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Department of the Treasury
Library
JAN 1 ~ 20C8
Treas.
HJ
10
.A13
P4
v.440
Department of the Treasury
PRESS RELEASES
Page 1 of 1
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June 1,2007
HP-438
Treasury Economic Update 6,01.07
"The economy is on track to rebound in the second quarter and beyond following a
slowdown of late-2006 and early this year. The strong labor market will support
household spending, and this in turn will drive a continued upturn in business
investment."
Assistant Secretary Phillip Swagel, June 1, 2007
REPORTS
•
Treasury Economic Update 6.01.07
http://www.treas.gov/preS5/rel~ai>es/hp438.htm
7/512007
TREASURY ECONOMIC UPDATE 6.1.07
"The economy is on track to rebound in the second quarter and beyond
following a slowdown of late-2006 and early this year. The strong labor
market will support household spending, and this in turn will drive a continued
upturn in business investment."
Assistant Secretary Phillip Swagel, June 1, 2007
Job Creation Continues:
Job Growth: 157,000 new jobs were created in May and 2 million new jobs have been created over the
past 12 months. The United States has added 8 million jobs since August 2003 - more new jobs than all
the other major industrialized countries combined. Our economy has seen job gains for 45 straight
months. Employment has increased in 48 states and the District of Columbia within the past year. (Last
updated: June 1, 2007)
Low Unemployment: The unemployment rate of 4.5 percent is close to the lowest reading in six
years. Unemployment rates have decreased or held steady in 31 states and the District of Columbia over
the past year. (Last updated: June 1, 2007)
The U.S. Economy is in Transition to a Sustainable Growth Path:
Economic Growth: Real GOP growth was 0.6 percent in the first quarter of 2007, and 1.9 percent over
the past 4 quarters. (Last updated: May 31, 2007)
Household Spending: Consumer spending-up a strong 4.4 percent in 01-is expected to provide a
solid foundation for faster economic activity in the rest of 2007. (Last updated: May 31, 2007)
Business Investment: Capital investment turned up in the first quarter, boosted by outlays for
commercial structures and equipment and software. (Last updated: May 31, 2007)
Tax Revenues: Tax receipts rose 11.8 percent in fiscal year 2006 (FY06) on top of FY05's 14.6
percent increase. Receipts have grown another 11.2 percent so far in FY07. (Last updated: May 10.2007)
Steady Productivity: Labor productivity has grown at an annual rate of 2.8 percent since the business
cycle peak in 200101. (Last updated: May 3, 2007)
Americans are Keeping More of Their Hard-Earned Money:
Real Wages Increased 1.2 percent Over the Past 12 Months (ending in April). This translates
into an additional $400 above inflation for the average full-time production worker.
Real After-Tax Income Per Person has Risen 11 percent - an extra $3,100 per person - since
the President took office.
Pro-Growth Policies will Enhance Long-Term U.S. Economic Strength:
The Administration proposed a budget that reaches a small surplus in 2012. Economic
growth has generated increased tax receipts and dramatically improved the budget outlook. The budget
holds the line on spending. The budget reduces the deficit as a percentage of GOP-the most meaningful
measure of its size-every year through 2012. The time has come for both political parties to work together
on comprehensive earmark reform that produces greater transparency and accountability to the
congressional budget process, including full disclosure for each earmark and cutting the number and cost
of all earmarks by half.
www.treas.gov/economic-plan
Page 1 of3
June 5, 2007
HP-439
Remarks by Treasury Secretary Henry M. Paulson, Jr. at
the Heritage Foundation Lee Lecture:
China and the Strategic Economic Dialogue
Washington, DC--It's a pleasure to be here this morning to talk about the U.S. China economic relationship. Prior to the first Strategic Economic Dialogue meeting
in Beijing last December, Heritage published a "Web Memo" offering insights and
advice about the SED. One of the points made was that American officials should
not approach the dialogue as an opportunity to lecture Chinese officials. In a similar
vein, I won't approach our time this morning as an opportunity to lecture you, given
the depth of Heritage's expertise on China. I look forward to sharing my views, and
to hearing about yours during the discussion following my remarks.
You are certainly familiar with the genesis of the SED. In August, 2006, President
Bush and President Hu agreed to create an on-going forum to manage our
economic relationship, for our mutual benefit, on a long-term strategic basis. We
held our inaugural meeting in Beijing, continued our efforts through a series of
meetings among Chinese and U.S. officials, and held the second meeting two
weeks ago here in Washington. This dialogue is important because we must get
this relationship right. An open, honest economic relationship between our two
countries is important to the future of the global economy.
For over 30 years, the Heritage Foundation has been formulating and promoting
free market public policies. There is much common ground in your commitment to
the principles of free enterprise and the over-riding objectives of broad-based
economic engagement with China. Across the spectrum of economic issues, I
believe it is in the best interest of the United States, China and the rest of the world
that China move more quickly to adopt market-based reforms. And that is one of
the primary objectives of the SED - to speed the pace of reform in China.
We who believe in open economies are swimming against a strong protectionist
tide these days. As I explained to the Chinese, a large section of the American
public doesn't believe that the benefits of trade are being shared equally between or
within our two countries, and Congress reflects that view. The Chinese delegation
had the opportunity to meet with Congressional leaders during their visit. I think the
meetings were mutually respectful, and it was beneficial for the Chinese to
personally meet those who have such serious concerns.
Protectionism isn't a growing force only in the United States. It is playing a role in
domestic politics in China as well. This fall, the Communist Party of China will hold
its 17th Party Congress, to determine changes in leadership. This may impact many
aspects of national policy, including the pace of economic reform in China.
The task of the SED is long-term, and that is difficult in a town where short-term ism
is the order of the day. A newspaper headline at the conclusion of the recent SED
meeting said that it did not "resolve major issues." This, in my opinion, misses the
point. The dialogue is an on-going process. To get results, we must build
relationships, and take smaller, deliberate steps forward together to create
momentum for greater change. Through candid discussions, we will ease, rather
than increase, tensions and get to solutions and action.
The second SED meeting produced tangible results that have laid the groundwork
for greater progress. In particular, we made notable progress on civil aviation,
http://www.treas.gov/preS5/rel~ai>es/hp439.htm
7/5/2007
Page 2 of3
energy and the environment, and financial services. We announced a new air
services agreement that will make it easier, cheaper, and more convenient to fly
people and to ship goods between the U.S. and China. Over the next several years,
we estimate that this agreement will stimulate some $5 billion in new business for
our airlines as they take advantage of growing travel between our two countries. In
addition to doubling the number of passenger flights over the next five years, by
2011 we will have full air cargo services available. Our future goal is to get a fully
liberalized agreement in place, just as the United States recently accomplished with
the European Union.
We also made progress in fostering further development of China's financial
markets, an area which is crucial to China's transition to a market-based economy.
The Chinese will remove a block of entry on new foreign securities firms and
resume licensing securities companies this year. They will also allow foreign
securities firms to expand into brokerage, proprietary training and fund
management businesses. They will increase the quotas for Qualified Foreign
Institutional Investors (QFII's) from $10 billion to $30 billion, and remove restrictions
on the types of investments that Qualified Domestic Institutional Investors (QDII's)
can make outside of China. Together, these agreements will expand opportunities
for U.S. financial services firms and, by allowing greater financial flows, help create
the basis for moving more quickly to a market-determined exchange rate.
China will also allow foreign-invested banks, including U.S. banks, to offer their own
brand of Renminbi-denominated credit and debit cards, and will complete decisions
on pending applications for U.S. non-life-insurers to convert into subsidiaries by the
first of August.
Our discussions also focused on increasing government transparency and
intellectual property rights. We signed an agreement to strengthen the enforcement
of intellectual property laws, and to maintain an exchange between our respective
Customs staff to share experiences on counterfeit goods and seizures.
Through the SED, we also collaborated on a series of policies to help promote
energy security and protect the environment, which will affect not only our two
countries but nations around the world. In particular, we reached agreements that
will create demand and incentives for the rapid development and deployment of
clean and efficient energy technology. We also agreed to work together as part of
. the WTO Doha negotiations to discuss reducing or eliminating tariffs in order to
increase access to important environmental technologies.
I again pressed the Chinese to increase the flexibility of their exchange rate in the
short term and to transition to a market-determined exchange rate in the medium
term. The Chinese have taken some steps, and they can do more. While currency
reform is not going to eliminate our trade deficit, a market-determined exchange
rate that reflects the underlying fundamentals of the Chinese economy is one
component of the actions needed to address imbalances.
Rebalancing China's growth to be less dependent on exports is key to reducing
China's trade surplus, and assuring that China can continue to grow in the future
without generating large imbalances. Moving more quickly to embrace competition
and market principles will also spread the benefits of China's robust growth to all of
China's people. Just as important is addressing the structural reasons why Chinese
households save so much and consume so little. Precautionary savings rates would
likely decrease, and consumption increase, if there were a stronger social safety
net. Competitive retail financial services would allow the Chinese public to insure
against risk, finance major expenditures like education, and garner a higher return
on their savings. Investments driven by market signals and expected profitability,
rather than by administrative guidance, combined with a reduction in precautionary
savings, would shift the economy from its infrastructure and export manufacturing
focus and spread prosperity more widely. This can only be beneficial, and China's
consumption and import level can only increase.
The question, of course, is how do we get there? We will have our third SED
meeting in December. Between now and then, we will continue to actively work on
the trade agenda, on opening markets, increasing transparency and innovation,
http://www.treas.gov/preS5/rel~ai>es/hp439.htm
7/5/2007
Page 3 of3
rebalancing growth and promoting energy efficiency and security, as well as
environmental protection measures. We will continue our focus on financial
services, moving at a faster pace towards a market-driven currency and expanding
U.S. access in the services sector. We have room to be more creative and
accomplish a good deal more.
As I said at the opening of the recent SED meeting, Americans are impatient to see
real change. Today, China is part-way between an administered economy and a
market-based one. I think that the greater risk for China is in moving too slowly, not
in moving too quickly, and I have tried to impress that upon the Chinese at every
opportunity. I view my job as working with Vice Premier Wu Yi to continue a
constructive relationship that speeds our pace forward on the long- term strategic
road, while building confidence and encouraging both sides to overcome hurdles
and focus on achievements.
Again, thank you for the opportunity to be with you today. I look forward to your
questions.
http://www.treas.gov/preS5/rel~ai>es/hp439.htm
7/5/2007
Page 1 of 5
June 5,2007
2007 -6-5-14-22-32-2107
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.s.
reserve assets totaled $65,755 million as of the end of that week, compared to $65,835 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
II
I
IA. Official reserve assets (in US millions unless otherwise specified)
IIJune 1, 2007
IIEuro
IIYen
IITotal
II
11 10 ,402
11 65 ,755
I(a) Securities
II
11 12 ,838
11 23,240
lof which: issuer headquartered in reporting country but located abroad
II
II
110
I(b) total currency and deposits with:
II
1(1) Foreign currency reserves (in convertible foreign currencies)
10) other national central banks, BIS and IMF
II
12,891
5,104
Iii) banks headquartered in the reporting country
II
11 17 ,995
11 0
11 0
lof which: located abroad
I(iii) banks headquartered outside the reporting country
11 0
11 0
lof which: located in the reporting country
1(2) IMF reserve position
11 4 ,480
1(3) SDRs
118,999
1(4) gold (including gold deposits and, if appropriate, gold swapped)
11 11 ,041
I--volume in millions of fine troy ounces
11 261 .499
1(5) other reserve assets (specify)
11 0
I--financial derivatives
II
I--Ioans to nonbank nonresidents
II
I--other
1
lB. Other foreign currency assets (specify)
I--securities not included in official reserve assets
I--deposits not included in official reserve assets
I--Ioans not included in official reserve assets
--financial derivatives not included in official reserve assets
I
I--gold not included in official reserve assets
I --other
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
http://www.treas.gov/pres5/rel~ai>es/2007651422322107.htm
7/5/2007
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II
II
II
II
IIMaturity breakdown (residual maturity)
II
Total
1. Foreign currency loans, securities, and deposits
I--outflows (-)
IIPrincipal
I
I--inflows (+)
IIlnterest
I
IIlnterest
"
I
II
I
II
I
More than 3
months and up to
1 year
More than 1 and
up to 3 months
Up to 1 month
I
II
II
II
IIPrincipal
I
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I
I
(a) Short positions ( - )
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
--other accounts receivable (+)
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
I
II
IITota,
I
11. Contingent liabilities in foreign currency
II
(a) Collateral guarantees on debt falling due within 1
year
II
II
II
Iapplicable)
Maturity breakdown (residual maturity, where
Up to 1 month
More than 3
months and up to
1 year
More than 1 and
up to 3 months
I(b) Other contingent liabilities
2. Foreign currency securities issued with embedded
options (puttable bonds)
II
13. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, BIS, IMF, and
other international organizations
I
I--other national monetary authorities (+)
I--BIS (+)
I
I--IMF (+)
I
il(b) with banks and other financial institutions
headquartered in the reporting country (+)
I
I
http://www.treas.gov/pres5/rel~ai>es/2007651422322107.htm
/I
I
I
7/5/2007
Page 3 of5
(c) with banks and other financial institutions
headquartered outside the reporting country (+)
I
IUndrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and
other international organizations
II
II
II
II
I
I
I
"
I
I--other national monetary authorities (-)
I
I
I--BIS (-)
I--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
II
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
II
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I(a) Short positions
I(i) Bought puts
I
"
I(ii) Written calls
I(b) Long positions
I(i) Bought calls
I(ii) Written puts
IPRO MEMORIA: In-the-money options 11
1(1) At current exchange rate
II
I(a) Short position
I(b) Long position
1(2) + 5 % (depreciation of 5%)
I
I
I
"
I(a) Short position
I(b) Long position
1(3) - 5 % (appreciation of 5%)
I(a) Short position
I
I(b) Long position
1(4) +10 % (depreciation of 10%)
I(a) Short position
I(b) Long position
1(5) - 10 % (appreciation of 10%)
I(a) Short position
I(b) Long position
1(6) Other (specify)
I(a) Short position
I(b) Long position
IV. Memo items
I
I
1(1) To be reported with standard periodicity and timeliness:
I(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic
http://www.treas.gov/pres5/rel~ai>es/2007651422322107.htm
I
I
I
I
7/5/2007
Page 4 of5
Icurrency)
II
I--nondeliverable forwards
I
II
--short positions
I
--long positions
I
I--other instruments
I
I(c) pledged assets
I
I--included in reserve assets
I
I--included in other foreign currency assets
I(d) securities lent and on repo
I--Ient or repoed and included in Section I
I--Ient or repoed but not included in Section I
I--borrowed or acquired and included in Section I
I--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I--forwards
I--futures
I--swaps
1/
I--options
II
I--other
II
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
I(b) long pOSitions (+)
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
I(a) short positions
l(i) bought puts
I(ii) written calls
I(b) long positions
l(i) bought calls
I(ii) written puts
1(2) To be disclosed less frequently:
I(a) currency composition of reserves (by groups of currencies)
1/65,755
I--currencies in SDR basket
11 65 ,755
I--currencies not in SDR basket
1/
I--by individual currencies (optional)
1/
I
II
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.s. Treasury to IMF data for the prior month
http://www.treas.gov/pres5/rel~ai>es/2007651422322107.htm
7/5/2007
Page 5 of5
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.treas.gov/pres5/rel~ai>es/2007651422322107.htm
7/5/2007
Page 1 of 1
June 5, 2007
HP-440
Statement by
Treasury Secretary Paulson
on Passing of Senator Craig Thomas
"I was deeply saddened to learn of the passing of Senator Craig Thomas. In my
short time in Washington, I have had the great pleasure of getting to know him and
work with him. He was an exceptional advocate for the people of Wyoming and a
steadfast friend to the Treasury Department. He will be deeply missed by all of us."
http://www.treas.gov/preS5/rel~ai>es/hp440.htm
7/5/2007
Page 1 of3
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June 5,2007
HP-441
Remarks by
Treasury Assistant Secretary
for Tax Policy Eric Solomon
on the U.S. Tax System's Role
in U.S. Competitiveness
Washington, D.C.--I want to start by thanking the United States Council for
International Business, the OECD and the Business and Industry Advisory
Committee for putting on this conference. This conference has considered
important matters involving international taxation issues in a growing global
marketplace.
I would also like to thank Jeffrey Owens, Mary Bennett, and others at the OECD's
Center for Tax Policy & Administration, for their participation at the conference and
their continuing efforts regarding international taxation issues.
There has been a great deal of discussion at this conference and elsewhere about
how to improve international tax rules. Today I would like to focus on the U.S. tax
system, and the impact of the U.S. tax system on the competitiveness of U.S.
businesses in global markets.
Competitiveness is a word that is used a lot. It is something Secretary Paulson,
since coming to the Treasury Department last year, has focused on.
Competitiveness has many possible definitions, depending on the context, and
means different things to different people. Today, I'd like to outline my thoughts on
how the U.S. tax system plays a role in our ability to compete in the global
marketplace.
A key objective of any country's international tax rules is to ensure that its tax
system interacts with other countries' tax systems efficiently, preventing, to the
greatest extent possible, double taxation of business income and capital, while
encouraging investment.
The United States, like most other countries, seeks to reduce or prevent double
taxation through its domestic law, by providing, for example, a foreign tax credit.
Nonetheless, bilateral tax treaties are often necessary to mesh the tax systems of
two countries to reduce disputes and to reduce withholding taxes which often result
in excessive taxation of cross-border trade and investment. Since the 1980s, the
United States has signed over 50 tax treaties and protocols aimed at reducing
double taxation, and fostering productive economic relationships with some of the
world's largest economies.
The Treasury Department has worked tirelessly not only to negotiate new treaties,
but also to work with existing treaty partners to update our treaties and adapt to the
changing economic landscape.
Of course, any discussion of business competitiveness should not focus solely on
specific cross-border trade and investment tax rules--we also need to consider the
impact of our entire tax system.
For example, one aspect to consider is the level of tax rates imposed on
businesses and how that positions the U.S. economy to compete in the global
marketplace.
http://www.treas.gov/pres5/rel~ai>es/hp441.htm
7/5/2007
Page 2 of3
Since the 1980's, the United States has gone from a high corporate tax rate
country, to a low corporate tax rate country and, based on some measures, has
returned to high corporate tax rate country. Indeed, the United States currently has
the second highest statutory corporate tax rate within the OECD.
The Tax Reform Act of 1986, which dramatically reformed the U.S. tax code,
lowered the federal statutory corporate tax rate from 46 to 34 percent. Since then,
other developed countries have also lowered their statutory tax rates, recognizing
that lower corporate tax rates spur investment in both physical and human capital.
As the global economy continues to expand and markets become more open to
investment, developed economies such as those within the OECD continue to
adapt their corporate tax systems to compete in the global marketplace. However,
since 1993, our federal statutory corporate tax rate has remained 35 percent.
Another essential question we need to consider besides corporate tax rates is what
kind of international tax system allows us to compete best in the global
marketplace.
In selecting the optimal international tax system, one aspect to consider is the
conflict between capital export neutrality, which is the concept that tax
considerations should not influence a taxpayer's decision of whether to invest in the
United States or abroad, and capital import neutrality, which is the concept that all
investment in a particular source country should be treated the same, regardless of
the residence of the investor.
We have three basic conceptual choices for taxing foreign source income: a full
inclusion approach, a territorial approach, or the current U.S. approach.
Under a full inclusion approach, a U.S person would pay immediate U.S. tax on its
income from all sources, including foreign source income earned by foreign
subsidiaries. The U.S. person would be able to take a foreign tax credit for some or
all of the foreign taxes paid on that income. Thus, a U.S. corporation that owns a
foreign subsidiary would pay current U.S. tax on the foreign subsidiary's income,
whether or not that income has been repatriated.
A full inclusion approach is generally consistent with capital export neutrality--U.S.
persons should pay the same amount of tax on foreign operations as on U.S.
operations. Various proponents of a full inclusion approach argue that economic
data does not show that this approach would have a negative effect on
multinational competitiveness, and that, in contrast to a territorial approach, it would
not have a distortionary effect on investment location decisions.
Under a territorial approach, a U.S. person would be subject only to local tax on
income earned outside the United States. Thus, a U.S. corporation that owns a
foreign subsidiary would not pay U.S. tax on the foreign subsidiary's income, even
when the income is repatriated as a dividend. There would be no foreign tax credit
for foreign taxes paid on exempt foreign income. In addition, deductions of the U.S.
person would be disallowed to the extent attributable to the exempt foreign
operations.
A territorial approach is also generally consistent with capital import neutrality, that
U.S. persons with foreign operations should pay no more total tax than foreign
persons carrying on the same activities in the same foreign location. Various
proponents of a territorial approach argue that tax is a relevant factor affecting the
ability to compete in foreign markets and adoption of a full inclusion approach would
have a negative effect on U.S. companies' ability to compete in those foreign
markets.
Then, there is our current system of international taxation, which generally defers
U.S. taxes on active foreign income until it is distributed to the U.S. owner. In
essence, our current system might be described as a blend of full inclusion and
territorial systems.
http://www.treas.gov/pres5/rel~ai>es/hp441.htm
7/5/2007
Page 3 of3
Our current approach reflects the tension between capital export neutrality and
capital import neutrality. Thus, the United States generally taxes its citizens and
residents on their worldwide income, with double taxation mitigated by the foreign
tax credit.
U.S. owners of foreign subsidiaries, however, generally are not subject to U.S. tax
on active foreign income earned by foreign subsidiaries until the income is
repatriated. Expenses of the U.S. owner attributable to foreign income are currently
deductible, the expenses may also have the effect of limiting the foreign tax credit.
Our system allows deferral, but this can encourage U.S. corporations to keep
earnings offshore to postpone the tax on repatriation as long as possible. In
addition, our current system provides numerous opportunities for foreign base
erosion. We need to consider the extent to which foreign base erosion concerns
us, both under our current system or under an alternative system.
As I have just outlined, the issues surrounding our corporate tax system, how it
interacts with different economies throughout the world and how our system affects
competitiveness of U.S. businesses, are complex.
In addition, in assessing international competitiveness, another essential question
we need to consider besides corporate tax rates and other tax factors, is the effect
of other non-tax factors, such as the openness of markets and regulatory schemes.
In other words, the decision whether to invest in a country depends on many
factors, not just taxes.
This conference has been an opportunity for us to discuss all of these issues and
many more, and I look forward to continuing our discussions in the future.
Thank you.
http://www.treas.gov/pres5/rel~ai>es/hp441.htm
Page 1 of 1
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June 7, 2007
HP-442
Treasury, Energy Departments Release
New Advanced Coal Project Tax Credit
Applications for 2007-2008
Washington, D.C.--The Treasury Department and the Department of Energy
(DOE) released today new instructions for applying for the tax credits for advanced
coal projects and gasification projects. The new instructions provide additional time
to submit applications for the credits. For the 2007-2008 allocation round,
applications for DOE certification are not due to the Energy Department until
October 31,2007.
"To further advance our nation's energy security, this Administration had made
sustained investments in research, development, and wider use of advanced coal
technologies a priority," Deputy Secretary of Energy Clay Sell said. "Through new
and innovative programs such as the Clean Coal Power Initiative and FutureGen
demonstration, private sector partnerships, and use of tax credits and loan
guarantees, the Department of Energy is advancing research to further develop and
deploy advanced coal technologies to meet growing energy demand."
IRS Notices 2007-52 and 2007-53, outline the procedures for allocation of credits
under the advanced coal project program and the qualifying gasification project
program, respectively, as well as modifications made from last year's application
and allocation processes.
Under the new credit allocation process, the Department of Energy will rank a
certified project relative to other certified projects and up to approximately $650
million of credits will be allocated to projects based on the DOE ranking. The
modified allocation method will substantially favor projects that capture and
sequester carbon dioxide emissions and will favor, to a lesser extent, projects
optimized for future carbon dioxide capture.
The tax credits were part of the Energy Policy Act of 2005, which was signed by
President Bush on August 8, 2005. The credits encourage the development of
energy and industrial feedstock sources that will not significantly contribute to air
pollution.
REPORTS
•
•
Notices 2007-52
Notices 2007-53
http://www.treas.gov/pres5/rel~ai>es/hp441.htm
7/5/2007
Part III - Administrative, Procedural, and Miscellaneous
Qualifying Advanced Coal Project Program
Notice 2007-52
SECTION 1. PURPOSE
This notice updates the procedures for the allocation of credits under the
qualifying advanced coal project program of § 48A of the Internal Revenue Code and
defines certain terms for purposes of § 48A. The purpose of the qualifying advanced
coal project program is the deployment of advanced coal-based generation
technologies. To further this purpose, the method of allocation is being modified for
allocation rounds after 2006. Under the modified method of allocation, the U.S.
Department of Energy ("DOE") will rank a certified project relative to other certified
projects in each pool and credits will be allocated to projects based on the DOE ranking.
The modified allocation method will substantially favor projects that capture and
sequester carbon dioxide emissions and will favor to a lesser extent projects optimized
for future carbon dioxide capture.
SECTION 2. BACKGROUND AND CHANGES
.01 Section 46 provides that the amount of the investment credit for any taxable
year is the sum of the credits listed in § 46. That list includes the qualifying advanced
coal project credit.
.02 The qualifying advanced coal project credit is provided under § 48A.
Section 48A(a) provides that the qualifying advanced coal project credit for a
taxable year is an amount equal to (1) 20 percent of the qualified investment (as
defined in § 48A(b)) for that taxable year in certified qualifying advanced coal
projects (as defined in § 48A(c)(1) and (e)) using an integrated gasification
combined cycle (IGee) (as defined in § 48A(c)(7)), and (2) 15 percent of the
qualified investment for that taxable year in other certified qualifying advanced
coal projects .
.03 Section 48A(d)(3)(A) provides that the aggregate credits allowed
under § 48A(a) may not exceed $1.3 billion. Section 48A(d)(3)(B) provides that
(i) $800 million of credits are to be allocated to IGee projects, and (ii) $500
million of credits are to be allocated to projects that use other advanced coalbased generation technologies (as defined in § 48A(c)(2) and (f)) .
.04 Section 48A(e)(3)(A) provides that the credits for IGee projects must
be allocated in accordance with the procedures set forth in § 48A(d), and in
relatively equal amounts to (i) projects using bituminous coal as a primary
feedstock, (ii) projects using subbituminous coal as a primary feedstock, and (iii)
projects using lignite as a primary feedstock. Further, § 48A(e)(3)(B) provides
that IGee projects that include (i) greenhouse gas capture capability (as defined
in § 48A(c)(5)), (ii) increased by-product utilization, and (iii) other benefits must
be given high priority in the allocation of credits for IGee projects .
.05 Section 48A(f) prescribes the requirements that must be satisfied to
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qualify as an advanced coal-based generation technology. These include
requirements that the unit be designed to attain specified standards for emissions
or removal of certain pollutants. As originally enacted, § 48A(f) required that a
unit be designed to achieve 99-percent removal of sulfur dioxide. Section 203(a)
of the Tax Relief and Health Care Act of 2006, Pub. L. 109-432, 120 Stat. 2922
(December 20,2006), modified this test for units designed for the use of
feedstock substantially all of which is subbituminous coal. Such a unit satisfies
the modified test if it achieves either 99-percent removal of sulfur dioxide or an
emission level of not more than 0.04 pounds of sulfur dioxide per million Btu,
determined on a 30-day average .
.06 The at-risk rules in § 49 and the recapture and other special rules in
§ 50 apply to the qualifying advanced coal project credit. Further, the qualifying
advanced coal project credit generally is allowed in the taxable year in which the
eligible property (as defined in § 48A(c)(3)) is placed in service (as defined in
section 3.04 of this notice) by the taxpayer. Pursuant to § 48A(d)(2)(E), a
taxpayer that receives a certification under § 48A(d)(2)(D) has 5 years from the
date of issuance of the certification to place the qualifying advanced coal project
in service .
.07 Section 48A(d)(1) provides that the Secretary, in consultation with the
Secretary of Energy, shall establish a qualifying advanced coal project program
for the deployment of advanced coal-based generation technologies. The
Treasury Department and the Internal Revenue Service established this program
in Notice 2006-24, 2006-11 I.R.B. 595.
3
.08 This notice modifies the qualifying advanced coal project program
established in Notice 2006-24 in a number of respects. The significant changes
made by this notice include the following:
(1) The Large and Mid-Size Business Division (LMSB) of the Service will
allocate the advanced coal project credits and issue the certification under
§ 48A(d)(2). The filing instructions in section 5.04 provide LMSB addresses to
reflect this change.
(2) Section 3 defines certain terms for purposes of § 48A.
(3) The method of allocation is modified for allocation rounds after 2006.
