the end of June can be accomplished through regular sales of 13-,
26-, and 52-week bills and 2-year and 5-year notes.
Additional
cash management bill financing may be needed to bridge the
seasonal low-point in the balance in June.
5.
We estimate Treasury net market borrowing needs to be
in the range of $40 to $45 billion for the July-September 1995
quarter, assuming a $30 billion cash balance on September 30.
The estimate does not include cash to be raised in the September
2- and 5-year notes, which will be issued on October 2.
6.
with this May refunding and the increases of $.5
billion each in the 2- and 5-year note offerings in April, the
Treasury has begun to increase coupon offerings to reflect
greater financing needs in future months.
These increases are
the first increases in the 2-year notes since July 1994, in 5-
4
year notes slnce January 1993, and in 3- and 10-year notes since
August 1993.
7.
The Treasury is reviewing a draft study evaluating the
results to date of the single-price auction technique.
We expect
to have a paper for public comment within the next couple of
months.
Treasury's use of the single-price auction method began
with the 2- and 5-year note auctions in September 1992.
The
stated purpose was to determine whether the single-price auction
technique broadens participation and reduces concentration of
securities on original issue, and whether it reduces the
Treasury's financing costs by encouraging more aggressive bidding
by participants.
8.
We will accept noncompetitive tenders up to $5 million
for each of the notes announced today.
The lO-year note
1S
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.
9.
The August midquarter refunding press conference will
be Wednesday, August 2, 1995.
REPORT TO THE SECRETARY OF THE TREASURY
FROM THE
TREASURY BORROWING ADVISORY COMMITTEE
OF THE
PUBLIC SECURITIES ASSOCIATION
MAY 3, 1995
Dear Mr. Secretary:
Since the Committee's last meeting with the Treasury in February 1995, the
pace of economic activity has moderated. Price increases for tinal goods are still
subdued, although inflationary pressures in raw materials and intermediate goods
continue to intensity. After raising the Federal funds rate 0.5% to 6.0% early in
February, the Federal Reserve has made no further changes in monetary policy.
During the last three months, yields on Treasury securities have declined.
The drop was only a few basis points on short-term bills but ranged between 60 to
70 basis points for maturities from two to ten years; the yield on 30-year bonds fell
less. with a drop of approximately 40 basis points The present shape of the yield
curve and forward prices for various fixed-income instruments indicate market
participants expect modest further increases in interest rates in the comIng
months.
Within this context. to refund the $32.1 billion of notes and bonds maturing
on May 15. 1995 that are privately held and to raise additional cash of $18.9
billion, the Committee recommends that the Treasury auction $51.0 billion of the
following securities:
• $18.0 billion 3-year notes due May 15,1998;
• $13.0 billion 10-year notes due May 15,2005;
• $10.0 billion cash management bills due June 22,1995; and,
• $10.0 billion cash management bills due September 21, 1995.
Of the 18 Committee members present for the meeting, 17 favored the
issuance 01 $18.0 billion 3-year notes and $13.0 billion 10-year notes. The
recommended increase of $1.0 billion for both offerings from the levels in the last
refunding was based on the absence of a 30-year bond in this quarterly cycle and
the belief that because of the substantial diminution of the cash raising potential
from the issuance of 5-year notes beginning in 1996. the Treasury should continue
2
the gradual building of the sizes of its coupon offerings. The vote of the Committee
on the sizes and maturities of the cash management bills was unanimous.
In considering whether to recommend issuing a new 10-year note or
reopening the 7 1/2% note due February 15, 2005, Committee members observed
that the tightness of the outstanding issue in the repurchase agreement market
was neither unusual nor acute. Also, the three paint premium in the current market
price of the outstanding issue materially exceeds the premiums of previously
reopened issues. Without compelling reason to recommend a break With existing
precedents, the Committee voted 15 to 3 in favor of a new issue.
With the aim of achieving a cash balance of $45 billion on June 30, the
Committee unanimously recommends that for the remainder of the quarter the
Treasury meet its borrowing requirement in the following manner:
•
Two 5-year notes totaling $11.5 billion each, to raise $23 billion
of new cash;
•
Two 2-year notes totaling $17.75 billion each, to raise $2.4
billion of new cash;
•
Two 1-year bills totaling $17.25 billion eaCh, to raise $1.8 billion
01 new cash;
•
Weekly issuance of 3- and 6-month bills through the remainder
of the quarter, to raise $1,1 billion of new cash; and,
•
The paydown on June 22 of $10,0 billion of cash management
bills issued in conjunction with the May refunding.
Including the $18.9 billion raised in the mid-quarter refunding as well as
anticipated foreign add-ons of $4.5 billion, the proposed financing schedule will
raise a total of $41.7 billion. This amount, after subtracting the net paydown of
$15.9 billion to date in the quarter, will accomplish the total net borrowing
requirement of $25.8 billion. In addition, an intra-quarter cash management bill
maturing on June 22 of approximately $17.0 billion will be needed to cover the
cash low point in eany June.
For the July-September quarter, the Treasury estimates a net borrowing
requirement in the range of $40 to $45 billion with a cash balance of $30 billion at
the end of September. To accomplish the antiCipated net borrowing requirement,
the Committee recommends the following provisional financing schedule:
3
Size
($billions)
Auctions
Refunding:
3-year note
10-year note
30-year bond
Subtotal
Other:
5-year notes
2-year notes
1-year bills
3- and 6-month bills
Cash management bill
(September maturity)
Estimated foreign add-ons
Subtotal
Less:
Raising
($billions)
18.5
135
12.0
44.0
14.0
2 x 12.0
2 x 18.25
3 x 18.25
13 x 27.4
24.0
3.0
4.2
12.7
(10.0)
~
38.4
Redemption of 7-year notes
Bonds called for redemption
on August 15, 1995
(2.3)
Subtotal
(9.1 )
Total Net Market Borrowing
(6.8)
43.3
The Committee also notes the likely need for the issuance of intra-quarter cash
management bills to cover cash low points during the quarter.
In the discussion of alternative ways of meeting the marketable financing
requirement through the remainder of the fiscal year, some members of the
Committee raised the possibility of the Treasury issuing foreign currency
denominated debt. In particular, these members expressed the view that the
combination of the current exchange rate for the US dollar and the Japanese yen
and the differential in current interest rates between the two debt markets offers an
opportunity to obtain funding on terms which they judge will likely prove attractive.
The discussion touched on a number of points in connection with issuing debt
denominated in foreign currencies, including past experiences of the Treasury,
practical considerations associated with the actual issuance, debt management
While the
policy objectives to be served, and potential market reactions.
Committee makes no recommendation on this matter, several members expressed
the view that the issuance of debt denominated in Japanese yen warrants
consideration by the Treasury at this time, preferably in the context of broader
public policy considerations.
4
The Committee's discussion of whether the Treasury should issue inflationindexed debt was wide-ranging. The proposal, it was noted, has been raised
numerous times over the years and has had sufficient merit to attract a number of
thoughtful and respected proponents. The Committee welcomed the opportunity
to offer its views on subject.
From the debt management standpoint, a" Committee members agreed that
the foremost criterion for judging any borrowing initiative by the Treasury should
be the potential contribution to raising substantial amounts of funds on favorable
terms. The Committee's deliberations focused on this objective and not on other
possible policy objectives, however worthy, such as providing a more direct gauge
of inflation expectations than is now available or discouraging the government
from pursuing inflationary policies.
The Committee recognized that there are conceptually sound reasons for
believing that the issuance of inflation-indexed debt could lower the cost of
borrowing over the longer term. Academic research often cites the existence of
some inflation risk premium in the yields on conventional debt that the Treasury
might capture through the issuance of inflation-indexed debt. By issuing both
conventional and inflation-indexed securities, the Treasury might be able to
segment to its advantage the market for its debt. The magnitude of any potential
saving is uncertain, however, and could be offset in some degree by the
comparatively low level of liquidity that typifies inflation-indexed securities in other
countries and the consequent negative effect the illiquidity would have on the
price of the securities.
The recent and prospective substantial growth in self-directed retirement
plans. which to date have evidenced a strong preference for safe, conservative
investments, may offer the potentiaJ of significant demand for inflation-indexed
securities, either in marketable or savings bond forms. The uniqueness of the
instrument would mean, however, a major educational effort would likely be
needed before the market reached meaningful proportions.
Defined benefit pension plans might aJso be a source of demand for
inflation-indexed securities. An asset class with an assured real return together,
in all likelihood, with low correlations with other standard asset classes is virtually
certain to permit attainment of a higher level of "portfolio optimality" and hence be
an attractive investment to defined benefit plans.
While there is an intriguing case, which necessarily is largely conjectural,
for there being a reasonable long-term potentiaJ for the Treasury in issuing
inflation-indexed securities, there are considerable short-term problems to
developing the product. To begin, recent debate about the accuracy of the
Consumer Price Index has to a degree politicized the issue and brings to the fore
concerns about the integrity of the price index to be used for the inflation
adjustment. More important, there is a need to pace the process of innovation in
debt management techniques; in the view of the Committee, other initiatives--for
MINUTES OF THE MEETING OF THE
TREASURY BORROWING ADVISORY COMMITTEE
OF THE PUBLIC SECURITIES ASSOCIATION
MAY 2 AND 3, 1995
May 2
The committee convened at 11:45 a.m. at the Treasury
Department for the portion of the meeting that was open to the
public. Members present were Chairman Francis, Vice Chairman
Kelly, Messrs. Ahearn, Bennett, Capra, and Corzine, Ms.
Kenworthy, and Messrs. Lakefield, McKnew, Napoli, and Pike, Ms.
Recktenwald, and Messrs. Roberts, Rosenberg, Sites, stark,
Thieke, and Wardlaw.
The Federal Register announcement of the
meeting and a list of Committee members are attached.
Deputy Assistant Secretary for Federal Finance Darcy
Bradbury welcomed the Committee and the public to the meeting.
Assistant Secretary for Economic Policy Alicia Munnell gave a
summary of the current state of the U.S. economy. Jill Ouseley,
Director of the Office of Market Finance, presented an
informational briefing updating Treasury borrowing estimates and
statistical information on recent Treasury borrowing and market
interest rates.
The borrowing estimates and other information 1n
chart form had been released to the public on May 1, 1995.
The pUblic meeting ended at 12:25 p.m.
The Committee reconvened in closed session at the Madison
Hotel at 1:45 p.m. The members listed above, Ms. Bradbury, Mr.
Norman Carleton, Director of the Office of Federal Finance Policy
Analysis, and Ms. Ouseley were present.
Ms. Bradbury gave the
Committee its Charge, which is also attached. The Committee
first discussed the size of the Treasury cash balance at the end
of June.
By consensus, a $45 billion balance was recommended.
The Committee then turned to the May midquarter refunding,
discussing the need to increase the sizes of Treasury coupon
issues in order to raise cash needed by the Treasury in the
refunding and beyond.
A draft proforma that had been prepared by
a member of the Committee (attached) was used during the
discussion.
The Committee voted 17-to-1 to recommend increasing the 3and 10-year notes by $1.0 billion each from the levels of the
February refunding to $18.0 billion for the 3-year notes and
$13.0 billion for the 10-year notes. The vote to recommend a new
10-year rather than to reopen the 7-1/2% note of 2/15/05 was 15to-3.
The consensus was that the Treasury should also issue cash
management bills to settle with the refunding issues on May 15.
The bills would be a $10.0 billion issue to mature on June 22,
1995 and a $10.0 billion issue to mature on September 21, 1995.
The Committee recommended by consensus that the Treasury leave
the 2- and 5-year notes at their April levels in the May and June
2
offerings and that the 52-week bill remain at $17.75 billion
during the rest of the quarter.
For the July-September quarter, the Committee consensus was
that the $30 billion end-ot-quarter balance recommended by the
Treasury is appropriate.
The Committee's preliminary consensus
recommendation was that the Treasury increase the sizes of the
coupon issues and 52-week bills by $.5 billion each from the
sizes in the April-June quarter and increase the 30-year bond by
$1.0 billion from the level in the February refunding to $12.0
billion.
Two members wanted to recommend an increase of $.5
billion, rather than $1.0 billion in the August 1995 bond.
Regular weekly bills would be adjusted appropriately.
Alternative borrowing instruments
Looking forward to 1996, when the 5-year notes which have
been offered monthly since January 1991 begin to mature, the
Treasury requested in its Charge that the Committee consider
whether to recommend that the Treasury issue inflation-indexed
debt securities to augment the current regular offerings of
Treasury securities.
Japanese yen-denominated debt.
Several Committee members
suggested that the Treasury consider issuing yen-denominated as
soon as possible to raise funds at reduced cost. They suggested
that the yen market is an attractive source of funding currently
and that other borrowers are taking advantage of financing
opportunities in yen.
No recommendation was made on this proposal.
Several
members were concerned that any foreign denominated currency
issuance by the Treasury be undertaken only in the context of
achieving broader economic policy objectives.
Inflation-indexed debt.
Charts and tables (attached) were
to frame the discussion on indexed securities.
Potential demand for inflation-indexed debt was seen from defined
contribution retirement plans, which tend to invest
conservatively in shorter term instruments, and defined benefit
retirement plans, which tend to prefer conservative longer term
assets.
The potential buyers were not viewed as likely to want
to trade their securities, and therefore there was a concern that
the market for inflation-indexed securities would be illiquid.
In this connection, several members thought an inflation-indexed
nonmarketable savings bond would be appropriate.
re~iewed
The discussion then turned to whether the Treasury could
sell enough inflation-indexed debt to make mounting a sales
effort worthwhile at this time. The consensus was that now is
not the time to introduce this new instrument for several reasons
3
relating to:
questions that have been raised recently about the
accuracy of the consumer price index to measure inflation; the
prospect that other debt management innovations, such as floating
rate notes, would gain greater market acceptance now; and the
Treasury's need to do more market research and to educate the
public about inflation-indexed instruments before mounting a
sales effort. The Committee did not address the specific terms
that the Treasury might offer on inflation-indexed debt.
The meeting adjourned at 4:40 p.m.
4
May 3, 1995
The committee reconvened at 8:30 a.m. at the Treasury in
closed session.
All members were present who attended the May 2
meeting except Messrs. Corzine and Napoli and Ms. Recktenwald.
The Chairman presented the Committee report (copy attached) to
Deputy Secretary Frank N. Newman and Deputy Assistant Secretary
Bradbury.
A discussion followed the reading of the committee report.
Several committee members believed that it is appropriate
now to signal gradual, continuing increases the sizes of
coupon issues in the future.
Regarding the statutory debt limit, members suggested that
the Treasury provide technical briefings on the potential
disruptions in Treasury's regular borrowing and the
securities markets as a result of a debt limit impasse for
Congress members and their staffs who will be working on the
issue this summer.
The meeting adjourned at 9:00 a.m.
/
~i I
K.~_---
K. Ouseley, Director
fice of Market Finance
omestic Finance
May 3, 1995
10
Attachments
Certified by:
Stephen C. Francis, Chairman
Treasury Borrowing Advisory Committee
of the Public Securities Association
May 3, 1995
Federal
R~mer
incorporated essenhaHy aU minor a
major chmges in the lAEA standan
with negliglbk- v~tions.. All nat
DEPARTMENT OF THE TREASURY
5
with ma;m- nuclear programs Invo ed
with significant com..merdal
transportation of nuclear maleri3!
lncorpcmlte the LAEA. standards to
their transptlrtation regul41tions [l smne
cases the lAEA regul.tiolJs are opled
bv reference.
. At the present time.. both RS .A and
the Nuclear Regulatory Caml1j >sian a~
revising the domestic tran..<;p( ation
r€gulations to irw::.orporale m t of the
;JrovlslOns of the 1985 L-\EA egulations.
RS amendt-'G in 1990. It is e) eded that
the l' S regulations in the
lure wiU
adopt pro,isions thaI will 8 in th~ 1996
IAE.-'\ ~gultllions.