Under the modified method of allocation, the DOE will rank a certified project
relative to other certified projects in each pool and credits will be allocated to
projects based on the DOE ranking. The modified allocation method will
substantially favor projects that capture and sequester carbon dioxide emissions
and will favor to a lesser extent projects optimized for future carbon dioxide
capture. Sections 4.02(3) and (4) reflect this change in the method by which
credits under § 48A are allocated to projects.
(4) Section 4.02(8) provides that the period for submitting the application
for § 48A certification (i) ends on March 3, 2008, for the 2007-08 allocation round
and (ii) begins on March 4, 2008, and ends on March 2, 2009, for the 2008-09
allocation round. Changes also are made to the dates in sections 4.02(10) and
(11) for accepting or rejecting a taxpayer's application for § 48A certification and
for executing closing agreements.
(5) Section 4.02(9) provides that the due date for the application for
4
DOE certification is October 31, that DOE will rank certified projects, and that the
due date for the DOE certification and ranking is March 1. Section 4.02(9) also
clarifies that the DOE certification and ranking (for projects determined to be
feasible) are provided to the Service.
(6) Section 4.02(11) provides that a successor in interest must execute a
new closing agreement with the Service no later than the due date (including
extensions) of the successor in interest's Federal income tax return for the
taxable year in which the transfer occurs.
(7) The information required to be included in the application for DOE
certification is modified. Section 5.02 requires submission of additional
information regarding the number and types of turbines to be used in the project
and with respect to the sulfur dioxide removal. Appendix B provides additional
information regarding program policy factors. Applicants will no longer be
required to submit independent financial reports.
(8) Section 5.02(13) defines the term "substantially all" for purposes of
determining whether a project's sUbbituminous coal usage qualifies it for the
modified sulfur dioxide removal test provided in § 48A(f)(1).
(9) Section 5.03 requests that a taxpayer submit with the application for
§ 48A certification a declaration consenting to the disclosure by the Service of
certain return information if the taxpayer is awarded an allocation of qualifying
advanced coal project credits. The form of the declaration is set forth in
Appendix C.
(10) Sections 5.03(1) and 5.04 require that a taxpayer submit one paper
5
copy and one electronic version on a floppy disc or a CD of the application for
§ 48A certification (including the application for DOE certification).
(11) Section 7.02 provides more details on who may sign the penalties
of perjury statement.
(12) Section 7.03 provides that the Service and the DOE must be
informed if the plans for the project change in any significant respect from the
plans set forth in the applications for § 48A and DOE certification, and also
provides the consequences of any significant change to the plans set forth in the
applications.
(13) Section 7.06 provides that the DOE will offer debriefings to
applicants that submitted an application for DOE certification.
(14) Section 10 provides guidance regarding Freedom of Information Act
requests for records relating to the qualifying advanced coal project program.
SECTION 3. DEFINITIONS
The following definitions apply for purposes of § 48A and this notice:
.01 Coal. Section 48A(c)(4) defines the term "coal" as meaning anthracite,
bituminous coal, subbituminous coal, lignite, and peat. Coal includes waste coal
(that is, usable material that is a byproduct of the previous processing of
anthracite, bituminous coal, subbituminous coal, lignite, or peat). Examples of
waste coal include fine coal of any of the listed ranks, coal of any of the listed
ranks obtained from a refuse bank or slurry dam, anthracite culm, bituminous
gob, and lignite waste .
.02 Total Nameplate Generating Capacity.
6
(1) Except as provided in section 3.02(2) of this notice, the total
nameplate generating capacity of a project is the aggregate of the numbers (in
megawatts) stamped on the nameplate of each generator to be used in the
project.
(2) If the number stamped on the nameplate of a generator is not
determined at the International Standard Organization (ISO) optimal conditions of
59 degrees Fahrenheit, 60% relative humidity, and 14.7 psia at sea level, the
number stamped on the nameplate is disregarded and the generator's capacity
(in megawatts) determined at such optimal conditions is used in its place .
.03 Fuel Input.
(1) In general. The term "fuel input" means, with respect to any type of
fuel, the amount of such fuel used during normal plant operations. The amounts
of the fuel used are measured (i) in British thermal units (Btus) on an energy
input basis and (ii) pursuant to applicable standards prescribed by the American
Society for Testing and Materials (ASTM). For example, § 48A(e)(1 )(B) provides
that the fuel input for the project, when completed, must be at least 75 percent
coal. This requirement is satisfied if, after completion and during normal plant
operations, coal provides 75 percent of the project's fuel measured in Btus on an
energy input basis and pursuant to applicable ASTM standards.
(2) Only normal plant operations taken into account. Only fuel used
during normal plant operations is taken into account for purposes of § 48A and
sections 5.02(5) and 5.02(13) of this notice. Normal plant operations are
operations other than during periods of initial plant certification, plant startup,
7
plant shutdown, integrated gasifier shutdown for gasification system
maintenance, or interruption of the coal supply to the project resulting from an
event of force majeure (including an act of God, war, strike, or other similar event
beyond the control of the taxpayer). For example, the fuel input during the initial
plant certification may consist entirely of natural gas or other non-coal fuels
because fuel used during initial plant certification is disregarded in determining
whether the 75-percent coal usage requirement of § 48A(e)(1 )(8) is satisfied .
.04 Placed In Service. For purposes of § 48A, property is placed in
service in the taxable year in which the property is placed in a condition or state
of readiness and availability for a specifically assigned function. See § 1.463(d)(1 )(ii) of the Income Tax Regulations. Thus, a qualifying advanced coal
project or eligible property (as defined in § 48A(c)(3)) that is a part of the project
is placed in service in the taxable year in which the project is placed in a
condition or state of readiness and availability for producing electricity from coal.
SECTION 4. QUALIFYING ADVANCED COAL PROJECT PROGRAM
.01 In General. The Service will consider a project under the qualifying
advanced coal project program only if the DOE provides a certification ("DOE
certification") and ranking (if any) for the project. Accordingly, a taxpayer must
submit, for each qualifying advanced coal project: (1) an application for
certification by the DOE ("application for DOE certification"), and (2) an
application for certification under § 48A(d)(2) by the Service ("application for
§ 48A certification"). 80th applications may be submitted only during the 3-year
period beginning on February 21, 2006. Certifications will be issued and credits
8
will be allocated to projects in annual allocation rounds. The initial allocation
round was conducted in 2006. Additional allocation rounds will be conducted in
2007-08 and, if necessary, in 2008-09 .
.02 Program Specifications.
(1) The Service determines the amount of the qualifying advanced coal
project credits allocated to a qualifying advanced coal project at the time the
Service accepts the application for § 48A certification for that project in
accordance with section 4.02(10) of this notice (see section 5 of this notice for
the requirements applicable to the application for DOE certification and the
application for § 48A certification).
(2) The qualifying advanced coal project credits of $1.3 billion and the
applications for certification are separated into the following four pools:
(a) Projects using an advanced coal-based generation technology
other than IGee. The aggregate amount of qualifying advanced coal project
credit for this pool is $500 million. The maximum amount of credits that will be
allocated to a project is $125 million. In the 2006 allocation round, $250 million
of credits was allocated from this pool. Therefore, $250 million of credits is
available for allocation from this pool in 2007-08.
(b) IGee projects using bituminous coal as a primary feedstock. The
aggregate amount of qualifying advanced coal project credit for this pool is $267
million. The maximum amount of credits that will be allocated to a project is
$133.5 million. In the 2006 allocation round, $267 million of credits (the entire
amount available) was allocated from this pool. Accordingly, no allocation round
9
for this pool will be conducted in 2007-08.
(c) IGee projects using subbituminous coal as a primary feedstock.
The aggregate amount of qualifying advanced coal project credit for this pool is
$267 million. The maximum amount of credits that will be allocated to a project is
$133.5 million. In the 2006 allocation round, no credits were allocated from this
pool. Therefore, $267 million of credits is available for allocation from this pool in
2007-08.
(d) IGee projects using lignite as a primary feedstock. The aggregate
amount of qualifying advanced coal project credit for this pool is $266 million.
The maximum amount of credits that will be allocated to a project is $133 million.
In the 2006 allocation round, $133 million of credits was allocated from this pool.
Accordingly, $133 million of credits is available for allocation from this pool in
2007-08.
(3) For projects using an advanced coal-based generation technology
other than IGee, DOE will rank the certified projects in descending order (that is,
first, second, third, etc.) and the $250 million available for allocation will be
allocated as follows in the allocation round in 2007-08:
(a) If the requested allocation of credits for projects that DOE has
certified for this pool does not exceed the amount available for allocation, each
certified project will be allocated the full amount of credit requested.
(b) If the requested allocation of credits for projects that DOE has
certified for this pool exceeds the amount available for allocation, the amount
available for allocation will be allocated as follows:
10
(i) The project receiving the highest ranking (that is, first) will be
allocated the full amount of credit requested (but not exceeding the amount
available for allocation) before any credit is allocated to a lower-ranked project.
The amount available for allocation is reduced by the amount of credit so
allocated and only the remainder is available for allocation to a lower-ranked
project.
(ii) Second and lower-ranked projects will be entitled to similar
priority in the allocation of credits and allocations to such projects will similarly
reduce the remainder of the amount available for allocation until the amount
available for allocation from the pool is exhausted.
(4) For each IGee pool described in section 4.02(2)(c) or (d) of this
notice, DOE will rank the certified projects in descending order (that is, first,
second, third, etc.) and the amount available for allocation from the pool will be
allocated as follows in the allocation round in 2007-08:
(a) If the requested allocation of credits for projects that DOE has
certified for an IGee pool described in section 4.02(2)(c) or (d) of this notice
does not exceed the amount available for allocation from that pool, each certified
project will be allocated the full amount of credit requested.
(b) If the requested allocation of credits for projects that DOE has
certified for an IGee pool described in section 4.02(2)(c) or (d) of this notice
exceeds the amount available for allocation from that pool, the amount available
for allocation will be allocated as follows:
(i) The project receiving the highest ranking (that is, first) will be
11
allocated the full amount of credit requested (but not exceeding the amount
available for allocation from the pool) before any credit is allocated to a lowerranked project. The amount available for allocation from the pool is reduced by
the amount of credit so allocated and only the remainder is available for
allocation to a lower-ranked project.
(ii) Second and lower-ranked projects will be entitled to similar
priority in the allocation of credits and allocations to such projects will similarly
reduce the remainder of the amount available for allocation from the pool until the
amount available for allocation from the pool is exhausted.
(5) If the amount available for allocation from a pool is not fully allocated
in the 2007-08 allocation round, a similar allocation round will be conducted in
2008-09. Generally, the results of each year will be announced. See section
5.03(2) of this notice for further information about this announcement.
(6) If the same project would otherwise be allocated credits under both
the qualifying advanced coal project program under this notice and the qualifying
gasification project program under Notice 2007-53, 2007-26 I.R.B. _ , the
following rules apply:
(a) The qualifying gasification project credit may not be allocated to the
project with respect to any qualified investment under § 48B for which a
qualifying advanced coal project credit is allowed under § 48A; and
(b) The qualifying gasification project credit may be allocated to the
project with respect to the qualified investment under § 48B for which a qualifying
advanced coal project credit is not allowed under § 48A.
12
(7) For each allocation round there will be an annual application period
during which a taxpayer may file its application for § 48A certification. The
Service will consider a project in an allocation round only if the application for
§ 48A certification for the project is submitted during the application period for
that round and the DOE provides the DOE certification and the DOE ranking (if
any) for the project before the end of the application period.
(8) For the allocation round conducted in 2007-08, the application period
begins on October 3, 2006, and ends on March 3, 2008, and any completed
application for § 48A certification received by the Service after October 2, 2006,
and before March 4, 2008, will be deemed to be submitted by the taxpayer on
March 3, 2008. For the allocation round to be conducted in 2008-09, the
application period begins on March 4, 2008, and ends on March 2, 2009, and any
completed application for § 48A certification received by the Service after March
3, 2008, and before March 3, 2009, will be deemed to be submitted by the
taxpayer on March 2, 2009. For purposes of this notice, an application that is
submitted by U.S. mail will be treated as received by the Service on the date of
the postmark and an application submitted by a private delivery service will be
treated as received by the Service on the date recorded or the date marked in
accordance with § 7502(f)(2)(C).
(9) See section 5.02 of this notice and Appendix B to this notice for the
information to be submitted to the DOE in an application for DOE certification.
Appendix B to this notice also provides the instructions and address for filing the
application for DOE certification. The DOE will determine the feasibility of the
13
project and, if the project is determined to be feasible, will provide a DOE
certification for the project to the Service. If the DOE certifies two or more
projects in a pool described in section 4.02(2) of this notice, the DOE also will
rank each of the projects it certifies (for example, first, second, third, etc.) relative
to other certified projects in the same pool. If an application for DOE certification
is postmarked on or before October 31 of a calendar year, the DOE will
determine the feasibility of the project and (for projects determined to be feasible)
provide the DOE certification and the DOE ranking (if any) to the Service by
March 1 of the year following that calendar year.
(10) By April 30 of the calendar year in which an application for § 48A
certification is deemed to be submitted (as determined under section 4.02(8) of
this notice), the Service will accept or reject the taxpayer's application for § 48A
certification and will notify the taxpayer, by letter, of its decision.
(11) If the taxpayer's application for § 48A certification is accepted, the
acceptance letter will state the amount of the credit allocated to the project. If a
credit is allocated to a taxpayer's project, the taxpayer will be required to execute
a closing agreement in the form set forth in Appendix A to this notice. By June
30 of the calendar year in which an application for § 48A certification is accepted,
the taxpayer must execute and return the closing agreement to the Service at the
appropriate address listed in section 5.04 of this notice or listed in later guidance
published in the Internal Revenue BUlletin. The Service will execute and return
the closing agreement to the taxpayer by August 31 of such calendar year. The
executed closing agreement applies only to the accepted taxpayer. Accordingly,
14
any successor in interest must execute a new closing agreement with the Service
no later than the due date (including extensions) of the successor in interest's
Federal income tax return for the taxable year in which the transfer occurs. If the
successor in interest does not execute a new closing agreement, the following
rules apply:
(a) In the case of an interest acquired at or before the time the
qualifying advanced coal project is placed in service, any credit allocated to the
project will be fully forfeited (and rules similar to the recapture rules of § 50(a)
apply with respect to qualified progress expenditures); and
(b) In the case of an interest acquired after the qualifying advanced
coal project is placed in service, the project ceases to be investment credit
property and the recapture rules of § 50(a) (and similar rules with respect to
qualified progress expenditures) apply.
SECTION 5. APPLICATIONS FOR CERTIFICATIONS
.01 In General. An application for § 48A certification and a separate
application for DOE certification must be submitted for each qualifying advanced
coal project. If an application for DOE certification does not include all of the
information required by section 5.02 of this notice and meet the requirements in
sections 7.01 and 7.02 of this notice, the DOE may decline to accept the
application. If an application for § 48A certification does not include all of the
information listed in section 5.03(1) of this notice and meet the requirements in
sections 7.01 and 7.02 of this notice, the application will not be accepted by the
Service.
15
.02 Information Required in the Application for DOE Certification. An
application for DOE certification must include all of the information requested in
Appendix B to this notice and all of the following:
(1) The name, address, and taxpayer identification number of the
taxpayer. If the taxpayer is a member of an affiliated group filing consolidated
returns, also provide the name, address, and taxpayer identification number of
the common parent of the group.
(2) The name and telephone number of a contact person.
(3) The name and address (or other unique identifying designation) of
the qualifying advanced coal project.
(4) A statement specifying whether the project is an IGCC project or a
qualifying advanced coal project that uses another advanced coal-based
technology.
(5) In the case of an IGCC project, a statement specifying the type of
coal (bituminous coal, subbituminous coal, or lignite) that will be the primary
feedstock. An application for DOE certification with respect to an IGCC project
will not be considered unless one of these types of coal is the primary feedstock.
For purposes of § 48A(e)(3)(A), a type of coal is the primary feedstock only if at
all times more than 50 percent of the cumulative total fuel input (coal and any
other fuel input) used in normal plant operations (as defined in section 3.03(2) of
this notice) of the project will consist of that type of coal.
(6) The estimated total cost of the project and the estimated total
qualified investment in the eligible property that will be part of the project.
16
(7) The amount of the qualifying advanced coal project credit requested
for the project. The amount requested must not exceed the maximum amount
provided in section 4.02(2) of this notice.
(8) If the taxpayer is or will be requesting an amount of the qualifying
gasification project credit under § 48B for the same project, a statement
specifying the amount of credit the taxpayer is or will be requesting under § 48B.
(9) A statement specifying whether the project is a new electric
generation unit (as defined in § 48A(c)(6)), a retrofit of an existing electric
generation unit, or a repower of an existing electric generation unit.
(10) In the case of an IGee project, a statement specifying whether the
project is entitled to priority for greenhouse gas capture capability (as defined in
§ 48A(c)(5)) or increased by-product utilization and, if entitled to priority, a
statement identifying which of these priorities apply to the IGee project.
(11) A statement specifying the number and types of generators to be
used in the project (for example, two combustion turbine generators and one
steam turbine generator).
(12) The exact total nameplate generating capacity (as defined in
section 3.02 of this notice) of the project.
(13) In the case of a project that will not achieve 99-percent removal of
sulfur dioxide, a statement that the project is designed for the use of a feedstock
substantially all of which is subbituminous coal and will achieve an emission level
of not more than 0.04 pounds of sulfur dioxide per million Btu, determined on a
30-day average. For this purpose, a project is designed for the use of feedstock
17
substantially all of which is subbituminous coal if at all times 80 percent or more
of the cumulative total fuel input (coal and any other fuel input) used in normal
plant operations (as defined in section 3.03(2) of this notice) of the project will be
subbituminous coal. Such a project meets the requirements in § 48A(f)(1) by
achieving either 99-percent removal of sulfur dioxide or an emission level of not
more than 0.04 pounds of sulfur dioxide per million Btu, determined on a 30-day
average. All other qualifying advanced coal projects must achieve 99-percent
removal of sulfur dioxide .
.03 Information To Be Included in the Application for § 48A Certification.
(1) Information required in the application for § 48A certification.
Pursuant to § 48A(d)(2)(B), an application for § 48A certification must include all
of the following:
(a) The name, address, and taxpayer identification number of the
taxpayer. If the taxpayer is a member of an affiliated group filing consolidated
returns, also provide the name, address, and taxpayer identification number of
the common parent of the group.
(b) The name, telephone number, and fax number of a contact person.
For such person, attach a properly executed power of attorney, preferably on
Form 2848, Power of Attorney and Declaration of Representative.
(c) One paper copy and one electronic version on a floppy disc or a
CD of the completed application for DOE certification submitted with respect to
the project in accordance with section 5.02 of this notice.
18
(2) Consent to disclosure of allocation. In order to provide the public
with information on how the qualifying advanced coal project credits authorized
by Congress have been allocated and facilitate oversight of the qualifying
advanced coal project program, the Service intends to publish the results of the
allocation process. The Service expects that a list identifying the taxpayers and
projects to which credits are allocated and specifying the amount of credit
allocated to each would be of particular interest to the public. Pursuant to
§ 6103, consent is required in order to disclose any return information with
respect to taxpayers awarded an allocation. Therefore, the Service requests that
each taxpayer submit with the application for § 48A certification a declaration,
consenting to the disclosure by the Service of the following return information in
the event a qualifying advanced coal project credit is allocated to the taxpayer's
project: (a) the name of the taxpayer; (b) if the taxpayer is a member of an
affiliated group filing consolidated returns, the name of the common parent of the
group; (c) the type and location of the project to which the application relates;
and (d) the amount of the qualifying advanced coal project credit allocated to the
project. To provide a valid consent, the declaration must be in the form set forth
in Appendix C. A taxpayer is not required to consent to disclosure of this
information in order to receive an allocation of the qualifying advanced coal
project credit, and neither the presence nor the absence of such a consent will be
taken into account in the evaluation of a taxpayer's application. The Service will
not publish any return information relating to a taxpayer if the taxpayer does not
19
consent to disclosure of this information or does not receive an allocation of the
qualifying advanced coal project credit.
.04 Instructions and Address for Filing § 48A Application. One paper
copy and one electronic version on a floppy disc or a CD of the application for
§ 48A certification must be submitted. Applications for § 48A certification should
be marked: SECTION 48A APPLICATION FOR CERTIFICATION. There is no
user fee for these applications.
(1) Applications submitted by U.S. mail must be sent to:
Internal Revenue Service
Industry Director, Natural Resources and Construction
Attn: Executive Assistant
1919 Smith Street
Stop HOU 1000
Houston, TX 77002
Applications submitted by a private delivery service must be sent to:
Internal Revenue Service
Industry Director, Natural Resources and Construction
Attn: Executive Assistant
1919 Smith Street, Floor P2
Stop HOU 1000
Houston, TX 77002
(2) Applications may also be hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. Central time to:
Internal Revenue Service
Industry Director, Natural Resources and Construction
Attn: Executive Assistant
1919 Smith Street, Floor P2
Stop HOU 1000
Houston, TX 77002
SECTION 6. ISSUANCE OF CERTIFICATION
.01 In General. Section 48A(d)(2)(D) provides that a taxpayer shall have 2
20
years from the date of acceptance of the § 48A application during which to
provide evidence that the criteria set forth in § 48A(e)(2) have been met.
Pursuant to § 48A(e)(2), a project shall be eligible for certification only if (A) the
taxpayer has received all federal and state environmental authorizations or
reviews necessary to commence construction of the project, and (B) the
taxpayer, except in the case of a retrofit or repower of an existing generation unit,
has purchased or entered into a binding contract for the purchase of the main
steam turbine or turbines for the project, except that this contract may be
contingent upon receipt of a certification under § 48A(d)(2). Section 48A(d)(2)(E)
provides that a taxpayer that receives a certification has 5 years from the date of
issuance of the certification to place the project in service and that the
certification is void if the project is not placed in service by the end of that fiveyear period .
.02 Requirements for Certification. Within 2 years from the date that the
Service accepts the taxpayer's application for § 48A certification under section
4.02(10) of this notice, the taxpayer must submit to the Service documentation
establishing that the requirements of § 48A(e)(2) are satisfied. See also sections
7.01 and 7.02 of this notice for other requirements that must be satisfied. The
taxpayer should mark the package "SECTION 48A CERTIFICATION
REQUIREMENTS" and send it to the appropriate address listed in section 5.04 of
this notice or listed in later guidance published in the Internal Revenue Bulletin .
.03 Service's Action on Certification. After receiving the material in section
6.02 of this notice, the Service will decide whether or not to certify the project and
21
will notify the taxpayer, by letter, of that decision. If the Service certifies the
project, the date of this letter is the date of issuance of the certification.
SECTION 7. OTHER REQUIREMENTS
.01 Signature. Each submission under sections 5 and 6 of this notice
must be signed and dated by the taxpayer. A stamped signature or faxed
signature is not permitted .
.02 Penalties of Perjury Statement.
(1) Each submission under sections 5 and 6 of this notice must be
accompanied by the following declaration: "Under penalties of perjury, I declare
that I have examined this submission, including accompanying documents, and,
to the best of my knowledge and belief, all of the facts contained herein are true,
correct, and complete."
(2) The declaration must be signed and dated by the taxpayer. The
person signing for the taxpayer must have personal knowledge of the facts.
Further, the declaration must be signed by an officer on behalf of a corporation, a
general partner on behalf of a state-law partnership, a member-manager on
behalf of a limited liability company, a trustee on behalf of a trust, and the
proprietor in the case of a sole proprietorship. If the taxpayer is a member of an
affiliated group filing consolidated returns, the declaration also must be signed by
a duly authorized officer of the common parent of the group. A stamped
signature or faxed signature is not permitted .
.03 Significant Change in Plans. The Service and DOE must be informed
if the plans for the project change in any significant respect from the plans set
22
forth in the applications for § 48A and DOE certification. Any significant change
to the plans set forth in the applications will have the following effects:
(1) The Service will disregard any certification or ranking provided by
DOE unless DOE is informed of the change before the date on which DOE
provides the certification or ranking (that is, the Service will not consider the
project unless DOE provides a new, timely certification and ranking (if any) on or
after the date on which DOE is informed of the change); and
(2) Any acceptance provided by the Service and any allocation or
certification based on that acceptance will be void unless the Service is informed
of the change before the date on which the acceptance is provided under section
4.02(10) of this notice .
.04 Effect of an Acceptance, Allocation, or Certification. An acceptance,
allocation, or certification by the Service under this notice is not a determination
that a project qualifies for the qualifying advanced coal project credit under
§ 48A. The Service may, upon examination (and after any appropriate
consultation with DOE), determine that the project does not qualify for this credit.
.05 No Right to a Conference or Appeal. A taxpayer does not have a right
to a conference relating to any matters under this notice. Further, a taxpayer
does not have a right to appeal the decisions made under this notice (including
the acceptance or rejection of the application for DOE or § 48A certification, the
amount of credit allocated to the project, or whether or not to certify the project)
to an Associate Chief Counselor any other official of the Service .
.06 DOE Debriefings. Although a taxpayer does not have a right to a
23
conference relating to any matters under this notice, the DOE will offer
debriefings to all applicants that submitted an application for DOE certification.
This debriefing will be held by the DOE after the Service has accepted the
applications for § 48A certification (as determined under section 4.02(10) of this
notice). The sole purpose of the debriefing is to enable applicants to develop
better proposals in future allocation rounds by providing DOE's review of the
strengths and weaknesses of their application for DOE certification.
SECTION 8. REVIEW AND REDISTRIBUTION
.01 In General. Section 48A(d)(4)(A) provides that the credits allocated
under § 48A must be reviewed not later than August 8, 2011. Pursuant to
§ 48A(d)(4)(B), credits available under § 48A(d)(3)(B)(i) and (ii) may be
reallocated if (i) there is an insufficient quantity of qualifying applications for
certification pending at the time of the review; or (ii) any certification made
pursuant to § 48A(d)(2) has been revoked pursuant to § 48A(d)(2)(D). If credits
under § 48A(d)(3)(B)(i) and (ii) are available for reallocation, § 48A(d)(4)(C)
authorizes the conduct of an additional program for applications for certification .
.02 Review and Redistribution of Credits.
(1) In general. If, after the allocation round in 2008-09, the entire credit
for a pool is not fully subscribed (that is, the aggregate credit for the pool has not
been fully allocated), the remaining credits from that pool will be reallocated to
pools that have been fully subscribed. Credits from pools not fully subscribed will
be reallocated to fully subscribed pools in proportion to the aggregate amounts of
credit specified for the fully subscribed pools in section 4.02(2) of this notice.
24
Future guidance will prescribe the procedures applicable to applications for
certification with respect to the reallocated credits.
(2) Reduction or forfeiture of allocated credits. Under the closing
agreement set forth in Appendix A to this notice, the qualifying advanced coal
project credits allocated under section 4 of this notice will be reduced or forfeited
in certain situations. A taxpayer must notify the Service of the amount of any
reduction or forfeiture required under the closing agreement. This notification
must be sent to the appropriate address listed in section 5.04 of this notice or
listed in later guidance published in the Internal Revenue Bulletin.
The amount of any reduction or forfeiture of the allocated credits will be
returned to the appropriate allocation pool and included in the aggregate credit
remaining to be allocated in the allocation round following the reduction or
forfeiture. If the reduction or forfeiture occurs after the allocation round in 200809, future guidance will prescribe procedures applicable to applications for
certification with respect to the returned credits.
SECTION 9. QUALIFIED PROGRESS EXPENDITURES
.01 Section 48A(b)(3) provides that rules similar to the rules of § 46(c)(4)
and (d) (as in effect on the day before the enactment of the Revenue
Reconciliation Act of 1990) shall apply for purposes of § 48A. Former §§ 46(c)(4)
and 46(d) provided the rules for claiming the investment credit on qualified
progress expenditures (as defined in former § 46(d)(3)) made by a taxpayer
during the taxable year for the construction of progress expenditure property (as
defined in former § 46(d)(2)).
25
.02 In the case of self-constructed property (as defined in former
§ 46(d)(5)(A)), former § 46(d)(3)(A) defined qualified progress expenditures to
mean the amount that is properly chargeable (during the taxable year) to capital
account with respect to that property. With respect to a qualifying advanced coal
project that is self-constructed property, amounts paid or incurred are chargeable
to capital account at the time and to the extent they are properly includible in
computing basis under the taxpayer's method of accounting (for example, after
applying the requirements of § 461, including the economic performance
requirement of § 461 (h)) .
.03 To claim the qualifying advanced coal project credit on the qualified
progress expenditures paid or incurred by a taxpayer during the taxable year for
construction of a qualifying advanced coal project, the taxpayer must make an
election under the rules set forth in § 1.46-5(0) of the Income Tax Regulations. A
taxpayer may not make the qualified progress expenditures election for a
qualifying advanced coal project until the taxpayer has received an acceptance
letter for the project under section 4.02(10) of this notice .
.04 If a taxpayer makes the qualified progress expenditures election
pursuant to section 9.03 of this notice, rules similar to the recapture rules in
§ 50(a)(2)(A)-(O) apply. In addition to the cessation events listed in § 50(a)(2)(A),
examples of other events that will cause the project to cease being a qualifying
advanced coal project are:
(1) Failure to satisfy any of the certification requirements in § 48A(e)(2)
within 2 years from the date that the Service accepted the taxpayer's application
26
for § 48A certification for the project under section 4.02( 10) of this notice;
(2) Failure to receive a certification for the project in accordance with
section 6.03 of this notice;
(3) Failure to place the project in service within 5 years from the date of
issuance of the certification under section 6.03 of this notice; or
(4) A significant change to the plans for the project as set forth in the
applications for § 48A and DOE certification if, under section 7.03 of this notice,
the Service's acceptance of the project is void as a result of the change.
SECTION 10. DISCLOSURE OF INFORMATION
.01 In general. Any information contained in the application for DOE
certification, the application for § 48A certification, or the documentation
submitted by the taxpayer pursuant to section 6.02 of this notice is subject to
§ 6103 and to any other applicable exemption set forth in the Freedom of
Information Act (the FOIA). Examples of FOIA exemptions include the FOIA
trade secrets and commercial or financial information exemption of 5 U.S.C.
552(b)(4) and the FOIA personal privacy exemption of 5 U.S.C. 552(b)(6)) .
.02 FOIA requests. Anyone interested in submitting a request for records
under the FOIA with respect to the qualifying advanced coal project program
under § 48A (including a request for records relating to the application for DOE
certification) should direct a request that conforms to the Service's FOIA
regulations, found at 26 C.F.R. § 601.702, to the following address:
IRS FOIA Request
Baltimore Disclosure Office
Room 940
31 Hopkins Plaza
27
Baltimore, MD 21201
SECTION 11. EFFECT ON OTHER DOCUMENTS
Notice 2006-24 is clarified, modified, amplified, and superseded.
SECTION 12. EFFECTIVE DATE
This notice is effective June 7, 2007.
SECTION 13. PAPERWORK REDUCTION ACT
The collection of information contained in this notice has been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C. § 3507) under control number 1545-2003.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless the collection of information
displays a valid OMB control number.
The collections of information in this notice are in sections 4, 5, 6, 7, 8,
and Appendix B of this notice. This information is required to obtain an allocation
of qualifying advanced coal project credits. This information will be used by the
Service to verify that the taxpayer is eligible for the qualifying advanced coal
project credits. The collection of information is required to obtain a benefit. The
likely respondents are business or other for-profit institutions.
The estimated total annual reporting burden is 4,950 hours.
The estimated annual burden per respondent varies from 70 to 150 hours,
depending on individual circumstances, with an estimated average of 110 hours.
The estimated number of respondents is 45.
The estimated annual frequency of responses is on occasion.
28
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and tax return information are confidential,
as required by 26 U.S.C. § 6103.
SECTION 14. DRAFTING INFORMATION
The principal author of this notice is Ruba Nasrallah of the Office of
Associate Chief Counsel (Income Tax & Accounting).
For further information
regarding this notice, contact Jaime Park of the Office of Associate Chief
Counsel (Passthroughs & Special Industries) at (202) 622-3120 (not a toll-free
call). For further information regarding the application for § 48A certification, the
documentation to be submitted to the Service establishing that the requirements
of § 48A(e)(2) are satisfied, and the issuance of the certification that the
requirements of § 48A(e)(2) are satisfied, contact Kimberly Edwards, Executive
Assistant, Office of the Industry Director, Natural Resources and Construction, at
(713) 209-3615 (not a toll-free number).
29
APPENDIX A
CLOSING AGREEMENT
Under § 7121 of the Internal Revenue Code, [insert taxpayer's name,
address, and identifying number] ("Taxpayer") and the Commissioner of Internal
Revenue ("Commissioner") make the following closing agreement:
WHEREAS:
1. On or before March [insert date and year], Taxpayer submitted to the
Internal Revenue Service ("IRS"), an application for certification under the
qualifying advanced coal project program described in Notice 2007-52
("Application for § 48A Certification");
2. Taxpayer's Application for § 48A Certification is for the qualifying
advanced coal project (the "Project") described below-(1) The Project will use [insert either "an integrated gasification
combined cycle (as defined in § 48A(c)(7))" or "an advanced coal-based
technology (as defined in § 48A(c)(2) and (f)) other than an integrated
gasification combined cycle"];
(2) The Project will be located at [insert address or other identifying
designation] ;
(3) The Project is [insert either: "a new electric generation unit (as
defined in § 48A(c)(6))"; "a retrofit of an existing electric generation unit (as
defined in § 48A(c)(6))"; or "a repower of an existing electric generation unit (as
defined in § 48a(c)(6)");
30
(4) The Project will have a total nameplate generating capacity (as
defined in section 3.02 of Notice 2007-52) of at least [insert number] megawatts;
[If the Project is an integrated gasification combined cycle project, insert:
(5) At all times more than 50 percent of the cumulative total fuel
input (as defined in section 3.03(1) of Notice 2007-52 and including coal and any
other fuel input) used during normal plant operations (as defined in section
3.03(2) of Notice 2007-52) for the Project will be [insert either: "bituminous coal";
"subbituminous coal"; or "lignite"];] and
3. On [insert date of acceptance letter issued under section 4.02(10) of
Notice 2007-52], the IRS accepted Taxpayer's Application for § 48A Certification
for the Project and allocated a qualifying advanced coal project credit under §
48A in the amount of $[insert number] to the Project.
NOW IT IS HEREBY DETERMINED AND AGREED FOR FEDERAL INCOME
TAX PURPOSES THAT:
1. The total amount of the qualifying advanced coal project credit to be
claimed for the Project under § 48A(a) must not exceed $[insert the number in
WHEREAS clause #3].
2. If Taxpayer fails to satisfy any of the certification requirements in
§ 48A(e)(2) within the time specified in § 48A(d)(2)(O) (2 years from [insert the
date in WHEREAS clause #3]), or if the IRS does not issue a certification for the
Project under Notice 2007-52, the qualifying advanced coal project credit in the
amount of $[insert the number in WHEREAS clause #3] allocated to the Project
is fully forfeited.
31
3. If the Project is not placed in service by Taxpayer within 5 years of the
date of issuance of the certification as determined under section 6.03 of Notice
2007 -52, the qualifying advanced coal project credit in the amount of $[insert the
number in WHEREAS clause #3] allocated to the Project is fully forfeited.
4. If the plans for the Project change in any significant respect from the
plans set forth in the application for DOE certification (as defined in section 4.01
of Notice 2007-52) and the Application for § 48A Certification (as defined in
section 4.01 of Notice 2007-52) and, under section 7.03 of Notice 2007-52, the
acceptance of Taxpayer's Application for § 48A Certification on [insert the date in
WHEREAS clause #3] is void, the qualifying advanced coal project credit in the
amount of $[insert the number in WHEREAS clause #3] allocated to the Project
is fully forfeited.
[If the Project is not an integrated gasification combined cycle project,
insert:
5. If the Project fails to satisfy any of the requirements in § 48A(e)(1 )(A),
(C), (D), (E), and (F) for a qualifying advanced coal project or, during normal
plant operations (as defined in section 3.03(2) of Notice 2007-52), fails to satisfy
the requirement in § 48A(e)(1 )(8) for a qualifying advanced coal project-(1) at the time the Project is placed in service, the qualifying advanced
coal project credit in the amount of $[insert the number in WHEREAS clause #3]
allocated to the Project is fully forfeited; and
(2) after the Project is placed in service (and after satisfying all such
requirements at the time the Project is placed in service), the Project ceases to
32
be investment credit property and the recapture rules of § 50(a) apply.]
[If the Project is an integrated gasification combined cycle project, insert:
5. (1) If the Project fails to satisfy any of the requirements in §
48A(e)(1 )(A), (C), (0), (E), and (F) for a qualifying advanced coal project or,
during normal plant operations (as defined in section 3.03(2) of Notice 2007-52),
fails to satisfy the requirement in § 48A(e)(1 )(8) for a qualifying advanced coal
project-(a) at the time the Project is placed in service, the qualifying
advanced coal project credit in the amount of $[insert the number in WHEREAS
clause #3] allocated to the Project is fully forfeited; and
(b) after the Project is placed in service (and after satisfying all such
requirements at the time the Project is placed in service), the Project ceases to
be investment credit property and the recapture rules of § 50(a) apply.
(2) If at any time more than 50 percent of the cumulative total fuel input
(as defined in section 3.03(1) of Notice 2007-52 and including coal and any other
fuel input) used during normal plant operations (as defined in section 3.03(2) of
Notice 2007-52) is not [insert the primary feedstock in WHEREAS clause #2(5)],
the Project ceases to be investment credit property and the recapture rules of
§ 50(a) apply.]
6. Taxpayer will not claim the qualifying gasification project credit under
§ 488 for any qualified investment for which the qualifying advanced coal project
credit is allowed under § 48A.
7. If Taxpayer elects to claim the qualifying advanced coal project credit
33
on the qualified progress expenditures paid or incurred by Taxpayer during the
taxable year(s) during which the Project is under construction and the Project
ceases to be a qualifying advanced coal project (whether before, at the time, or
after the Project is placed in service), rules similar to the recapture rules in §
50(a)(2)(A) through (0) apply.
8. This agreement applies only to Taxpayer. Any successor in interest
must execute a new closing agreement with the IRS. If the interest is acquired at
or before the time the Project is placed in service and the successor in interest
fails to execute a new closing agreement, the qualifying advanced coal project
credit in the amount of $[insert the number in WHEREAS clause #3] allocated to
the Project is fully forfeited. If the interest is acquired after the time the Project is
placed in service and the successor in interest fails to execute a new closing
agreement, the Project ceases to be investment credit property and the recapture
rules of § 50(a) apply.
THIS AGREEMENT IS FINAL AND CONCLUSIVE EXCEPT:
1. The matter it relates to may be reopened in the event of fraud,
malfeasance, or misrepresentation of a material fact;
2. It is subject to the Internal Revenue Code sections that expressly
provide that effect be given to their provisions (including any stated exception for
§ 7122) notwithstanding any law or rule of law; and
3. If it relates to a tax period ending after the date of this Closing
Agreement, it is subject to any law enacted after such date, which applies to the
tax period.
34
By signing, the parties certify that they have read and agreed to the terms of this
Closing Agreement.
Taxpayer: [insert name and identifying number]
By: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Date Signed:
[insert name]
Title: [insert title]
[insert taxpayer's name]
Commissioner of Internal Revenue
By: ___________________________
[insert name]
Title: [insert title]
35
Date Signed: ________
I have examined the specific matters involved and recommend the acceptance
of the proposed agreement.
(Receiving Officer)
..................................................................... .
(Title)
................................................ .
Date Signed
I have reviewed the specific matters involved and recommend the acceptance
of the proposed agreement.
(Reviewing Officer)
................................................................... .
(Title)
.............................................. .
Date Signed
36
APPENDIX B
APPLICATION FOR DOE CERTIFICATION
REQUEST FOR SUPPLEMENTAL APPLICATION INFORMATION FOR DOE
The Internal Revenue Service ("IRS") and the Department of Energy ("DOE")
seek to certify applications that demonstrate a high likelihood of being
successfully implemented by the applicants. To qualify, projects must be
economically feasible and use the appropriate clean coal technology.
This request for submission of supplemental application information:
1. Describes the information to be provided by the applicant seeking a
certification of feasibility, and
2. Lists the evaluation criteria and Program Policy Factors to be used by
DOE in the evaluation of applications.
In conducting this evaluation, the DOE may utilize assistance and advice from
qualified personnel from other Federal agencies and/or non-conflicted
contractors. DOE will obtain assurances in advance from all evaluators that
application information shall be kept confidential and used only for evaluation
purposes. DOE reserves the right to request clarifications and/or supplemental
information from some or all applicants through written submissions and/or oral
presentations.
Notice is given that DOE may determine whether or not to provide a certification
to the IRS at any time after the application has been received, without further
exchanges or discussions. Therefore, all applicants are advised to submit their
most complete and responsive application.
Applications will not be returned.
SUBMISSION INFORMATION FOR DOE CERTIFICATION APPLICATION
A.
General
This request, together with the information in sections 5.02, 7.01, and 7.02 of
Notice 2007-52 includes all the information needed to complete an application for
DOE certification. All applications shall be prepared in accordance with this
request in order to provide a standard basis for evaluation and to ensure that
each application will be uniform as to format and sequence.
Each application should clearly demonstrate the applicant's capability,
knowledge, and experience in regard to the requirements described herein.
37
Applicants should fully address the requirements of Notice 2007-52 and this
request and not rely on the presumed background knowledge of reviewers.
DOE may reject an application that does not follow the instructions regarding the
organization and content of the application when the nature of the deviation
and/or omission precludes meaningful review of the application.
B.
Unnecessarily Elaborate Applications
Unnecessarily elaborate brochures or other presentations beyond those sufficient
to present a complete and effective application are not desired. Elaborate art
work, graphics and pictures are neither required nor encouraged.
C.
Application Submission for DOE Certification
The application submission to DOE must include the information and
documentation required by sections 5.02,7.01, and 7.02 of Notice 2007-52.
An application to DOE will not be considered in the allocation round conducted in
2007-08 unless it is postmarked by October 31,2007, and will not be considered
in the allocation round conducted in 2008-09 unless it is postmarked by October
31,2008. Two paper copies and one electronic version on a floppy disc or a CD
of the Application must be submitted to:
Melissa Robe
National Energy Technology Laboratory
3610 Collins Ferry Road
Morgantown, WV 26507
Note that under section 5.03(1) of Notice 2007-52, one paper copy and one
electronic version must be sent to the IRS as part of the application for IRS
certification. The application for IRS certification will not be considered in the
allocation round conducted in 2007-08 unless it is submitted to the IRS by March
3, 2008, and will not be considered in the allocation round conducted in 2008-09
unless it is submitted to the IRS by March 2, 2009.
THE INFORMATION REQUIRED BY THIS REQUEST MUST BE SUBMITTED
USING THE FORMAT AND THE HEADINGS OF THE "PROJECT
INFORMATION MEMORANDUM" AS DESCRIBED BELOW.
To aid in evaluation, applications shall be clearly and concisely written and
logically assembled. All pages of each part shall be appropriately numbered and
identified with the name of the applicant and the date.
The application, including the Project Information Memorandum, MUST be
formatted in one of the following software applications:
38
Microsoft Word tm 2002 or later edition
Microsoft Excel tm 2002 or later edition
Adobe Acrobattm PDF 6.0 or later edition
Financial models should be submitted using the Excel tm spreadsheet and must
include calculation formulas and assumptions.
The applicant is responsible for the integrity and structure of the electronic files.
The DOE will not be responsible for reformatting, restructuring or converting any
files submitted under this announcement.
The Project Information Memorandum, excluding Appendices, shall not exceed
seventy-five (75) pages. Pages in excess of the page limitation will not be
considered for evaluation. All text shall be typed, single spaced, using 12 point
font, 1 inch margins, and unreduced 8-1/2-inch by 11-inch pages. Illustrations
and charts shall be legible with all text in legible font. Pages shall be sequentially
numbered. Except as otherwise noted herein the page guidelines previously set
forth constitute a limitation on the total amount of material that may be submitted
for evaluation. No material may be incorporated in any application by reference
as a means to circumvent the page limitation.
D.
Form of Project Information Memorandum
PROJECT INFORMATION MEMORANDUM
I.
SUMMARY AND INTRODUCTION
Description of the Project
Financing and Ownership Structure
Describe the main parties to the project, including background,
ownership and related experience
Current Project Status and Schedule to Beginning of Construction
II.
TECHNOLOGY AND TECHNICAL INFORMATION
Provide a description of the proposed technology, including sufficient
supporting information (such as vendor guarantees, process flow
diagrams, equipment descriptions, information on each major process unit
and the total plant, compositions of major streams, and the technical plan
for achieving the goals proposed for the project) as would be needed to
allow DOE to confirm that the technical requirements of § 48A are met.
Specifically the applicant should:
Provide evidence sufficient to demonstrate that the proposed
technology meets the definition of "Advanced Coal-Based Generation
39
Technology," either as integrated gasification combined cycle (IGCC)
technology, or other advanced coal-based electric generation
technology meeting the heat rate requirement of 8530 Btu/kWh. For
advanced coal-based electric generation:
o The applicant must provide evidence sufficient to justify the
actual heat rate and heat rate corrected to conditions
specified in § 48A(f)(2)
o For projects including existing units, the applicant must
provide evidence sufficient to justify that the proposed
technology meets heat rate requirements specified in §
48A(f)(3)
Provide evidence sufficient to justify that the proposed project is
designed to meet the following performance requirements:
o S02 (subbituminous coal is 80 percent or more of fuel
input) ........ 99 percent removal or emissions not more than
0.04Ibs/MMBTU
o S02 (subbituminous coal is not more than 80 percent of fuel
input) ............................ 99 percent removal
o S02 (for all projects other than subbituminous coal
projects) ........................ 99 percent removal
o NOx emissions ............... 0.07 Ibs I MMBTU
o PM emissions ................. 0.015 Ibs I MMBTU
o Hg percent removaL ......... 90 percent
Provide evidence sufficient to demonstrate that the project meets the
requirements for qualifying advanced coal projects as specified under
§ 48A(e)(1) including:
o The project will power a new electric generation unit or
retrofitlrepower an existing electric generation unit. At least
50% of the useful output of the project is electrical power.
o The fuel for the project is at least 75% coal (as defined in
§ 48A(c)(4) and section 3.01 of Notice 2007-52), on an
energy input basis.
o The project is located at one site and has a total nameplate
electric power generating capacity (as defined in section
3.02 of Notice 2007-52) of at least 400 MW
III.
APPLICANT'S CAPABILITY TO ACCOMPLISH THE TECHNICAL
OBJECTIVES
Provide a narrative supporting the Applicant's capability to accomplish the
technical objectives of the proposed project, including supporting
documentation demonstrating that the applicant has assembled a team
that is formally committed to participate in the proposed project.
Provide information to support that the applicant has assembled a
team with the skills and resources needed to implement the project as
40
proposed. Provide signed agreements or letters from team members
demonstrating that the proposed team members are fully committed to
the project.
Provide information, including examples of prior similar projects
completed by applicant, EPC contractor, and suppliers of major
subsystems or equipment, which support the capabilities of the
applicant and its team members to design, construct, permit, and
operate the facility. The applicant should demonstrate that the team
members have a corporate history of successful completion of similar
projects.
Provide information to support that key personnel of the applicant and
its team members have knowledge, experience, and adequate degree
of involvement to successfully implement the project.
Include the project status and relevant information from ongoing
engineering activities. Also include in an appendix any engineering
report or reports used by the applicant to develop the project and to
estimate costs and operating performance. Include copies of any
signed agreements to support project status claims regarding
preliminary design studies, FEED, and EPC-type agreements.
IV.
PRIORITY FOR INTEGRATED GASIFICATION COMBINED CYCLE
PROJECTS
For IGCC Projects, the applicant must submit information sufficient for
categorization and prioritization of projects for certification, including:
Identification of the primary feedstock (as defined in section 5.02(5) of
Notice 2007-52), and all other feedstocks.
If applicable, evidence demonstrating that the project will be capable of
adding components that can capture, separate and permanently
sequester greenhouse gases.
A plan showing how project by-products will be marketed and utilized.
Other benefits, if any.
V.
SITE CONTROL AND OWNERSHIP
Provide evidence that demonstrates the overall feasibility of implementing
the project at the proposed site.
Provide evidence that the applicant owns or controls a site in the
United States of sufficient size to allow the proposed project to be
constructed and operated on a long-term basis. Documentation such
as a deed demonstrating the applicant owns the project site, a signed
option to purchase the site from the site owner, or a letter of intent by
the site owner to sell the site to the applicant should be provided.
41
Describe the current infrastructure at the site available to meet the
needs of the project.
Provide documentation supporting applicant's conclusion that the
proposed site can fully meet all environmental, coal supply, water
supply, transmission interconnect, and public policy requirements.
Such documentation may include signed agreements, letters of intent,
or term sheets, such as coal supply, water supply, and product
transportation etc., and regulatory approvals supporting the key claims.
Provide detailed plans, schedules and status updates, particularly, for
sites with pre-existing conditions that could impact the proposed
project. Pre-existing conditions may include, but are not limited to,
sites with mandated environmental remediation efforts; brown-field
sites that will require building demolition; or sites requiring substantial
rerouting of existing roads, railroads, transmission lines or pipelines
prior to the start of the project.
Applicants must select one "proposed site." However, projects with
key physical or logistical elements that require close integration with
another system for the project to succeed should provide information
on all integrated systems regardless of where they are located.
Example 1: a power plant designed to operate exclusively on coal from
a to-be-opened mine should provide supporting documentation for the
new mine. Example 2: an oxygen-blown IGCC plant planning to
purchase oxygen from a third party who will construct a plant
exclusively for this project should provide documentation for the
oxygen supplier.
VI.
UTILIZATION OF PROJECT OUTPUT
Provide evidence that demonstrates that a majority of the project output is
reasonably expected to be acquired or utilized.
Provide a projection of the anticipated costs of electricity and other
marketable by-products produced by the plant.
Provide documentation establishing that a majority of the output of the
plant is reasonably expected to be acquired or utilized. Such
documentation should be signed by authorizing officials of both the
buyer and seller, and may include: Sales Agreements, Letters of Intent,
Memoranda of Understanding, Option Agreements, and Power
Purchase Agreements.
Describe any energy sales arrangements that exist or that may be
contemplated (e.g., a Power Purchase Agreement or Energy Sales
Agreement) and summarize their key terms and conditions.
Include as an appendix any independent Energy Price Market Study
that has been done in connection with this project, or if no independent
42
•
VII.
market study has been completed, provide a copy of the applicantprepared market study.
Identify and describe any firm arrangements to sell non-power output,
and provide any evidence of such arrangements. If the project
produces a product in addition to power, include as an appendix any
related market study of price and volume of sales expected for that
product.
PROJECT ECONOMICS
Describe the project economics and provide satisfactory evidence of
economic feasibility as demonstrated through the financial forecast and
the underlying project assumptions. The project economic and financial
assumptions should be clearly stated and explained.
Show calculation of the amount of tax credit applied for based on
allowable cost.
VIII.
PROJECT DEVELOPMENT AND FINANCIAL PLAN
Provide the total project budget and major plant costs (e.g., development,
operating, capital, construction, and financing costs). Provide the
estimated annual budget for and source of project development costs from
the time of the application until the beginning of construction, including
legal, engineering, financial, environmental, overhead, and other
development costs. Describe the overall approach to project development
and financing sufficient to demonstrate project viability. Provide a
complete explanation of the source and amount of project equity. Provide
a complete explanation of the source and amount of project debt. Provide
the audited financial statements for the most recently ended three fiscal
years and quarterly interim financial statements for the current fiscal year
for (a) the applicant, (b) for any of the project parties providing funding,
and (c) for any third party funding source. If the applicant or another party
does not have audited financial statements, the applicant or the party
should provide equivalent financial statements prepared by the applicant
or the party, in accordance with Generally Accepted Accounting
Principles, and certified as to accuracy and completeness by the Chief
Financial Officer of the party providing the statements.
For internally financed projects, provide evidence that the applicant has
sufficient assets to fund the project with its own resources. Identify any
internal approvals required to commit such assets. Include in an appendix
copies of any board resolution or other approval authorizing the applicant
to commit funds and proceed with the project.
For projects financed through debt instruments either unsecured or
43
secured by assets other than the project, provide evidence that the
applicant has sufficient creditworthiness to obtain such financing along
with a discussion of the status of such instruments. Identify any internal
approvals required to commit the applicant to pursue such financing.
Include in an appendix copies of any board resolution or other approval
authorizing the applicant to commit to such financing.
For projects financed through investor equity contributions, describe the
source and status of each contribution. Discuss each investor's financial
capability to meet its commitments. Include in an appendix, copies of any
executed investment agreements.
If financing through a public offering or private placement of either debt or
equity is planned for the project, provide the expected debt rating for the
issue and an explanation of applicant's justification for the rating.
Describe the status of any discussions with prospective investment
bankers or other financial advisors.
Include as an appendix copies of any existing funding commitments or
expressions of interest from funding sources for the project.
For projects employing non-recourse or limited recourse debt financing,
provide a complete discussion of the approach to, and status of, such
financing. In an appendix, provide an Excel based financial model of the
project, with formulas, so that review of the model calculations and
assumptions may be facilitated; provide pro-forma project financial,
economic, capital cost, and operating assumptions, including detail of all
project capital costs, development costs, interest during construction,
transmission interconnection costs, other operating expenses, and all
other costs and expenses.
IX.
PROJECT CONTRACT STRUCTURE
Describe the current status of each of the agreements set forth below.
Include as an appendix copies of the contracts or summaries of the key
provisions of each of the following agreements:
Power Purchase Agreement (if not fully explained in Section IV)
Coal Supply: describe the source and price of coal supply for the project.
Include as an appendix any studies of coal supply price and amount that
have been prepared. Include a summary of the coal supply contract and a
signed copy of the contract.
Coal Transportation: explain the arrangements for transporting coal,
including costs.
44
Operations & Maintenance Agreement: include a summary of the terms
and conditions of the contract and a copy of the contract.
Shareholders Agreement: summarize key terms and include the
agreement as an appendix.
Engineering, Procurement and Construction Agreement: describe the key
terms of the existing or expected EPC contract arrangement, including
firm price, liquidated damages, hold-backs, performance guarantees, etc.
Water Supply Agreement: confirm the amount, source, and cost of water
supply.
Transmission Interconnection Agreement: explain the requirements to
connect to the system and the current status of negotiations in this
respect.
X.
PERMITS INCLUDING ENVIRONMENTAL AUTHORIZATIONS
Provide a complete list of all federal, state, and local permits, including
environmental authorizations or reviews, necessary to commence
construction of the project.
Explain what actions have been taken to date to satisfy the required
authorizations and reviews, and the status of each.
Provide a description of the applicant's plan to obtain and complete all
necessary permits, and environmental authorizations and reviews.
XI.
STEAM TURBINE PURCHASE
If applicant plans to purchase a steam turbine or turbines for the project,
indicate the prospective vendors for the turbine and explain the current
status of purchase negotiations, and provide a timeline for negotiation and
purchase with expected purchase date.
XII.
PROJECT SCHEDULE
Provide an overall project schedule which includes technical, business,
financial, permitting and other factors to substantiate that the project will
meet the 2 year project certification and 5 year placed-in-service
requirement.
The project schedule should be comprehensive and provide sufficient
detail to demonstrate how applicant will meet the certification and placedin-service requirements. The schedule should demonstrate that the
applicant understands the required tasks, and has allowed realistic times
for accomplishing the technical and financial tasks. The schedule should
include the milestone accomplishments needed to obtain the financing for
the project.
•
Applicants should document their progress toward meeting the 2 year
45
completion of permitting deadline. Existing permits and permit
applications must be specific to the project proposed. If eXisting permits
are not specific for the proposed coal-based project (e.g .. the permits are
for oil-fired or natural gas-based units), specific plans, procedures and
schedules for reapplying, modifying and/or renegotiating permits should
be provided. Any local, state or federal permitting schedules which may
impact the overall project schedule should be included.
Applicant should document their progress toward obtaining engineering
design information (FEED) to initiate permitting activities and to finalize the
turbine generator purchase specification within the 2 year window. Most
often, this requires final site, technology, process selection. Signed FEED
and/or EPC-type agreements, if available, should be provided.
APPENDICES
•
•
E.
Copy of internal or external engineering reports.
Copy of site plan, together with evidence that applicant owns or controls a
site. Examples of evidence would include a deed, or an executed contract
to purchase or lease the site.
Information supporting applicant's conclusion that the site is fully
acceptable as the project site with respect to environment, coal supply,
water supply, transmission interconnect, and public policy reasons.
Power Purchase or Energy Sales Agreement.
Energy Market Study.
Market Study for non-power output.
Financial Model of project.
Financial statements for the applicant and other project funding sources
for the most recently ended three fiscal years, and the unaudited quarterly
interim financial statements for the current fiscal year.
Expressions of interest or commitment letters from funding sources.