A few of the expected c ,arrgec;
bet ween ,~ 19&) and 1 ~ 5 L\E.'\
regulatIOns Invoh.oe:
-:\ higher performal1.O fype C pauage
for lar')2e quantities a: natenals
transported by aiL
-Exclusive use of th~ nternation.}l
System of L'nirs (~ ?nits) in the
regulations and on :.hels ilnd
shipping documer ,
-LntematlOnal CDrr ;IlSSlon on
RadlOloglc.]1 Prot :1lon standard.,
(lCRP 60/61) Imi cts on radlatloOl
protection prog~ ms and IlmltJtlons
on quar.tilles al
classlfic:t.on or
radIOactive m~ rials
-For fissue mat lals. l.alculatlor.,J1
procedures fa criticalll\' and
Identificalioc ,fCnncallt\ Saret~
Index (C51)" documents .1nJ
nad,ages
-I{,'\ !'e shl~
n", names Jnd L'''<
Identdlcat~ n Numb€rs
-~nerlrlc rE llrements for Ur.1ill urn
hexafluor e. both fiSSile .1nd non·
fissdc
It should ~e noted that dunn" the
tl:ne since muarv ..... hen the current
droft ..... as
epared. several technical
meellnl;s a\e been held resulting III
changes
some of the pro\'lslo~s of the
draft re~ latIOns Some of these cr.anges
roncerTi' :ontent and performance
cntenq )r Typp C pacKa(2es
"rmdr henng for packa/::e desl~ns and
speCie form. and requlremen!s for
uran~ 'Tl bexafluonde CDmmcnts
recel "d 0:1 the lanuarv 1995 draft \\ill
be r le ..... ed and considered hy RSP:\ to
the denr POS51ble cunn", meetln!,!s al
th
P-EA
ur
uec 1:1 \Va,rd!:l'to:1 DC on Al'lrd S 199:;
'r the iluthOnl\ d"l!"'!ill"ej In 49 eFR P.l:-t
l'
•
...1,PPCOC;\ A
'In I. Rober.s.
socJOre ..\dminls,ruror
Jtenais Safer,
h.'
ffuZ,Uri/'II.'
R D<x. 9:,-a839 Flied 4-1;)....Y'i R ~S "r.,1
IlLJfojG COO£
.91~
I Vol. 60.1\"0.69 I Tuesday. April 11. 1995 I ~Jotices
Departmental Offices. Debt
Management Advisory Committee;
Meeting
Notice is hereb\ gl\·en. pursu:mt to 5
S C. :\pp 10(.1)[21. that a meeting \\,ill
he held at the U S Tn-aSW'V
Oep']Mment. 15:h and Pennsvh'ama
Avenue. NW .. Washrnpton. Dc. on May
2 and ~1ay' 3. 1995. of the followjng debt
managemenr adVlsorv committee:
L~
Publl~ Secuntre~ .~5(JCl:tlOn. T~l'V
Borruwtng ."UVLSrJrv L.om.Inlrtce
The ag~~da for the meetln~ provirl8s
for a ter:hnu::al barkground hnefing by
Treasury st,lt! on May 2. follow-ed by a
Lhary:?'e by th~ Secrerary of the TreaSllry
or hiS desl~ate Ina! the committee
dl:,cuss particular lS'Sues. and a working
sessIOn On \la~ 3. the (ommittee will
present a wnilen n>port of Its
recommendatlon<,
The bacl~ound bnefinR by TMjasury
st.] ff will be heid at 11 31) a.m. Eas1em
time on Mav 2 and will he open to the
publiC The remaJnI~ <;~sions on M.ay
2 and tbe commlttee's reponing ~sion
on Ma\ 3 wlil b€ (lost'd to the pub!lc.
pur"uan: to 5 L' S C App 10(d)
Th:s not!'.. e shall con"tltute Jr.\
determlJ1Jlloll. puro;uant 10 the authunt\
plJct'G 111 heads of u",p.]rtmpnt" h\ :')
L1 S C :\pp lOldl anU \e<;tt'rill1 me b';
Treo~LJ~\ D!,~Jrtmt'll: O~\j"r !'\u. 101-0~
that the cio ... ",d por:lOl1<; of rhp ffit;<>ting
ilrt: (d:~, prnt'u "I!h 1I:fIl~il ..l!J/)n tll.:!t 1<;
exem;,JI from J.<;( lo ... un- u;,(ll'r 5 L:.S C
55:::bl( )('1)(:\) The punll' :r,:pn'st
n"qu.n":; tt;,l such ml't>!I:':~" ~t:' clo~pd to
the puhllc. because th,· T~",lSLJry
Oppartment reaUire<; tr;m\... and full
ad\lct' from represer.tatl\'t's uf the
fina~clal commur1ltv pnr)r to ma~ln~ lIS
final deCISion on malar f:nilnclng
operations HlstorIL<.llh. thiS adviCY h;)s
been ofiered b\' dent rr.alla~ef1ent
adVISOr. commlttet's t'stahIISIIE'd bv the
several malor set:rnents of tht' finallel"l
communlr\ \Vhe~ <;0 utt!llPU. c;u(h a
comrmttee IS rft.oC-;1IZ1-d to he aOl
advI<;on commltr •.":! unJ"r :, U.SC AIlP
3
Altho~c.h the Trt"a~·.Jr. s IlnJl
announcement of fln3nlln1; plans ma:not refleet the recommendatIOns
pro\ Ided In repoMs of the ad\·lsor.
comml!tee premature disclosure of the
committees deliberations and reports
would be IIK .. lv to lead to sq;;nificant
finanCial speculRtlon In the seCuflIJes
mar\...e! Th~5 these mp€!mgs fall \\Itilin
thf' eXem?llOn (o·. ered hv 'i l: S C
18439
meetings cL'1d for providmg annual
reports setting forth a sumrnarv of
committee actiVities and such other
matters as may be informative to lh:e
public cons:st'ent with the policy of 5
l'S.C. 552b.
D-.:ired ..... prd ... 199':'
Frilnk N. N~an.
[kpu/\' Sl"cretu~' of the Tr-,)5Un,
IFR!)0{ 9:).-0619 Fd{"d
BILL!NG COOE
4-li}-05 B-1'; .~:-;l!
481~
[Treasury Order Number:
1~tl
Defegalions of Authority to Act to,.
Secretary on Trust Fund Soares
e
D<lted Man"h 22. 19'.i5.
Bv V;J:1ue of the authontv "eo;:. 10
the Secretarv of the Treasurv. in ,~in~
the nuthontv vested bv 31 U.S! 3~11h)
and delegated to the Deputy Sfi ret.ry
bv Treasury Order (TO) 101-{1 . i ~reby
delegate to the Fiscal !\SS}sta
Secretarv or. ill the absence
thtlt
offiCial. ihe person deslgnal ':i 10 ,K1 10
that cat:'autv. the authontv [) repre,.,ent
the S~~retJ~' of the Treas~
a~ J
memb~r oi the.
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i8: f'lkd 4-](}-'l'i 8
4~
.. ·nl
'JI "-2!>-P
Fiscal ~ r.llce
[Dept C c. 570. 1994
Re~ .•
Supp. No. 20]
Sure! Companies Acceptable on
Fedf' II Bonds; Acadia Insurance
Con: any
I] :ertlflcate of ;\uthonty as an
ac
pt3ble !'utetv on Federal Bonds IS
~by Issued to the following compa~\,
~ oer Sect~cns 9104 to 9308. Title 31.
5~:2blc1(9)1:\1
h
The Ufflce uf the Under StXJetary for
Oome<,tlC Finance IS responsible :ur
malntaICllr.~ records of debt
In.lna).!pmpnt acivisorv COm'TlrttL'"
the lJlllted States Code. Federal bOlld·
ap?rovmg officers should annolate their
n:rer€nce ropl'.!s of the Treasur. CirCllla~
Treasury Borrowinq Advisory committee
o! the
Public Securities Association
Chairman
stephen C. Francis
Managing Director
Fischer, Francis, Trees & Watts, Inc.
200 Park Avenue, 46th Fl.
New York, NY 10166
Vice Chairman
Richard Kelly
Chairman of the Board
Aubrey G. Lanston & Co., Inc.
One Chase Manhattan Plaza, 53rd Fl.
New York, NY 10005
Daniel s. Ahearn
President
Capital Markets strategies Co.
50 Congress Street, Ste. 842
Boston, MA 02109
Barbara Kenworthy
Managing Director
of Mutual Funds - Taxable
Prudential Insurance
McCarter Highway
2 Gateway Center, 7th Floor
Newark, NJ 07102-5029
Thomas Bennett
Partner
Miller Anderson & Sherrerd
One Tow Bridge
West Conshohocken, PA 19428
Mark F. Kessenich, Jr.
President
Eastbridge capital, Inc.
135 East 57th Street
New York, NY 10022
James R. Capra
Principal
Moore Capital Management
350 Theodore Fremd Avenue
3rd Floor
Rye, NY 10580
Bruce R. Lakefield
Managing Director
Lehman Brothers
200 Vesey Street, 9th Fl.
New York, NY 10285
Jon S. Corzine
Senior Partner & Chairman
Goldman, Sachs & Company
85 Broad street
New York, NY 1004
Richard D. Lodge
President
Banc One Funds Management Co.
100 East Broad st., 17th Fl.
Columbus, OH 43271-0133
2
Robert D. McKnew
Executive Vice President
Bank of America
555 California street,
10th Fl.
San Francisco, CA 94104
Joseph Rosenberg
President
Lawton General Corporation
667 Madison Avenue
New York, NY 10021-8087
Daniel T. Napoli
Senior Vice President
Merrill Lynch & Company
250 Vesey Street, North Tower
World Financial Ctr, 8th Fl.
New York, NY 10281
John C. Sites, Jr.
Executive Vice President
Bear Stearns & Company, Inc.
245 Park Avenue, 4th Fl.
New York, NY 10167
William H. Pike
Managing Director
Chemical Bank
270 Park Avenue
New York, NY 10017
Morgan B. Stark
Managing Director
Granite Capital International
Group
375 Park Avenue, 18th Floor
New York, NY 10152
Marcy Recktenwald
Managing Director
Bankers Trust Company
1 Appold Street
Broadgate
London EC2A 2HE
England
Stephen Thieke
Chairman, Market Risk
Committee
JP Morgan & Company, Inc.
60 Wall Street, 20th Floor
New York, NY 10260
Richard Roberts
E)=ecuti ve Vice President
Wachovia Bank & Trust Co.,
N.A.
P.O. Box 3099
Winston-Salem, NC 27150
Craig M. Wardlaw
Executive Vice President
Nations Bank Corporation
Nations Bank Corporate Center
Mail Code Ncr 007-0606
Charlotte, NC 28255-0001
May 2, 1995
COMMITTEE CHARGE
The Treasury would like the Committee's specific advice on
the following:
the composition of a financing to refund $32.1 billion of
privately held notes and bonds maturing on May 15 and to
raise $18 to $20 billion of cash in 3- and 10-year notes and
a cash management bill;
reopening the 7-1/2% note of February 15, 2005;
the maturity of the cash management bill to be issued in
refunding;
~he
the composition of Treasury marketable financing for the
remainder of the April-June quarter and the July-September
quarter; and
the levels of Treasury cash balances on June 30 and the end
of September.
other topics
We would like to have the Committee's views on the concept
of regular offerings of Treasury inflation-indexed debt:
the
appropriate index for such securities; maturity; sale technique;
potential demand for the securities from various types of
investors; and any other considerations. To facilitate
discussion, we are attaching hypothetical term sheets.
The Treasury uould welcome any comments that the Committee
might wish to make on related matters.
DRAFT FOR DISCUSSION PURPOSES
HYPOTHETICAL TERMS OF TREASURY INDEXED BOND
GENERAL INFORMATION
ISSUER
United states Treasury
ISSUE
Inflation-indexed bond
PAYMENT DATES
Principal on the indexed bond will be paid on
the maturity date as specified in the
offering announcement.
Interest on the
indexed bond is payable on a semi-annual
basis on the interest payment dates specified
in the offering announcement through the date
the principal becomes payable.
In the event
any principal or interest payment date is a
Saturday, Sunday or other day on which the
Federal Reserve Banks are not open for business, the amount is payable (without additional interest) on the next business day.
MATURITY DATE
Two to thirty years maturity term.
INDEX RATIO
The face value of the indexed bond shall be
indexed to the Consumer Price Index (CPI).
The Reference Index will be the most recently
released Consumer Price Index prior to the
date of issuance of the indexed bond.
The
Current Reference Index will be the most·recently released Consumer Price Index.
The
Index Ratio is determined by dividing the
Current Reference Index level by the
Reference Index.
PRINCIPAL VALUE
The Inflation-Adjusted Principal Value at any
date is equal to the par value at issuance
times the Index Ratio.
COUPON INTEREST
Coupon interest is paid semi-annually on the
Inflation-Adjusted Principal Value of the
indexed bond.
The amount of interest paid
each period would be determined by
multiplying the Inflation-Adjusted Principal
Value determined as of the coupon payment
date by the stated interest rate divided by
2.
STRIPS
Eligible for the STRIPS program.
For an
indexed bond to be stripped into principal
and interest components at issuance, the par
amount of the bond must be in an amount that,
based on the coupon rate, will produce a
semi-annual coupon payment, unadjusted for
inflation, in a multiple of $1,000.
For an
inflation indexed bond to be stripped into
principal and interest components at a later
date, the current principal value of the bond
must be an amount that would have been
eligible for stripping at issuance at its
original value.
The minimum par amount
required to strip an indexed bond will be
provided in the press release announcing the
auction results.
TAXATION
Coupon payments and appreciation of the
principal will be taxed as ordinary lncorne ln
the period earned or accrued.
AUCTION TECHNIQUE
Uniform price auction.
(1)
(2)
(3)
Options:
Bidders bid for coupon.
The highest
accepted yield becomes the coupon.
Bond
is issued at 100.
Bidders bid real yield, coupons come in
increments of 1/8, price is determined
by pre-announced formula at the highest
accepted yield.
Before the auction Treasury announces a
coupon, bonds are issued at lowest
accepted price.
DRAFT FOR DISCUSSION PURPOSES
HYPOTHETICAL TERMS OF TREASURY ZERO-COUPON INDEXED BOND
GENERAL INFORMATION
ISSUER
United states Treasury
ISSUE
Zero-coupon Inflation-indexed bond
PAYMENT DATES
Principal and accrued interest on the indexed
bond will be paid on the maturity date.
MATURITY DATE
Two to thirty years maturity term.
INDEX RATIO
The face value of the indexed bond shall be
indexed to the Consumer Price Index (CPI).
The Reference Index will be the most recently
released Consumer Price Index prior to the
date of issuance of the indexed bond.
The
Current Reference Index will be the most
recently released Consumer Price Index.
The
Index Ratio is determined by dividing the
Current Reference Index level by the
Reference Index.
VALUE OF BOND
AT MATURITY
The value of the bond at maturity is
is determined by the following formula, where
Value at maturity =
P
r
=
n
=
=
P
original issue price
annual real rate (determined at
issuance)
number of full semi-annual periods
from issuance to maturity
* [1
n
+ rj2]
*
[Index Ratio]
TAXATION
Appreciation of the principal will be taxed
as ordinary income in the period accrued.
AUCTION TECHNIQUE
A uniform price auction.
bonds are issued at 100.
Bidders bid yield,
SUMMARY OF APRIL - JUNE 1."
ESTIMATED NET MARKETABLE IORROWlNO
(In billion, 01 dollar.)
Net new monly railld Of 8MOUncec:l
~u
of May ,. ,99B}
Regular weekly tr88SUry blJl.
52·week bUll Unoludes .273 miliOn foreign add-one)
-, 8.3
Cuh m8/'\IQement bill, ,
2-vur notta (inclUdN U33 million foreign add-ona)
'-'lear note. (lndudN .550 million foreIgn odd-o~)
7 -year notes redel'T'lptlon
-9.1
2.26
2.2
12.05
-7.0
.' &.9
Net new monlV to M ralItd:
Regular weekly treesl')' bills
2.1
1.8
10.0
b~11
~n.a~emen1
52-week
Calh
bills 1#
2 and 6-year noteS •
28.4
Refunding •
:.M
41.7
T oUd n e1 m.,tetabl. born> wing In quart w:
2&.8
Allum .. In tnd of quatt. cuh belanct of .45 bIlDon.
Note:
SUMMARY OF JULY. SEPTEMBER 1996
!.$TlMATI!O N!T MAPU(!TA!lle aO""OWINQ
(in bj!Hon. 01 dollars)
R~ul.r w~eldy tr . . . ury
billa
16.e
52'weeK bills
Cash man~ement blill +
2 1M 5·year notes ••
Refurdlng ••
'"'fur rote. redemptJon
Bond. called tor reO«r'lption on August 16, 199&
-10.0
30.0
14.0
Totii nit m ..... tlbl. borrowing In quart .. :
44.85
Note:
lutum ..