For each project contract, if no contract currently exists, provide a
summary of the expected terms and conditions.
List of all federal, state, and local permits, including environmental
authorizations or reviews, necessary to commence construction.
Evaluation Criteria
Advanced coal projects: will be evaluated on whether they meet all the
requirements of § 48A.
Technical: will be evaluated on whether the applicant has demonstrated the
capability to accomplish the technical objectives.
Site: will be evaluated on the basis that the site requirement for ownership or
control has been met, and that the site is suitable for the proposed project.
46
Economic: will be evaluated on whether the project has demonstrated economic
feasibility, taking into consideration the submitted financial and project
development and structural information and financial plan.
Schedule: will be evaluated on the applicant's ability to meet the 2 year project
certification and the 5 year placed-in-service requirement.
F.
Program Policy Factors to be used by DOE in the evaluation of
applications
Section 48A identifies minimum requirements for consideration for the qualifying
advanced coal project credit, including the project's technical feasibility, cost, and
applicant's ability. In the event that there are more qualified (certifiable)
applications than there are available tax credits, the DOE will apply additional
factors to rank eligible IGCC and non-IGCC projects based on their ability to
advance coal technology beyond its current state.
If there are more certified applications than available credits for a pool described
in section 4.02(2) of Notice 2007-52, DOE will rank the certified projects in
descending order (that is, first, second, third, etc.), based on evaluation of the
following Program Policy Factors. Factors 1,2, and 3 are Primary Ranking
Factors. A certified project that satisfies one of these factors will be ranked
ahead of each project that satisfies only factors listed below that factor.
Specifically, all certified projects satisfying Factor 1 will be selected before any
project that does not satisfy Factor 1; all projects satisfying Factor 2 will be
ranked ahead of any project that satisfies only Factor 3 and/or one or more
Secondary Ranking Factors; and all projects satisfying Factor 3 will be ranked
ahead of any project that does not satisfy any Primary Ranking Factors.
Primary Ranking Factors:
1. Capture and sequestration of 50 percent or more carbon dioxide
emissions. Only projects capturing and sequestering 50 percent or more
of the plant's carbon dioxide emissions will satisfy this factor. Within this
factor, higher rankings will be given to those projects capturing and
sequestering higher percentages of plant carbon dioxide emissions.
2. Use of advanced technologies that optimize the plant for future carbon
dioxide capture (for example, gasifier sizing and pressure, air separation
unit sizing, and quench system) as well as systems that are designed to
capture and sequester less than 50 percent of the carbon dioxide. Within
this factor, higher rankings will be given to those projects capturing and
sequestering higher percentages of plant carbon dioxide emissions and/or
requiring less retrofitting to implement greater than 50 percent carbon
47
capture and sequestration.
3. Location of the facility within 25 miles of potential carbon sequestration
locations and carbon dioxide (C02) pipelines or pipeline easements.
Within this factor, higher rankings will be given to those projects with the
facility located closer to potential carbon sequestration locations and
carbon dioxide (C02) pipelines or pipeline easements.
Secondary Ranking Factors:
Location of the facility relative to potential carbon sequestration
locations and carbon dioxide (C02) pipelines or pipeline easements
(for facilities not meeting Factor 3).
Presentation of other environmental, economic, or performance
benefits (including, in the case of an IGCC project, priority factors that
are listed in section 5.02(10) of Notice 2007-52 and are not included in
the Primary Ranking Factors).
Higher plant efficiency.
Geographic distribution of potential markets.
The ratio of total nameplate generating capacity (as defined in section
3.02 of Notice 2007-52) to requested tax credit.
Diversity of technology approaches and methods.
G.
Supplemental Technical and Financial Guidance for Section D
"Project Information Memorandum"
Technology and Technical Information
•
It is important that the applicant select a specific gasification system for
their project. Without that decision, it is difficult to provide the necessary
specific design information needed for DOE to evaluate the project
feasibility with respect to performance, emissions, outputs of major
streams as well as capital and operating costs.
•
The Applicant's capability to meet the legislated heat rate and/or
environmental targets should be supported with design information, and or
vendor guarantees which are project, site and coal specific.
48
Project Economics
•
Applicants should demonstrate the project's economic feasibility and
financial viability by providing a clear statement and explanation of the
economic and financial assumptions made by the applicant, and a
financial forecast for the project. The financial forecast should flow
logically from the applicant's assumptions and be consistent with them.
Applicants should include assumptions regarding financial and economic
issues that may not be included in the project costs but have a direct
impact on the project. The examples given in the "Site Control and
Ownership" section are relevant here and their impact on the project
economics should be discussed here.
Project Development and Financial Plan
•
The information provided by the applicant in this section should
demonstrate that the applicant's financial plan for developing the project is
feasible and that the applicant will have access to necessary financing.
The applicant should explain the source and timing for obtaining all
financing, including the project development costs. It is important that the
applicant explain and provide evidence that it has the capacity to fund the
pre-construction project development costs, together with a budget for and
description of those costs. Note that financial information is required for
the applicant and for any other funding source.
Project Contract Structure
•
This section requires that the applicant demonstrate an understanding of
the commercial contracting process and show progress in establishing the
framework of contracts and agreements that a project typically requires.
Applicants should show that their intended contract structure is reasonable
and that their assumptions relative to price, terms, and conditions are
consistent with current market conditions. Evidence of final agreements,
agreements in principle, or summaries of terms and conditions between
the applicant and contract counterparties should be provided if available.
49
APPENDIX C
CONSENT TO PUBLIC DISCLOSURE
OF CERTAIN QUALIFYING ADVANCED COAL PROJECT PROGRAM
APPLICATION INFORMATION
In the event that the Application for § 48A Certification of [(Insert name of
applicant-taxpayer here):
1(the ApplicantTaxpayer) for an allocation of qualifying advanced coal project credits under
section 48A of the Internal Revenue Code is approved, the undersigned
authorized representative of the Applicant-Taxpayer hereby consents to the
disclosure by the Internal Revenue Service through publication of a Notice in the
Internal Revenue Bulletin or a press release of: (1) the name of the ApplicantTaxpayer; (2) if the Applicant-Taxpayer is a member of an affiliated group filing
consolidated returns, the name of the common parent of the group; (3) the type
and location of the project that is the subject of the Application for § 48A
Certification; and (4) the amount of the allocation, if any, of qualifying advanced
coal project credits for such project. The undersigned understands that this
information might be published, broadcast, discussed, or otherwise disseminated
in the public record.
This authorization shall become effective upon the execution thereof. Except to
the extent disclosure is authorized herein, the returns and return information of
the undersigned taxpayer are confidential and are protected by law under the
Internal Revenue Code.
I certify that I have the authority to execute this consent to disclose on behalf of
the taxpayer named below.
Date: _ _ _ _ _ _ __
Signature:
Print name:
Title:
Name of Applicant-Taxpayer: _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
Taxpayer Identification Number: _ _ _ _ _ _ _ _ _ _ _ _ _ __
Taxpayer's Address:
50
Note: Treasury Regulations require that the Internal Revenue Service must
receive this consent within 60 days after it is signed and dated.
51
Part III - Administrative, Procedural, and Miscellaneous
Qualifying Gasification Project Program
Notice 2007-53
SECTION 1. PURPOSE
This notice updates the procedures for the allocation of credits under the
qualifying gasification project program of § 48B of the Internal Revenue Code
and defines certain terms for purposes of § 48B. The purpose of the qualifying
gasification project program is to consider and award certifications for qualified
investment eligible for credits under § 48B to qualifying gasification project
sponsors. To further this purpose, the method of allocation is being modified for
allocation rounds after 2006. Under the modified method of allocation, the U.S.
Department of Energy ("DOE") will rank a certified project relative to other
certified projects and credits will be allocated to projects based on the DOE
ranking. The modified allocation method will substantially favor projects that
capture and sequester carbon dioxide emissions and will favor to a lesser extent
projects optimized for future carbon dioxide capture.
SECTION 2. BACKGROUND AND CHANGES
.01 Section 46 provides that the amount of the investment credit for any
taxable year is the sum of the credits listed in § 46. That list includes the
qualifying gasification project credit.
.02 The qualifying gasification project credit is provided under § 4B8.
Section 4B8(a) provides that the qualifying gasification project credit for a taxable
year is an amount equal to 20 percent of the qualified investment (as defined in
§ 4B8(b)) for that taxable year in qualifying gasification projects .
.03 The term "qualifying gasification project" is defined in § 4B8(c)(1) as
meaning any project that (A) employs gasification technology, (8) will be carried
out by an eligible entity (as defined in section 3.02 of this notice), and (C)
includes a qualified investment of which an amount not to exceed $650 million is
certified under the qualifying gasification program as eligible for credit under
§ 4B8. Pursuant to § 4B8(c)(2), gasification technology is any process that
converts a solid or liquid product from coal (as defined in section 3.01 of this
notice), petroleum residue (as defined in § 4B8(c)(B)), biomass (as defined in
§ 4B8(c)(4)), or other materials that are recovered for their energy or feedstock
value into a synthesis gas composed primarily of carbon monoxide and hydrogen
for direct use or subsequent chemical or physical conversion .
.04 The qualifying gasification project credit generally is allowed in the
taxable year in which the eligible property (as defined in § 4B8(c)(3)) is placed in
service (as defined in section 3.05 of this notice) by the taxpayer. Further, the atrisk rules in § 49 and the recapture and other special rules in § 50 apply to the
qualifying gasification project credit.
.05 Section 4B8(d)(1) provides that the Secretary, in consultation with the
Secretary of Energy, shall establish a qualifying gasification project program to
consider and award certifications for qualified investment eligible for credits
2
under § 48B to qualifying gasification project sponsors. The Treasury
Department and the Internal Revenue Service established this program in Notice
2006-25,2006-11 I.R.B. 609. Pursuant to § 48B(d)(2), certificates of eligibility
may be issued under the program only during the 1O-year period beginning on
October 1,2005 .
.06 This notice modifies the qualifying gasification project program
established in Notice 2006-25 in a number of respects. The significant changes
made by this notice include the following:
(1) Large and Mid-Size Business Division (LMSB) of the Service will
allocate the qualifying gasification project credits. The filing instructions in
section 5.04 provide LMSB addresses to reflect this change.
(2) Section 3 defines certain terms for purposes of § 48B.
(3) The method of allocation is modified for allocation rounds after 2006.
Under the modified method of allocation, the DOE will rank a certified project
relative to other certified projects and credits will be allocated to projects based
on the DOE ranking. The modified allocation method will substantially favor
projects that capture and sequester carbon dioxide emissions and will favor to a
lesser extent projects optimized for future carbon dioxide capture. Section
4.02(4) reflects this change in the method by which credits under § 48B are
allocated to projects.
(4) Section 4.02(8) provides that the period for submitting the application
for § 48B certification (i) ends on March 3, 2008, for the 2007-08 allocation round
and (ii) begins on March 4, 2008, and ends on March 2, 2009, for the 2008-09
3
allocation round. Changes also are made to the dates in sections 4.02(10) and
(12) for accepting or rejecting a taxpayer's application for § 488 certification and
for executing closing agreements.
(5) Section 4.02(9) provides that the due date for the application for
DOE certification is October 31, that DOE will rank certified projects, and that the
due date for the DOE certification and ranking is March 1. Section 4.02(8) also
clarifies that the DOE certification and ranking (for projects determined to be
feasible) are provided to the Service.
(6) Section 4.02(12) provides that a successor in interest must execute a
new closing agreement with the Service no later than the due date (including
extensions) of the successor in interest's Federal income tax return for the
taxable year in which the transfer occurs.
(7) The information required to be included in the application for DOE
certification is modified. Section 5.02 requires submission of additional
information regarding the priority benefits of the project. Appendix 8 provides
additional information regarding program policy factors. Applicants will no longer
be required to submit independent financial reports.
(8) Section 5.03 requests that a taxpayer submit with the application for
§ 488 certification a declaration consenting to the disclosure by the Service of
certain return information if the taxpayer is awarded an allocation of qualifying
gasification project credits. The form of the declaration is set forth in Appendix C.
(9) Sections 5.03(1) and 5.04 require that a taxpayer submit one paper
copy and one electronic version on a floppy disc or a CD of the application for
4
§ 488 certification (including the application for DOE certification).
(10) Section 6.02 provides more details on who may sign the penalties
of perjury statement.
(11) Section 6.03 provides that the Service and the DOE must be
informed if the plans for the project change in any significant respect from the
plans set forth in the applications for § 488 and DOE certification, and also
provides the consequences of any Significant change to the plans set forth in the
applications.
(12) Section 6.06 provides that the DOE will offer debriefings to
applicants that submitted an application for DOE certification.
(13) Section 9 provides guidance regarding Freedom of Information Act
requests for records relating to the qualifying gasification project program.
SECTION 3. DEFINITIONS
The following definitions apply for purposes of § 488 and this notice:
.01 Coal. Section 488(c)(6) defines the term "coal" as meaning
anthracite, bituminous coal, subbituminous coal, lignite, and peat. Coal includes
waste coal (that is, usable material that is a byproduct of the previous processing
of anthracite, bituminous coal, subbituminous coal, lignite, or peat). Examples of
waste coal include fine coal of any of the listed ranks, coal of any of the listed
ranks obtained from a refuse bank or slurry dam, anthracite culm, bituminous
gob, and lignite waste .
.02 Eligible entity. Section 488(c)(7) defines "eligible entity" as meaning
any person whose application for certification is principally intended for use in a
5
domestic project that employs domestic gasification applications related to
chemicals, fertilizers, glass, steel, petroleum residues, forest products, and
agriculture (including feedlots and dairy operations). For purposes of § 48B, a
qualifying gasification project is carried out by an eligible entity if the project
supplies more than 50 percent of the thermal output in British thermal unit (Btu)
from the gasification process in the form of synthesis gas for direct use or
subsequent chemical or physical conversion in an application related to one or
more of the industries listed in § 48B(c)(7) or if more than 50 percent of the fuel
input in Btu to the gasification process is supplied from one or more of the
industries listed in § 48B(c)(7) .
.03 Total synthesis gas capacity. The total synthesis gas capacity of a
project is the total MMBtu per hour of the synthesis gas (higher heating value
(HHV)) at the gasifier outlet of the project. The synthesis gas must be composed
primarily of carbon monoxide and hydrogen for direct use or subsequent
chemical or physical conversion .
.04 Fuel Input.
(1) In general. The term "fuel input" means, with respect to any type of
fuel, the amount of such fuel used during normal plant operations. The amounts
of the fuel used are measured (i) in British thermal units (Btus) on an energy
input basis and (ii) pursuant to applicable standards prescribed by the American
Society for Testing and Materials (ASTM). For example, § 48B(d)(3)(O) provides
that the fuels identified in § 48B(c)(2) will at all times cumulatively comprise at
least 90 percent of the total fuels (fuels identified in § 48B(c)(2) and any other
6
fuel input) required by the project. This requirement is satisfied if, after
completion and during normal plant operations, the fuels identified in § 488(c)(2)
will cumulatively comprise at least 90 percent of the project's total fuels
measured in 8tus on an energy input basis and pursuant to applicable ASTM
standards.
(2) Only normal plant operations taken into account. Only fuel used
during normal plant operations is taken into account for purposes of § 488.
Normal plant operations are operations other than during periods of initial plant
certification, plant startup, plant shutdown, interconnected gasifier(s) shutdown
for gasification system maintenance, or interruptions of the supply of fuels
identified in § 488(c)(2) to the project resulting from an event of force majeure
(including an act of God, war, strike, or other similar event beyond the control of
the taxpayer). For example, the fuel input during the initial plant certification may
consist entirely of natural gas or other fuels not identified in § 488(c)(2) because
fuel used during initial plant certification is disregarded in determining whether
the requirement of § 488(d)(3)(O) to use 90 percent of the fuels identified in
§ 488(c)(2) is satisfied .
.05 Placed In Service. For purposes of § 488, property is placed in
service in the taxable year in which the property is placed in a condition or state
of readiness and availability for a specifically assigned function. See § 1.463(d)(1 )(ii) of the Income Tax Regulations. Thus, a qualifying gasification project
or eligible property (as defined in § 488(c)(3)) that is a part of the project is
placed in service in the taxable year in which the project is placed in a condition
7
or state of readiness and availability for producing synthesis gas from the
feedstocks identified in § 4BB(c)(2).
SECTION 4. QUALIFYING GASIFICATION PROJECT PROGRAM
.01 In General. The Service will consider a project under the qualifying
gasification project program only if the DOE provides a certification ("DOE
certification") and ranking (if any) for the project. Accordingly, for each qualifying
gasification project, a taxpayer must submit: (1) an application for certification by
the DOE ("application for DOE certification"), and (2) an application for
certification under § 4BB by the Service ("application for § 4BB certification").
Both applications may be submitted only during the 3-year period beginning on
February 21, 2006. Certifications will be issued and credits will be allocated to
projects in annual allocation rounds. The initial allocation round was conducted
in 2006. Additional allocation rounds will be conducted in 2007-0B and, if
necessary, in 200B-09 .
.02 Program Specifications.
(1) The Service determines the amount of the qualifying gasification
project credits allocated to a qualifying gasification project at the time the Service
accepts the application for § 4BB certification for that project in accordance with
section 4.02(9) of this notice. The qualified investment in the project will be
certified as eligible for the credit to the extent such investment does not exceed
the amount of the credit allocated to the project multiplied by five. See section 5
of this notice for the requirements applicable to the application for DOE
certification and the application for § 4BB certification.
B
(2) The certification for a project cannot apply to more than $650 million
of the qualified investment in the project. Thus, the maximum amount of
qualifying gasification project credits that will be allocated to a project is $130
million.
(3) Pursuant to § 4B8(d)(1), the aggregate amount of credits allocated to
all qualifying gasification projects may not exceed $350 million. In the 2006
allocation round, $349,663,000 of credits was allocated. Therefore, $337,000 of
credits is available for allocation in 2007 -OB.
(4) DOE will rank the certified projects in descending order (that is, first,
second, third, etc.) and the $337,000 available for allocation will be allocated as
follows in the allocation round in 2007 -OB:
(a) If the requested allocation of credits for projects that DOE has
certified does not exceed the amount available for allocation, each certified
project will be allocated the full amount of credit requested.
(b) If the requested allocation of credits for projects that DOE has
certified exceeds the amount available for allocation, the amount available for
allocation will be allocated as follows:
(i) The project receiving the highest ranking (that is, first) will be
allocated the full amount of credit requested (but not exceeding the amount
available for allocation) before any credit is allocated to a lower-ranked project.
The amount available for allocation is reduced by the amount of credit so
allocated and only the remainder is available for allocation to a lower-ranked
project.
9
(ii) Second and lower-ranked projects will be entitled to similar
priority in the allocation of credits and allocations to such projects will similarly
reduce the remainder of the amount available for allocation until the amount
available for allocation is exhausted.
(5) If the amount available for allocation is not fully allocated in the 200708 allocation round, a similar allocation round will be conducted in 2008-09.
Generally, the results of each year will be announced. See section 5.03(2) of this
notice for further information about this announcement.
(6) If the same project would otherwise be allocated credits under both
the qualifying gasification project program under this notice and the qualifying
advanced coal project program under Notice 2007-52,2007-26 I.R.B. _ , the
following rules apply:
(a) The qualifying gasification project credit may not be allocated to the
project with respect to any qualified investment under § 48B for which a
qualifying advanced coal project credit is allowed under § 48A; and
(b) The qualifying gaSification project credit may be allocated to the
project with respect to the qualified investment under § 48B for which a qualifying
advanced coal project credit is not allowed under § 48A.
(7) For each allocation round, there will be an annual application period
during which a taxpayer may file its application for § 48B certification. The
Service will consider a project in an allocation round only if the application for
§ 48B certification for the project is submitted during the application period for
that round and the DOE provides the DOE certification and the DOE ranking (if
10
any) for the project before the end of that application period.
(8) For the allocation round conducted in 2007-08, the application period
begins on October 3, 2006, and ends on March 3, 2008, and any completed
application for § 48B certification received by the Service after October 2, 2006,
and before March 4, 2008, will be deemed to be submitted by the taxpayer on
March 3, 2008. For the allocation round to be conducted in 2008-09, the
application period begins on March 4, 2008, and ends on March 2, 2009, and any
completed application for § 48B certification received by the Service after March
3, 2008, and before March 3, 2009, will be deemed to be submitted by the
taxpayer on March 2, 2009. For purposes of this notice, an application that is
submitted by U.S. mail will be treated as received by the Service on the date of
the postmark and an application submitted by a private delivery service will be
treated as received by the Service on the date recorded or the date marked in
accordance with § 7502(f)(2)(C).
(9) See section 5.02 of this notice and Appendix B to this notice for the
information to be submitted to the DOE in an application for DOE certification.
Appendix B to this notice also provides the instructions and address for filing the
application for DOE certification. The DOE will determine the feasibility of the
project and, if the project is determined to be feasible, will provide a DOE
certification for the project to the Service. If the DOE certifies two or more
projects, the DOE also will rank each of the projects it certifies (for example, first,
second, third, etc.) relative to other certified projects. If an application for DOE
certification is postmarked on or before October 31 of a calendar year, the DOE
11
will determine the feasibility of the project and (for projects determined to be
feasible) provide the DOE certification and the DOE ranking (if any) to the
Service by March 1 of the year following that calendar year.
(10) By April 30 of the calendar year in which an application for § 48B
certification is deemed to be submitted (as determined under section 4.02(8) of
this notice), the Service will accept or reject the taxpayer's application for § 48B
certification and will notify the taxpayer, by letter, of its decision.
(11) A taxpayer that receives an acceptance letter under section
4.02(10) of this notice has 7 years from the date of the acceptance letter to place
the project in service and if the project is not placed in service by the end of that
period then the acceptance letter is void.
(12) If the taxpayer's application for § 48B certification is accepted, the
acceptance letter will state the amount of the credit allocated to the project and
the amount of qualified investment that is certified as eligible for the credit. If a
credit is allocated to a taxpayer's project, the taxpayer will be required to execute
a closing agreement in the form set forth in Appendix A to this notice. By June
30 of the calendar year in which an application for § 48B certification is accepted,
the taxpayer must execute and return the closing agreement to the Service at the
appropriate address listed in section 5.04 of this notice or listed in later guidance
published in the Internal Revenue Bulletin. The Service will execute and return
the closing agreement to the taxpayer by August 31 of such calendar year. The
executed closing agreement applies only to the accepted taxpayer. Accordingly,
any successor in interest must execute a new closing agreement with the Service
12
no later than the due date (including extensions) of the successor in interest's
Federal income tax return for the taxable year in which the transfer occurs. If the
successor in interest does not execute a new closing agreement, the following
rules apply:
(a) In the case of an interest acquired at or before the time the
qualifying gasification project is placed in service, any credit allocated to the
project will be fully forfeited (and rules similar to the recapture rules of § 50(a)
apply with respect to qualified progress expenditures); and
(b) In the case of an interest acquired after the qualifying gasification
project is placed in service, the project ceases to be investment credit property
and the recapture rules of § 50(a) (and similar rules with respect to qualified
progress expenditures) apply.
SECTION 5. APPLICATIONS FOR CERTIFICATIONS
.01 In General. An application for § 488 certification and a separate
application for DOE certification must be submitted for each qualifying
gasification project. If an application for DOE certification does not include all of
the information required by section 5.02 of this notice and meet the reqUirements
in sections 6.01 and 6.02 of this notice, the DOE may decline to accept the
application. If an application for § 488 certification does not include all of the
information listed in section 5.03 of this notice and meet the requirements in
sections 6.01 and 6.02 of this notice, the application will not be accepted by the
Service .
.02 Information Required in the Application for DOE Certification. An
13
application for DOE certification must include all of the information requested in
Appendix B to this notice and all of the following:
(1) The name, address, and taxpayer identification number of the
taxpayer. If the taxpayer is a member of an affiliated group filing consolidated
returns, also provide the name, address, and taxpayer identification number of
the common parent of the group.
(2) The name and telephone number of a contact person.
(3) The name and address (or other unique identifying designation) of
the qualifying gasification project.
(4) A statement specifying the projected placed-in-service date of the
qualifying gasification project.
(5) The estimated total cost of the project and the estimated total
qualified investment in the eligible property that will be part of the project.
(6) The amount of the qualifying gasification project credit requested for
the project. The amount requested must not exceed $130 million (the maximum
amount permitted under § 4BB(a) and (c)(1 )(e)).
(7) If the taxpayer is or will be requesting an amount of the qualifying
advanced coal project credit under § 4BA for the same project, a statement
specifying the amount of credit the taxpayer is or will be requesting under § 4BA.
(B) The exact total synthesis gas capacity (as defined in section 3.03 of
this notice) of the project.
(9) A statement specifying whether the project is entitled to priority for
carbon capture capability (as defined in § 4BB(c)(5)), for using renewable fuel, or
14
for having project teams with experience that demonstrates successful and
reliable operations of the gasification technology on the domestic fuels identified
in § 488(c)(2), and, if entitled to priority, a statement identifying which of these
priorities apply to the project.
(10) Documentation or other evidence establishing that the taxpayer is
financially viable without the receipt of additional federal funding associated with
the qualifying gasification project.
.03 Information To 8e Included in the Application for § 488 Certification.
(1) Information required in the application for § 488 certification. An
application for § 488 certification must include all of the following:
(a) The name, address, and taxpayer identification number of the
taxpayer. If the taxpayer is a member of an affiliated group filing consolidated
returns, also provide the name, address, and taxpayer identification number of
the common parent of the group.
(b) The name, telephone number, and fax number of a contact person.
For such person, attach a properly executed power of attorney, preferably on
Form 2848, Power of Attorney and Declaration of Representative.
(c) One paper copy and one electronic version on a floppy disc or a
CD of the completed application for DOE certification submitted with respect to
the project in accordance with section 5.02 of this notice.
(2) Consent to disclosure of allocation. In order to provide the public
with information on how the qualifying gasification project credits authorized by
Congress have been allocated and facilitate oversight of the qualifying
15
gasification project program, the Service intends to publish the results of the
allocation process. The Service expects that a list identifying the taxpayers and
projects to which credits are allocated and specifying the amount of credit
allocated to each would be of particular interest to the public. Pursuant to
§ 6103, consent is required in order to disclose any return information with
respect to taxpayers awarded an allocation. Therefore, the Service requests that
each taxpayer submit with the application for § 488 certification a declaration,
consenting to the disclosure by the Service of the following return information in
the event a qualifying gasification project credit is allocated to the taxpayer's
project: (a) the name of the taxpayer; (b) if the taxpayer is a member of an
affiliated group filing consolidated returns, the name of the common parent of the
group; (c) the type and location of the project to which the application relates;
and (d) the amount of the qualifying gasification project credit allocated to the
project. To provide a valid consent, the declaration must be in the form set forth
in Appendix C. A taxpayer is not required to consent to disclosure of this
information in order to receive an allocation of the qualifying gasification project
credit, and neither the presence nor the absence of such a consent will be taken
into account in the evaluation of a taxpayer's application. The Service will not
publish any return information relating to a taxpayer if the taxpayer does not
consent to disclosure of this information or does not receive an allocation of the
qualifying gasification project credit.
.04 Instructions and Address for Filing § 488 Application. One paper copy
and one electronic version on a floppy disc or a CD of the application for § 488
16
certification must be submitted. Applications for § 48B certification should be
marked: SECTION 48B APPLICATION FOR CERTIFICATION. There is no user
fee for these applications.
(1) Applications submitted by U. S. mail must be sent to:
Internal Revenue Service
Industry Director, Natural Resources and Construction
Attn: Executive Assistant
1919 Smith Street
Stop HOU 1000
Houston, TX 77002
Applications submitted by a private delivery service must be sent to:
Internal Revenue Service
Industry Director, Natural Resources and Construction
Attn: Executive Assistant
1919 Smith Street, Floor P2
Stop HOU 1000
Houston, TX 77002
(2) Applications may also be hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. Central time to:
Internal Revenue Service
Industry Director, Natural Resources and Construction
Attn: Executive Assistant
1919 Smith Street, Floor P2
Stop HOU 1000
Houston, TX 77002
SECTION 6. OTHER REQUIREMENTS
.01 Signature. Each submission under section 5 of this notice must be
signed and dated by the taxpayer. A stamped signature or faxed signature is not
permitted .
.02 Penalties of Perjury Statement.
(1) Each submission under section 5 of this notice must be accompanied
17
by the following declaration: "Under penalties of perjury, I declare that I have
examined this submission, including accompanying documents, and, to the best
of my knowledge and belief, all of the facts contained herein are true, correct,
and complete."