, The $2&
bi~i9n
"
The
M
4.16
-e.e
-2.3
end of Cluartef eaah balance or .10 blIion.
cash mgmt blll luued on April 3 matured on April 20.
*,! billion cuh mgmt bill to be Issued In mid M.y and ., 3 billion cash mgmt bill to be issued in ~rly JUM are
Up,fI.Lwd lO m~lturo wlttlln
the q\J.llrter. A ., 0 billion
cUI'l m~mt bill to b. iaelH<i In early Juncs will mature
in September.
• Includ... entJclp.ete(j foreign .dd-()n. tctallng approximately '4.6 billion.
-+-
TI'I .. C.Hh mgmt bills to be illlued
it! tn. Jul' - Seotember Quaner art IXl)tcted to meture wittlin &e quarter .
•• lneludea anticipated foreign .dd~n. totaling epproxlmatety U.S billion.
ESTJMATED TREASURY MARKETABLE BORROWING
(In billions 01 dollarl)
APFUL • JUNE 1995
Toteltttlmated 1NI'kaub'- bonowlnG
26.8
-16 .•
Tot .. Mt ",Me"" borrowing '_wed or enn~ ttvouf¥' M.-y 1, '11&
Total remllnlng Mt mMketable borrowing
41.7
45.0
Cuh balance at end of quirt ...
AmoW1t
J.8 month ~
Apr 6
Apr 13
Apr 20
I\+Jr27
May 4
Amount
Foreign
Cllh
Cumuletlvi
add-on.
r".~
Cash railed
mlWring
oif.,.o
26.8
24.2
25.8
23.3
-3.e
2~.7
23.2
27.1
~3.4
-3.5
·3.7
·2.a
27.6
24.7
·2.9
26.8
-2.0
May'8
MlIv 26
27.9
28.3
27.3
·1.5
Jun
Jun
Jun
Jun
Jun
27.4
27.2
la.8
2!.7
26.6
26.8
27.6
27.6
May 11
1
8
15
22
29
0.3
0.2
0.4
27.6
27.6
27.6
27.8
O.S
1.9
2.0
-14.2
62 wMk bitt
1e.6
16.8
Apr 6
May 4
17.26
0.3
0.06
0.96
1 .• 6
Jun ,
16.9
17.9
17.75
JUI'I 29
18.9
, 7.76
0.915
26.1
25. ,
·34.2
16.0
Cun mgmt
0.86
4.1
bQls
Settlement
dal
Aor 3
Aor 20
MIY 16 (Jun 22 mat)
~
Jun 1 WUf'I 22 met)
i- {5 -.kim (Sept 21 mat)
Jun 22
34.2
+&.e-
(C
r
, 3,0
13.0
10.0
10.0
·25.0
28.0
Coupoc1'
Apr 7-year
~r 2'ycer
-7.0
7.0
1 e. ,
Apr 6'yaar
MIY 3-yur
0.6
17.76
1 1.6
0.55
, 7.6
0.9
2.16
12.06
~
O.S
Rlfundlng
32.1
30.0
1.5
-<:>.8
May 2 -year
May IS-vellr
1e.3
, 7.76
11.6
0.9
2.36
0.6
12.1
Jun 2.yelr
1e.8
17.75
'1.5
0.9
1.B6
888.3
6.9
~av 1 D·yelr
Jun D·V •• '
Orand Totli
668.4
0"'
o.e
12.1
3&.0
25.8
25.1
ESTIMATED TREASURY MARKETABLE BORROW1NG
(in Dllllons or COllarl)
JULY - SEPTEMSER 1886
44.85
Total .. dmatld matketabHI bottowlng
Tot.! n.t MatitatabM borrowing I..ued or announced dvouoh M.y 1, 1996
Total rtmalnlng Mt mlrtc.tabI. borrowlAg
0.0
".85
Cuh bliance 81 end of qutttil
AmOlSlt
30.0
matlIrtng
Amount
offered
FOl.I~
add-on.
C.. h
railed
CUl11\lJativ.
Cuh r•• ed
31&6 month bOll
e
26.3
27.6
Jut 13
Jut 20
2~.!5
27.0
2. ,
26.2
~7
26.2
26.0
26.8
27.S
27.6
27.8
2.d
Jul
Jul
Aug 3
Aug
AUO
AUO
Aug
10
17
24
31
27.4
27.3
1.3
2.4-
27.6
1.6
0.8
27.S
-0.:2
27.6
27.6
0.2
0.3
27.6
Sep 7
2&.9
26.3
26.4
26.9
27.6
27.6
27.e
27.6
0.7
Sip 14
Stp 21
Stp 28
17.0
H1.6
, 8.26
18.25
1.25
Aug 204
Sip 21
16.8
18.26
1.45
10.0
15.0
16.0
82 wMk bUll
Jul 27
1.3
1.2
1.7
, 5.8
1.45
4.15
Cuhm~bU1s
s..ttt.maM
dati
Aug 16
Sep 1
SIP 21
Coupona
Jul '-year
J\Jll-v~r
-36.0
35.0
S.8
, e.s
Jul G·year
Aug 3-.,ear
Aug 10..,,111'
Aug 30-Y88r
Aafundno
10.0
, 6.25
12.0
0.9
0.6
~/8
- _.
~
Aua :Z.."ear
Aug S-year
1e.9
Orand- TOtJ'
601.2
-6.B
2.55
12.6
~
-~
~
/ _"J,.)
~/;l,C'
32.3 •
-10.0
0.9
0.5
42.6
1.6
11.7
18.25
12.0
0.9
0.6
2.26
12.6
J4.8
1)41.65
4.S
44.8e
44.85
• ~uda .2.3 bUlon bunda CllGcd fvt r-.dempUon.
--
--
-,...
=>............:::"
-~.~-
-.,....
..
-
~::.:
....
---::: ::. :
~
Real Rates of Return
Returns on Constant-Maturity Treasuries Minus the CPI
Periods Ending March 31, 1995
6-Monlh T·81U
Last 3
Years
30- Year T·Bond
Last 5
Years
111111111~5-RmY&ari T·Note
30- Year T-Bond
Last 10
Years
5- Year T-Note
3O-Year T-8'X1d
Last 15
Years
o
2
4
6
8
10
Annualized Return, %
12
14
16
18
Nominal Rates of Return
Constant-Maturity Treasuries and the CPI
Periods Ending March 31, 1995
Last 3
Years
30- Year T-Bond
Last 5
Years
30- Y9al T-Bond
Last 10
Years
5- Year T-Note
30- Year T-Bond
Last 15
Years
30- Year T-80nd
o
2
4
6
8
'0
Annualized Return, %
'2
'4
'6
'8
Nominal Rates of Return
Constant-Maturity Treasuries and the CPI
Periods Ending March 3', 1995
CPI
Last 3 Years
2.82~o
Last 5 Years
3.30
Last 10 Years
Last 15 Years
6-Month
1-Year
2-Year
3-Year
5- Yea r
10- Year
30- Year
T-8ill
T-Bill
T-Note
T-Note
T-Note
T-Note
T-Bond
3.80%
4.40%
4.77%
5.98%
7.60%
9.58%
5.29
5.72
6.68
7.27
8.23
9.57
19.77
3.55
642
6.84
7.79
8.41
9.54
11.26
13.06
434
854
9.05
9.88
10.38
11.01
12.20
13.42
10-Year
30-Year
T-Note
T-Bond
Real Rates of Return
Returns on Constant Maturity Treasunes Minus the CPI
Periods Ending March 31, 1995
6-Month
T-8111
1-Year
2-Year
3-Year
T-Bill
T-Note
T-Note
Last 3 Years
o 98~o
096%,
1.54%
1.91 %
3.08%
4.66%
Last 5 Years
1 93
2.34
3.28
3.85
4.78
6.08
7.24
Last 10 Years
277
3.18
4.10
4.70
5.79
7.45
9.18
Last 15 Years
404
453
5.32
580
6.40
7.54
8.71
5- Yea r
T-Note
6.59%
TREASURY FINANCING REQUIREMENTS
January - March 1995
$Bil.
Uses
$Bil.
Sources
178}'2
175
175
150
150
125
Coupon Maturities •
State and Local
100
•
.---
+
Coupon Refunding
Savings Bonds
•
9%
75
125
100
75
Decrease i
Cash
Balance
50
•
25
50
25
a
0
.:/ Indudes budget defldt, changes In accrued Interest and checks
outstanding and miscellaneous debt transaCIJons.
TREASURY FINANCING REQUIREMENTS
$Bil.
120
April - June 1995
$8il.
,..----------------r--------------------,
Sources
Uses
120
100
100
80
Coupon Maturities
+
+
Coupon Refunding
80
60
60
Savings Bonds
State and Local
40
•
•
4 ';.
40
Cash
Surplus~'
20
..... Increase
~ in Cash Balance Y
o
•
20
4
0
Y Assumes a $45 billion cash balance June 30, 1995.
~'Includes budget surplus, changes
In accrued Interest and checks
outstanding and miscellaneous debt transactJons.
Mey 1, 19Q5...2
NET MARKET BORROWING
April - June 1995
(Billions of Dollars)
Total
25.8
Done .1J
Bills
Regular weekly
52 week
Cash management
-15.9
-16.3
2.3
-9.1
Notes
7 year note
2 year note
5 year note
-7.0
2.2
12.0
To Be Done
41.7
JJ
Issued or announced through April 28, 1995
May',llil9S-3
TREASURY OPERATING CASH BALANCE
Semi- Monthly
$Bil.r------------------~----------~-W-It-h-o-ut--,
~
-~~
Borrowing Y
Tax and Loan
50
Total Operating
Balance
40
•
30
,,
,,
,,
20
10
o
-10
1-------------.. ------------+-"" ,
--""""!
Federal Reserve Account
\
-20
-30
~o
:
...
'.
, ••
,,
,,
..
It
~
__
Apr
~
__
~
May
__
~
Jun
__
Jul
~
__
~
__
~
Aug Sep
1994
__
~
Oct
__
~
Nov
__
~
Dec
__
~~
Jan
__
Feb
~
__
L __ _
Mar Apr
1995
~
__
May
~
__
~
Jun
YAssumes refunding of malunng ISSUes.
May 1, lQQ5.-.4
TREASURY NET MARKET BORROWING.1I
$Bil.r---------------------------------,$Bil.
Coupons
103.5
DOver 10 yrs.
100
100
5 -10 yrs . .2I
o
o
2 - under 5 yrs
Bills
80
80
•
60
60
40
40
20
20
o
-20
·20
40~------~-------L-------L------~-~40
II
III
1991
IV
J..!
.21
II
III
1992
IV
II
III
1993
IV
II
III
1994
IV
I
1995
Excludes Federal Reserve and Govemment Account TransacIJons .
7 year note dlsconbnued after Apnl 1993.
May 1,1WS-S
AWARDS IN WEEKLY BILL AUCTIONS
(13- and 26-Week Bills Combined)
$Mil. . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , $Mil.
25,000
25,000
20,000
20,000
15,000
15,000
10,000
10,000
5,000
5,000
o
1994
1993
Calendar Year
"Data through April 24, 1995 Auction.
1995*
o
AWARDS IN 52-WEEK BILL AUCTIONS
$Mil.
$Mil.
16,000
16,000
14,000
14,000
Federal Reserve and Foreign
12,000
12,000
10,000
10,000
a,ooo
6,000
4,000
2,000
0
1993
1995-
1994
Calendar Year
·Data through Apnl 27, 1995 auction.
~ 01
0f'Ice 01
ttw Tta.NII'f
~t
May 1, lQQ5.--7
Rnanc.
NET NEW CASH FROM NONCOMPETITIVE TENDERS IN
WEEKLY BILL AUCTIONS.!!
Discount Rate %
$Mil.
Net New Cash (left scale)
700 r
o 26 week
600 e-
_. __..
-
.13 week
26 week
200 f.-'
;/
.........
-
300 r
........ 't-'
~
13 week
500 e400
r• .......'...........
Discount Rate (nght scale)
...
..---
..••
....
..ft
... 10.. ••
......
...
"
- 6.5
'.......-......... 6.0
.-
V -
-
~
~~
-
5.0
-
4.5
- 4.0
- 3.5
100
I
o
-100
5.5
In
II
U
f--
,~
I-
·200 r
-
-300 e-
j
I
-400
Apr
May
I
I
Jun
,I
I,
Jul
I
1
Aug
1994
Y
,I
I
I
Sep
Oct
II
Nov
I
Dec
III
I
Jan
,I
I
I
Feb
Mar
AprP
1995
Excludes noncompetitive tenders from fore'gn offiCIal accounts and tI1e Federal Reserve account.
p Preliminary
May 1, RQ5....8
NONCOMPETITIVE TENDERS IN TREASURY NOTES AND BONDS.li
$Bil.
$Bi I.
3.5 I--
3.0 t-
_7Year
-
3.5
c:=J 2 & 5 Year
I11III3. 10& 30 Year
-
3.0
-
2.5
-
2,0
r:
2.5 I-
2.0
I-
.--- 1.5
1.5 I-J""
II'
1.0 I--
0.5
r:
l-
f-
1.0
I--
0.5
""
"
o
J
A M
J
A
SON
D
J
F M A
1993
Y
M
J
J
A
SON
D
1994
Excludes foreign add-ons from noncompetitIVe tenders
J
o
F M AP
1995
p Preliminary
Treasury Increased t!1e maximum nonoompetitNe award to any noncompetitive bidder to $5 million effectIVe November 5, 1991
Effective February 1" 1992, a noncompetitive bidder may not hold a position In WIITading, futures, or forward contracts,
rts own account.
no< submit both competitive and nonoompetrbve bids for
M.y
1,
,rms.1iI
SECURITIES HELD IN STRIPS FORM 1993-1995
Privately Held
$BiI .. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - . $Bil.
80
•
Strippable
Stripped
As of April 30. 1993: $646.9 billion, $17S.0 billion
0
As of April 30, 1994: $721.1 billion, S221.2 billion
&I
As of April 21, 1995: snS.6 billion, $226.4 billion
80
60
60
40
40
20
20
o
Less than 5 years
5-1 0. years
10-15 years
15-20 years
20-25 years
25-30 years
o
Years Remaining to Maturity
Note: The STRIPS program was established In February 1985. The 11 518% note of November 15,
1994, issued on November 15, 1984, was the first STRIPS-eligible secunty to mature.
~yl,'~'O
SECURITIES HELD IN STRIPS FORM 1993-1995
Percent of Privately Held
%r-------------------------------------------------------------------,%
50
40
•
As of April 30, 1993
o
As of April 30, 1994
81
As of April 21, 1995
50
40
30
20
10
a
Less than 5 years
5-10 years
*
10-15 years
15-20 years
20-25 years
25-30 years
Years Remaining to Maturity
• The 11 3/4% bond ot 11/15/09-14 had $4.9 billion (privalely-held) available tor S1npplng, ot which
76% was held In S1npped form.
Note: The STRIPS program was established in February 1985. The 11 5/8% note of November 15,
1994, Issued on November 15, 1984, was the first STRIPS-eligible secunty to mature.
TREASURY NET BORROWING FROM NONMARKETABLE ISSUES
$BiL . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , $Bil.
8
6
4
2
a
-2
-4
-8
-10
-6
D
Savings Bonds
o
State and Local Series
•
Foreign Series
-4.7
-8
-10
-8.9
-12
-12
_14L------~~-----~------~------~-~~-14
II
III
1991
IV
II
III
IV
II
1992
III
1993
e
IV
II
111
1994
IV
I
lie
1995
estimate
JMy
1.1~'2
SALES OF UNITED STATES SAVINGS BONDS
1980 - 1995
$Bil.r------------------:..---------------,
6
5
•
4
Total Sales
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 199495e
End of Quarter
e esbmate
STATE & LOCAL GOVERNMENT SERIES
$Bil.r----------------------------------,$Bil.
.~
• ••
• ••
........
10
5
••••
....
.+
••
•
•
...
. ...
••
•••
:•
•
10
:•
5
.... Grosslssues
• ••
Redemptions
o
0
$Bil.
$Bil.
o
0
~
-10
-5
L--~~-~-~--L-~-~-~-~~-~-~-~-~-~-~~_10
"
1991
'"
IV
II
1992
III
IV
II
1993
III
IV
""I
1 994
IV
I
1995
STATE AND LOCAL MATURITIES 1995-1997
$8il
$8il
14
13.6
14
12
12
10
10
8
8
6
6
4
4
2
2
0
II
III
IV
"1996
1995
0
III
IV
"1997
III
IV
~attt.T,....1IY
<>mot d
~t
RNnoe
'"-Y "
19Q5..15
QUARTERLY CHANGES IN FOREIGN AND INTERNATIONAL
HOLDINGS OF PUBLIC DEBT SECURITIES
$8il . . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , $8il.