(2) The declaration must be signed and dated by the taxpayer. The
person signing for the taxpayer must have personal knowledge of the facts.
Further, the declaration must be signed by an officer on behalf of a corporation, a
general partner on behalf of a state-law partnership, a member-manager on
behalf of a limited liability company, a trustee on behalf of a trust, and the
proprietor in the case a sole proprietorship. If the taxpayer is a member of an
affiliated group filing consolidated returns, the declaration also must be signed by
a duly authorized officer of the common parent of the group. A stamped
signature or faxed signature is not permitted .
.03 Significant Change in Plans. The Service and DOE must be informed
if the plans for the project change in any significant respect from the plans set
forth in the applications for § 488 and DOE certification. Any significant change
to the plans set forth in the applications will have the following effects:
(1) The Service will disregard any certification or ranking provided by
DOE unless DOE is informed of the change before the date on which DOE
provides the certification or ranking (that is, the Service will not consider the
project unless DOE provides a new, timely certification and ranking (if any) on or
after the date on which DOE is informed of the change); and
(2) Any acceptance provided by the Service and any allocation or
18
certification based on that acceptance will be void unless the Service is informed
of the change before the date on which the acceptance is provided under section
4.02(10) of this notice .
.04 Effect of an Acceptance or Allocation. An acceptance or allocation by
the Service under this notice is not a determination that a project qualifies for the
qualifying gasification project credit under § 48B. The Service may, upon
examination (and after any appropriate consultation with DOE), determine that
the project does not qualify for this credit.
.05 No Right to a Conference or Appeal. A taxpayer does not have a right
to a conference relating to any matters under this notice. Further, a taxpayer
does not have a right to appeal the decisions made under this notice (including
the acceptance or rejection of the application for DOE or § 48B certification or the
amount of credit allocated to the project) to an Associate Chief Counselor any
other official of the Service .
.06 DOE Debriefings. Although a taxpayer does not have a right to a
conference relating to any matters under this notice, the DOE will offer
debriefings to all applicants that submitted an application for DOE certification.
This debriefing will be held by the DOE after the Service has accepted the
applications for § 48B certification (as determined under section 4.02(10) of this
notice). The sole purpose of the debriefing is to enable applicants to develop
better proposals in future allocation rounds by providing DOE's review of the
strengths and weaknesses of their application for DOE certification.
SECTION 7. REVIEW AND REDISTRIBUTION
19
.01 In General. Section 48B(d)(1) provides for the review and
redistribution of credits allocated under the qualifying gasification project program
under rules similar to the rules of § 48A(d)(4) .
.02 Review and Redistribution of Credits.
(1) In general. If, after the allocation round in 2008-09, the aggregate
credit of $350 million is not fully subscribed (that is, the aggregate credit is not
fully allocated), an additional program for applications for certification to allocate
the remaining credits will be conducted. Future guidance will prescribe the
procedures applicable to applications for certification with respect to the
remaining credits.
(2) Reduction or forfeiture of allocated credits. Under the closing
agreement set forth in Appendix A to this notice, the qualifying gasification
project credits allocated under section 4 of this notice will be reduced or forfeited
in certain situations. A taxpayer must notify the Service of the amount of any
reduction or forfeiture required under the closing agreement. This notification
must be sent to the appropriate address listed in section 5.04 of this notice or
listed in later guidance published in the Internal Revenue Bulletin.
The amount of any reduction or forfeiture of the allocated credits will be
returned and included in the aggregate credit remaining to be allocated in the
allocation round following the reduction or forfeiture. If the reduction or forfeiture
occurs after the allocation round in 2008-09, future guidance will prescribe
procedures applicable to applications for certification with respect to the returned
credits.
20
SECTION 8. QUALIFIED PROGRESS EXPENDITURES
.01 Section 48B(b)(3) provides that rules similar to the rules of § 46(c)(4)
and (d) (as in effect on the day before the enactment of the Revenue
Reconciliation Act of 1990) shall apply for purposes of § 48B. Former §§ 46(c)(4)
and 46(d) provided the rules for claiming the investment credit on qualified
progress expenditures (as defined in former § 46(d)(3)) made by a taxpayer
during the taxable year for the construction of progress expenditure property (as
defined in former § 46(d)(2)) .
.02 In the case of self-constructed property (as defined in former
§ 46(d)(5)(A)), former § 46(d)(3)(A) defined qualified progress expenditures to
mean the amount that is properly chargeable (during the taxable year) to capital
account with respect to that property. With respect to a qualifying gasification
project that is self-constructed property, amounts paid or incurred are chargeable
to capital account at the time and to the extent they are properly includible in
computing basis under the taxpayer's method of accounting (for example, after
applying the requirements of § 461, including the economic performance
requirement of § 461 (h)) .
.03 To claim the qualifying gasification project credit on the qualified
progress expenditures paid or incurred by a taxpayer during the taxable year for
construction of a qualifying gasification project, the taxpayer must make an
election under the rules set forth in § 1.46-5(0) of the Income Tax Regulations.
The taxpayer may not make the qualified progress expenditures election for a
qualifying gasification project until the taxpayer has received an acceptance letter
21
for the project under section 4.02(10) of this notice .
.04 If a taxpayer makes the qualified progress expenditures election
pursuant to section 8.03 of this notice, rules similar to the recapture rules in
§ 50(a)(2)(A)-(D) apply. In addition to the cessation events listed in § 50(a)(2)(A),
examples of other events that will cause the project to cease being a qualifying
gasification project are:
(1) Failure to place the project in service within 7 years from the date of
the acceptance letter under section 4.02( 10) of this notice; or
(2) A significant change to the plans for the project as set forth in the
applications for § 488 and DOE certification and, under section 6.03 of this
notice, the Service's acceptance of the project is void as a result of the change.
SECTION 9. DISCLOSURE OF INFORMATION
.01 In general. Any information contained in the application for DOE
certification or the application for § 488 certification is subject to § 6103 and to
any other applicable exemption set forth in the Freedom of Information Act (the
FOIA). Examples of FOIA exemptions include FOIA trade secrets and
commercial or financial information exemption of 5 U.S.C. 552(b)(4) and the
FOIA personal privacy exemption of 5 U.S.C. 552(b)(6)) .
.02 FOIA requests. Anyone interested in submitting a request for records
under the FOIA with respect to the qualifying gasification project program under
§ 488 (including a request for records relating to the application for DOE
certification) should direct a request that conforms to the Service's FOIA
regulations, found at 26 C.F.R. § 601.702, to the following address:
22
IRS FOIA Request
Baltimore Disclosure Office
Room 940
31 Hopkins Plaza
Baltimore, MD 21201
SECTION 10. EFFECT ON OTHER DOCUMENTS
Notice 2006-25 is clarified, modified, amplified, and superseded.
SECTION 11. EFFECTIVE DATE
This notice is effective June 7, 2007.
SECTION 12. PAPERWORK REDUCTION ACT
The collection of information contained in this notice has been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C. § 3507) under control number 1545-2002.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless the collection of information
displays a valid OMB control number.
The collections of information in this notice are in sections 4, 5, 6, 7, and
Appendix B of this notice. This information is required to obtain an allocation of
qualifying gasification project credits. This information will be used by the Service to
verify that the taxpayer is eligible for the qualifying gasification project credits. The
collection of information is required to obtain a benefit. The likely respondents are
business or other for-profit institutions.
The estimated total annual reporting burden is 1,700 hours.
The estimated annual burden per respondent varies from 50 to 125 hours,
depending on individual circumstances, with an estimated average of 85 hours.
23
The estimated number of respondents is 20.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and tax return information are confidential,
as required by 26 U.S.C. § 6103.
SECTION 13. DRAFTING INFORMATION
The principal author of this notice is Ruba Nasrallah of the Office of
Associate Chief Counsel (Income Tax & Accounting). For further information
regarding this notice, contact Jaime Park of the Office of Associate Chief
Counsel (Passthroughs & Special Industries) at (202) 622-3120 (not a toll-free
call). For further information regarding the application for § 48B certification,
contact Kimberly Edwards, Executive Assistant, Office of the Industry Director,
Natural Resources and Construction, at (713) 209-3615 (not a toll-free number).
24
APPENDIX A
CLOSING AGREEMENT
Under § 7121 of the Internal Revenue Code, [insert taxpayer's name,
address, and identifying number] ("Taxpayer") and the Commissioner of Internal
Revenue ("Commissioner") make the following closing agreement:
WHEREAS:
1. On or before March [insert date and year], Taxpayer submitted to the
Internal Revenue Service ("IRS"), an application for certification under the
qualifying gasification project program described in Notice 2007-53 ("Application
for § 488 Certification");
2. Taxpayer's Application for § 488 Certification is for the qualifying
gasification project (the "Project") described below-(1) The Project will be located at [insert address or other identifying
designation];
(2) The Project will have a total synthesis gas capacity (as defined
in section 3.03 of Notice 2007-53) of at least [insert number] total MM8tu per
hour of synthesis gas. The synthesis gas is composed primarily of carbon
monoxide and hydrogen for direct use or subsequent chemical or physical
conversion;
(3) The fuels identified in § 488(c)(2) will at all times cumulatively
comprise at least 90 percent of the total fuel input (as defined in section 3.04(1)
of Notice 2007-53 and including fuels identified in § 488(c)(2) and any other fuel
input) required by the Project for normal plant operations (as defined in section
25
3.04(2) of Notice 2007-53) for the production of chemical feedstocks, liquid
transportation fuels, or co-production of electricity; and
3. On [insert date of acceptance letter issued under section 4.02(9) of
Notice 2007-53], the IRS accepted Taxpayer's Application for § 488 Certification
for the Project and allocated a qualifying gasification project credit under § 488 in
the amount of $[insert number] to the Project.
NOW IT IS HEREBY DETERMINED AND AGREED FOR FEDERAL INCOME
TAX PURPOSES THAT:
1. The total amount of the qualifying gasification project credit to be
claimed for the Project under § 488(a) must not exceed $[insert the number in
WHEREAS clause #3].
2. If the Project is not placed in service by Taxpayer within 7 years of
[insert the date in WHEREAS clause #3], the qualifying gasification project credit
in the amount of $[insert the number in WHEREAS clause #3] allocated to the
Project is fully forfeited.
3. If the plans for the Project change in any significant respect from the
plans set forth in the application for DOE certification (as defined in section 4.01
of Notice 2007-53) and the Application for § 488 Certification (as defined in
section 4.01 of Notice 2007-53) and, under section 6.03 of Notice 2007-53, the
acceptance of Taxpayer's Application for § 488 Certification on [insert the date in
WHEREAS clause #3] is void, the qualifying advanced coal project credit in the
amount of $[insert the number in WHEREAS clause #3] allocated to the Project
is fully forfeited.
26
4. (1) If the Project fails to use gasification technology as defined in
§ 488(c)(2) or is not carried out by an eligible entity (as defined in section 3.02 of
Notice 2007-53), the qualifying gasification project credit in the amount of $[insert
the number in WHEREAS clause #3] allocated to the Project is fully forfeited.
(2) If, at any time, the fuels identified in § 488(c)(2) with respect to the
gasification technology for the Project do not cumulatively comprise at least 90
percent of the total fuel input (as defined in section 3.04(1) of Notice 2007-53 and
including fuels identified in § 488(c)(2) and any other fuel input) required by the
Project for normal plant operations (as defined in section 3.04(2) of Notice 200753) for the production of chemical feedstocks, liquid transportation fuels, or coproduction of electricity, the Project ceases to be investment credit property and
the recapture rules of § 50(a) apply.
5. Taxpayer will not claim the qualifying advanced coal project credit under
§ 48A for any qualified investment for which the qualifying gasification project
credit is allowed under § 488.
6. If Taxpayer elects to claim the qualifying gasification project credit on
the qualified progress expenditures paid or incurred by Taxpayer during the
taxable year(s) during which the Project is under construction and if the Project
ceases to be a qualifying gasification project (whether before, at the time, or after
the Project is placed in service), rules similar to the recapture rules in
§ 50(a)(2)(A) through (D) apply.
7. This agreement applies only to Taxpayer. Any successor in interest
must execute a new closing agreement with the IRS. If the interest is acquired at
27
or before the time the Project is placed in service and the successor in interest
fails to execute a new closing agreement, the qualifying gasification project credit
in the amount of $[insert the number in WHEREAS clause #3] allocated to the
Project is fully forfeited. If the interest is acquired after the time the Project is
placed in service and the successor in interest fails to execute a new closing
agreement, the Project ceases to be investment credit property and the recapture
rules of § 50(a) apply.
THIS AGREEMENT IS FINAL AND CONCLUSIVE EXCEPT:
1. The matter it relates to may be reopened in the event of fraud,
malfeasance, or misrepresentation of a material fact;
2. It is subject to the Internal Revenue Code sections that expressly
provide that effect be given to their provisions (including any stated exception for
§ 7122) notwithstanding any law or rule of law; and
3. If it relates to a tax period ending after the date of this Closing
Agreement, it is subject to any law enacted after such date, which applies to the
tax period.
By signing, the parties certify that they have read and agreed to the terms of this
Closing Agreement.
Taxpayer: linsert name and identifying number]
By: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Date Signed: _ _ _ __
[insert name]
28
Title: [insert title]
[insert taxpayer's name]
Commissioner of Internal Revenue
By: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Date Signed: _ _ _ __
[insert name]
Title: [insert title]
29
I have examined the specific matters involved and recommend the acceptance
of the proposed agreement.
(Receiving Officer)
..................................................................... .
(Title)
................................................ .
Date Signed
I have reviewed the specific matters involved and recommend the acceptance
of the proposed agreement.
(Reviewing Officer)
................................................................... .
(Title)
.............................................. .
Date Signed
30
APPENDIX B
APPLICATION FOR DOE CERTIFICATION
REQUEST FOR SUPPLEMENTAL APPLICATION INFORMATION FOR DOE
The Internal Revenue Service ("IRS") and the Department of Energy ("DOE")
seek to certify applications that demonstrate a high likelihood of being
successfully implemented by the applicants. To qualify, projects must be
economically feasible and use the appropriate gasification technology.
This request for submission of supplemental application information:
1. Describes the information to be provided by the applicant seeking a
certification of feasibility, and
2. Lists the evaluation criteria and Program Policy Factors to be used by
DOE in the evaluation of applications.
In conducting this evaluation, the DOE may utilize assistance and advice from
qualified personnel from other Federal agencies and/or non-conflicted
contractors. DOE will obtain assurances in advance from all evaluators that
application information shall be kept confidential and used only for evaluation
purposes. DOE reserves the right to request clarifications and/or supplemental
information from some or all applicants through written submissions and/or oral
presentations.
Notice is given that DOE may determine whether or not to provide a certification
to the IRS at any time after the application has been received, without further
exchanges or discussions. Therefore, all applicants are advised to submit their
most complete and responsive application.
Applications will not be returned.
SUBMISSION INFORMATION FOR DOE CERTIFICATION APPLICATION
A.
General
This request, together with the information in sections 5.02, 6.01, and 6.02 of
Notice 2007-53 includes all the information needed to complete an application for
DOE certification. All applications shall be prepared in accordance with this
request in order to provide a standard basis for evaluation and to ensure that
each application will be uniform as to format and sequence.
Each application should clearly demonstrate the applicant's capability,
knowledge, and experience in regard to the requirements described herein.
31
Applicants should fully address the requirements of Notice 2007-53 and this
request and not rely on the presumed background knowledge of reviewers.
DOE may reject an application that does not follow the instructions regarding the
organization and content of the application when the nature of the deviation
and/or omission precludes meaningful review of the application.
B.
Unnecessarily Elaborate Applications
Unnecessarily elaborate brochures or other presentations beyond those sufficient
to present a complete and effective application are not desired. Elaborate art
work, graphics and pictures are neither required nor encouraged.
C.
Application Submission for DOE Certification
The application submission to DOE must include the information and
documentation required by sections 5.02, 6.01, and 6.02 of Notice 2007-53.
An application will not be considered in the allocation round conducted in 200708 unless it is postmarked by October 31, 2007, and will not be considered in the
allocation round conducted in 2008-09 unless it is postmarked by October 31,
2008. Two paper copies and one electronic version on a floppy disc or a CD of
the Application must be submitted to:
Melissa Robe
National Energy Technology Laboratory
3610 Collins Ferry Road
Morgantown, WV 26507
Note that under section 5.03(1) of Notice 2007-53, one paper copy and one
electronic version must be sent to the IRS as part of the application for IRS
certification. The application for IRS certification will not be considered in the
allocation round conducted in 2007-08 unless it is submitted to the IRS by March
3, 2008, and will not be considered in the allocation round conducted in 2008-09
unless it is submitted to the IRS by March 2, 2009.
THE INFORMATION REQUIRED BY THIS REQUEST MUST BE SUBMITTED
USING THE FORMAT AND THE HEADINGS OF THE PROJECT
INFORMATION MEMORANDUM AS DESCRIBED BELOW.
To aid in evaluation, applications shall be clearly and concisely written and
logically assembled. All pages of each part shall be appropriately numbered and
identified with the name of the applicant and the date.
The application, including the Project Information Memorandum, MUST be
32
formatted in one of the following software applications:
Microsoft Word tm 2002 or later edition
Microsoft Excel tm 2002 or later edition
Adobe Acrobae m PDF 6.0 or later edition
Financial models should be submitted using the Excel tm spreadsheet and must
include calculation formulas and assumptions.
The applicant is responsible for the integrity and structure of the electronic files.
The DOE will not be responsible for reformatting, restructuring or converting any
files submitted under this announcement.
The Project Information Memorandum, excluding Appendices, shall not exceed
seventy-five (75) pages. Pages in excess of the page limitation will not be
considered for evaluation. All text shall be typed, single spaced, using 12 point
font, 1 inch margins, and unreduced 8-1/2-inch by 11-inch pages. Illustrations
and charts shall be legible with all text in legible font. Pages shall be sequentially
numbered. Except as otherwise noted herein the page guidelines previously set
forth constitute a limitation on the total amount of material that may be submitted
for evaluation. No material may be incorporated in any application by reference
as a means to circumvent the page limitation.
D.
Form of Project Information Memorandum
PROJECT INFORMATION MEMORANDUM
I.
SUMMARY AND INTRODUCTION
Description of the Project
Financing and Ownership Structure
Describe the main parties to the project, including background,
ownership and related experience
Current Project Status and Schedule to Beginning of Construction
II.
TECHNOLOGY AND TECHNICAL INFORMATION
Provide a description of the proposed technology, including sufficient
supporting information (such as vendor guarantees, process flow
diagrams, equipment descriptions, information on each major process unit
and the total plant, compositions of major streams, and the technical plan
for achieving the goals proposed for the project) as would be needed to
allow DOE to confirm that the technical requirements of § 48B are met.
Specifically, the applicant should:
33
Provide evidence sufficient to demonstrate that the proposed
technology will employ gasification technology as defined in §
48B(c)(2).
Present information sufficient to justify the total amount of synthesis
gas (as defined in § 48B(c)(2)) to be produced by the project
(synthesis gas capacity). Provide the total MMBtu/hr of the syngas
(HHV) at the gasifier outlet.
Provide evidence sufficient to ensure that fuels defined in § 48B(c)(2)
will comprise 90 percent of the total fuel input (fuels defined in
§ 48B(c)(2) and any other fuel input) for the project. Provide the total
quantities of CO, H2, CH4, C02, and water in the syngas.
Identify the domestic industry for which the proposed project is
intended to be used.
Identify the specific products and quantities produced by the proposed
project, providing sufficient evidence to support claims.
Provide evidence that indicates, for projects using non renewable
fuels, the gasification technology design reflects reasonable
consideration for, and is capable of, accommodating equipment
necessary to capture carbon dioxide for later use or sequestration.
Include the project status and relevant information from ongoing
engineering activities. Also include in an appendix any engineering
report or reports used by the applicant to develop the project and to
estimate costs and operating performance.
III
Applicant's Capability to Accomplish the Technical Objectives
Provide a narrative supporting the applicant's capability to accomplish the
technical objectives of the proposed project, including supporting
documentation demonstrating that the applicant has assembled a team
that is formally committed to participate in the proposed project.
Provide information to support that the applicant has assembled a
team with the skills and resources needed to implement the project as
proposed. Provide signed agreements or letters from team members
demonstrating that the proposed team members are fully committed to
the project.
Provide information, including examples of prior similar projects
completed by applicant, EPC contractor, and suppliers of major
subsystems or equipment, which support the capabilities of the
applicant and its team members to design, construct, permit, and
operate the facility. The applicant should demonstrate that the team
members have a corporate history of successful completion of similar
projects.
Provide information to support that key personnel of the applicant and
its team members have knowledge, experience, and adequate degree
of involvement to successfully implement the project.
34
Include the project status and relevant information from ongoing
engineering activities. Also include in an appendix any engineering
report or reports used by the applicant to develop the project and to
estimate costs and operating performance. Included copies of any
signed agreements to support project status claims regarding
preliminary design studies, FEED, and EPC-type agreements.
IV.
SITE CONTROL AND OWNERSHIP
Provide evidence that the applicant owns or controls a site in the
United States of sufficient size to allow the proposed project to be
constructed and operated on a long-term basis. Documentation such
as a deed demonstrating the applicant owns the project site, a signed
option to purchase the site from the site owner, or a letter of intent by
the site owner to sell the site to the applicant should be provided.
Describe the current infrastructure at the site available to meet the
needs of the project.
Provide documentation supporting applicant's conclusion that the
proposed site can fully meet all environmental, feedstock supply, water
supply, transportation and public policy requirements. Such
documentation may include signed agreements, letters of intent, or
term sheets, such as coal supply, water supply, and product
transportation etc., and regulatory approvals supporting the key claims.
Provide detailed plans, schedules and status updates, particularly, for
sites with pre-existing conditions that could impact the proposed
project. Pre-existing conditions may include, but are not limited to,
sites with mandated environmental remediation efforts; brown-field
sites that will require building demolition; or sites requiring substantial
rerouting of existing roads, railroads, or pipelines prior to the start of
the project.
Applicants must select one "proposed site." However, projects with
key physical or logistical elements that require close integration with
another system for the project to succeed should provide information
on all integrated systems regardless of where they are located.
Example 1: a gasification plant designed to operate exclusively on
coals from a to-be-opened mine should provide supporting
documentation for the new mine. Example 2: an oxygen-blown
gasification plant planning to purchase oxygen from a third party who
will construct a plant exclusively for this project should provide
documentation for the oxygen supplier.
V.
UTILIZATION OF PROJECT OUTPUT
Provide evidence that a market exists for the products of the proposed
project as evidenced by contracts or written statements of intent from
potential customers. Such documentation should be signed by
35
authorizing officials by both the buyer and seller, and may include:
Sales Agreements, Letters of Intent. Memoranda of Understanding,
and Option Agreements.
Describe any sales arrangements that exist or that may be
contemplated and summaries of their key terms and conditions.
Include as an appendix any independent Market Study that has been
done in connection with this project. or if no independent market study
has been completed. provide a copy of the applicant-prepared market
study.
VI.
PROJECT ECONOMICS
Describe the project economics and provide satisfactory evidence of
economic feasibility as demonstrated through the financial forecast and
the underlying project assumptions. The project economic and financial
assumptions should be clearly stated and explained.
Discuss the market potential for the proposed technology beyond the
project proposed by the applicant.
Show calculation for the amount of tax credit applied for based on
allowable cost.
VII.
PROJECT DEVELOPMENT AND FINANCIAL PLAN
Provide the total project budget and major plant costs (~, development.
operating. capital, construction. and finanCing costS). Provide the
estimated annual budget for and source of project development costs from
the time of the application until the beginning of construction. including
legal. engineering. financial. environmental, overhead. and other
development costs. Describe the overall approach to project development
and financing sufficient to demonstrate project viability. Provide a
complete explanation of the source and amount of project equity. Proiide
a complete explanation of the source and amount of project debt. Pro'/ide
the audited financial statements for the applicant for the most recently
ended three fiscal years. and the unaudited quarterly interim financial
statements for the current fiscal year for (a) the applicant. (b) for any of the
project parties providing funding. and (C) for any third party funding
source. If the applicant or another party does not have audited financial
statements. the applicant or the party should pro'lide equi/alent financial
statements prepared by the applicant or the party. in accordance .'1ith
Generally Accepted Accounting Principles. and certified as to accurac/
and completeness by the Chief Financial Officer of the part] proliding the
statements. Applicant should demonstrate that the aNard recipient is
finanCially viable without the receipt of additional federal funding
associated with the proposed project.
36
For internally financed projects, provide evidence that the applicant has
sufficient assets to fund the project with its own resources. Identify any
internal approvals required to commit such assets. Include in an appendix
copies of any board resolution or other approval authorizing the applicant
to commit funds and proceed with the project.
For projects financed through debt instruments either unsecured or
secured by assets other than the project, provide evidence that the
applicant has sufficient creditworthiness to obtain such financing along
with a discussion of the status of such instruments. Identify any internal
approvals required to commit the applicant to pursue such financing.
Include in an appendix, copies of any board resolution or other approval
authorizing the applicant to commit to such financing.
For projects financed through investor equity contributions, discuss the
source and status of each contribution. Discuss each investor's financial
capability to meet its commitments. Include in an appendix, copies of any
executed investment agreements.
If financing through a public offering or private placement of either debt or
equity is planned for the project, provide the expected debt rating for the
issue and an explanation of applicant's justification for the rating.
Describe the status of any discussions with prospective investment
bankers or other financial advisors.
For projects employing nonrecourse debt financing, provide a complete
discussion of the approach to, and status of, such financing. In an
appendix, provide (1) an Excel based financial model of the project, with
formulas, so that review of the model calculations and assumptions may
be facilitated; provide pro-forma project financial, economic, capital cost,
and operating assumptions, including detail of all project capital costs,
development costs, interest during construction, other operating
expenses, and all other costs and expenses.
VIII.
PROJECT CONTRACT STRUCTURE
Describe the current status of each of the agreements set forth below.
Include as an appendix copies of the contracts or summaries of the key
provisions of each of the following agreements:
Raw Material Input Supply: describe the source and price of raw
material inputs for the project. Include as an appendix any studies of
price and amount of raw materials that have been prepared. Include a
summary of any supply contracts and a signed copy of the contracts.
37
•
IX.
Transportation: explain the arrangements for transporting project
inputs and outputs, including costs.
Operations & Maintenance Agreement: include a summary of the
terms and conditions of the contract and a copy of the contract.
Shareholders Agreement: summarize key terms and include the
agreement as an appendix.
Engineering, Procurement and Construction Agreement: describe the
key terms of the existing or expected EPC contract arrangement,
including firm price, liquidated damages, hold-backs, performance
guarantees, etc.
Water Supply Agreement: confirm the amount, source, and cost of
water supply.
PERMITS INCLUDING ENVIRONMENTAL AUTHORIZATIONS
Provide a complete list of all federal, state, and local permits, including
environmental authorizations or reviews, necessary to commence
construction of the project.
Explain what actions have been taken to date to satisfy the required
authorizations and reviews, and the status of each.
Provide a description of the applicant's plan to obtain and complete all
necessary permits, and environmental authorizations and reviews.
Existing permits and permit applications must be specific to the project
proposed. If existing permits are not specific for the proposed project
(i.e. permits for oil-fired or natural gas-based systems), specific plans,
procedures and schedules for reapplying, modifying and/or
renegotiating permits should be provided.
X.
PROJECT SCHEDULE
Provide an overall project schedule which includes technical, business,
financial, permitting and other factors to substantiate that the project
will meet the 7 year requirement for placing the plant in service.
The project schedule should be comprehensive and provide sufficient
detail to demonstrate how applicant will meet the placed-in-service
requirement. The schedule should demonstrate that the applicant
understands the required tasks, and has allowed realistic times for
accomplishing the technical and financial tasks. The schedule should
include the milestone accomplishments needed to obtain the financing
for the project.
APPENDICES
•
Copy of internal or external engineering reports .
38
•
•
E.
Copy of site plan, together with evidence that applicant owns or controls a
site. Examples of evidence would include a deed, or an executed contract
to purchase or lease the site.
Information supporting applicant's conclusion that the site is fully
acceptable as the project site with respect to environment, raw material
supply, water supply, and public policy reasons.
Project Market Study.
Financial Model of project.
Financial statements for the applicant and other project funding sources
for the most recently ended three fiscal years, and the unaudited quarterly
interim financial statements for the current fiscal year.
Expressions of interest or commitment letters from funding sources.
For each project contract, if no contract currently exists, provide a
summary of the expected terms and conditions.
List of all federal, state, and local permits, including environmental
authorizations or reviews, necessary to commence construction.
Copies of any contract or written statements from customers of intent to
purchase project products.