Nonmarketable
o
Marketable
o Net Auction Awards to Foreign J/
35
30
•
25
35
33.1
30
Other Transactions
25
21.7
20
20
15
15
10
10
5
5
o
0
-5
-5
-10L-------~------~------~----------~~
II
III
1991
IV
""I
1992
IV
II
1/1
1993
IV
"1994
III
IV
IV
-10
1995
J/ Auction ~wartls to foreign official purchasers netted against holdings of matunng secunbes.
V
Data through February 28, 1995.
May " '~S-16
NET AWARDS TO FOREIGN OFFICIAL ACCOUNTS !I
$Bil r - - - - - - - - - - - - - - - - - - - - - - - - : - - - - - - - - - - , $ B i J .
6.1
4.7
8
8
6
6
4
4
2
2
o
-2
-2
Notes
-4
-6
-8
c=J 5 years and over
c::J 2-3 years
-
-4
Bills
-6
-4.2
~------------~----------~------------~------------L-----~~-8
II III IV
1991
II III
1992
IV
1/
Noncompe~~ve
Y
Through Apn12B, 1995
II III IV
1993
Quarterly Totals
II III IV
1994
awards to foreign offiCial accounts held in custody at the Federal Reserve
excess of foreign custody account holdings of maturing secuntJes.
In
lola.", Ums.,7
SHORT TERM INTEREST RATES
Quarterly Averages
%r-------------------------------------------------------------------~%
Prime Rate
12
12
Through
April 26
10
10
8
8
6
6
3 Month
Treasury Bill
4
4
2
2
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994 1995
May 1. lS1QS...18
INTERMEDIATE TERM INTEREST RATES
Weekly Averages'
%r---------------------------------------------------------------~ 0/0
9
FHLMC 30-Year
Conventional
.... '\ \0 '\ ... ,
~ .. ;
-
;
_..........
_........ , ....
.,
'\
....... "
#" .;
9
Through
,
.... " '\ ¥ " \
Apnl 2;
---,
..
~
8
8
7
7
•
Treasury 5-Year
6 ~----------~----~------------------------------------~----~
6
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
1994
1995
• Salomon 10·yr. AA Industnal
IS
a Thursday rate.
M.y " lDG5-21
MARKET YIELDS ON GOVERNMENTS
1
I.
January 30,1995
7.5 -
v
V
-t
-Y
V---•
7.0 -
6.5
6.0
5.5
~-.
April 28, 1995
%
-
-
7.0
-
6.5
-
6.0
-
5.5
%
I'-""
7.5 J-
7.0
-
~
~
r-
,0
12
2
3
4
-
7.5
-
7.0
",.., ~
14
16
I
o
7.5
I
6.5
5.0
-
5
6
18
20
22
24
J
I
7
8
26
65
30 .
28
5.0
9
10
Years to Maturity
May 1, 1'1iG5-22
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
BY MATURITY
$Bil. r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
March 31, 1995
Over 10 years
2800
0
2600
2400
2200
0
2-10 years
0
1-2 years
II
1 year & under
•
Bills
2000
1800
1600
1400
1200
1000
800
600
L---------
400-~EI
200
o
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
As of December 31
May 1. 1 W5-23
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
Percent Distribution By Maturity
Coupons
0
Over 10 years
02-10 years
o 1-2 years
•
•
Bills
1 year & under
100%
15
80
35
60
20
o
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994 Mar '95
As of Decembe r 31
May'.11i195-2~
AVERAGE LENGTH OF THE MARKETABLE DEBT
Privately Held
yeaffi------------------------------~--------------------
. - - June 1947
10 Years
5 Months
10
___________,
Months - - - - - - - - - - - - - - - - - - - .
March 31, 1995
5 Years,S Months
66
9
64
8
62
7
J
F M A M J
J
A SON
D
6
December 1975
2 Years
5 Months
5
4
3
2
I
19454749 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93
!Uy '. 1 gQ~25
MATURING COUPON ISSUES
May - September 1995
(in millions of dollaffi)
March 31,1995
Held by
Maturing Coupons
57/8%
81/2%
11 1/4%
125/8%
103/8%
41/8%
41/8%
87/8%
41/4%
83/8%
101/2%
81/2%
45/8%
37/8%
37/8%
Note
Note
Note
Bond
Bond
Note
Note
Note
Note
Bond
Note
Note
Nate
Note
Note
Totals
5/15/95
5/15/95
5/15/95
5/15/95
5/15/95
5131/95
6130/95
7115/95
7131/95
8/15/95Y
8/15/95
8/15/95
8/15/95
8/31/95
9/30/95
Total
Federal Reserve
& Government
Accounts
Private
Investors
ForeignY
Investors
19,152
8,293
7,127
1,503
1,504
17,527
18,164
6,805
17,183
4,612
7,956
8,877
18,038
17,577
17,904
3,829
273
798
417
126
1,227
1,392
300
562
2,219
1,097
866
2,911
725
961
15,323
8,020
6,329
1,086
1,378
16,300
16,772
6,505
16,621
2,393
6,859
8,011
15,127
16,852
16,943
999
286
55
4
201
2,275
1,934
415
1,650
46
437
953
922
2,592
2,206
172,222
17,703
154,519
14,975
:.; F.R.B. custody accounts for foreign ofllclallnstJtutlons; included in Pnvate Investors
ij On April
11, Treasury called for redempbon at par the 8318% Bonds 1995-00, issued
August 15, 1975.
TREASURY MARKETABLE MATURITIES
Privately held, Excluding Bills
$ B i I · r - - - - - - - - - r - - - - - - - - - - - - r - - - - = - - -____~----------~_,
~
1995
30
28
26
24
22
20
'8
16
14
12
10
8
6
4
2
O~----------------~--------38
36
34
32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
o
F
J
M
A
J
M
J
A
S
_
Secuntles Issued pnor to 1993
~ New issues calendar year 1994
/IlII!IIIIII
New Issues calendar year 1993
c::J
0
N
D
Issued or announced tt1rough Apnl 28. 1995
May " t'QQ5-27
TREASURY MARKETABLE MATURITIES
Privately held, Excluding Bills
$iir--27--9--2-7-7--2-9-'--2-8-B-27-7---1--9-9-7----~-9----~-----2-7-.3~--~$~'I~s==---~-----r--------~2~0~0~1~--------;-----------iI
I
~~
24
~'8
246
2.~
~ r-
182::
~~
;;S=
7
~~
117
116
:"3"
120
132
' 3>
1
10 I-
8
6
4
al6 I-
2
4 r-
o
2r-
~
~
2002
32 r301al-
269
~
iiii
_
~~~==~===*==~~======~===*==~~==~
1998
28
I
1a I-
26~
N
22
~
~r-
219
22r~ I-
16
'~:8 ~
18
I-
~~
120:- 11 2
11
122
11.7
Q
10
11 0
93
8
107
12r10
sr-
r-
.~~~~~--~~~~~--~~~~aL--~~&L~&L~.uJ~r-===~-'~6====~====~==========~====~===~...====~
6
:~
14
12
10
113
8
6
16
~
32 rr-
34rlOr28
2003
277
261-
240
22f-16 f--f-24 I-
~~~~::::~~~~::::::~~~~::::~~~~~::~~~f-....
18
14
12
10
8
B
2o•
,. I12110 tat6t-
121
103
107
.f-2f--
J
F
M
AMJ
J
ASOND
0
J
FMAMJ
J
_
Securities Issued pnor to 1993
o
New Issues calendar year 1994
_
New Issues calenda' yea, 1993
CJ
Issued 0' announced tt1rough Apnl 28.1995
A
S
o
N
D
JMy '.1~28
TREASURY MARKETABLE MATURITIES
Privately held. Excluding Bills
.~
'jI~[1====2011~3"i ~II
~
!§ I
lj
:!~ I
I~h~~~~ill:" I
~ ~===*=~~=::::;:::::~~II 1§ I .
!g~~~~::~F
'(
18
2t=
I
2r.
2T
I I II
I I i II
' 20]16
I ' II
I
1
1_.
78
78
. _ ..
'17820117 '
1
33
1
I
:1
1
~~E==~==~==~~~~======~==~==~II ~;§======~.===!_==~.~==_~==~.========~.
'I ~
lI'l i..--~
8
I
----:-.-IIIi~'II
---:......1_____.......:--2T
J
_
J
o
o
Securities Issued pnor to 1993
III New Issues calendar year 1993
M A M J
J
A SON
Issued or announced through Apnl 28, 1995
lr
Ud g
2019 '"
Privatety held,
'~ t=
0
241-22 f-201--
26 I -
,SI-16 I-14 I-12 I-10 f--
20.9
;n 8;11.
I
2022 '"
2023
220
174
sl--
6 I-4 I--
I~~
~ t=
o2~1--==~==~==~~==~==~==~======~
I~:=
2021
~ t=
I--
1891.8
2
;g~9
()~~:;::::=====~~==~
41-
i
2024
lSf--
12
I-141-10
32
32.0
21--
~:=
o~------~------~------~--~~--~
2025
~t=
,8 I--
24 I -
I--
201-'8 I-161-,. I 12 I-10 fsf6f4t-
109
g~t-
~
16 f-
F
~
M
~
A
~~
".8
116
__ __ ____ __ __
J
11.0
4 I--
~I--
22
"'! I
~~=::::::::=I~~I:::=;:
61-4 I-2f--
o~~~==;=====~~~~~==~======~
r2020
D
New Issues calendar year 1994
TREASURY MARKETABLE MATURITIES
1~ '"
24 I-22 I-2OtlS t16 t14 I -
F
M J
~
J
~~~~~
A
__
SON
t=
"0
1() f-sf6f4f-
~
D
g~I---~--~------~--------~------~
J
A S o N D
J
F M A M J
_
Securities Issued pnor to 1993
o
_
New ISSUes calendar year 1993
EJ
New Issues calendar year 1994
Issued or announced through Apn128, 1995
Mey , , 1 QUS-JO
SCHEDULE OF ISSUES TO BE ANNOUNCED AND AUCTIONED
IN MAY 1995 Y
Monday
Tuesday
1
2
8
9
15
16
3
Auction
3 yearY
10
17
23
22
Wednesday
Announce
2 year
5 year
4
5
11
12
18
19
Announce
52 week
26
25
24
Auction
2 year~
29
Auction
10 yearY
Friday
Thursday
Auction
5 year 'Y
Auction
52 week 'Y
31
30
Holiday
.y Does
not inClude weekly bills
yFor settlement May 15
;YFor settlement May 31
yFor settlement June 1
May 3. '995-31
SCHEDULE OF ISSUES TO BE ANNOUNCED AND AUCTIONED
1f\1.. U!MF_1,q.CL,)/
Monday
Wednesday
Tuesday
Friday
Thursday
1
2
5
6
7
8
9
12
13
14
15
16
Announce
52 week
19
26
21
20
28
27
Auction
2 year~
Announce
2 year
5 year
22
23
Auction
52 week£!
29
Auction
5 year~
30
YDoes not inClude weekly bills
YFor settlement June 29
~ F or settlement June 30
Mayl
lQ95...3:2
SCHEDULE OF ISSUES TO BE ANNOUNCED AND AUCTIONED
IN JULY 1995.!1
Monday
3
Tuesday
4
Wednesday
Friday
Thursday
5
6
7
12
13
14
Holiday
10
11
Announce
52 week
17
24
18
19
Announce
2 year
5 year
26
25
Auction
2 year~
21
20
Auction
52 week Y
27
28
Auction
5 year:U
31
.y Does not Include weekly bills
yFor settlement July 27
;YFor settlement July 31
May 3. lQQs..3:l
SHORT TERM INTEREST RATES
Weekly Averages
o/r---------------------------------------------------------------------------~%
9
.-----------------~9
Prime Rate
•
8
8
Through
7
Commercial
Paper
Apnl26
~
•
Jul
Aug
Sep
Oct
Nov
Dec
7
Feb
Jan
1994
Mar
Apr
1995
LONG TERM MARKET RATES
Quarterly Averages
0/o~------------------------------------------------------------------------~ 0/0
14
14
13
13
...
12
12
New Aa Corporates
11
-
10 -
----
11
Through
Apnl26
10
9
9
..
8
7
8
7
30-Year
Municipal Bonds
6
6
5L-----L-----~---~--------~----~----L-----------~---~------~5
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994 1995
M.y 2, lQ1i1S-20
DEPARTMENT
OF
THE
IREASURY ((fj)j
~\.I. /~
.
/'
,
NEW S
-----I'
-------..::',,~.-.
TREASURY
......
1 · ... '1 .........
--.~---------...:.......:--=---
OFFICE OF PUBUC AFFAIRS. 1500 PDo,·'SH.\ASI.\ .\\I-.'l L .'.W. • WA.':iHli\(;TO:\i, D.C.. 20220. (202) 622-2960
CONTACT:
FOR RELEASE AT 2:30 P.M.
May 2, 1995
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $25,600 million, to be issued May 11,
1995.
This offering will result in a paydown for the Treasury of
about $2,025 million, as the maturing weekly bills are
outstanding in the amount of $27,637 million.
Federal Reserve Banks hold $7,088 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $2,891 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders.
Additional
amounts may be issued for such accounts if the aggregate amount
of new bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C.
This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are glven In the
attached offering highlights.
000
Attachment
RR-266
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED MAY 11,
1995
May 2, 1995
Offering Amount .
$12,800 million
$12,800 million
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .
91-day bill
912794 U4 4
May 8, 1995
May II, 1995
August 10, 1995
February 9, 1995
$13,996 million
$10,000
$ 1,000
182-day bill
912794 V6 8
May 8, 1995
May II, 1995
November 9, 1995
May II, 1995
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
Competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single Yield
35% of public offering
Maximum Award .
35% of public offering
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
For Release Upon Delivery
Expected at 9:30 A.M.
May 3, 1995
STATEMENT OF
LESLIE B. SAMUELS
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SENATE FINANCE COMMITTEE
Mr. Chairman and Members of the Committee:
I welcome the opportunity this morning to discuss the
Administration's views regarding the importance of the individual
and corporate alternative minimum tax (AMT), as well as the
changes to the AMT proposed by H.R. 1215.
Since the introduction in 1969 of the individual and
corporate minimum tax, its primary goal has been to strengthen
taxpayers' confidence in the fairness of our income tax system.
This was also one of the objectives of the sweeping changes made
by the Tax Reform Act of 1986 (TRA 86). Strengthening the
individual and corporate minimum taxes was one of the ways that
TRA 86 sought to increase both the actual and perceived fairness
of the income tax by inhibiting tax shelter activities and
ensuring that taxpayers with SUbstantial economic income pay tax
on that income.
The AMT is not a perfect mechanism, although some
improvements have been made in recent years. The complexity of
the AMT, especially the corporate AMT, has been eased repeatedly
since 1986, most recently in the Omnibus Budget Reconciliation
Act of 1993 (OBRA 93), which repealed the depreciation component
of adjusted current earnings (ACE) for assets placed in service
after 1993.
We are committed to simplifying the AMT where possible
through administrative measures, as we had done in November,
1994, through the promulgation of a regulation allowing regular
tax AGI to be used for AMT purposes where AGI acts as a
constraint in limiting deductions or exclusions. Moreover, the
Administration welcomes the opportunity to work with the Congress
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
RR 267
to identify areas where further simplification is possible on a
revenue-neutral basis, either within the AMT or by identifying
other acceptable revenue offsets.
In reviewing the AMT, it is important to note that although
theoretically more attractive approaches can be imagined, the
flaws of an AMT fade when measured against the potential damage
to our tax system that might result if wealthy individuals and
profitable corporations were able to pay little or no tax by
investing in tax-favored activities or assets. This would be
particularly true if the tax cuts in H.R. 1215, which reflects
the House Republicans' Contract with America, were to be enacted.
Moreover, in the event H.R. 1215 were enacted, we estimate that
approximately 76,000 corporations that would otherwise have paid
income tax in 2005 would avoid paying any tax.
These companies
account for approximately $1.1 trillion in sales, or 16 percent
of total sales ($7.1 trillion), and $2.7 trillion in assets, or
18 percent of total assets ($15.4 trillion) of corporations
currently subject to tax.