Evaluation Criteria:
Industrial Gasification Projects: will be evaluated on whether they meet all the
requirements of § 488.
Technical: will be evaluated on whether the applicant has demonstrated the
capability to accomplish the technical objectives.
Site: will be evaluated on the basis that the site requirement for ownership or
control has been met, and that the site is suitable for the proposed project.
Economic: will be evaluated on whether the project has demonstrated economic
feasibility, taking into consideration the submitted financial and project
development and structural information and financial plan.
Schedule: will be evaluated on the applicant's ability to meet the 7 year placedin-service requirement.
F.
Program Policy Factors to be used by DOE in the evaluation of
applications
Section 488 identifies minimum requirements for consideration for the qualifying
gasification project credit, including the project's technical feasibility, cost, and
applicant's ability. In the event that there are more qualified (certifiable)
applications than there are available tax credits, the DOE will apply additional
factors to rank eligible projects based on their ability to advance the deployment
of industrial gasification technology beyond its current state.
39
If there are two or more certified applications than available credits, DOE will
rank the certified projects in descending order (that is, first, second, third, etc.),
based on evaluation of the following Program Policy Factors. Factors 1, 2, and
3 are Primary Ranking Factors. A certified project that satisfies one of these
factors will be ranked ahead of each project that satisfies only factors listed
below that factor. Specifically, all certified projects satisfying Factor 1 will be
selected before any project that does not satisfy Factor 1; all projects satisfying
Factor 2 will be ranked ahead of any project that satisfies only Factor 3 and/or
one or more Secondary Ranking Factors; and all projects satisfying Factor 3 will
be ranked ahead of any project that does not satisfy any Primary Ranking
Factors.
Primary Ranking Factors:
1. Capture and sequestration of 50 percent or more of carbon dioxide
emissions. Only projects capturing and sequestering 50 percent or more
of the plant's carbon dioxide emissions will satisfy this factor. Within this
factor, higher rankings will be given to those projects capturing and
sequestering higher percentages of plant carbon dioxide emissions.
2. Use of advanced technologies that optimize the plant for future carbon
dioxide capture (for example, gasifier sizing and pressure, air separation
unit sizing, and quench system) as well as systems that are designed to
capture and sequester less than 50 percent of the carbon dioxide. Within
this factor, higher rankings will be given to those projects capturing and
sequestering higher percentages of plant carbon dioxide emissions and/or
requiring less retrofitting to implement greater than 50 percent carbon
capture and sequestration.
3. Location of the facility within 25 miles of potential carbon sequestration
locations and carbon dioxide (C02) pipelines or pipeline easements.
Within this factor, higher rankings will be given to those projects with the
facility located closer to potential carbon sequestration locations and
carbon dioxide (C02) pipelines or pipeline easements.
Secondary Ranking Factors:
Location of the facility relative to potential carbon sequestration
locations and carbon dioxide (C02) pipelines or pipeline easements
(for facilities not meeting Factor 3).
Presentation of other environmental, economic, or performance
benefits (including priority factors that are listed in section 5.02(9) of
Notice 2007-53 and are not included in the Primary Ranking Factors).
40
Higher plant efficiency.
Geographic distribution of potential markets.
The ratio of total synthesis gas capacity (as defined in section 3.03 of
Notice 2007-53) to requested tax credit.
Diversity of technology approaches and methods.
G.
Supplemental Technical and Financial Guidance for Section D
"Project Information Memorandum"
Technology and Technical Information
•
It is important that the applicant select a specific gasification system for
their project. Without that decision, it is difficult to provide the necessary
specific design information needed for DOE to evaluate the project
feasibility with respect to performance, emissions, outputs of major
streams as well as capital and operating costs.
Project Economics
•
Applicants should demonstrate the project's economic feasibility and
financial viability by providing a clear statement and explanation of the
economic and financial assumptions made by the applicant, and a
financial forecast for the project. The financial forecast should flow
logically from the applicant's assumptions and be consistent with them.
Applicants should include assumptions regarding financial and economic
issues that may not be included in the project costs but have a direct
impact on the project. The examples given in the "Site Control and
Ownership" section are relevant here and their impact on the project
economics should be discussed here.
Project Development and Financial Plan
•
The information provided by the applicant in this section should
demonstrate that the applicant's financial plan for developing the project is
feasible and that the applicant will have access to necessary financing.
The applicant should explain the source and timing for obtaining all
financing, including the project development costs. It is important that the
applicant explain and provide evidence that it has the capacity to fund the
pre-construction project development costs, together with a budget for and
description of those costs. Note that financial information is required for
41
the applicant and for any other funding source.
Project Contract Structure
This section requires that the applicant demonstrate an understanding of
the commercial contracting process and show progress in establishing the
framework of contracts and agreements that a project typically requires.
Applicants should show that their intended contract structure is reasonable
and that their assumptions relative to price, terms, and conditions are
consistent with current market conditions. Evidence of final agreements,
agreements in principle, or summaries of terms and conditions between
the applicant and contract counterparties should be provided, if available.
42
APPENDIX C
CONSENT TO PUBLIC DISCLOSURE
OF CERTAIN QUALIFYING GASIFICATION PROJECT PROGRAM
APPLICATION INFORMATION
In the event that the Application for § 48B Certification of [(Insert name of
applicant-taxpayer here):
1(the ApplicantTaxpayer) for an allocation of qualifying gasification project credits under section
48B of the Internal Revenue Code is approved, the undersigned authorized
representative of the Applicant-Taxpayer hereby consents to the disclosure by
the Internal Revenue Service through publication of a Notice in the Internal
Revenue Bulletin or a press release of: (1) the name of the Applicant-Taxpayer;
(2) if the Applicant-Taxpayer is a member of an affiliated group filing consolidated
returns, the name of the common parent of the group; (3) the type and location of
the project that is the subject of the Application for § 48B Certification; and (4) the
amount of the allocation, if any, of qualifying gasification project credits for such
project. The undersigned understands that this information might be published,
broadcast, discussed, or otherwise disseminated in the public record.
This authorization shall become effective upon the execution thereof. Except to
the extent disclosure is authorized herein, the returns and return information of
the undersigned taxpayer are confidential and are protected by law under the
Internal Revenue Code.
I certify that I have the authority to execute this consent to disclose on behalf of
the taxpayer named below.
Date: _ _ _ _ _ _ __
Signature:
Print name:
Title:
Name of Applicant-Taxpayer: _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
Taxpayer Identification Number: _ _ _ _ _ _ _ _ _ _ _ _ _ __
Taxpayer's Address:
43
Note: Treasury Regulations require that the Internal Revenue Service must
receive this consent within 60 days after it is signed and dated.
44
Page 1 of2
PRESS ROOM
June 7, 2007
HP-443
Treasury's CDFI Fund Lends a Hand to Gulf Coast
Fund Director, Advisory Board Visit Area Developments Made Possible by
CDFI
Washington, DC- The Treasury Department's Community Development Financial
Institutions Fund visits the Gulf Coast this week to discuss the area's recovery after
Hurricane Katrina, break ground for a housing development made possible through
the CDFI Fund's New Markets Tax Credit Program and learn how the Fund can
provide further assistance to attract private sector investment.
CDFI Fund Director Kimberly A. Reed also requested that the Community
Development Advisory Board, which advises the director on policy matters, hold its
annual meeting in New Orleans, La. today, the first time that the board has met
outside of Washington, D.C.
"I am committed to helping those affected by Hurricane Katrina, and I want the
Community Development Advisory Board to see firsthand how the CDFI Fund's
programs, including $1 billion in New Markets Tax Credits for the Gulf Opportunity
Zone, can attract private sector capital investment and provide critically needed
financial education and services. More importantly, we are learning what else the
CDFI Fund can do to help these communities become better and stronger," said
Director Reed.
The Congressionally-created Community Development Advisory Board today will
receive a presentation by President George W. Bush's Office of Federal Support for
Gulf Coast Recovery and Rebuilding, a bus tour of revitalization projects financed
in-part through CDFI Fund awards and presentations by CDFI Fund staff and
experts on key community development topics.
The advisory board consists of 15 members, including the Secretary of the
Departments of Agriculture, Commerce, Housing and Urban Development, Interior
and Treasury and the Administrator of the Small Business Administration, or his or
her designee; and nine private citizens appointed by the President.
"Secretary Paulson and Director Reed have reinvigorated the CDFI Fund's
commitment to restoring the Gulf Coast," said Don Powell, the President's Federal
Coordinator for Gulf Coast Rebuilding. "We appreciate all the Treasury has done so
far for this region and the Department's continued commitment to helping us
rebuild'"
The Director met earlier this week with families who received assistance from
organizations supported by the CDFI Fund and she visited a financial counseling
center that is helping Mississippi families as they rebuild their homes. Advisory
Board Chairman Bill Bynum and Director Reed also visited Jackson, Gulfport, and
Biloxi, Miss. to meet with U.S. and local official offices and area businesses.
In the aftermath of Hurricane Katrina, the CDFI Fund has been focused on
revitalizing Gulf Coast communities The U.S. Treasury Department announced
changes to the NMTC application materials as a first step to be helpful on
September 9, 2005, in Mobile, Ala. President Bush signed the Gulf Opportunity
Zone (GO Zone) Act in December 2005 to help create jobs and spur development
by providing tax relief for businesses and entrepreneurs in Louisiana, Mississippi,
and Alabama. As part of this legislation, the CDFI Fund is providing $1 billion in
http://www.treas.~ov/press/releases/hp443.htm
7/5/2007
Page 2 of2
federal tax incentives through its NMTC Program. $600 million in tax credits were
awarded in June 2006, less than six months after the GO Zone legislation was
enacted, and the final $400 'million will be awarded in the fall of 2007 as part of the
$3.9 billion 2007 NMTC application round.
For more information on the CDFI Fund and its program please visit
wwvVcdflfund.gov.
http: //w ww.treas.gov/press/releaseslbp443.htm
7/512007
Page I of I
June 7, 2007
hp-444
Secretary Paulson to Deliver Remarks on Treasury's Role in National Security
Treasury Secretary Henry M. Paulson. Jr. will deliver remarks before the Council on
Foreign Relations in New York City focusing on the Treasury Department's role in
national security.
Who
Secretary Henry M. Paulson, Jr.
What
Remarks before the Council on Foreign Relations
When
Thursday. June 14, 8:00 a.m. EDT
Where
The Council on Foreign Relations
The Harold Pratt House
58 East 68th Street
New York, NY 10021
Note
Media must pre-register with CFR at nypressrsvp@cfr.org.
- 30-
http://www.tr~r.s.go\.Jj1rcss/n:iLt:lt.;:)·j:r144.htm
11512007
P<lgc I of 2
June 8,2007
HP-445
Task Force on New Americans to Announce Initiatives
to Help Immigrants Transition into American Culture
U.S. Treasurer Anna Escobedo Cabral will join officials from five Administration
agencies and departments on Tuesday, June 12, to announce the Task Force on
New Americans' first major initiatives and launch the federal government's website
for new immigrants, WelcometoUSA.gov.
The Task Force on New Americans will highlight programs and initiatives to help
legal immigrants embrace the common core of American civic culture, learn our
common language and fully become Americans.
Other participating leaders of the task force member federal agencies include
Emilio Gonzalez, Director, U.S. Citizenship and Immigration Services; James
Williams, Commissioner, Federal Acquisition Service, General Services
Administration; Martha Newton, Director, Office of Refugee Resettlement,
Department of Health and Human Services; William Turri, Acting Public Printer,
Government Printing Office; Desiree Sayle, Special Assistant to the President and
Director, USA Freedom Corps; and Alfonso Aguilar, Chief, Office of Citizenship,
USC IS.
Who
Treasurer Anna Escobedo Cabral
What
Task Force on New Americans Press Conference
When
Tuesday, June 12, 10:00 a.m. EDT
Where
Department of Treasury
Media Room 4121 A
1500 Pennsylvania Avenue, NW
Washington, DC
Note
Media without Treasury press credentials should contact Frances Anderson at
(202)622-2960, or frances.anderson@do.treas.gov with the following information:
name, Social Security number, and date of birth.
hUp:llwww.treris.gm . plt.:~;/.ITc.l<.-.l~ .•--445.htm
/ !j!2()()7
Page 1 of 1
June 8, 2007
HP-446
Deputy Secretary Kimmitt to Deliver Remarks
on the Importance of International Investment
U.S. Treasury Deputy Secretary Robert M. Kimmitt will make remarks on the
importance of international investment and Treasury's role in protecting national
security to the Atlantic Council next week as part of its Global Leadership Series.
Who
Deputy Secretary Robert M. Kimmitt
What
Remarks to The Atlantic Council on "The Importance of Open Economies:
international Investment and the Protection of National Security"
When
Tuesday, June 12,2007,5:30 p.m. EDT
Where
The Atlantic Council of the United States
11 01 Fifteenth Street, N.w., 11th floor
Washington, D.C.
Note:
Media must pre-register for this event. Please contact Elena Pak at (202) 778-4967
or epak@acus.org to RSVP if planning on attending.
http://www.tre~s.gov/press/releasesJ11fJ..~46.htm
)15/2007
Page I of3
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June 8, 2007
HP-447
Treasury Takes Additional Measures to
Combat Iranian WMD Proliferation
Iranian Nuclear & Missile Firms Targeted
The U.S. Department of the Treasury today designated four Iranian companies,
Pars Tarash (a/k/a Pars Trash Company), Farayand Technique, Fajr Industries
Group, and Mizan Machine Manufacturing Group, for their role in Iran's proliferation
of weapons of mass destruction.
This action was taken pursuant to Executive Order 13382, an authority aimed at
freezing the assets of proliferators of weapons of mass destruction (WMD) and their
supporters. Designations under E.O. 13382 are implemented by Treasury's Office
of Foreign Assets Control (OFAC), and they prohibit all transactions between the
designees and any U.S. person and freeze any assets the designees may have
under U.S. jurisdiction.
"So long as Iran continues to pursue a nuclear program in defiance of the
international community's calls to halt enrichment, we will continue to hold those
responsible to account for their conduct," said Stuart Levey, Under Secretary for
Terrorism and Financial Intelligence (TFI).
Pars Tarash and Farayand Technique are owned or controlled by, or act or purport
to act for or on behalf of the Atomic Energy Organization of Iran (AEOI) and/or the
Kalaye Electric Company, an AEOI subsidiary designated by OFAC on February
16,2007.
The AEOI manages Iran's overall nuclear program and reports directly to the
Iranian president. Identified by President George W. Bush in the Annex to E.O.
13382, the AEOI is the main Iranian institute for research and development
activities in the field of nuclear technology, including Iran's centrifuge enrichment
program and experimental laser enrichment of uranium program.
The AEOI is named in the Annex to United Nations Security Council Resolution
(UNSCR) 1737 for its involvement in Iran's nuclear program. Pars Tarash and
Farayand Technique were also listed in the Annex to UNSCR 1737 for their
involvement in Iran's centrifuge program and were identified in reports of the
International Atomic Energy Organization (IAEA).
According to IAEA reports, Iran disclosed the existence of these two entities in
October of 2003, and indicated that they were involved in the domestic production
of centrifuge components. It was revealed to the IAEA in January 2004 that Pars
Tarash and Farayand were subsidiaries of the Kalaye Electric Company, an AEOI
subsidiary. Farayand Technique has had a number of different roles in Iran's
centrifuge enrichment program, and performs quality control on components used
at the uranium enrichment facility at Natanz. Farayand Technique also has
capabilities suitable for the testing and assembly of centrifuges. Pars Tarash has
been identified by the IAEA as a site used by Natanz and the Kalaye Electric
Company to store centrifuge equipment.
Also designated today are Fajr Industries Group and Mizan Machine Manufacturing
Group, two entities owned or controlled by, or acting or purporting to act for or on
behalf of Iran's Aerospace Industries Organization (AIO). The AIO, which was also
http://www.tr~.:.s.gov/presslreleaSes/llJj..1.17.htm
//)/1.00/
Page 2 or 3
Iranian Ministry of Defense and Armed Forces Logistics, and is the overall manager
and coordinator of Iran's missile program.
Fajr Industries Group is subordinate to the AIO and involved in the production and
acquisition of precision equipment for missile guidance and control systems. Fajr
has consistently procured a wide range of missile guidance and control equipment
on behalf of the AIO over the years. Since the late 1990s, Fajr has purchased high
strength steel alloy, useful for guidance equipment in ballistic missiles and missilerelated technology and items. Fajr Industries Group was also identified in the
Annex to UNSCR 1737 for its involvement in Iran's ballistic missile program.
Mizan Machine Manufacturing Group is one of several front companies utilized by
AIO in commercial transactions. In particular, Mizan Machine Manufacturing Group
has been used by AIO to acquire sensitive material for Iran's ballistic missile
program. For example, in April 2005, Mizan Machine Manufacturing Group
purchased a state-of-the-art crane for Iran's weapons program. An investigation of
this transaction determined the crane was probably intended for use in Iran's
Shahab missile program. Cranes can be used to support missiles, like the Shahab,
in the field or at storage facilities.
Mizan Machine Manufacturing Group has also acted on behalf of the Shahid
Hemmat Industrial Group (SHIG), a subordinate entity of the AIO which is listed in
UNSCR 1737 for its direct role in advancing Iran's ballistic missile program. In
2005, Mizan Machine Manufacturing Group was connected to the acquisition of
equipment, on behalf of SHIG, that could be used to calibrate guidance and control
instruments for more accurate targeting of Iran's ballistic missiles.
Background on E.O.13382
Today's action builds on President Bush's issuance of E.O. 13382 on June 29,
2005. Recognizing the need for additional tools to combat the proliferation of
WMD, the President signed the E.O. authorizing the imposition of strong financial
sanctions against not only WMD proliferators, but also entities and individuals
providing support or services to them.
In the Annex to E.O. 13382, the President identified eight entities operating in North
Korea, Iran, and Syria for their support of WMD proliferation. E.O. 13382
authorizes the Secretary of the Treasury, in consultation with the Secretary of State,
the Attorney General, and other relevant agencies, to designate additional entities
and individuals providing support or services to the entities identified in the Annex
to the Order.
In addition to the entities identified in the annex of E.O. 13382, the Treasury
Department has designated thirty entities and two individuals as proliferators of
WMD, specifically:
• Eight North Korean entities on October 21, 2005;
• Two Iranian entities on January 4, 2006;
• One Swiss entity and one SwiSS individual tied to North Korean proliferation
activity on March 30, 2006;
• Four Chinese entities and one U.S. entity tied to Iranian proliferation activity
on June 8, 2006.
• Two Iranian entities on July 18, 2006;
• Three Syrian entities on January 4, 2007;
• One Iranian entity, one British entity, and one individual tied to Iranian
missile proliferation on January 9, 2007;
• Three Iranian entities on February 16, 2007; and
• Four Iranian entities on June 8, 2007.
The designation announced today is part of the ongoing interagency effort by the
United States Govemment to combat WMD trafficking by blocking the property of
entities and individuals that engage in proliferation activities and their support
networks.
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10 VIew or pnnt rne fJUr content on tms page. dOwnlOad rne Tree I\c/o/m'.) Acronat"" f«IfI(/or~.'.
June 8, 2007
HP-448
Secretary Paulson to Participate in Americas
Competitiveness Forum in Atlanta
Treasury Secretary Henry M. Paulson, Jr. will participate in the inaugural
conference next week of the Americas Competitiveness Forum hosted by
Commerce Secretary Carlos Gutierrez. In the opening session of the second day of
the forum Secretary Paulson will deliver keynote remarks focusing on efforts to
bring new economic opportunities, continued poverty reduction and an expanded
middle class to this hemisphere. Secretary Paulson will announce a new initiative to
expand lending to small businesses that currently have little access to financing.
The forum will bring key public and private-sector leaders together to discuss ways
to increase competitiveness in the Western Hemisphere. It will facilitate the sharing
of ideas and examples of success from other countries in the region in education,
innovation, supply chain strategies, workforce development and small business
development growth. For more information on the forum go to:
http://www.ita.doc.gov/competitiveness/ACF/index.asp
Who
Secretary Henry M. Paulson, Jr.
What
Opening Plenary Remarks
When
Tuesday, June 12, 8:30 a.m. (EDT)
Where
Atlanta Marriott Marquis Hotel
265 Peachtree Center Avenue
Marquis Ballroom B-D
Atlanta, Georgia
Who
Secretary Henry M. Paulson, Jr.
Commerce Secretary Carlos Gutierrez
What
Joint Press Briefing
When
Tuesday, June 12, 9:30 a.m. (EDT)
Where
Atlanta Marriott Marquis Hotel
265 Peachtree Center Avenue
Lobby Level, L506
Atlanta, Georgia
Note
Media must complete application and submit it to the Commerce Department's
International Trade Administration Office of Public
Affairs: http://lrade.gov/compelillveness/ACF/acCmedia_credenlial_form.pdf
7/5/2007
Page I of 1
June 11. 2007
HP-449
Treasury to Release Semiannual Report on International Economic and
Exchange Rate Policies Wednesday
The Treasury Department will release its Semiannual Report on International
Economic and Exchange Rate Policies at 10 a.m. (EDT) on Wednesday. June 13.
A copy of the report will be posted at: hltp:iiwww.treasurygov/offices/internationalaffa irsf econo Illlc-ex c 113 nge-r3 tes!.
):!lwww.trea~.g6v/press!releases ... u449.htm
7/5/2007
Page I 01'5
June 11, 2007
2007-6-11-12-38-17-294
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S.
reserve assets totaled $65,624 million as of the end of that week, compared to $65,755 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
I
IA. Official reserve assets (in US millions unless otherwise speCified)
II
IIJune 8, 2007
IIEuro
liVen
IIrotal
II
11 12,763
II
1110,434
1123 ,197
lof which: issuer headquartered in reporting country but located abroad
II
II
110
I(bl total currency and deposits with:
II
II
115,124
II
1117,947
110
1(1} Foreian currency reserves (in convertible foreign currencies)
I(al Securities
I(i) other national central banks, BIS and IMF
12,823
Iii) banks headquartered in the reportina country
II
lof which: located abroad
II
I(iii} banks headquartered outside the reporting country
1(211MF reserve position
1(3)SDRs
114,466
118 ,972
1(41 gold ~including gold deposits and, if appropriate, gold swapped)
11 11 ,041
11261.499
I--volume in millions of fine troy ounces
110
110
II
]1
lof which: located in the reporting country
1(5) other reserve assets (specify)
1165,624
110
0
I-financial derivatives
I--Ioans to nonbank nonresidents
I--other
lB. Other foreign currenc~ assets (specify)
I-securities not included in official reserve assets
I--deposits not included in official reserve assets
E-Ioans not included in official reserve assets
-financial derivatives not included in official reserve assets
I-~Id not included in official reserve assets
[ --other
II
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
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[
[
II
II
II
I11.
Total
"
I
IIprincipal
I
I--inflows (+)
IIlnterest
I
IIlnterest
"
I
More than 3
months and up to
1 year
More than 1 and
up to 3 months
Up 101 monlh
Foreign currency loans, securities, and deposits
I--outflows (-)
I
II
II
IIMaturity breakdown (residual maturity)
II
IIprincipal
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
(a) Short positions ( - )
(b) Long positions (+)
I
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
I
--other accounts payable (-)
I
II
II
--other accounts receivable (+)
II
II
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
I
I
II
II
II
I
II
I Maturity breakdown (residual maturity, where
applicable)
II
Up to 1 month
Total
11. Contingent liabilities in foreign currency.
(a) Collateral guarantees on debt falling due within 1
year
More than 3
months and up to
1 year
More than 1 and
up to 3 months
II
I
II
I
I(b) Other contingent liabilities
II
I
I
2. Foreign currency securities issued with embedded
options (putlable bonds)
13. Undrawn, unconditional credit lines provided by:
I
(a) other national monetary authorities, 81S, IMF, and
other international organizations
t-other national monetary authorities (+)
[--BIS (+)
I--IMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
I
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I
II
II
7/5/2007
Page 3 or .s
(c) with banks and other financial institutions
headquartered outside the reporting country (+)
II
[Undrawn, unconditional credit lines provided to:
/I
r~~
/I
II
II
~
~
~
I-other national monetary authorities (-)
I-BIS (-)
I-IMF(-)
(b) banks and other financial institutions headquartered
in reporting country (- )
~
~
~
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I(a) Short positions
I
I
I(i) Bought puts
I(ii) Written calls
I(b) Long positions
I(i) Bought calls
I(ii) Written puts
II
IPRO MEMORIA: In-the-money options 11
I
1(1 ) At current exchange rate
II
II
I(a) Short position
II
II
II
I(b) Long position
I
I
~
~
~
~
~
~
~
~
~
~
~
~
~
1(2) + 5 % (depreciation of 5%)
I(a) Short position
I(b) Long position
~
~
~
~
~
~
~
~
~
~
~
~
1(3) - 5 % (appreciation of 5%)
I(a) Short position
I(b) Long position
1(4) +10 % (depreciation of 10%)
I(a) Short position
I(b) Long position
I
1(5) - 10 % (appreciation of 10%)
I
I(a) Short position
I(b) Long position
1(6) Other (specify)
II
I(a) Short position
II
I
II
II
I(b) Long position
~
IC=~
(a) other national monetary authorities, 81S, IMF, and
other international organizations
IV. Memo items
[
II
~
~a) short-term domestic currency debt indexed to the exchange rate
II
~
~1) To be reported with standard periodicity and timeliness:
I~I======~
II(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic I
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I
7!5/2007
Page 4 of5
I
II
II
II
Icurrenc~)
--nondeliverable forwards
--short positions
--long positions
II
-other instruments
(c) pledged assets
I-included in reserve assets
1--inCluded in other foreign currency assets
I(d} securities lent and on repo
I--lent or repoed and included in Section I
I--lent or repoed but not included in Section I
I-borrowed or acquired and included in Section I
1--borrOWed or acquired but not included in Section I
I
I(e) financial derivative assets (net, marked to market)
I-forwards
I-futures
I--swaps
I--options
l-other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
lib) long positions (+)
I--asgregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
I{a) short positions
I(i) bought puts
I(iil written calls
I(b) long positions
!Ii) bought calls
I(ii) written puts
1(2~ To be disclosed less frequently:
I(a) currency composition of reserves (by groups of currencies)
1165,624
I-currencies in SDR basket
1165,624
I-·currencies not in SDR basket
II
I-by individual currencies (optional)
II
I
II
I
I
I
I
Notes:
1/ Indudes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked·
to-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Positlon" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation l by the U.S. Treasury to IMF data for the prior month
):jlwww.trea~.gov/press!releases/~l)07611123817294.htm
7/512007
Page 5 of'5
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
/1512007
Page I of 7
June 11, 2007
HP-450
Treasury Assistant Secretary for Financial Markets
Anthony W. Ryan
Remarks before the
Managed Funds Association Conference
Chicago- Good afternoon. Thank you for inviting me to join you here in Chicago.
It's a pleasure to be here.
There must be 300 people in the audience and collectively, you represent a
significant portion of the approximately $1.4 trillion in assets under management in
hedge funds. In addition, hedge funds represent anywhere from 30 to 60 percent of
trading activity, depending on the asset class or instrument. No wonder there has
been a lot of discussion regarding your impact on the financial markets. Private
pools of capital bring many advantages to our capital markets but also pose
challenges including systemic risk and investor protection.
While it is important to address both of these challenges, I would like to focus on
the issue of systemic risk. We will never eliminate the potential for systemic risk,
but we can seek to reduce the probability of it occurring and its impact. My purpose
today is to sensitize all of us as to how systemic risk operates and urge all
stakeholders in our capital markets to take the necessary steps to implement
policies, procedures and efforts to mitigate it.
Numbers
Let me begin by offering an observation. You like to quantify and measure things.
You quantify returns, risk, hurdles, assets under management, leverage, spreads,
premiums and discounts, drawdowns, locks ups and let's not forget fees.
Why do people like to quantify things so much? I would argue that people gain
comfort in being able to define and measure certain characteristics. In doing so,
they seek a framework and perspective in which to make assessments, draw
comparisons and make forecasts - frequently with a great deal of conviction. As a
group, you've gotten to be pretty good at defining characteristics and measuring
them.
That being said, I know you're a competitive lot and do not like to be outdone, but
another group has you beat. Like you they are passionate and committed to their
pursuit. This group also keeps copious and meticulous records, and makes fervent
prognostications. The group that I speak of is baseball fans.
In the investment community, one of the hardest things to do is to produce returns
with the least risk possible, hence the frequently mentioned goal of a high Sharpe
ratio. In baseball the same is true. Players seek to get hits with the least outs
possible with the ultimate goal being a high batting average.