In the remainder of my testimony, I will briefly review the
history of the individual and corporate AMT, summarize how the
AMT is calculated, and examine the record of AMT liabilities and
credits, and the reasons why taxpayers are subject to the AMT.
My testimony will briefly comment on economic issues related to
the AMT.
I will then turn to the provisions of H.R. 1215, which
would significantly weaken the AMT system over the next five
years and totally repeal the corporate AMT in 2001.
I.
Legislative History of the Minimum Tax
Responding to Treasury studies that found some high-income
individuals paid little or no tax, in 1969 Treasury proposed a
minimum tax for individuals. The Tax Reform Act of 1969 included
a minimum tax for individual and corporate taxpayers on certain
tax preferences and excluded capital gains for individuals. A
10-percent tax was levied on the taxpayer's minimum tax base,
which was the sum of the tax preferences less an exemption amount
and the taxpayer's regular tax liability. This was an add-on
rather than an alternative tax; taxpayers paid both the regular
tax and the minimum tax.
The Tax Reform Act of 1976 added more
preferences to the base of the individual minimum tax, including
one for "excess itemized deductions," and, for both the
individual and corporate minimum tax, reduced the exemption
amount and increased the minimum tax rate to 15 percent.
The Revenue Act of 1978 removed the excluded capital gains
and excess itemized deductions preferences from the individual
minimum tax, and included them as part of the base of an
alternative tax with graduated rates ranging up to 25 percent,
which would generate a supplemental AMT liability that applied
only when the alternative tax was greater than the regular tax
liability.
From 1978 to 1982, individuals were subject to both
2
the AMT and the add-on minimum tax. The Economic Recovery Tax
Act of 1981 (ERTA) lowered the top AMT rate to 20 percent, so
that the maximum rate on excluded capital gains would be no
higher than on capital gains under the regular tax.
In the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA), the add-on tax for individuals was repealed, and the
base of the AMT was broadened to include nearly all of the tax
preferences that had been included in the add-on minimum tax. To
address increasing concerns about the equity of the corporate tax
system, TEFRA also· contained a direct 15 percent cutback in
certain corporate tax preferences.' Although these cutbacks
operated independently of the corporate minimum tax, adjustments
were made to the minimum tax to prevent the combination of that
tax and the cutback provisions from unduly reducing the benefits
from a preference.
The Deficit Reduction Act of 1984 increased the direct
cutback of certain corporate tax preferences from 15 percent to
20 percent and again made corresponding adjustments to the
corporate add-on minimum tax. Except for the cutbacks in
preferences enacted in 1982 and 1984, the corporate add-on tax
was essentially unchanged between 1978 and 1986 . . Just prior to
the Tax Reform Act of 1986 (TRA 86), corporations paid an add-on
minimum tax equal to 15 percent of certain tax preferences to the
extent that the preferences exceeded the greater of regular tax
paid or $10,000. The tax preferences in the corporate minimum
tax base included the excess of accelerated depreciation over
straight line, excess bad debt deductions for financial
institutions, percentage depletion in excess of basis, and a
portion of net capital gains.
While the corporate add-on minimum tax reduced benefits from
tax preferences, it failed to ensure that corporations with book
income paid tax in the year they received that income, and that
all corporations with sUbstantial economic income paid tax on
that income. Groups outside the government brought attention to
corporations reporting sUbstantial earnings, while not paying
corporate tax. Also, calculations of effective tax rates on
economic income generally showed low or even negative effective
tax rates on some forms of corporate investment. These results,
in combination with publicity about tax shelters and high-income
individuals without income tax liability, raised concerns about
whether the high level of voluntary taxpayer compliance that had
characterized our tax system could be maintained.
In response to these concerns about corporate tax avoidance,
President Reagan's 1985 tax reform proposals included a provision
'section 291, as amended by TRA 86, remains in current law.
3
to replace the add-on minimum tax with a 20 percent alternative
minimum tax (AMT) that included various tax preferences. The
President's message noted that "the prospect of high-income
corporations payin~ little or no tax threatens public confidence
in the tax system" and asserted that "an alternative minimum tax
limited to the tax preferences applicable to corporations under
[pre-TRA 86] law would be insufficient to prevent many
corporations from eliminating their regular tax on economic
income. ,,3
In enacting TRA 86, Congress reduced tax rates and broadened
the tax bases of the individual and corporate income taxes to
ensure that taxpayers with sUbstantial economic income would not
escape income tax by using tax preferences. TRA 86 repealed the
investment tax credit, the partial exemption of capital gains
income and certain other incentives, and imposed limits on
deductibility of passive losses. To ensure that remaining
incentives in the tax law did not allow taxpayers to escape tax
completely, TRA 86 also replaced the corporate add-on minimum tax
with a new AMT similar in structure to the alternative minimum
tax that had applied to individuals before 1986. TRA 86 also
changed the individual AMT by increasing the AMT tax rate,
effectively eliminating the AMT exemption for joint returns with
AMT income over $310,000 ($232,500 for single filers), and adding
new preference items. 4
For both corporations and individuals, TRA 86 introduced
credits for previously paid AMT, allowing taxpayers to use part
of AMT liability incurred in one year as a credit to offset
regular tax liability in future years. These AMT credits,
however, could only be generated from AMT liability resulting
from "timing" preferences that turned around in future years.
Allowing credits for timing preferences was necessary to enable
taxpayers to recover fully the amount of capital invested.
without the credits, a taxpayer could be forced, for example, to
use the relatively back-loaded AMT depreciation schedule in the
2"The President's Tax Proposals to the Congress for
Fairness, Growth, and Simplicity," May, 1985, p. 335.
3I
bid., p. 334.
4An important effect of TRA 86 on the AMT carne from the
elimination of the capital gains exclusion in the regular tax.
Before TRA 86, the capital gains exclusion was by far the largest
difference between taxable income under the regular tax and under
the AMT for individuals. TRA 86 also phased out the personal
interest deduction, another major AMT preference item for
individuals.
4
early years of an asset's life and the relatively accelerated
regular tax schedule in the later years.
The senate Finance Committee's Report discussed the
rationale for these changes in the AMT:
The Committee believes that the minimum tax should serve one
overriding objective: to ensure that no taxpayer with
sUbstantial economic income can avoid significant tax
liability by using exclusions, deductions, and credits.
Although these provisions may provide incentives for worthy
goals, they become counterproductive when taxpayers are
allowed to use them to avoid virtually all tax liability.
The ability of high-income individuals and highly profitable
corporations to pay little or no tax undermines respect for
the entire tax system and, thus, for the incentive
provisions themselves.
In addition, even aside from public
perceptions, the committee believes that it is inherently
unfair for high-income individuals and profitable
corporations to pay little or no tax due to their ability to
utilize various tax preferences.
In particular, both the perception and the reality of
fairness have been harmed by instances in which major
corporations have paid little or no tax in years when they
reported substantial earnings, and may even have paid
substantial dividends, to shareholders. Even to the extent
that these instances reflect deferral, rather than permanent
avoidance, of corporate tax liability, the committee
believes that they demonstrate a need for change. 5
To ensure that corporations reporting book income paid some
tax, TRA 86 included for years 1987 through 1989 an AMT
adjustment for 50 percent of any excess of book income over
minimum taxable income after other adjustments and preferences.
Negative adjustments were not allowed. Beginning in 1990, TRA 86
replaced the book income adjustment with an adjustment based on
tax definitions of earnings and profits, the adjusted current
earnings (ACE) adjustment. Seventy-five percent of the amount by
which ACE exceeds alternative minimum taxable income (AMTI) must
be added to AMTI. Unlike the book-income adjustment, these
adjustments could be either positive or negative.
The Omnibus Budget Reconciliation Act of 1989 extended the
corporate AMT credit to all items generating an AMT liability,
even "exclusion items." Exclusion items are preferences that
cause a permanent difference in taxable income, rather than a
5U . S . Senate, Committee on Finance, "Tax Reform Act of
1986", Report 99-313, pp. 518-9, May 1986.
5
difference in the timing of income (for example, tax-exempt
It also repealed a limitation on ACE writeoffs
interest income).
for depreciation, intangible drilling costs, depletion, and
mining costs.
The Omnibus Budget and Reconciliation Act of 1990 (OBRA 90)
permitted a special energy deduction against alternative minimum
taxable income for oil and gas interests, which was in effect for
tax years 1991 and 1992. In addition, OBRA 90 raised the
individual AMT tax rate and removed as a preference item the
capital gain from appreciated tangible personal property donated
to charity. (Subsequent legislation applied this change to
property donated through June 30, 1992, and then OBRA 93 made
this change permanent.)
For years beginning in 1993, the Energy Policy Act of 1992
repealed the energy deduction enacted in OBRA 90 and eliminated
excess intangible drilling costs and percentage depletion
deductions as AMT and ACE preference items for independent
producers, subject to certain limitations.
In its February 1993 Budget, this Administration proposed
AMT tax relief. OBRA 93 incorporated one of the proposed AMT
changes. The depreciation component of the ACE adjustment, which
was measured by the difference between AMT depreciation (150
percent declining balance method) and depreciation based on use
of the straight line method over the class life of the asset, was
repealed for property placed in service after 1993. OBRA 93 also
lengthened the depreciable life for non-residential structures
under the regular tax, thereby reducing the AMT preference for
those assets.
In addition, for individuals, OBRA 93 created a two-tier tax
rate structure (26 percent on the first $175,000 of a taxpayer's
AMT income subject to tax 6 , and 28 percent on amounts in excess
of $175,000), increased the AMT exemption to $45,000 for married
individuals filing joint returns 7, and permanently removed the
capital gain from charitable contributions of appreciated
property as a preference item.
6$87,500 for married individuals filing separately.
7The exemption amount for single filers was raised to
$33,750, and to $22,500 for married individuals filing
separately.
6
II. Description of the AMT under Current Law
Corporate AMT
The computation of the corporate AMT is generally a two-step
process. The starting point is the corporation's regular taxable
income before any net operating loss deduction. This amount is
increased by tax preferences for the year and increased (or
decreased) by adjustments that modify certain items of income or
deductions used in the computation of regular taxable income, and
reduced by the net operating loss deduction for AMT purposes.
In
a second step, alternative minimum taxable income ("AMTI") is
adjusted further to reflect the ACE adjustments. The resulting
amount of AMTI, reduced by an exemption amount of $40,000 less 25
percent of the amount by which AMTI exceeds $150,000 (which
effectively eliminates the AMT exemption for AMT income over
$310,000), is taxed at a 20 percent rate to compute the tentative
minimum tax before credits.
The tentative minimum tax before credits may be partially
offset by the AMT foreign tax credit.
If the resulting tentative
minimum tax exceeds the corporation's regular tax, the excess is
defined as the AMT; the corporation pays its regular tax plus the
AMT. The AMT paid becomes a credit that may be used to offset
regular tax in any later year, but may not be used to reduce
regular tax below the tentative minimum tax for the year in which
the credit is claimed.
Adjustments and Preferences
The adjustments and preferences applicable in computing
unadjusted AMTI are:
Adjustments~-all
taxpayers:
(1)
Depreciation (post-1986 property)--computed using
generally longer class lives prescribed by the alternative
depreciation system under the Code and either the straight-line
method for property subject to this method for the regular tax,
or the ISO-percent declining balance method for other property.
(2)
Amortization of pollution control facilities (post-1986
property)--computed using the alternative depreciation system
under the Code.
(3)
Mining exploration and development costs--capitalized
and amortized over a 10-year period.
(4)
Long-term contract taxable income (other than home
construction)--computed using the percentage-of-completion method
of accounting.
7
(5)
Installment sales (property other than timeshares and
residential lots)--installment method of accounting not available
for dealers in property.
(6)
Tax shelter farm or passive activities--Iosses denied.
Adjustments--corporate taxpayers only:
(1)
below.
Adjusted current earnings (ACE) adjustment--described
(2) Merchant Marine capital construction funds--special
rules apply.
(3) Blue Cross and Blue Shield organizations--special
deduction not allowable.
Preferences:
(1)
Percentage depletion--excess over the adjusted basis of
the property at the end of the taxable year.
(Post-1992, the
preference is not applicable to percentage depletion allowed for
oil and gas properties.)
(2) Tax-exempt interest income--interest income on private
activity bonds (other than qualified 501(c) (3) bonds) issued
after August 7, 1986.
(3)
Intangible drilling and development costs--excess costs
(over la-year amortization) in the taxable year that exceed 65
percent of the net income from oil, gas, and geothermal
properties.
(Post-1992, this preference is not applicable to
independent producers to the extent the producer's AMTI is
reduced by 40 percent or less without the preference.)
(4)
Bad debt reserves--excess deductions determined under
the Code over the financial institution's actual experience.
(5)
Real estate depreciation (pre-1987 property)--excess of
accelerated depreciation over the straight-line method.
(6) Amortization of pollution control facilities (pre-1987
property)--excess over other methods under the Code.
(7)
Gains on sale of certain small business stock--one-half
of the amount excluded from income under the Code.
Operation of the Accumulated Current Earnings (ACE) Adjustment
A corporation must increase its AMTI by 75 percent of the
amount by which ACE exceeds AMTI determined without regard to the
8
ACE adjustment and alternative tax NOLs.
If unadjusted AMTI
exceeds ACE, AMTI is reduced by 75 percent of the difference.
This reduction, however, is limited to the aggregate amount by
which AMTI has been increased by the ACE adjustment in prior
years.
To calculate ACE, the following items are added to AMTI:
(1) income items that are included in determining earnings and
profits (E&P) but are not otherwise included in AMTI, such as
tax-exempt interest (other than interest on specified private
activity bonds); (2) items deductible in computing AMTI but not
deductible for determining E&P, such as the dividends received
deduction; and (3) certain specific adjustments, such as
depreciation (other than for personal property placed in service
after 1993).
In addition, certain adjustments to the computation
of unadjusted AMTI are required in computing ACE.
AMT NOLs
Net operating loss deductions under the AMT are determined
by using a separate computation of AMT net operating losses and
loss carryovers. This computation takes into account differences
between the regular tax base and the AMT base. The amount of the
AMT net operating loss for any taxable year is in general equal
to the amount by which the deductions allowed in computing AMTI
for the taxable year (other than the deduction for carryovers to
the taxable year of AMT net operating losses) exceed the gross
income includible in AMTI for the taxable year.
In light of the
parallel nature of the regular tax and AMT systems, any
limitations applying for regular tax purposes to the use by a
consolidated group of net operating losses or current-year losses
apply for AMT purposes as well. Moreover, alternative tax NOLs
cannot reduce current-year AMTI by more than 90 percent.
Foreign tax credits for AMT
The foreign tax credit (FTC) is allowed for minimum tax
purposes, but the credit is calculated specially for the minimum
tax.
In essence, the minimum tax FTC is figured in the same
manner as for the regular tax, except it includes only AMT items
of income and deduction, uses AMT taxable income instead of
regular taxable income, and uses AMT in place of regular tax.
Foreign tax credits, in combination with NOLs, can offset no more
than 90 percent of the tentative minimum tax.
Excess AMT foreign
tax credits can be carried forward 5 years or back 2 years.
AMT Credit
AMT paid by a corporation in one year is available as a
credit against its regular tax liability in future years. This
AMT credit generally compensates the corporation for the loss of
9
a regular-tax benefit when the corporation is in an AMT position
by reducing the corporation's regular tax in subsequent years.
The AMT credit cannot reduce regular tax after other credits
below the tentative minimum tax.
Unused AMT credits may be
carried over indefinitely to subsequent tax years.
Individual AMT
The structure of the individual AMT is generally similar to
that for corporations. Alternative minimum taxable income (AMTI)
for individuals is taxable income (before limitations on personal
exemptions) for the regular tax, and various preferences and
adjustments, including an adjustment for the net operating losses
allowed under the AMT. AMTI in excess of an exemption amount
(described below), phased out at higher levels of AMTI, is then
subjected to a two-tier tax rate structure (for married
individuals filing a joint return, 26 percent for the first
$175,000 of AMTI and 28 percent of AMTI in excess of $175,000).
After allowance for the foreign tax credit for AMT purposes, the
resulting tentative minimum tax is compared to the individual's
regular tax liability, with the taxpayer owing the regular tax
plus the individual AMT equal to the excess (if any) of the
tentative minimum tax over the regular tax liability.
AMT NOLs
The net operating loss deduction allowed for individual
minimum tax purposes is similar to that for the corporate AMT.
It is calculated using AMT items of income and deduction, and
cannot reduce AMT by more than 90 percent.
Preferences and Adjustments
other than the previously listed adjustments and preferences
applicable for all taxpayers, additional adjustments for
individuals include the following:
(1)
state, local, and foreign taxes.
(2)
Miscellaneous itemized deductions (in excess of 2
percent of taxpayer's AGI) .
(3)
Special rules relating to incentive stock options.
(4)
Standard deductions and personal exemptions.
(5)
Medical deductions (between 7.5 percent and 10 percent
of a taxpayer's AGI).
(6)
Circulation expenditures--capitalized and amortized
over a three-year period.
10
(7)
Research and experimental expenditures--capitalized and
amortized over a 10-year period (unless material participation by
taxpayer) .
Exemption amount for AMT
An exemption is allowed for AMTI of $45,000 for joint
returns, and $33,700 for single returns. These amounts are
phased out at a rate of $1 for every $4 of AMTI in excess of
$150,000 for joint returns and $112,500 for single returns. This
eliminates the exemption at AMTI of $310,000 for joint returns,
and $232,500 for single returns.
Foreign tax credits for AMT
A foreign tax credit is allowed for minimum tax purposes,
but it is calculated specially for the minimum tax (as discussed
above) .
AMT credits
AMT liability in one year may be credited against regular
tax liability in future years. These AMT credits, however,
cannot lower a taxpayer's regular tax liability for a given year
below the taxpayer's tentative minimum tax for that year, and,
for individuals, they can only be generated from AMT liability
resulting from timing preferences. For example, AMT liability
generated by accelerated depreciation can result in AMT credits,
but not AMT liability resulting from state and local tax
deductions.
Excess credits can be carried forward indefinitely.
Pattern of Corporate AMT Liabilities and Credits
Table 1 summarizes the historical revenue pattern from
corporate income taxes. until TRA 86, the corporate minimum tax
generally accounted for less than one percent of total corporate
tax liabilities. TRA 86, however, substantially increased the
importance of the corporate AMT as a source of revenue.
From
gross corporate AMT revenues averaging about $3 billion per year
in 1987 though 1989, corporate AMT revenues jumped to $8.1
billion in 1990, with the replacement of the 50 percent book
income adjustment by the 75 percent ACE adjustment that year.
In
1991 and 1992, gross corporate AMT revenue declined to about $5
billion. At the same time, the use of AMT credits grew.
From an
average of less than $700 million in 1988 through 1990, corporate
AMT credit use increased to $1.5 billion in 1991 and $2.4 billion
in 1992, the last year for which corporate tax data are
available. Thus, in 1992, the corporate AMT produced net revenue
of $2.7 billion compared with net revenue of $7.4 billion in the
peak year of 1990. The decline in net AMT revenue is expected to
continue after 1992, with $1.4 billion estimated for 1993.
11
Table 1
HISTORIC PATTERN OF CORPORATE TAX REVENUE
Year
Total
Minimum AMT credits
Net
Minimum
Corporate Tax before
Tax
Income Tax
Credits
(after credits)
Net Minimum
Tax as %
Total Tax
Unused
AMT
Credits
(Dollar amounts in billions)
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993-est.
27.5
30.2
33.5
39.1
40.6
39.7
49.8
56.7
64.4
65.9
63.0
58.4
47.1
51.9
64.0
62.4
73.2
87.0
95.9
96.1
96.4
92.6
104.6
123.8
0.3
0.3
0.3
0.3
0.3
0.2
0.2
0.3
0.3
0.4
0.4
0.5
0.5
0.6
0.5
0.7
1.0
2.2
3.4
3.5
8.1
5.3
5.1
4.9
0.5
0.8
0.7
1.5
2.4
2.9
0.3
0.3
0.3
0.3
0.3
0.2
0.2
0.3
0.3
0.4
0.4
0.5
0.5
0.6
0.5
0.7
1.0
2.2
2.9
2.7
7.4
3.8
2.7
1.4
1.0%
0.9%
0.9%
0.9%
0.9%
0.4%
0.4%
0.5%
0.5%
0.7%
0.7%
0.9%
1.0%
1.1%
0.9%
1.2%
1.4%
2.5%
3.0%
2.8%
7.7%
4.1%
2.6%
1.1%
2.2
5.1
7.8
15.2
19.0
21.7
23.1
Source: IRS, Corporation Income Tax Returns, relevant issues, and unpublished IRS data
Note: 1993 data are estimated.
12
This downward trend in AMT net revenues is expected to
continue for several reasons.
First, depreciation adjustments,
by far the largest source of AMT revenue, only affect the timing,
rather than the total amount, of depreciation deductions. Most
AMT revenues are initially generated from the less-accelerated
depreciation allowed for AMT purposes. Subsequently, these
depreciation allowances reverse and AMT revenues from
depreciation adjustments decline. We have now reached the period
where this reversal is occurring for post-TRA 86 investment. 8
Second, the removal of depreciation from the ACE adjustment
under OBRA 93 and the lengthening of the regular-tax depreciation
lives of non-residential real property are expected to reduce
future AMT liabilities (and increase the utilization of AMT
credits). Third, as the number of corporations subject to the
AMT and tentative" minimum tax liabilities decline, corporations
are able to use an increasing amount of AMT credits to reduce
their regular tax liability. The economic recovery will likely
contribute to this trend.
For these reasons, the downward trend
in net corporate AMT revenues since 1990 (when the one-time spike
in revenues occurred) is expected to continue.
The relative importance of adjustments and preferences in
corporate AMTI is presented in Table 2, which is derived from
data presented in a recent GAO report on experience with the
corporate AMT. 9 Since the depreciation adjustment was the
largest adjustment and played a dominant role in the ACE
adjustment, the difference between regular tax and AMT
depreciation has been the most significant reason most
corporations were subject to the AMT. 1o
8However, net depreciation adjustments remain positive
because corporate investment continues to grow.
9General Accounting Office, "The Experience with the
Corporate Alternative Minimum Tax," GAO/GGD-95-88, April, 1995,
Table 11.20, p. 47 (hereinafter cited as "GAO").
10See also GAO (1995), Table 11.21, p. 48.
13
Table 2.
Corporate AMT Adjustments and Preferences for 1992
Item
Amount ($ millions) Percent of total
Adjustments
ACE
Depreciation (post-1986)
Pollution facilities
Mining development
Basis adjustment on sale
Long-term contracts
Installment sales
Merchant marine construction
Section 833 deduction
Farm losses
Passive losses
18,890
22,030
21
108
-3,368
95
-14
44.6
54.0
0.0
0.3
-8.0
0.2
-0.0
31
0.1
1,478
o
3.5
0.0
34
0.1
1,620
128
3.8
0.3
Preferences
Percentage depletion
Tax-exempt bonds
Charitable contribution
of appreciated property
Intangible drilling costs
Reserves for bad debts
Accelerated depreciation
of real property
Accelerated depreciation
of personal property
14
82
0.2
176
86
0.4
108
0.3
4
0.0
0.2
Large firms pay most of the corporate AMT. Table 3 shows
that corporations (other than pass-through entities) with assets
over $500 million pay 75 percent of the corporate AMT and 69
percent of total corporate tax. Smaller corporations are largely
eliminated from the corporate AMT by the $40,000 exclusion.
Table 3.
Corporate AMT Liabilities, AMT Credits, and Total Corporate Tax
by Asset Size in 1992
($ millions)
Total Tax
Asset size class
AMT Credit
Including AMT
less than 1
> 1 less than 10
> 10 less than 100
> 100 less than 500
> 500
58
222
473
567
3,738
26
100
166
238
1,846
3,131
5,710
10,698
13,356
71,698
Total
5,058
2,376
104,593
Although large corporations pay most of the AMT, and many
large corporations have been subject to the AMT at least once,
Table 4 shows that the duration of their AMT status has been
relatively short. Based upon an analysis of a panel of
approximately 9,000 large corporations with assets over $50
million, we found that approximately 55 percent were subject to
the AMT in at least one year between 1987 and 1992. Of those
that paid the AMT at least once, 64 percent paid it for only one
or two years. Only 90 firms, or 1 percent of these large firms,
were subject to the AMT in all 6 years (1987 - 1992).
Table 4.
Percentage of Corporations with Assets over $50 Million
Paying AMT by the Number of Years Paying AMT (1987 - 1992)
Years in AMT Status
Never
Paid
AMT
Corporations
(Percent)
44.7
1
20.5
2
15.0
15
3
10.3
4
5
6
5.7
2.8
1.0
Pattern of Individual AMT Liabilities and Credits
The tax liability generated by the individual minimum tax
has fluctuated substantially since it began, generally as a
result of changes in tax law. Table 5 reports the individual
minimum tax liabilities and the number of returns paying minimum
tax from 1970 through 1993.
It also indicates the years in which
significant tax changes became effective.
From producing average revenue of $160 million on about
25,000 tax returns per year in the early 1970s, the individual
minimum tax jumped to $1 billion paid by nearly 250,000 taxpayers
in 1976 with the Tax Reform Act of 1976. The revisions in the
Revenue Act of 1978 lowered total individual minimum tax revenues
and taxpayers in 1979. Changes to the regular tax in the
Economic Recovery Tax Act in 1981 boosted individual minimum tax
liabilities, and the expansion of the individual minimum tax in
the Tax Equity and Fiscal Responsibility Act of 1982
substantially increased individual minimum tax revenues in 1983
and later years.
The Tax Reform Act of 1986 had major effects on individual
AMT collections, first raising them in 1986 before the capital
gains exclusion ended, and then lowering them in 1987 when the
exclusion had expired. TRA 86 also instituted the credit for
previously paid AMT on timing preferences. These have averaged
about 20 percent of the previous year's minimum tax, consistent
with the share of total preferences and adjustments made up of
timing preferences. OBRA 90 and OBRA 93 both expanded the impact
of the individual AMT.
Economic conditions, as well as tax laws, affect minimum tax
liability. Relatively modest decreases in minimum tax liability
can be attributed to recessions in 1974 and 1982.
The preferences and adjustments to income that give rise to
individual minimum tax liability have also varied over time.
When excluded capital gains were a preference for the individual
minimum tax, they accounted for around 70 to 80 percent of total
preferences and adjustments in the mid-1980s, with state and
local taxes the next largest preference at about 10 percent.
About equally important were accelerated depreciation,
miscellaneous itemized deductions, personal interest deductions,
and personal exemptions, each accounting (on average) for about 2
percent of total preferences and adjustments.
As shown in Table 6, in 1992 deductions for state and local
taxes contributed nearly 40 percent of total individual AMT
preferences and adjustments, followed by miscellaneous deductions
in excess of the 2 percent floor at about 25 percent, and
depreciation at about 10 percent.
Capital gains on certain
charitable contributions added about 8 percent, certain allowed
16
TABLE 5
HISTORIC INDIVIDUAL MINIMUM TAX DATA
AND TAX LEGISLATION 1/
liability
Year
Total Income
Tax liability
After Credits
Minimum Tax Liability
Net of
Gross of
Credits
Credits 2/
Credits
1970
1971
1972
1973
1974
1975
$83,905
85,400
93,600
108,100
123,600
124,526
$122
168
216
182
143
144
1976
1977
1978
141,800
159,800
188,200
1,000
1,323
1,514
1979
1980
214,500
250,341
1,175
1,263
1981
1982
284,100
277,600
1983
1984
1985
1986
274,200
301,900
325,710
367,300
1987
1988
1989
1990
369,200
412,900
432,900
447,126
1991
1992
448,430
476,239
1993 - prel. 3/
509,700
Number of Returns with:
Minimum tax
AMT
Liability 2/
Credits
in thousands
19
24
27
26
19
20
Tax Reform Act of 1976
247
399
495
Revenue Act of 1978
222
211
Economic Recovery Tax Act of 1981
1,827
1,520
Tax Equity and Fiscal Responsibility Act of 1982
2,521
4,490
3,792
6,713
Tax Reform Act of 1986
1,675
825
1,028
203
578
831
253
616
830
214
Omnibus Budget Reconciliation Act of 1990
1,205
1,036
169
1,357
1,073
274
Omnibus Budget Reconciliation Act of 1993
1,751
217
1,534
251
225
265
370
428
609
140
114
117
132
26
40
34
244
287
32
63
323
56
Source: Various issues of "Individual Income Tax Returns," IRS, Statistics of Income Division; and unpublished IRS data.
1/ Legislation is listed before the year in which it became effective.
2/ For 1979 - 1982, minimum tax liability includes both add-on and alternative minimum tax. Number of returns include
those paying either AMT or add-on minimum tax.
3/ 1993 minimum tax data are preliminary.
17
TABLE 6
ADJUSTMENTS AND PREFERENCES FOR INDIVIDUAL TAX RETURNS
REPORTING AMT LIABILITY, 1992
In millions
Amounts
Percent
Number of
Returns
(in 1000s)
$5,644
3,613
1,441
1,073
824
576
450
235
169
126
119
116
76
62
50
47
28
27
19
13
1/
(2)
(99)
(379)
$14,228
39.7%
25.4%
10.1%
7.5%
5.8%
4.0%
3.2%
1.7%
1.2%
0.9%
0.8%
0.8%
0.5%
0.4%
0.4%
0.3%
0.2%
0.2%
0.1%
0.1%
0.0%
-0.0%
-0.7%
-2.7%
100.0%
245
169
66
16
70
19
4
21
5
1
38
15
3
30
5
6
1
2
7
1
2/
2/
20
112
287
Re~orted
Adjustments and Preferences from Form 6251
State and local tax deductions
1
Miscellaneous deductions above the 2-percent floor
2
3/
Post-1986
depreciation
3
Charitable donations
4
5
3/ Passive activity loss
6
Depletion
3/ Incentive stock options
7
3/ Beneficiaries of estates
8
3/ Intangible drilling costs
9
10
3/ Long-term contracts
11
Standard deduction
12
Private activity bonds interest
13
3/ Loss limitations
14
Medical deductions
15
Investment interest
Home-mortgage interest
16
17
3/ Mining costs
18
3/ Circulation expenses and R&E expenses
19
3/ Pre -1987 accelerated depreciation
3/ Tax shelter farm loss
20
3/ Pollution control facilities
21
3/ Installment sales
22
3/ Adjusted gain or loss
23
State and local tax refunds
24
Total, Adjustments and Preferences
Source: Unpublished data from IRS Statistics of Income, Individual Income Tax Returns, 1992
Notes:
1/ Less than $500,000.
2/ Less than 500.
3/ Item is generally considered a "timing" item for purposes of calculating AMT credits.
18
passive losses contributed about 6 percent, and depletion
allowance 4 percent. The remaining 20 preferences and
adjustments each added little to total individual AMT revenues.
Like corporations, individuals tend to pay AMT only
temporarily, not permanently.
In recent years, on average 35
percent of individuals with AMT liability in one year have AMT
liability in the following year. Of a panel of taxpayers with
any AMT liability over 1989-91, only 6 percent had AMT
liabilities in all years, and 80 percent had AMT liabilities in
only one year.
With OBRA 93, total revenues from the individual AMT are
expected to grow, as are the number of returns subject to the
AMT. The relative importance of various individual preferences
should not significantly differ from that reported in 1992.
Incentive stock options appear to be an individual preference
that is growing in importance, though for only relatively few
taxpayers, while capital gains on charitable contributions has
been removed as an individual AMT preference.
Has the AMT Accomplished its Goals?
As the legislative history for the TRA 86 suggests, the
primary objective of the AMT is to ensure that taxpayers with
significant economic income pay some income tax.
Evidence
indicates that the individual and corporate AMT, together with
the TRA 86 changes to the regular income tax, have largely
accomplished this objective. Over the 1990-92 period, the
individual AMT imposed tax on about 19,000 taxpayers per year who
paid no regular u.s. individual income tax. Of these, over 1,000
on average had AGI in excess of $200,000. At the same time,
approximately 1,200 individuals with AGI over $200,000 paid
neither AMT nor regular federal income tax." This is not
entirely indicative of success or failure, however, because the
definition of income used in the analysis, adjusted gross income,
is not the same as economic income. The possibility that some
taxpayers with high economic income have been able to utilize
tax-exempt bonds, and business and investment tax preferences to
reduce their AGI below $200,000 is thus not reflected in this
analysis. The AMT can only be as successful as the AMT
definition of income is in capturing economic income. 12
11 All en
Lerman, "High Income Tax Returns for 1991," IRS, SOl
Bulletin, winter 1994-95.