Now baseball has been played for a long time. Players get several "at bats" per
game and they playa lot of games in a season. As a result, there is no shortage of
observations.
So how do hitters fare? Admittedly, hitting a major league pitch is a tough thing to
do. It is also perhaps unfair to make comparisons across history. Think about how
many more eligible players there are today and how well traint;d they are versus
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2 01'7
'-
when the game began over 100 years ago. Because you like to measure things, let
me share some numbers with you. The batting average for the entire major league
from 1876-1890 was .259. Now, one hundred years later, despite all of the
changes, the major league batting average for the decade ending in 1990 was .259.
[iJ
All of those games, all of those at bats, and the league batting average did not
change 1/1000. But, something did change during that period. During the first few
decades of play, there were 34 different batters that had a season batting average
over .400.[ii] Then, 11 years went by without a single player accomplishing the
goa\. Finally, in 1941, the Boston Red Sox' Ted Williams batted .406. During the
last 65 years not a single major leaguer has batted over .400.
I know that getting 4 out of 10 investment decisions correct on average is unlikely to
generate stellar returns, but in baseball it's likely to get you a ticket to the Hall of
Fame.
Now most of you probably have never heard of Stephen Jay Gould. He was not
some great hedge fund manager or professional baseball player, but he was a
prominent evolutionary biologist and Red Sox fan. He postulated that like many
other species through time, the .400 hitter has become extinct. Using statistical
measures - many of which are the same used by so many risk measurement
systems and trading desks today - he concluded that .400 averages were simply
outliers in the overall distribution of averages.[iii]
Gould wrote, "[V]ariation in batting averages must decrease as improving play
eliminates the rough edges that great players could exploit."[ivJ There has been a
compression of talent towards the league average; hence, the "tails of the
distribution" have shortened because of better play. This is true for the best
batters, as well as for those batters with the lowest averages. All players' batting
averages moved towards the mean, despite the mean not moving over time. It is
something to think about.
PWG
Let me return to hedge funds. As I am sure you are all aware, the policymakers
and regulators comprising the President's Working Group on Financial Markets
(PWG) have evaluated hedge funds over the years. The PWG is chaired by the
Secretary of the Treasury and also includes the chairmen of the Board of
Governors of the Federal Reserve System, the Securities and Exchange
Commission, and the Commodity Futures Trading Commission. Since 1988, the
PWG's overarching, non-partisan mission has been to maintain investor confidence
and enhance the integrity, efficiency, orderliness, and competitiveness of U.S.
financial markets.
Earlier this year the PWG released an agreement outlining its views on private
pools of capital, which include hedge funds. The PWG stated its collective belief
that the most effective mechanism to mitigate systemic risk is market discipline and
that a combination of market discipline and regulatory policies is the best way to
protect investors.
As I mentioned at the outset, I'd like to confine my remarks this afternoon to the
issue of systemic risk.
Systemic Risk
SystemiC risk can be defined as the potential that a single event, such as a financial
institution's loss or failure, may trigger broad dislocation or a series of defaults that
impact the financial system so significantly that the real economy is adversely
affected.
Some may posit that the increasing sophistication of risk management systems
coupled with other developments and efforts has placed systemic risk on the
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Page 3 01'7
endangered species list. For supportive proof they point to the lack of extensive
ripple effects upon the financial markets follOWing some relatively recent shocks.[v]
I'd like to elaborate why, given market conditions. I believe that subscribing to this
thesis is both potentially misleading and imprudent. Let's begin with answering the
question: how could a systemic risk event manifest itself? Meteorologists describe
atmospheric conditions conducive to producing a perfect stonn. WI1at are the
atmospherics for a perfect financial storm? While there would be several, let me
name a few: easy credit and leverage, highly correlated strategies, connected and
concentrated lenders, inadequate information, and underdeveloped financial market
infrastructure. Let's look at those elements more closely.
Credit and Leverage
We must understand the impact of the remarkable surge in liquidity available today
to borrowers, such as private pools.of capital. Interest rates around the world are
low and the competition to deploy this capital has evidenced itself in numerous
ways including declining lending standards. Institutions and investors have
exposure to balance sheet leverage, and perhaps more Importantly, embedded
leverage as a result of both simple and complex strategies and instruments they
utilize. We must ensure that the implications of this degree of leverage are well
understood.
Correlations
We should also consider the increase in the correlation of returns among hedge
funds. Returns moving in the same direction when facing similar market conditions
could suggest an increasing concentration of risk. Many will recall almost 10 years
ago, the markets received a real shock when a highly levered hedge fund imploded
as its diversification strategy was compromised by just such an occurrence of riSing
correlation.
In fact, we are seeing a rise in correlation of returns among hedge funds today.
The Federal Reserve Bank of New York recently commented on this and
appropriately highlighted an important difference between the rising correlation of
returns we witnessed a decade ago with what we see today. The recent increase In
correlation results mainly from a decline In the volatility of returns, While the earlier
rise was driven by high covariance.lvi] On the one hand that is comforting, but we
need to appreciate that covariance can increase and correlations can change
during periods of mai'Mt stress.
Connectivhy and Concentration
We must also appreciate the concentration among counterparties and creditors. A
few large financial institutions serve as the principal counterparties and creditors to
hedge funds. The ooncentrated and connected network of these core financial
institutions raises the specter of a major market event having a systemic impact.
This March, E. Gerald Corrigan, chairman of the Counterparty Risk Management
Group, stated 'he potential damage that could result from such shocks is greater
due to the increased spread, complexity, and tighter linkages that characterize the
global ~nancial system.-[vii] Although these sophisticated institutions have
improved their capital positions and risk management practices over the past
decade, there Is room for additional improvement.
Inadequate Information
The availability of Information also plays an important role. Only with accurate and
timely information can counterpartles, creditors, and investors understand and
adequately assess their risk exposure. Much of this information can only be
disclosed by the managers of the private pools of capital. If investors.
counterpariies and creditors are to define and create effective market discipline.
they must have access to reliable and timely Information.
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or 7
Financial Market Infrastructure
It is also critical that we appreciate the importance of our financial systems'
underlying structure. It facilitates liquidity. It includes the market-making capacity
and the system for clearing and settlement of financial transactions. Market
infrastructure must adapt quickly to product innovation and increasing trading
volume. Not having effective and rapid clearing and settlement procedures could
stimulate a systemic contagion effect if there were a failing counterparty or highly
leveraged market participant.[viii]
The state of these conditions contributes to defining the atmospheric environment
for a systemic risk event. We must now ask ourselves: Should we be concerned
about systemic risk?
Returning to Gould
Let me return to Gould's prior conclusion regarding the .400 hitter. Recall, he
postulated that because of the better play, there has been a compression of talent
towards the overall league batting average; hence, the tails of the distribution of
individual players' batting averages have shortened. As a result, the .400 hitter is
extinct.
Could our capital markets practices' better play have influenced the distribution of
risk events such that the tails of the distribution have shortened? It is true that the
dispersion of risk is greater. The presence of so many derivatives strategies and
instruments do help to hedge risk, and markets have adjusted to "tremors." At the
same time, we can also observe that the capital markets, with a few periodic
exceptions, are not pricing risk and future volatility anywhere near close to longterm averages.[lx]
Stakeholders in our markets must not operate under the false illusion that systemic
risk is not a real possibility. Whether examining batting averages or financial
market risk, we must account for the possibility of outliers.
Let's take it a step further. Outliers, by definition, are long tail events. They are
distant from the norm. But not all outliers, or long tails, significantly impact the
norm. Another .400 hitter would be a long tail event, but it would not Significantly
impact the overall major league batting average.
When an outlier is impactful, it is considered a fat tail. Look at baseball salaries. On
a prorated basis, the New York Yankees will pay Roger Clemens $28 million this
year. That is almost seven times the average salary of his teammates, and as
such, has a real impact on the team's average compensation. No wonder fans call
Clemens the Rocket!
So, the long tails of some distributions may also be a lot fatter than people
frequently assume. Besides baseball salaries, there are many other data series
where the distributions are anything but normally distributed. Look at "book sales
per author ... populations of cities ... numbers of speakers per language, damage
caused by earthquakes, deaths in war, deaths from terrorist incidents ... or the sizes
of companies."[x]
Could the same be true of capital markets, commOdity prices, inflation rates, and
economic data? If so, what are the implications? What if such events occur with
much more frequency than people recognize, and what are the consequences if we
do a particularly poor job in preparing for them?
One student of such distributions is Nassim Taleb. He defines an occurrence such
as a systemic risk event as follows: "First, it is an outlier, as it lies outside the realm
of regular expectations, because nothing in the past can convincingly point to its
possibility. Second, it carries an extreme impact. Third, in spite of its outlier status,
human nature makes us concoct explanations for its occurrence after the fact,
making it explainable and predictable."[xi]
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If we can not predict a systemic market event in advance, and we seek to reduce
the impact of such an event, we must prepare.[xiij The PWG's Principles and
Guidelines released last February are a call to action to foster preparedness. They
direct all stakeholders to undertake efforts that seek to mitigate the likelihood and
impact of a systemic risk eveni.[xiii]
These Principles and Guidelines highlight how potential systemic risk is best
mitigated within the current regulatory framework by market discipline that is
developed and applied by creditors, counterparties and investors.
Let's return to the environmental conditions that I outlined earlier: easy credit and
leverage; rising correlations, connected and concentrated lenders; information flow;
and financial market infrastructure.
Credit and Leverage
First, the Principles and Guidelines call upon financial institutions to determine
appropriate credit terms. In doing so, they must assess market, credit, liquidity and
operational risk. Financial institutions also need to be disciplined and independent
in quantifying valuations. Importantly, they need to guard against the risks to their
reputation. They should expect their prudential regulators to closely monitor their
management of these risks and assess whether their performance is in line with
expectations set out in supervisory guidance.
To deal with these challenges, counterparties and creditors must maintain
appropriate policies, procedures, and protocols. They must clearly define,
implement and continually enhance best risk management practices. These
practices must address how the quality of information from a client affects margin,
collateral, and other credit terms and other aspects of counterparty risk
management.
Correlations, Connectivity and Concentration
In terms of combating the network effects of increased risk concentration, the PWG
guidelines encourage lenders to private pools of capital to frequently measure their
exposures, taking into account collateral to mitigate both current and potential
future exposures, Credit exposures, in addition to being measured frequently,
should also be subject to rigorous stress testing, not just at the level of an individual
counterparty, but also aggregated across counterparties and should consider
scenarios of adverse liquidity conditions. The liquidity of the counterparty's
positions should be a factor in exposure measurement. since concentrated or
illiquid positions can lead to crowded trades and unexpected exposures in the event
of a counterparty default or market volatility.
Inadequate Information
A debate has emerged over disclosure. While the arguments are somewhat
confused. the premise is somewhat less so. Disclosure does help. The PWG
expects enhanced disclosure and communication between three explicit groups:
managers and investors. managers and their counterparties. and creditors and their
regulators.
Information should be disclosed frequently enough and with sufficient detail that
investors. counterparties and creditors stay informed of strategies and the amount
of risk being taken. On a regular basis, investors, counterparties and creditors
should seek to obtain from the manager both quantitative data and qualitative
information on the pool's net asset value, performance, market and credit risk
exposure, and liquidity,
The PWG articulated that regulators' clear communication of expectations
regarding prudent management of counterparty credit exposures to hedge funds is
also critical.
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7/Si2007
Page 6 01'7
Financial Market Infrastructure
Regarding post·trade obligations, managers, counterparties and creditors should
also continue to strengthen and enhance their processing, clearing, and settlement
arrangements, particularly for OTe derivatives. This will limit the contagion effect of
weak post·trade processes if there is a failing counterparty or highly leveraged
institution.
Conclusion
We cannot get lulled into a false sense of confidence because of the increased
dispersion of risk, the presence of diverse and flexible instruments and strategies to
manage and hedge risk, or the abundance of capital and liquidity characterizing the
recent benign market environment.
I began my remarks this afternoon with an observation, so I will conclude with
another. Maybe the tails are longer than Gould thought. I'd bet that somewhere in
the world there is a kid dreaming about being the next .400 hitter. I have enough
suspicion in models and statistics to think the potential for that kid to accomplish
that dream is a real possibility. While I hope it does occur, another .400 hitter may
or may not happen. If it does, it will have a big impact on sports media but virtually
no impact on the overall league batting average.
So the tails may be longer than people imagine, and the tails could also easily be
fatter. We must therefore be humble enough to realize that a systemic event in the
financial markets cannot be discounted and its impact will be significant.
Preparedness is therefore key and all stakeholders in the capital markets must
contribute to the effort.
As Taleb illustrates, fat tail events occur. When one does, it will be rare, have a big
impact, and many experts retrospectively, although not prospectively, will argue it
was predictable. When the next outlier occurs, regardless of its type, let's make
sure the experts are commenting on something positive like the baseball player's
hitting acumen rather than some systemic event in our capital markets.
Thank you very much.
[i] Thomas J. Miceli, Minimum Quality Standards in Baseball and the Paradoxical
Disappearance or the .400 Hitter, Economics Working Papers, University of
Connecticut (May 2005). at 1.
Iii] Miceli at 7.
[iii) Stephen Jay Gould, Why No One Hits .400 Any More in Triumph and Tragedy in
Mudville: A Lifelong Passion for Baseball (2003) (first published as Entropic
Homogeneity Isn't Why No One Hits .400 Any More in Discover (Aug. 1986)).
[iv] Gould at 163 (emphasis added).
[v) But cf., E. Gerald Corrigan, Chairman, Counterparty Risk Management Group.
Hedge Funds and Systemic Risk in the Financial Markets, Statement before the
Committee on Financial Services, U.S. House of Representatives (Mar. 13,2007)
at 9·10 (describing the reasons why a hedge fund's collapse did not pose a
systemic risk).
[vi] Tobias Adrian. Measuring Risk in the Hedge Fund Sector, Current Issues in
Economics and Finance. Federal Reserve Bank of New York, Vol. 13, No.3
(Mar.lApr. 2007).
http://www.trt:.;:s.guv/lJress/releasesfhl.·1.50.htm
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(vii) E. Gerald Corrigan, Chairman, Counterparty Risk Management Group, Hedge
Funds and Systemic Risk in the Financial Maricets, Statement before the
Committee on Financial Services, U.S. House of Representatives (Mar. 13, 2007),
at 8. See also Timothy Geithner, President and Chief Executive Officer, Federal
Reserve Bank of New York, Liquidity Risk and the Global Economy, Remarks at the
Federal Reserve Bank of Atlanta's 2007 Financial Markets Conference--Credit
Derivatives (May 15,2007) at 3 ("And yet this overall jUdgment, that both financial
efficiency and stability have improved, requires some qualification. Writing a
decade ago about the history of the financial shocks of the 1980s and early 1990s,
Jerry Corrigan argued that these same changes in financial markets we see today,
though less pronounced then than now, created the possibility that financial shocks
would be less frequent, but in some contexts they could be more damaging. This
judgment, that systemic financial crises are less probable, but in the event they
occur could be harder to manage, should be the principal preoccupation of market
participants and policymakers today.")
(viii] Donald L. Kohn, Vice Chairman, Federal Reserve Board, Financial Stability
and Policy Issues, Remarks at the Federal Reserve Bank of Atlanta's 2007
Financial Markets Conference--Credit Derivatives (May 16, 2007) at 4
rWeaknesses in such [clearing and settlement] systems can be a source of
systemic contagion. Conversely, when such arrangements are robust, the potential
for contagion is significantly diminished.").
fix] See e.g., Andrew Bary, A World at Risk, Barron's (Mar. 15,2007) (profiling
historian Niall Ferguson and his views on the "'paradox of diminishing risk in an
apparently dangerous world"').
[x] Nassim Nicholas Taleb, The Black Swan 35 (2007).
[xi] Taleb at xvii-xviii.
[xii] Taleb at 208, 213.
[Xlii] Cf., E. Gerald Corrigan, Chairman, Counterparty Risk Management Group,
Hedge Funds and Systemic Risk in the Financial Markets, Statement before the
Committee on Financial Services, U.S. House of Representatives (Mar. 13, 2007),
at 8 ("[O]ur collective capacity to anticipate the specific timing and triggers of future
financial [systemic] shocks is extremely low, if not nil. Indeed, if we could antiCipate
the timing and triggers such shocks would not occur. Thus, since we certainly
cannot rule out future financial shocks we have no choice but to strengthen what I
like to call the ·shock absorbers" of the global financial system in order to limit and
contain the damage caused by future financial shocks when - not if - they occur.")
Ittp:llwww.tre?s.gov/press/relea!:;e~i1l1!{~O.htl11
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June 12. 2007
HP-451
Remarks by Treasury Secretary Henry M. Paulson, Jr.
on Supporting Small Business in the Americas
at the Americas Competitiveness Forum
Atlanta, GA·· Thank you, Carlos. for that kind introduction. This inaugural meeting
of the Americas Competitiveness Forum is possible because of your leadership.
This is a unique opportunity to engage in meaningful discussion about ways to
enhance competitiveness and economic prosperity in our region.
I would also like to acknowledge Rob Mosbacher, the President of the Overseas
Private Investment Corporation. OPIC does valuable work mobilizing one of our
greatest assets, U.S. private capital, to promote social and economic development
in the Western Hemisphere and around the world.
I welcome this opportunity to share my thoughts and to emphasize the U. S.' stake
in the economic success of Latin America. This region is moving towards its
enormous potential as an engine of growth, opportunity and poverty reduction for its
own citizens and for the global economy. In recent years, a number of governments
have strengthened their policies - shored up public finances, reduced debt
vulnerability, opened markets, and laid the foundation for the growth we are now
seeing.
My message today is that spreading economic opportunity within and between the
nations of the Americas is urgent and possible. President Bush often refers to the
growing ties between Western Hemisphere nations. We share two-way trade flows
of more than $1 trillion and two-way investment of more than $1 trillion. Last year
workers from the region employed in the United States sent an estimated $45 billion
home to their families. The U.S. acts in our own and, we believe, the region's best
interest when we help neighboring nations build open economies and create
opportunity for all their people. This includes those who have not yet benefited from
this progress.
A key to spreading prosperity is supporting entrepreneurs. More people share in the
benefits of economic freedom and growth when small businesses thrive. Small
businesses tend to be labor intensive and are usually responsible for over 50
percent of new job creation. They are the engine of job and wealth creation in most
economies. So, in March, when the President asked the Treasury and State
Departments to develop an initiative to "help U.S. and local banks improve their
ability to extend good loans to small businesses," I was pleased to accept his
charge.
A thriving small business community can reduce poverty and inequality, as well as
create jobs. When individuals turn their ideas into productive businesses, they
make a transition from workers to owners. Ownership helps create sustainable and
stable economies with broader opportunities for all citizens. Economic and social
mobility have always been at the core of the U.S. system. We want to help Latin
American countries create the same mobility for their citizens.
We need to get real support to these entrepreneurs. They have good ideas,
markets to serve and the skills to operate in an often tough environment. They can
also form constituencies that drive governments to strengthen their business
climates and improve governance.
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But, they often are frozen out of the formal financial sector. It is estimated that only
10 percent of small businesses in Latin America have access to financing from
banks and commercial lenders. The other 90 percent depend on friends, relatives
or other informal sources of capital that can charge 10 percent or more in daily
interest.
One key barrier to credit is that banks lack information about, and experience with,
smaller companies. Banks are often more comfortable lending to larger companies
that have collateral, formal financial statements and documentation. Small
companies may not yet have these resources, and so traditional lending criteria
don't apply. Banks need the tools necessary to assess the value and risk of these
smaller companies.
Lack of finance may mean the difference between success and failure, growth or
stagnation. These entrepreneurs need capital to expand into bigger space,
purchase additional inventory to serve growing demand and new markets, to buy
capital equipment. We see evidence in economies around the world that greater
availability of finance not only enhances growth, it reduces poverty and inequality,
and helps to build a middle class.
I'm pleased to announce our answer to President Bush's call - we have developed
a three-part plan to catalyze market-based bank lending to small businesses in
Latin America. By breaking down the barriers that block commercial bank financing,
we can work to build this necessary function in developing economies.
This Initiative targets small, profitable firms with growth potential, and it has three
elements. The first two will provide support to banks willing to commit to specific
and ambitious targets for small business lending. The third will address the
regulatory environment.
First, we will promote the spread of new lending models that fit the unique
characteristics of smaller companies. We will offer the tools to adopt these models
so that banks can build capacity to quickly and accurately assess the credit quality
of small companies. This capacity building facility would be housed in the
Multilateral Investment Fund, MIF. of the Inter-American Development Bank. We
have committed to replenish this fund and we are actively working With the MIF to
develop a program which would provide up to $50 million over five years for this
purpose.
Second, the Overseas Private Investment Corporation, OPIC, and the lOB Group's
Inter-American Investment Corporation, IIC, will assume a portion of the risks
associated with this lending. OPIC has already identified banks with the potential to
proVide up to $150 million using OPIC support through various vehicles that
address particular market needs. The IIC will also build upon its relationships in the
region to offer a similar menu of options to banks under the initiative. These
vehicles include credit guarantees to banks to support small business on-lending by
banks in Latin America; local currency guarantees on small business loan portfolioS
held by local banks; and partial guaranties for bond issues to fund small business
loans.
A third and equally important step is making sure that small business lending isn't
unnecessarily constrained by burdensome regulations or bureaucracy. Treasury's
Office of Technical Assistance and the MIF will work with local authorities to review
existing regulations. The team will identify and address obstacles to small business
lending, such as excessive collateral and capital requirements and interest rate
restrictions. The MIF, with support from Treasury, will also engage with regional
banking regulators and supervisors to define and promote the adoption of best
practices in micro, small and medium lending.
Taken together, these three steps - bUilding new lending models, sharing the initial
risk for early-stage loans and helping to ensure a constructive bank regulatory
environment - will open new opportunities for banks to lend and for small
businesses to grow. Public efforts and funds will leverage private money to support
small bUSinesses, and create the foundation for sustainable, non-governmental
lttP:!/www,trea~.gov/presslreleasesihp451.htl11
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Page 3 of 3
market-based lending. We'll kick-start the model to help existing businesses in the
region best positioned to expand, and to help entrepreneurs with good ideas get
started.
Once participating banks demonstrate that it is profitable to lend to small
businesses, competition will bring other banks into the market and the need for ongoing assistance should diminish. Application of this model in Eurasia has created
over $12 billion in new small business lending to nearly two million companies and.
especially for small countries, transformed financial sectors.
Household financial education is also vital to the success of this initiative. Many
entrepreneurs get their start using their own savings or personal loans. Treasurer
Anna Cabral will host a Latin America Regional Conference this fall to discuss ways
we can enhance access to financial services, including financial service access of
entrepreneurs in the region.
Our interest in Latin America is strong. and it will continue. The countries of the
Americas are brought together by geography and history, and bound together by
common interest. The United States is committed to helping Latin America reduce
poverty. fight corruption, build the middle class, and generate more opportunities for
people who feel excluded from the region's growing prosperity.
Since becoming Treasury Secretary, I have visited Colombia, Guatemala, Peru and
Mexico. This region is a high priority for me, and I will return to South America in
July. I'll also continue discussing with my regional colleagues how we can work
together to improve economic and social opportunities for people throughout Latin
America.
Thank you. I welcome the opportunity to answer a few questions.
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June 12, 2007
HP-452
Fact Sheet:
Treasury Proposal to Expand Small
Business lending in Latin America
·I'm also directing Secretary Rice and Secretary Paulson to develop a new
initiative that will help U.S. and local banks improve their ability to extend
good loans to small businesses [in Latin America}. It's in our interest that
businesses flourish in our own neighborhood. Flourishing business will
provide jobs for people at home. "
-President Bush, March 5, 2007
http://www.whitehouse.gov!newslreleases/2007103120070305-6.html
"A thriving small business community can reduce poverty and inequality, as
well as create jobs. When individuals turn their ideas into productive
businesses, they make a transition from workers to owners. Ownership helps
create sustainable and stable economies with broader opportunities for all
citizens. Economic and social mobility have always been at the core of the
U.S. system. We want to help Latin American countries create the same
mobility for their citizens. "
- Treasury Secretary Henry M. Paulson. Jr., June 12, 2007
Secretary Paulson announced today a three-part plan to provide the ways and
means to encourage market-based bank lending to small businesses. The
first two elements will provide support to banks willing to commit to specific
and ambitious targets for small business lending. The third will address the
regulatory environment.
First, introduce new lending models that fit the unique characteristics of
smaller firms. One key barrier to credit is that banks lack information about. and
experience with. smaller companies. Banks are often more comfortable lending to
larger companies that have collateral, formal financial statements and
documentation. Small companies may not yet have these resources. Banks need
the tools necessary to assess the value and risk of these smaffer companies. We
will promote the spread of new lending models that fit the unique characteristics of
smaller companies. We will help banks build capacity to quickly and accurately
assess the credit quality of small companies.
Subject to approval from its donor committee. the Inter-American Development
Bank's Multilateral Investment Fund (MIF) will engage with selected interested and
eligible banks to provide tailored technical assistance to work with banks to expand
small business lending.
• MIF would provide financing to support consulting ser\lices related to credit
officer training, material development, software and computer equipment,
credit scoring systems, and other relevant assistance required to implement
a successful small business lending program and minimize per-loan costs.
• MIF is proposing to its donor committee that it finance up to $10 million per
year over five years for this initiative, with no more than $1 million per single
bank.
• This technical assistance would be provided on a cost-sharing basis to
ensure banks have committed capital as well as capacity.
Second, assume a portion of the risks associated with this lending. Sharing
the initial risk of lending to new. small business customers can help banks address
ttp:/!www.treac;.gov!press(releaseslhp452.htm
Page 2 of3
the uncettalnty and lack of knowledge about this new client base.
The Overseas Private Investment Corporation (OPIC), the U.S. government agency
responsible for promoting social and economic development by mobilizing U.S.
private capital, wiD ofter risk-sharing guarantees and loans to eligible banks to
extendfcatalyze their financing activity for small and medium-sized businesses in
the region. OPIC will provide support through three vehicles:
Credit guarantees for U.S. bank loans to local banks to support "on-lending" (when
one bank borrows from another bank and uses those funds to make smaller loans)
to small business.
• Guarantees on bond issues to allow local financial institutions, including
microfinance institutions, to raise funds to finance small and medium
enterprise (SME) loans in the local capital markets.
• Guarantees to local banks on portfolioS of small business loans in which
OPIC and the local banks would share risk of loss.
OPIC currently anticipates $150 million will be available for SME lending through
these vehicles. The factors that will determine Whether a bank qualifies for OPIC
support are the potential benefit to economic development from the bank's SME
lending activHy, the bank's ability and commitment to build an SME loan portfolio
efficiently and profitably. and the bank's ability to utilize OPIC support in a manner
consistent with OPIC statutory requirements.
lhe Inter·A.merican Investment Corporation (Ile) of the lOB Bank Group is focused
on providing financing to SMEs in the region. The IIC will build upon its
relationships in the region to offer a similar menu of options to banks under the
initiative, particularly those that do not qualify for OPIC support.
Third, ensure that small business lending Is not unnecessarily constrained by
burdensome regulations or bureauc:raGY. In many caaes, bank regulaloly
authorities perceive small businesses to be vel)' high risle borrowers and impose
heavy collateral ancVor provisionary requit8ments. We wiD help introduce best
practice regulatory models that ensure prudentially sound lending while avoiding
requirements more suited to lending to larger firms.
• Treasury's Office of Technical Assistance - which has 33 advisors working
in 16 countries in Latin America - will allocate one regional advtsor to help
ide'1tify regulatory changes needed for more credit to be made available to
the SME sector.
• MIF will engage the Latin American Association of SupervisorS of Banks of
the Americas (ASBA) aoo facilitate cross-border seminars and regional
workshops to define and promote the adOption of beSt practices in SME and
mlcrolending among its members.
Measurable Results. Ttaeking dthe small business /elidIng results is expected to
be overseen by a program manager hOused at the MIF. A steering committee WIll
be created to ovetSee petformanCe under the initiative SlId meet twice a year to
ensure the program's effectiveness in catalyzing lending to smaD businesses.
• Eighty percent of the volume of lending under this initiative wiD be
composed of loans under $100,000.
• Participating banks will also likely Sign a policy statement, similar to a
business plan, outlining a strategy for lending to small business. The
statement would incorporate several indicators of measurable results we
would target for this effort, such as the total volume of loans disbursed to
small businesses, the average loan amount and the number of loan officers
trained.