12 The
individual AMT does not, for example, capture taxexempt interest on public purpose municipal bonds or "insidebuildup" on life insurance. Consequently, this possibility is
significant.
19
The 1995 GAO report points out that in every year examined
(1987 - 1992) at least 6,000 corporations with positive book
income that paid no regular tax paid some corporate AMT. 13
However, it also notes that in each of those years at least
290,000 corporations with positive book income paid no income
tax. Although at first glance this might suggest that the
corporate AMT, unlike the individual AMT, is not very successful,
the GAO report also notes that about 98 percent of the nontaxpaying corporations were relatively small, having less than
$10 million in assets. About 85 percent had less than $40,000 in
net income and probably qualified for the AMT exemption. The few
large non-taxpaying corporations with $1 billion or more in
assets were predominantly mutual funds and investment companies,
which generally pass all income to shareholders, and are exempt
from the book income and ACE adjustments. 14
More important, the objective of ensuring that profitable
taxpayers pay some tax is too narrow a characterization of the
goal of the AMT. A large fraction of taxpayers subject to the
individual and corporate AMT ("AMT payers") pay both the regular
and AMT tax (about 75 percent of corporate AMT payers and 92
percent of individual AMT payers in 1992).
If the AMT were to be
judged only by its impact on those taxpayers who pay no regular
tax (i.e., who "zero out" their regular tax liability), it would
thus be measured by its effect on only a fraction of the affected
taxpayers.
A more appropriate standard for the success of the AMT is
whether it helps ensure that taxpayers with significant economic
income pay a tax relatively commensurate with that income.
By
examining the average tax rate (defined as the ratio of tax
liability to regular taxable income) in each of eight major
industries over the 1987-1992 period, the GAO report shows that
the corporate AMT helped bring the average tax rate closer to the
maximum statutory rate. 15 As in the case of the individual AMT,
a more compelling demonstration that the corporate AMT has
13 GAO
(1995), Table 111.7, p. 64.
(1995), Table 111.14, p. 68. The measure of book
income used in the GAO analysis (that shown on schedule M-1 of
Form 1120) is reported inconsistently, because it does not affect
the corporation's tax liability and is provided for informational
purposes only.
It is intended to reflect the income shown on the
parent corporation's consolidated financial statement, which may
not include the same members of the affiliated group that are
included in the consolidated tax return.
14 GAO
15 GAO
(1995), Table 11.12, p. 41.
20
achieved its goal would require measuring the tax paid against
economic income, which is not generally possible to infer from
the tax return information of non-AMT payers.
criticisms of the AMT
The corporate AMT has been criticized for having adverse
effects on economic growth. It has been argued that, by delaying
the receipt of tax benefits, the AMT raises the cost of capital
for many corporations, and thus reduces their incentive to
invest.
It has been suggested that it also creates different
incentives for different corporations making identical
investments, depending upon whether they are likely to be subject
to the AMT, and if so, for how long. Furthermore, it has been
suggested that the corporate AMT may encourage mergers and
acquisitions and uneconomic leasing transactions in order to
allow corporations to avoid the AMT or better utilize AMT
credits.
While there is some validity to these concerns, they may
easily be overstated. The lower AMT tax rate can increase the
incentive to invest if the corporation were to remain subject to
the AMT over the life of the asset, or if a firm not currently
subject to the AMT anticipates that it will be subject to the AMT
after a few years and can thus claim regular-tax depreciation
allowances now, while a portion of the returns will be taxed at
the lower 20 percent AMT rate in later years. Moreover, by
design, the AMT reduces the incentive to invest in tax-favored
assets. Thus, the overall efficiency of investment may be
enhanced by the AMT's propensity to create a more neutral tax
system.
Any potential adverse macroeconomic effect of the AMT on
investment is also mitigated by the fact that few corporations
are subject to the corporate AMT. Approximately 28,000
corporations, or about 1.3 percent of the 2.1 million nonsubchapter S corporations, were subject to the AMT in 1992.
Moreover, smaller corporations are less likely to be subject to
the AMT. As noted in the GAO report, less than one-half of one
percent of corporations with assets under $1 million, and only 7
percent of corporations with assets under $10 million, were
subject to the AMT in 1992. In contrast, approximately 20
percent of corporations with assets over $1 billion were subject
to the AMT in that year. 16 As noted above, however, most large
corporations that paid AMT between 1987 and 1992 were AMT payers
for one or two years.
16 GAO
(1995), Table 11.4, p. 36.
21
In general, firms subject to the AMT do not permanently lose
their tax benefits (except for the benefits of timing), because
AMT liability generates credits that can be used against regular
tax in later years. Although the relatively slow use of AMT
credits has been a source of concern, the repeal of the ACE
depreciation adjustment under OBRA 93 is expected to reduce
future AMT liabilities and increase the use of AMT credits.
Concern also has been voiced about the compliance costs of
the AMT. This concern has been addressed in part by the OBRA 93
repeal of the ACE depreciation adjustment for investment after
1993.
Prior to the repeal of the ACE depreciation adjustment,
taxpayers were required to make three separate depreciation
computations to determine taxable income and alternative minimum
taxable income. The depreciation adjustment was also the most
important component of ACE. The repeal of the ACE depreciation
adjustment eases the compliance costs for those likely to be
subject to the AMT and will significantly reduce the application
of the AMT to taxpayers. Moreover, as stated above, the
Administration welcomes the opportunity to work with the Congress
to identify areas where further simplification is possible on a
revenue neutral basis, either within the AMT or by identifying
other acceptable revenue offsets.'7
While supporting revenue-neutral legislative changes to make
the AMT more simple and rational, the Administration is also
committed to simplifying the AMT through administrative measures,
where possible. For instance, last November the Treasury
Department issued final regulations that will eliminate
sUbstantial complexity and recordkeeping burden for all
individual AMT taxpayers. The regulations allow taxpayers to use
regular-tax AGI in determining items of income, exclusion, or
deduction that are computed with reference to AGI (for instance,
medical expenses) in computing AMTI, instead of having to make
separate calculations of minimum-tax AGI for such purposes.
H.R. 1215 AMT Proposal
The tax provisions in House bill H.R. 1215, which
incorporates the tax provisions in the House Republicans'
contract with America, provide significant tax benefits to
individual and corporate taxpayers. The Administration is very
concerned about the potential effects of H.R. 1215 on the Federal
deficit, and in particular about the estimated $178 billion
17The concerns with complexity and compliance costs are
particularly noteworthy for the individual AMT, with fewer than
0.3 percent of individual returns owing AMT liability, but ten
times as many filing AMT forms.
22
revenue cost of the tax provisions over the FY 1995-2000 period,
and the approximately $99 billion annual revenue cost by the year
2005. Several of these provisions, such as the Neutral Cost
Recovery System (NCRS) and the capital gain exemption and
indexing provisions, will further complicate an already
complicated tax system and provide disproportionate benefits to
high-income individuals and highly profitable corporations.
H.R. 1215 weakens the regular income tax as a measure of
income. While the Administration opposes NCRS and the capital
gains provisions of H.R. 1215, the fact that they are not subject
to AMT compounds this problem. As I have noted, the primary
objective of the individual and corporate AMT system is to ensure
that taxpayers earning substantial economic income pay a tax
relatively commensurate with that income. The greatly expanded
tax benefits in the bill significantly increase the importance of
an AMT system in serving that function, particularly for
corporations. Whereas for individual taxpayers, the limits on
passive losses may restrict tax avoidance activity, for
corporations the AMT is the principal backstop. Yet the bill
includes provisions that would seriously impair the AMT system:
1.
For individuals, all AMT preferences (depletion, excess
intangible drilling costs, tax shelter farm activities,
passive losses) are repealed after 1995;
2
Those adjustments that are business-related
(depreciation, mining exploration and development
costs, long-term contracts, pollution control
facilities, installment sales, circulation
expenditures, research and experimentation
expenditures) are repealed for transactions after 1995;
3.
For corporations, AMT preferences and adjustments
applying generally to transactions after 1995 are
repealed;
4.
The 90 percent limitations on the AMT use of net
operating losses (NOLs) and foreign tax credits (FTCs)
are repealed for taxable years after 1995;
5.
The corporate AMT is repealed for taxable years
beginning after December 31, 2000; and
6.
AMT credits could be used to offset up to 90 percent of
the regular tax liability for tax years (after
application of other credits) after 1995, but not below
the tentative alternative minimum tax.
These provisions leave only preferences and adjustments
attributable to investments made prior to 1996 (many of which
will reverse in future years) subject to the corporate AMT before
23
its total repeal in 2001.
Even if the other tax provisions of
H.R. 1215 were not enacted, we estimate that the repeal of the
corporate AMT alone when fully phased in in 2001, would allow
over 12,000 corporations each year to avoid paying any income
tax.
Those corporations account for almost $840 billion in
sales, or 12 percent of total sales, and approximately $2.1
trillion in assets, or 14 percent of total assets of all
corporations currently subject to tax.
If NCRS is enacted and the corporate AMT repealed, we
estimate that about 76,000 corporations that would otherwise have
paid an income tax in 2005 would avoid paying any tax.
These
corporations account for approximately 16 percent of total sales
($7.1 trillion) and 18 percent of total assets ($15.4 trillion)
of all non-subchapter S corporations currently subject to tax.
More important, NCRS is estimated to cost over $32 billion
in 2005. Even if NCRS allows only a limited number of
corporations to "zero out," it nevertheless results in a
significant reduction in corporate tax liabilities. Because
these tax benefits are not subject to AMT, corporations would no
longer pay a tax that is relatively commensurate with their
economic income. Likewise, none of the $12 billion cost of the
individual capital gains tax cuts in 2005 would be reflected in
the individual AMT.
While H.R. 1215 does not repeal the individual AMT, the only
adjustments that remain subject to the tax are: miscellaneous
itemized deductions; state, local, and foreign taxes; medical
expenses between 7.5 and ten percent of adjusted gross income;
tax-exempt interest on private activity bonds; standard
deductions and personal exemptions; and incentive stock options.
Unlike the corporate AMT, which is essentially vitiated by the
bill even prior to its total repeal in 2001, the individual AMT
is weakened in comparison to current law.
The revenue losses anticipated for the proposed changes to
the individual and corporate AMT under H.R. 1215 are about $19
billion over the FY 1995-2000 period and $36 billion over the FY
1995-2005 period. These losses are much greater than simply the
loss of AMT liabilities which would otherwise have been
generated. The tentative alternative minimum tax, which
currently acts as a limit on the extent to which AMT credits can
be used to reduce the regular tax, would no longer be a
meaningful constraint. The bill's 10 percent floor on the
residual regular tax would instead allow a greatly accelerated
use of the outstanding stock of unused AMT credits ($22 billion
in 1992). This speed-up in credit usage accounts for the
additional revenue cost of these provisions.
These estimated revenue losses, which make the commitment to
fiscal responsibility more difficult, reflect only one dimension
24
of the impact of H.R. 1215 on the AMT. Our tax system largely
relies on voluntary compliance with the tax laws.
stories about
large profitable corporations or wealthy individuals who manage
to avoid paying any income tax reduce the willingness of other
taxpayers to comply with our tax laws.
Conclusions
The AMT system has served a very useful purpose by helping
ensure that individuals and corporations earning sUbstantial
economic income pay income tax relatively commensurate with that
income.
since the last major reform of the minimum tax in TRA
86, Congress has simplified the system and provided targeted
relief that has been, and will continue to be, reflected in a
decline in net AMT revenues. Nevertheless, despite the lower
revenues, the importance of the AMT system has not diminished.
Thus, a visible AMT system should continue into the future.
Indeed, if the tax cuts in H.R. 1215 (other than the AMT
proposals) are enacted, an enhanced AMT system will eventually be
required to prevent a reemergence of the tax reduction-type
activity that characterized the years prior to enactment of TRA
86. Moreover, the provisions of H.R. 1215 that weaken the
individual AMT, and weaken and then repeal the corporate AMT
will, instead, facilitate tax avoidance and reduce the perceived
and actual fairness of the income tax. Thus, the Administration
opposes proposals in H.R. 1215 that seriously weaken the
objectives of the AMT. However, the Administration would welcome
the opportunity to work with the Congress to develop measures
that would simplify the AMT on a revenue-neutral basis, either
within the AMT or by identifying other acceptable revenue
offsets.
25
Impact of Neutral Cost Recovery System and
Repeal of Corporate Alternative Minimum Tax
Share of Assets of Currently Taxable Corporations
Nontaxable under
AMT Repeal
Nontaxable
under NCRS
4.0
/
Taxable under NCRS and
AMT Repeal
Corporate
Alternative Minimum Tax and Credits
1987 -1993
Billions of dollars - - - - - - - - - - - - - - - - - - - - - - ,
8
7 ~
•
AMT before credits
6 ~
~
AMT credits
claimed
5
4
3
2
1
o
1987
1988
1993 data are projections.
1989
1990
1991
1992
1993-Proj
Individual
Alternative Minimum Tax and Credits
1987 -1993
Billions of dollars - - - - - - - - - - - - - - - - - - - - - - .
8
7
6 l--
• AMT before credits
~ AMT credits claimed
5
4
3
2
1
o
1987
1988
1993 data a~e preliminary.
1989
1990
1991
1992
1993-Prel
DEPARTMENT
OF
THE
TREASURY
NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220. (202) 622-2960
STATEMENT OF DARCY BRADBURY
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR FEDERAL FINANCE BEFORE THE
SUBCOMMITTEE ON POSTSECONDARY EDUCATION, TRAINING
AND LIFELONG LEARNING OF THE COMMITTEE ON ECONOMIC AND
EDUCATIONAL OPPORTUNITIES AND THE
SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH,
NATURAL RESOURCES AND REGULATORY AFFAIRS OF THE
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
UNITED STATES HOUSE OF REPRESENTATIVES
MAY 3, 1995
Chairman McKeon, Chairman McIntosh, members, on behalf of
secretary Rubin,
I welcome the opportunity to appear before you
today to discuss the Administration's proposals to cut the ties
to the Federal Government of two Government-sponsored enterprises
("GSE' s")
-- the Student Loan Marketing Association (Sallie Mae)
and the College Construction Loan Insurance Association (Connie
Lee).
The Treasury has for a number of years, in Democratic and
Republican Administrations, believed that it is appropriate to
wean a GSE from Federal sponsorship once the GSE becomes
economically viable and successfully fulfills the purpose for
which it was created with Federal sponsorship, or when the
purpose for which it was created ceases to exist.
The GSEs expose the Government to the market perception of
implicit risk that legislation would be enacted to prevent a GSE
RR 268
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
2
from defaulting on its obligations.
As the Treasury said in its
1990 Report on GSESl:
The market perception of Federal backing for GSEs
weakens the normal relationship between the
availability and cost of funds to the GSEs and the
risks that these enterprises assume .
The prospect
that Congress would use taxpayer funds to prevent the
failure of a GSE is perceived in the securities markets
as protecting investors in GSE debt securities or GSEguaranteed securities from loss .
In April 1991, as required by FIRREA and the Omnibus Budget
Reconciliation Act of 1990 2 , the Treasury followed up with a
further report on the GSEs in 1991. 3
The 1991 Report reiterated
statements of concern about the Government's risk exposure to the
GSEs.
At the Treasury's request, as part of the 1991 Report,
Standard and Poors (S&p) assessed the likelihood that a GSE would
be able to meet its future obligations from its own resources and
expressed that likelihood as a traditional credit rating.
gave a triple-A credit rating to Sallie Mae.
S&P
Connie Lee had
obtained a triple-A credit rating from S&P previously, and in
March 1990, S&P indicated to the Treasury that Connie Lee's
status as a GSE was not a factor ln granting the triple-A rating
to Connie Lee as a bond reinsurer.
Report of the Secretary of the Treasury on Governmentsponsored Enterprises, May 1990, page 1. This 1990 Report was
required under section 1404 of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA) (P.L. 101-73).
1
2
Public Law 101-508, section 13501.
3 Report of the Secretary of the Treasury on Governmentsponsored Enterprises, April 1991, or the 1991 Report.
3
In 1992, legislation was enacted to provide for Federal
financial safety and soundness oversight of the housing-related
GSEs -- the Federal National Mortgage
As~ociation
and the Federal
Home Loan Mortgage Corporation -- and Sallie Mae to mitigate the
perception of implicit risks to the Government.
Federal
oversight of the Farm Credit System had been tightened earlier as
a result of problems that arose and required Federal assistance
in the mid-1980s.
As a general principle, we believe that the Government and
the GSEs would benefit from removal of the Government ties
because privatizing the GSEs would:
Reduce the amount of GSE debt, over time, that carries some
perception of U.S. Government support;
Demonstrate our commitment to moving from creating effective
pUblic-private partnerships to then enabling complete
privatizing when Government support for an activity is no
longer neededj
Show the financial markets that the Government respects the
interests of private bond- and shareholdersj and
Support Federal efforts to create new GSEs in the future,
when appropriate, by demonstrating that the Federal
relationship can be severed when the time is right.
A
business operation that starts as a GSE with a limited
charter can be freed to operate ln other markets once it has
fulfilled the purpose for which it was created.
4
Sallie Mae
Under legislation enacted in 1992,4 the Treasury has a
special relationship with Sallie Mae as its financial safety and
soundness regulator.
We have reviewed Sallie Mae's financial
condition and can see their successes to date and challenges for
the future.
Sallie Mae benefitted from large increases in
leverage and relatively low cost GSE funding through the early
1990s.
Sallie Mae's balance sheet grew rapidly in the 1980s,
when it expanded market share in response to opportunities
arising from amendments to its charter.
The company's earnings
record was especially strong in 1992, 1993, and early 1994, when
market interest rates were low and Sallie Mae was able to capture
windfall profits as a result of a floor on the interest rate on
most of its student loan assets.
Since then, however, return on
assets and net interest margin have been negatively impacted by a
rise in market rates of interest and shifts towards lower
yielding assets.
The financial environment for Sallie Mae has changed since
enactment of the Student Loan Reform Act of 1993 5 , which reduced
the returns on guaranteed student loans and imposed a 30 basis
P.L. 102-325, enacted on July 23, 1992, added subsection
439(r) to the Sallie Mae charter in the Higher Education Act of
1965 (20 U.S.C. 1087-2(r)), providing a capital standard for
Sallie Mae and for Treasury financial safety and soundness
oversight.
4
P.L. 103-66. Subtitle A of the Omnibus Budget
Reconciliation Act of 1993.
5
5
point fee on all guaranteed student loans purchased by Sallie Mae
after August 10, 1993.
Even more significantly, the Act also
established the Federal Direct Student Loan Program (now the
William D. Ford Direct Loan Program), under which loan capital is
provided directly to student and parent borrowers by the Federal
Government rather than through private lenders.
The Student Loan Reform Act authorizes the Department of
Education to replace up to 60 percent of (new loan volume in) the
Federal guaranteed student loan programs with direct lending by
the Department of Education by the 1998 academic .year, and
further provides that the proportion of direct loans may rise
above 60 percent, if the Secretary of Education "determines that
a higher percentage is warranted by the number of institutions of
higher education that desire to and are eligible to participate
In the program .
The Direct Student Loan Program is one of the President's
top priorities.
The Administration, In the Budget for FY 1996,
proposed implementation of laO-percent direct lending (new loan
volume)
in 1997.
Consistent with the implementation of direct
lending under current law, the Administration has been studying
options for the future of Sallie Mae, including in particular,
restructuring the company into a fully private company.
As noted
above, privatizing Sallie Mae would significantly benefit the
Subsection 453(a) of the HEA of 1965, as amended (20
U.S.C. l087c(a).
6
6
U.S. Government.
In addition, removing Federal ties would mean
that the restrictions on Sallie Mae's business operations under
its current charter would cease to exist and that Sallie Mae
could engage in profit-making activities that it cannot enter as
a GSE.
In any restructuring, currently outstanding Sallie Mae debt
would retain the characteristics of GSE debt, and customers with
pre-existing commitments with the GSE would not be affected.
Any
new debt issued by a private company successor to Sallie Mae
would not possess the characteristics of GSE debt.
The Administration believes that the benefits to be gained
by the Government and Sallie Mae from privatization, in the
context of continued expansion of the Direct Student Loan
Program, are such that Congress should favorably consider
legislation to authorize Sallie Mae's management to form a fully
private company and to wind down the GSE during a transition
period.
In this connection, we have been working with the Department
of Education, the Office of Management and Budget, the Domestic
Policy Council, and the National Economic Council to develop
legislation to privatize Sallie Mae.
We look forward to sharing
an Administration legislative proposal with Congress in the near
future.
Key elements of the proposal are:
7
The Sallie Mae Board of Directors would be authorized to
carry out a reorganization, after which Sallie Mae would be
a wholly-owned subsidiary of an ordinary state-chartered
holding companYi
The reorganization plan would be subject to certain reviews
by the Departments of Education and Treasury followed by
approval by holders of a majority of Sallie Mae common
stock;
After the reorganization, Sallie Mae would enter a
transition period during which new business activities of
the GSE would be restricted and new debt issued by the GSE
would be restricted;
During the transition, excess capital of the GSE could be
transferred to the new private holding company subject to
specific limitations and approval of the Secretaries of
Education and Treasury, and continued compliance with the
GSE's statutory capital requirements;
During the transition, the GSE would be protected from the
financial failure of the holding company or its other
subsidiaries;
As a form of "exit fee", to recognl.ze the benefits Sallie
Mae has received because of its GSE status, the legislation
would enable the United States to participate in the success
of the holding company, for example through the issuance of
stock warrants, and in addition, the rest of the legislation
must be revenue neutral.
8
Connie Lee
The Administration proposed in the Budget for FY 1996 to
convert Connie Lee to a fully private enterprise. Congress
structured Connie Lee as a private, for-profit corporation, but
provided for a limited infusion of Federal capital in the form of
stock purchases by the Secretary of Education in order to get the
corporation started.
Congress clearly intended the Federal
Government's direct interest in Connie Lee to diminish and
eventually terminate,7 as evidenced by the statutory limitations
on purchases of stock by the Secretary of Education and the
authorization of the sale of such stock.
The Administration will soon propose legislation that will
sever all Federal ties with Connie Lee, largely by requiring that
the Connie Lee stock that is held by the Department of Education
be sold by a date to be specified in the bil1 8 .
The legislation
would also delete Federal approval of directors and eliminate all
business restrictions.
In marketing securities, Connie Lee would
have to notify potential investors of these changes.
The
Treasury is prepared to act on behalf of the Department of
Education to sell the Government's stake in Connie Lee.
Thus,
7 U.S. Congress, House, Committee on Education and Labor,
Higher Education Amendments of 1985, 99th Congress, 1st sess.,
1985, H. Rept. 99-383 to accompany H.R. 3700, page 74.
8In the 1990 Report, the Treasury proposed that the Federal
Government sell its Connie Lee stock when it had authority to do
so (February 1992) .
9
Connie Lee would be permitted to pursue business opportunities
and the Federal Government would be free of any perception of
implied risk that it would be
cal~ed
upon to provide assistance
in the unlikely event that Connie Lee gets into financial
difficulty.
Conclusion
We appreciate the opportunity to testify on these two
proposals.
Privatization, if implemented in a careful and
deliberate manner, can benefit the u.s. Government and taxpayers,
as well as Sallie Mae's and Connie Lee's stockholders, and the
students and schools we are all trying to serve.
I will be glad to answer any questions that you may have.
DEPARTMENT
OF
THE
TREASURY
OFFICE OF PUBUC AFFAIRS • 1500 PE;"Ii:\SYL\'.\...\;1.\ .\\'l:\Ll-.. "..l\'.• WASHINGTON, D.C.. 20220. (202) 622·2960
.-~,--------------------~------
Rermrk5 by
Lawrence H SWlIlrIS
Under Secretuy of the Trea;my
Syf11XJsiwn on Capital Flows
JelUialem, Israel
April 3\ 1995
Introduction
Thank you very much. I am delighted to have the chance to participate in this
SympOSilllll on this very important topic.
The problem of how to approach capital flows provokes a range of differing opinions
Nonetheless. it is encouraging to recognize that the entire discussion of developing economies
takes place within an area of consensus that is far larger than would have been the case even
a decade ago. No one who discusses emerging markets today can doubt the fundamental
importance of stabilization. No one can doubt the fundamental importance of openness in
promoting economic growth, or the role played by the private sector as a critical engine of
economic growth. It is a sign of progress that our discussion today is much narrower than
the discussion we would have had 10 or 15 years ago. The [MF and the multilateral
development banks have had a great deal to do Vv;th that development.
I would like to propose some answers -- \'ery tentative answers to be sure -- to three
questions which I think must be addressed in any discussion of how cmmtries should treat
capital flows. First, when are capital inflows a problem') Second. what can colll1tries facing
strong capital inflows, or excessive volatility, do in response? And third. how can the
international system respond?
\\hen Are Capital Flows a Problem?
First. when are capital inflows a problem') Nigel Lawson attempted to provide an
answer to that question. He proposed that large flows are not a cause for concern if they can
RR-269
be attributed largely to private sector requirements. mld are not caused by a public sector
deficit.
I agree with his fonnulation to the extent that the absence of a public deficit is a
necessaI)' condition for confidence that capital inflows will not create difficulties. But I do
not believe that the lack of a public deficit alone is a sufficient condition for confidence.
I would suggest three critical tests to detennine when a potential problem exists.
First policylnakers and analysts must look at how capital flows are being used.
PresLUnptively, for nations as well as people, borrmv1ng to finance investment is healthy;
borrowing to firumce COnSLUTIption is much more problematic. \Vhen the lion's share of
inflows are being used for investment there is the presLUnption that the economy is
generating the capacity to repay these obligations. That presLUnption is much safer when
investment is taking place largely in the export sector. rather thml in the non-tradeable goods
sector.
Similarly, the national sa\ings rate can ofter some evidence as to whether capital
inflows are being used to firumce LUlsustainable consLUnption or invesonent. The national
savings rate also pro\ides an indicator of a nation's ability to weather a sudden diminution or
reversal of capital flows. It is a basic truth that Latin America's lower savings rate, in
relation to Asia's, explains this continent's poorer economic record and weaker resistance to
capital tlow volatility.
Second analysts must examine the tenns lll1der which capital is being lent or invested.
\\!hen the money is entering on terms that are steadily more favorable and more secure for
the borrower, there is much less need for concern. \\!hen flows are proceeding on steadily
less secure terms for the borrower and more secure tenns for the lender, greater concern is in
order.
How can one determine whether terms are improving or deteriorating for the
borrower? The maturity of outstanding debt is one indicator. There is less need for wony
when maturities are lengthening. The opposite is true if they are shortening. Similarly, when
debt is increasingly denominated in local currency, there is much less of a problem than when
debt is increasingly denominated in foreign clUTency. Last, when flows are going
increasingly into direct investments or into portfolio or equity investments rather than debt
investments. there is much less of a problem. On the other hand when the pattern is one of
increasingly short-teon increasingly foreign-currency-denominated debt, that would suggest
that a serious problem is arising.
TIle third criteria for determining when a problem exists centers on the size of capital
flows. It is very lll1likely that any COlll1try can.. over a very long period of time, borrow more
than 5°'0 of its GNP lll11ess it is grm"ing at a very rapid rate. The adjustment required when
silnply the rate of grm"th of debt suddenly has to be reduced can be very dangerous. 111at is
2
the case even when ~e total stock of debt or investment need not faIL and people are holding
the ,stock that they W1S~. For that reason, an ~x.cessive rate of ~'Towth of outstanding debt or,
eqwval ently, an excessIve CWTent accOlU1t deficIt is dangerou5.
I think that analysts and policymakers seeking to detennine when countries must
adjust to potential capital flow problems can be usefully guided if they respond to these three
criteria: investment versus COnslunptiOn, the tenns lU1der which capital inflows are coming,
and the quantity of those flows.
The Appropriate Respoffle
The second question policymakers must answer is, how should cmU1tries respond when
they judge that capital flows are a problem? I think the one point on which almost all would
agree is that policymakers should respond conservatively.
That suggests a number of specific approaches.
First, there is a natural hwnan tendency to suppose that periods of substantial inflows
represent a permanent change, whereas periods of capital outflows represent a transitory
disturbance. I think that experience suggests the opposite is true. As a rule, inflows should
be treated as temporary. and outflow pressures as pennanent. TIle policy responses are likely
to be much healthier if that view is internalized.
The second general rule must be that responses are less painful if implemented sooner
and quicker. The same policy response taken preemptively will generate a much greater
response, and a much greater corrective effect. than if taken lU1der duress.
I think that calls forth three further nues.
First, countries must respond through fiscal policy. For most countries, an improved
budgetary position is the right response to pressure both from capital inflows and from capital
outflows. For the vast majority of nations, a larger budget surplus or a smaller budget deficit
would represent an important contribution to economic health. If economics and accOlmting
have one thing to teach politicians, it is that budget deficits are not an alternative to tax
increases or reductions in expenditures. They are merely a way of postponing them, and way
of postponing them with very substantial risks.
Second, countries should be very cautious about sterilizing changes in reserves,
particularly when they are associated with capital outflows. That conclusion res~ts from the
principle that I suggested a few m01nents ago, that one should treat outflows as likely to be
permanent, arId inflows as likely to be temporary.
The final point regarding how countries shmud respond to charIging or volatile
financial circlIDlStances is that they should respond aggressively, with changes in the tools and
3
methods of financial supenision and re~JU.lation. In my judgment it is clear that we would all
rather liYe in cOlmtries \'/hich capital is trying to get into. rather than cOlmtries from which
capital is trying to get out. TIlat suggests that cowltries should be very cautious about
imposing capital controls with the o~iective of discouraging capital inflows. At the SaIne
time, new techniques of financial innovation present challenges to stability. It is appropriate
for supenisory authorities to think about reserve requirements and new regulations. and to be
prepared to respond aggressively to changes in the pattern of capital inflows. through
regulatory and supenisory improvements.
The International Res JXlose
Let me hUll to the final question which policymakers must address. How can the
intemational cOrrnTIlll1ity respond to this new environment of vastly ~Jfeater aIld more volatile
capital flows to emerging and other markets')
First, I think it is important to recognize that despite the enonnous changes we have
seen in international capital Il1Mkets. the basic tenets still hold. l\ toney borrowed if used
wisely, serves nations well. But money borrowed if used poorly. throws nations into
difficulty.
In evaluating the international financial system and how it must adapt, I would
highlight four issues. The first is the overwhelming importance of transparency. The need
for financial transparency is something of a cliche. so I don't think it is treated with the
importance that it deserves. Timely and frequent publication of comprehensive data on
national aCCOlll1ts, on monetary conditions, aIld on central bank balance sheets makes an
important contribution to international confidence, in those cOlmtries who practice it. It
serves to signaL at an early stage, that potential problems may arise. It therefore calls market
and policy responses into play at an early stage, when responses are most effective.
Transparency therefore exercises important discipline on policymakers, so that they cannot
slip and slide through a difficult situation.
I believe that it is very important that the world move quickly to raise very
substantially the international nonns and standards for the publication of financial
infonnation. This is a task in which the international financial institutions have a role to play.
Second I believe that we have to improve our tools and our means of slllVeillance.
Policymakers and analysts must systematically examine the criteria I have just suggested for
judging capital inflows. In part this is a task for the international financial institutions. But
in a very large part it is also a task for the markets. Increased emphasis on transparency is
something the markets should insist upon.
Third the official sector needs to be able to respond in extraordinary circ\.Dl1Stances
when problems of confidence arise. The dictum that there is a need for lending of last resort
in situations where there are liquidity problems but not solvency problems has a role in the
international arena.
Fourth, there may be a need for enhanced coordination of debt restructuring involving
both private and public creditors, when nations do nUl into difficulties. Just as in the
corporate setting, it is sometimes in all creditors' interest to coordinate their response to
debtor difficulties, while insisting on conditions needed to ensure a return to economic
stability. The fact that sovereign debt is today widely traded means that the old methods of
coordinating bank-debt restructuring may no longer be applicable.
It is right to worry about moral hazard. rvloral hazard is a \·ery serious problem. But
I do not side with those who believe that the fire department should not exist because it will
encourage people to smoke in bed. In just the same way, it is appropriate for the
international cornmtmity to respond at times of crisis, particularly when the crisis is of a
systemic nature, as it is in the case of Mexico. The G-7 leaders \'1111 give careful
consideration at Halifax to how we can begin to consider modifications to the international
financial architecture. We will have to give careful thought to how to maintain the capacity
to respond at moments of extraordinary duress. But any solutions must ultimately rely on
what is most important to international financial stability: market incentives, and strong policy
decisions by particular cOlmtnes. These are the l~titnate!:-ruarantors of stability and
confidence.
5
@FedFRASER