):lJwww.treas~ov/presslreleWl~!:I/bp452.htm
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June 12, 2007
HP-453
Secretary Paulson Recognizes Individuals for Dedication to Volunteer Service
Atlanta, GA- Secretary Henry M. Paulson, Jr. presented the President's Volunteer
Service Award to Charles Bruce, Andrea Eva and Dr. Michael Pete lie as part of the
USA Freedom Corps Presidential Volunteer Service Recognition Program today in
Atlanta, Georgia. Both Bruce and Eva have served countless hours at Volunteer
Income Tax Assistance sites while Dr. Petelle has dedicated his time to improving
the environment.
Charles Bruce has been a volunteer with the Volunteer Income Tax Assistance
Program since 1998. Under his leadership over the past nine years, thousands of
low-income individuals have received free tax preparation and e-file services. Bruce
is currently the Site Coordinator for one of the premiere sites in Metro-Atlanta Clarkston Library. Andrea Eva serves as the Community Affair Committee Director
of the National Association of Black Accountants, which adopted the Westend Mall
Volunteer Income Tax Assistance site as a community service project. She took the
lead in training all new preparers for the site, developed a refresher class for the
professionals and increased the volunteer lifeline. Dr. Michael Petelle has spent his
life involved in improving the environment, going back to high school when he
single-handedly planted 3600 trees to forest a pasture. Petelle has sponsored the
environmental club SAVE at North Cobb High School for 16 years where they
recycle, plant trees, organize clean-ups and monitor water quality in local lakes and
streams. Each award recipient has individually dedicated more than 4,000 hours of
volunteer service over their lifetime.
In his January 2002 Stale of the Union Address, President Bush called on all
Americans to make a difference in their communities through volunteer service. He
created USA Freedom Corps, an Office of the White House, to strengthen and
expand volunteer service. Americans are responding to the President's Call to
Service. According to the Bureau of Labor Statistics, more than 61 million
Americans volunteered in 2006. Go to www.volunteer.gov or call 1-877-USACORPS to find an existing volunteer service opportunity in your area or to find more
information about service programs, including national service programs such as
the Peace Corps, AmeriCorps, Senior Corps, and Citizen Corps. USA Freedom
Corps is also highlighting youth volunteer service. Visit www.voluntcorkids·9 0v for
games and ideas designed to show how America's youth are making a difference.
The President's Volunteer Service Award was created at the President's direction
by the President's Council on Service and Civic Participation. The Award is
available to youth ages 14 and under who have completed 50 or more hours of
volunteer service; to individ uals 15 and older who have completed 100 or more
hours; and to families or groups who have completed 200 or more hours. For more
information about the Award, please visit www.presidenlialserviceawards·9 0v .
)://www.tre8:~ . gov/press/releasesfhp4~.3.htm
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June 12, 2007
HP-454
Asst Sec Ryan to Discuss Treasury Markets at New York Fed
Treasury Assistant Secretary for Financial Markets Anthony W. Ryan will discuss
current topics related to the Treasury markets Thursday at the Federal Reserve
Bank of New York in New York City. NY. Assistant Secretary Ryan will be the
featured speaker at the Treasury Markets Practice Group Conference.
Who
What
When
Where
Assistant Secretary for Financial Markets Anthony W. Ryan
Remarks on the Treasury Markets
Thursday, June 14,8:30 a.m. (EDT)
Federal Reserve Bank of New York
33 Liberty Street
12th Floor Conference Center
New York, NY
)://www.trea~.govfpress/releases/hp4J4.htm
7iS/2007
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June 12, 2007
HP-455
Treasury Deputy Secretary Kimmitt to Visit Beijing and Moscow
Treasury Deputy Secretary Robert M. Kimmitt will travel to Beijing and Moscow next
week to meet with government officials as well as US., Chinese, Russian and other
foreign investors and leaders in the business community. In his discussions in both
countries he will underscore the importance of open investment. The following
event is open to credentialed media:
Who
Deputy Secretary Robert M. Kimmitt
What
Remarks to the American Chamber of Commerce in Russia on the Importance of
Open Investment
When
Thursday, June 21,2007,8:30 a.m. (12:30 a.m. EDT)
Where
Marriott Aurora
2nd Floor, Petrozka Street, 11/20
Moscow, Russia
lttp:llwww.trea~ ..gov/press/releases!hp4~~.htm
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June 13, 2007
hp-456
Treasury Releases Semiannual Report on International Economic and
Exchange Rate Policies
Washington, DC -- The Treasury Department today released its Semiannual Report
on International Economic and Exchange Rate Policies.
REPORTS
•
Semiannual Report on International Economic and Exchange Rate Policies
.ttp:J/www.trea~..gov/press/releasesl11p4A.htm
7/512007
Report to Congress on
International Economic and Exchange Rate Policies
June 2007
This report reviews developments in international economic and exchange rate policies, focusing
on the second half of 2006 ,and is required under the Omnibus Trade and Competitiveness Act
of 1988 (the "Act,,)2,J.
Major Findings:
• Global growth remains very robust. It increased to S.4 percent in 2006, the fastest annual
rate in over thirty years. 4 The sustained increase in global growth primarily reflects the very
strong performance in emerging market and developing countries.
• Global imbalances remain a key issue on the international agenda, and reducing these
imbalances is a shared responsibility. Some rebalancing is underway and the u.s. current
account deficit has fallen from its peak, but more needs to be done to rebalance global
demand in a manner that sustains strong global growth.
• The U.S. economy is contributing to a healthy global economy. Growth is poised to pick up
over the course of 2007. The fiscal deficit fell to 1.9 percent of GDP in FY2006, down from
a recent peak of3.6 percent in FY2004. The U.S. labor market remains healthy and core·
measures of inflation have stabilized or eased.
• Growth in Europe and Japan has been well above recent five-year averages. To rebalance
global demand, Europe and Japan will need to implement further structural reforms and
sustain and boost their respective paces of domestic demand growth.
• Several oil exporters have accumulated large current account surpluses. These countries can
help sustain robust global growth by: (1) increasing expenditure on oil production capacity,
(2) judiciously increasing spending to enhance potential growth and diversify economies, and
(3) strengthening monetary policy management, where appropriate, by, among other things,
moving toward more flexible exchange rates.
• China has achieved exceptionally rapid growth, However, its growth has become severely
unbalanced - dependent on exports and investment and characterized by very high savings,
weak consumption, and an inflexible exchange rate.
More recent significant developments are also discussed if information is available.
among other things, that: "The Secretary of the Treasury shall analyze on an annual basis the
exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider
whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes
of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international
trade,"
3 The Treasury Department has consulted with IMF management and staff in preparing this report.
4 See the IMF's World Economic Outlook, http://www.imf.orglPubs/FTlweo/2007/0Ilindex.htm. Forecasts of
aggregate world GDP growth use purchasing power parity (PPP) weights.
1
2 The Act states,
•
Heavy foreign exchange market intervention by China's central bank to manage the currency
tightly has led to excessive accumulation of foreign exchange reserves and a quick increase
in domestic liquidity. Rapidly expanding domestic liquidity increases the risks of
overheating, a build-up of new non-performing loans leading to banking sector stress, and
asset bubbles. These trends clearly increase the risk of a renewed boom-bust cycle, which
would be quite harmful for the global economy.
•
In addition to economic rebalancing within China, allowing the currency to adjust is a matter
of international interest and responsibility, with critical implications for the smooth
functioning of the world's trading system and the adjustment of global imbalances.
• China should not hesitate any longer to take far more vigorous action to rebalance its
economy, promote immediate RMB movement to tackle the currency's undervaluation, and
achieve far greater flexibility in the exchange rate regime.
• At the second session of the U.S.-China Strategic Economic Dialogue (SED) held on May 22
and 23, Chinese and U.S. officials discussed the Chinese government's reform agenda.
Chinese officials emphasized the priority they place on continued implementation of reforms
to address economic imbalances and to shift growth toward consumption and away from
investment and exports. They also acknowledged the role of exchange rate reform in that
process.
•
The Department of the Treasury concluded that, although the Chinese currency is
undervalued, China did not meet the technical requirements for designation under the terms
of Section 3004 of the Act during the period under consideration. Treasury was unable to
determine that China's exchange rate policy was carried out for the purpose of preventing
effective balance of payments adjustment or gaining unfair competitive advantage in
international trade.
•
Even though the Treasury has not designated China pursuant to the Act, Treasury forcefully
raises the Chinese exchange rate regime with Chinese authorities at every available
opportunity and will continue to do so. China's exchange rate has been a prominent feature
of the SED, G-7 discussions with China, and G20 and IMF Board deliberations.
• Treasury also concluded that no other major trading partner of the United States met the
technical requirements for designation under the Act during the period.
2
u.s. Macroeconomic Trends
U.S. economic growth slowed in 2006 and early 2007, as the economy edged away from an
unsustainably rapid rate of growth. The labor market remained broadly healthy with a low
unemployment rate, steady job gains and solid real wage growth. Both headline and core
measures of inflation stabilized or eased, in large part reflecting declining energy prices in the
latter part of 2006, although headline inflation increased again as energy costs rose in early 2007.
The Federal Reserve held its short-term interest rate target unchanged from July 2006 through
May 2007 after having raised the federal funds rate at every previous policymaking meeting
since mid-2004. With the economy moderating and inflation stabilizing, yields on longer-term
securities declined. Most private forecasters predict that real GOP growth will remain below
trend in 2007, with stable inflation and a modest increase in the unemployment rate.
Real GOP grew by 3.1 percent over the four quarters of 2006, matching the pace recorded during
2005. Growth slowed over the second half of 2006, however, to a 2.2 percent annual rate from a
rapid 4.1 percent pace in the tirst half of 2006. Economic activity continued to moderate in the
first quarter of 2007, with real GOP growth easing to 0.6 percent at an annual rate. Residential
investment dropped sharply in the second half of 2006 and first quarter of 2007, accounting for a
large portion ofthe moderation in overall GOP growth. Household consumption remained
strong, however, rising by 3.8 percent at an annual rate between the second quarter of 2006 and
tirst quarter of 2007, matching the pace averaged over the prior three years. Nonresidential
investment declined at the end of 2006 but turned up slightly in the tirst quarter of 2007.
The decline in residential building activity has been holding down overall GOP growth since late
2005. Over the four quarters of2006, residential investment fell by nearly 13 percent - the
largest annual decline since 1990. Most of the drop occurred in the second half of 2006,
subtracting 1.2 percentage points from annualized GOP growth in both the third and fourth
quarters. In the first quarter of 2007, the housing sector reduced real GDP growth by nearly a
full percentage point, slightly less than in the prior two quarters. Recent data suggest that the
residential sector remains weak, but there are signs that the hou.sing market is stabilizing.
Housing starts have started to recover from the low levels recorded last fall, and sales of existing
single-f~ly homes (over 80 percent of the one-family market) edged higher in the first quarter.
New single-family home sales also appear to have stabilized, but the overhang of all singlefamily homes for sale remains substantial. Private analysts expect that declining housing activity
will continue to act as a damper on growth through late 2007.
Nonfann payroll employment expanded by 88,000 in April 2007. Since the employment trough
in August 2003, the economy has generated 7.9 million jobs, or 179,000 a month. The
unemployment rate edged up in April to 4.5 percent but was still among the lowest jobless
readings since mid-2001. Real hourly earnings for production workers rose by 1.2 percent
during the twelve months ended in April. Real hourly earnings fell during 2004 and 2005.
Productivity growth has decelerated, reflecting slower output growth. Output per hour in the
nonfann business sector rose 1.7 percent at an annual rate in the tirst quarter of 2007 and was up
just 1.1 percent over the past four quarters - notably less than the 2.8 percent pace since the business
cycle peak in the first quarter of 200 1. Growth of unit labor costs slowed to 1.3 percent over the
latest four quarters from 3.4 percent during 2006.
3
Inflation eased at the end of 2006 as energy prices fell, and underlying price pressures remained
relatively contained through the first four months of 2007, although energy prices rebounded.
Headline consumer price inflation rose by 2.6 percent over the twelve months ended in April,
down from a 3.6 percent gain in the year-earlier period. Energy prices increased 2.9 percent in
the latest twelve-month period compared the 21 percent average year-over-year increase during
the first half of 2006. Excluding both energy and food, core consumer prices advanced by 2.4
percent in the year ending April 2007, slower than the 2.9 percent gain posted over the year
ending in September 2006.
At its most recent meeting in May, the Federal Open Market Committee (FOMC) left the federal
funds target rate unchanged at 5.25 percent. The FOMe has maintained that rate at its current
level since August 2006, which is the highest since March 2001. The FOMe raised the fed
funds rate in seventeen straight hikes of 25 basis points each from June 2004 through June 2006.
Despite monetary tightening during that two-year period, long-term interest rates remained
relatively stable. The level of the Treasury ten-year yield fluctuated between four and five
percent from mid-2004 to early 2006. The ten-year rate rose as high as 5.25 percent in late June
2006 but has since eased to about 4.85 percent as of late May 2007. Mortgage rates have
generally moved with the 10-year Treasury yield, remaining in a fairly narrow band around 5.8
percent from 2003 through 2005. Low mortgage rates pushed home sales to record levels in
2004 and 2005. Mortgage rates jumped sharply between mid-2005 and mid-2006 but have since
retreated in line with the 10-year Treasury rate. In late May, the average interest rate for a 30year fixed-rate mortgage was close to 6.4 percent, down from a recent high of 6.8 percent in July
2006.
The federal budget situation has improved notably in the past two years, with the deficit
shrinking by half of the FY2004 estimate a full three years ahead of the Administration's
FY2009 goal. The FY2006 deficit was $248 billion, $70 billion less than in FY2005. As a share
ofGDP, the deficit amounted to 1.9 percent in FY2006, down from a recent peak of3.6 percent
in FY2004 and below the 40-year average of 2.3 percent. Strong receipts growth has been largely
responsible for the improved near-term federal budget situation, with receipts up nearly 12
percent in FY2006. At the same time, growth in outlays has remained subdued. The FY2008
budget sees steady improvement in the U.S. government's fiscal situation over the next five
years. The deficit is projected to shrink each year through FY2011, averaging 1.1 percent of
GDP over the FY2007-FY2011 period. A small surplus is projected for FY2012.
The Administration's most recent economic forecast, prepared in May 2007, projects moderate
growth and inflation and continued low unemployment for the remainder of 2007. Real GDP is
expected to rise by 2.3 percent during the four quarters of 2007, down from 2006, and 0.6
percentage point below the 2007 growth prediction in last November's forecast. The growth
reduction for the year reflects the low growth that has already occurred; GDP rose 0.6 percent in
the first quarter of 2007. Going forward, growth is likely to accelerate back to near-trend rates
(about three percent). Some recent private forecasts see a sharp rebound in growth in the second
quarter of 2007. Overall, the Administration projections for growth, inflation, and the
unemployment rate are very similar to the private consensus. The Administration is projecting
4
headline consumer price inflation of around 3.2 percent for 2007, a faster pace than predicted last
November. The higher inflation forecast reflects the rebound in energy costs during the first four
months of the year. The Administration sees a modest increase in the unemployment rate in
2008, averaging 4.7 percent for the year.
World Economic Conditions
The global economy expanded 5.4 percent in 2006, its fastest annual growth rate in over thirty
years. The IMF projects strong growth to continue at 4.9 percent in 2007 and 2008. 5 The
sustained increase in global growth from 2003 to 2006 primarily reflects strong growth in
emerging market and developing countries, which have grown 4.8 percent faster on average than
advanced economies over this four-year period. Importantly, growth of output per capita in
emerging market and developing countries have averaged over six percent per annum the last
four years, far in excess of the 2.2 percent average growth rate from 1989 to 1998.
Overall, the growth rate in developing and emerging market economies averaged 7.9 percent in
2006, fueled by very rapid growth in China and India. However, strong growth has not been
limited to China and India. In developing Asia, excluding China and India, the IMF expects
economic growth to average six percent in 2007 and 2008. Moreover, the benefits of healthy
global economic growth are spread widely across all regions, including Africa, Emerging
Europe, Latin America, and the Middle East.
Economic growth in both the Euro-area and Japan is expected to be in the neighborhood of two
and one-half percent for 2007. For the Euro-area that is double the average pace of growth of the
five years (2001-05). At 7.3 percent, unemployment is at a IS-year low in the Euro-area. The
pace of growth in Japan has picked up and, at 2.2 percent in 2006, was nearly one percent faster
than the 2001-05 average. Unemployment in Japan is at a nine-year low of3.8 percent in April.
Lower oil prices in the second half of 2006 helped to alleviate some global inflationary concerns.
In the early part of 2007, however, oil prices have risen once again to above $60 a barrel. Non-
energy commodity prices also remain at or near all-time highs, with metals prices rising by 41
percent in the year through May 2007. 6 Short-term financial conditions have tightened over the
last six months with the European Central Bank (ECB) raising its overnight interest rate by 75
basis points to 4.00 percent and the Bank of Japan (BoJ) raising its reference rate by 25 basis
points to 0.50 percent. Recent data suggest market participants expect that both the ECB and the
BoJ will raise their respective official interest rates at least once more in 2007. Still, both real
and nominal long-term interest rates in the advanced economies are relatively low, while interest
rate spreads for riskier markets and assets remain near historic lows. Lower spreads presumably
7
reflect less perceived risk due to less overall government debt, higher reserve coverage ratios,
and improved economic growth in many emerging market economies. The weighted-average
S See the IMF's World Economic Outlook, http://www.imf.orglPubslFT/weo/2007/0Ilindex.htm; forecasts of
aggregate world GDP growth use PPP weights.
6 The Commodity Research Bureau (CRB) Metals Index (a sub-index of five markets of the overall CRB commodity
index, including: copper scrap, lead scrap, steel scrap, tin and zinc).
7 According to the IMF, the reserves to import ratio will reach 79.1 percent in 2008, after rising from less than 50
percent at the end of2001 to 71.4 percent at the end of2006. See Table 35 on page 269 in the Statistical Annex of
the IMF's most recent World Economic Outlook, htto:/lwww.imf.org/Pubs/FT/weoI2007/01/pdf/statappx.pdf
5
spread that large emerging market countries pay on their external debt over lO-year U.S.
Treasuries fell to near 150 basis points in early June 2007 from around 190 basis points in early
November 2006. 8
An important contributing factor to the low level of spreads on emerging market foreign
currency debt is the large amounts of foreign exchange reserves that emerging markets,
especially China and the oil producing countries, have accumulated in recent years. IMF data
show official reserve holdings of emerging market and developing countries rose from $802.5
billion at end-2000 to about $3 trillion at end-2006, a nearly four-fold increase in six years (see
below).9 IMF projections show reserves of these countries rising to $4.3 trillion by end-2008.
This figure does not include asset holdings of sovereign wealth funds (i.e., government-owned or
-controlled investment funds that are not part of official reserves). Private sector estimates put
the size of sovereign wealth funds between $1 and $2.5 trillion at end-2006, and many expect
that they will grow substantially in size, along with official reserves, over the next few years (see
Appendix 3).
International Reserves of Emerging Market and Developing Countries lO
(Billions oeu.s. Dollars)
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
liChi~aqfuele~p~r1ers 0 Non-china, non-fuel I
Source: IMF WEO statistical appendix. Spring 2007
8 As
measured by JP Morgan EMBI+ spread.
Table 35 on page 269 in the Statistical Annex of the IMF's spring 2007 World Economic Outlook,
http://www.imf.org/PubslFT/weo/2007/01/pdf/statappx.pdf. Counting advanced economies, total global
international reserves were about $4.8 trillion at year-end 2006.
10 This IMF grouping does not include the newly industrialized Asian economies of Hong Kong, South Korea,
Singapore, and Taiwan.
9 See
6
Global imbalances (i.e., large current account deficits and surpluses) stabilized somewhat in
2006, with the U.S. current account deficit falling to 5.8 percent ofGDP in Q4 2006 versus 7.0
percent in Q4 2005. A key part of the international strategy to reduce global imbalances is the
rebalancing of global demand. To some extent there has been some demand rebalancing as
weaker but more sustainable domestic demand growth in the United States was partially offset
by stronger domestic demand abroad, especially in the Euro-area. Domestic demand growth in
the Euro-area was 2.5 percent in 2006 (on a calendar year basis) and 2.3 percent (on a Q4/Q4
basis). However, both rates were less than GDP growth rates in the Buro-area, suggesting net
exports continued to supplement overall Euro-area growth. Domestic demand growth also
strengthened in Japan, but less substantially than in the Euro-area, and recent quarterly patterns
have been both bullish and bearish. Japan's QI 2007 GDP growth number was 3.3 percent
(annualized), with only 1.4 percent of that coming from domestic demand.
Further efforts will be needed to rebalance global demand. That more needs to be done can be
seen from the table below, which shows changes in domestic demand for the United States and
for that of G-7 partners of the United States. In 2006 the pace of the partners' demand expansion
increased by a weighted average of 0.6 percent ll while in the U.S. demand expansion declined
by 0.2 percent. However, current forecasts for 2007 suggest no growth offset from partners
despite a further slowing in the U.S. And in 2008, if forecasts are correct, the growth gaps could
once again widen. Without offsetting demand-driven growth from elsewhere, the goal of
ensuring sustained overall global economic growth might be in jeopardy. To be sure, other
countries, including China and other large surplus countries, and not just the United States' G-7
partners, need to boost their reliance on domestic demand-driven growth.
Domestic Demand Growth in U.S. and G7 ex-U.S.
(Percent Chan~e)
u.s. Domestic Demand
2006
2007F
2008F
3.1
1.7
-1.4
2.7
+1.0
-0.2
Change
2.1
2.1
2.1
+0.6
0.0
0.0
.. appendLX, Sprmg 2007 and Treasury calculatIOns
Source: IMF WEO statlstlcai
G7 ex-U.S. Domestic Demand
Chanl[e
II
PPP weights.
7
The United States International Accounts 12,13
• U.S. Balance oj Payments
U.S. Balance of Payments and Trade
($ billions, seasonally adjusted unless otherwise indicated)
2005
1200:> 12006
Q3
Q4
2UUti
Ql
(.12
(.13
Q4
~urrent Account:
Balance on Goods
Balance on Services
Balance on Income 11
Net Unilateral Current Transfers
Balance on Current Account
Balance on Current Account as % of GDP
MajOr WPltal tlOW \;omponents \tlnanclal Innow .)
Net Bank Flows
Net Direct Investment Flows
Net Securities Sales
Net Liabilities to Unaffiliated Foreigners by Non-banking Concerns
Memoranda:
Statistical Discrepancy
Change in Foreign Official Assets in the United States
[Traae In GoodS
Balance
lTotarExports
of Which:
Agricultural Products
Capital Goods Ex Autos
Automotive Products
Consumer Goods Ex Autos and Food
Industrial Supplies and Materials 21
TotaITmpOrfs
of Which
Petroleum and Products
Capital Goods ex Autos
Automotive Products
Consumer Goods Ex Autos and Food
lTTnauaing compensation of employees
21lnduding petroleum and petroleum products
Source: BEA, Bureau of Census
-782.7 -836.0 -198.7 -212.5 -20B.2 -210.9 -21B.9 -197.9
17.7 16.6 17.2 17.5 19.4
66.0 70.7
17.0
-7.3
-2.2
-5.5
3.0
7.8
-2.2
-2.6
11.3
-86.1 -84.1
-9.5 -26.2 -19.5 -21.9 -22.5 -20.2
-791.5 -856.7 -183.4 -223.1 -213.8 -217.7 -229.4 -195.8
-5.8
-6.4
-7.0
-6.9
-6.6
-6.6
-6.5
-5.8
-lUI -21.5
-7.0
17.5 -48.4
100.7 -65.3 74.8
52.3 -16.2
669.2 650.6 186.3 213.8 203.6
-14.1 132.1
-9.2 -55.1
28.8
4'f.1
-0.6
116.1
-6.1
44.3
75.7
65.1
75.9
10.4 141.4
199.5 300.5
-72.2
34.0
-19.1
71.9
-8.4
-6.0
-3.B -44.7
188.4 142.5
46.2 63.2
0.2
78.4
31.8
70.5
-782.7 -836.0 -198.7 -212.5 -208.2 -210.9 -218.9 -197.9
884.5 1023.7 224.9 232.9 243.7 252.1 ~1.3 266.6
16.3
16.5
lB.7
ti4J:I 72.8
17.2
lB.1
HUI
362.( 414.0 90.6
96.1
99.9 102.1 ~ lUB.l
26.1
26.u 2(.r 2(.2
9B.6 107.2 25.2
26.2
11:>.r 129.2
29.1
30.0
31.1
31.4 ~8 33.9
68.9 ~.3 71.7
233.1 27:J.B 5S.8 59.0 63.B
16( (.4 1859.7 423.7 445.4 452.0 462.9 ~U.2 4ti4.b
73.2
2:>1.9 302.6 67.3
418.4 95.8
97.5
239.5 256.7 60.3 62.6
40f.3 442.9 101.0 103.8
3r9.2
72.3
100.9
64.4
106.0
79.::' 114.4 66.4
103.r lur.3 1U6.6
64.4 03.3 ti4.6
107.:> 112.2 -,,-".1
The U.S. current account deficit was $850 billion (at a seasonally adjusted annual rate, or
"saar"), or 6.4 percent ofGDP, in the second half of 2006, compared with $863 billion, or 6.6
percent ofGDP, in the first half of 2006. Viewed over a longer period, the U.S. current account
deficit increased, as a percent of GDP, from around zero in 1991 to over four percent in the
fourth quarter of 2000. Then, after a cyclically induced narrowing in 2001, it resumed increasing
to reach 7.0 percent in the fourth quarter of2005, before easing from this peak in 2006.
12 The IMF annually reviews U.S. economic performance and policies through the IMF Article IV surveillance
process. The last Article IV surveillance review took place in July 2006. The IMF Article IV Staff Report and the
results of the IMF Executive Board's discussion of the U.S. Article IV review can be found at
http://www.imf.orglexternal/pubs/ft/scr/2006/cr06279.ru!f. In addition, the IMF discusses U.S. economic policies
and performance in the context of its twice yearly World Economic Outlook reports. These can be found at
http://www.imf.orgiPubsJFT/weoI2007/01/index.htm.
13 This report was prepared before the June 8,2007 publication of the annual revisions of U.S. International Trade in
Goods and Services statistics. These revisions are generally small and do not affect the analysis of the report.
8
Although services constitute around 30 percent of U.S. exports of goods and services and around
15 percent of U.S. imports of goods and services, the balance oftrade in services is relatively
small, being around a four to eight billion dollars month surplus over the past several years, and
is relatively stable, showing a slight upward trend. As a consequence, movements in the balance
of trade in goods and services reflect, in the main, movements in the balance of trade in goods.
In the second half of 2006, the United States exported $1,056 billion (saar) in goods and
imported $1,889 billion, with a resulting $834 billion deficit on trade in goodS. 14 Exports of
goods increased 6.5 percent in the second half of 2006 compared to the first half of 2006, while
imports increased 3.3 percent. Imports are sufficiently large relative to exports that the gap
between imports and exports narrowed only marginally, even with weak growth in imports.
Non-automotive capital goods constituted 40.2 percent of merchandise exports in the second half
of 2006. Consumer goods constituted 24.3 percent, and non-automotive capital goods
constituted 22.6 percent of merchandise imports. Petroleum and petroleum product imports
accounted for 16.0 percent of merchandise imports. The value of petroleum and petroleum
product imports as a percent of total merchandise imports has risen from 10.4 percent in the
second half of 2003. The rise in the U.S. oil bill has been an important factor in the growth in
the U.S. trade and current account deficits.
Canada, Mexico, China, Japan, Germany, and the u.K. remain the largest trading partners of the
United States. Canada purchased 21.4 percent of U.S. exports, Mexico 12.7 percent, Japan 5.8
percent, China 5.5 percent, and the U.K. 4.2 percent in the second half 0[2006. China accounted
for 16.8 percent of U.S. imports, Canada 15.5 percent, Mexico 10.5 percent, Japan 8.0 percent,
and Germany 4.7 percent in the second half of 2006.
Country
Total, All Countries (fBII)
Exports
JuI06·Dec06
Country
531.0
Total, All Countries ($BII)
Percent of
Total
I (;anaCia
I MeXICO
I Japan
I China, MalnlanCi
; United Kingdom
I Germany
RepUbliC or Korea
I Netherlands
• Singapore
Taiwan
, France
Memo
!:uro-area
OPE(;
14.9
4.0
953.9
Percent of
Total
IChlna. MalnlanCi
IcanaCia
IMexICO
IJapan
IGermany
IUnitecl KingClom
IRepublic of Korea
ITaiwan
IMalaysia
IFrance
IVenezuela
IMemo
Euro-area
21.4
12.7
5.8
5.5
4.2
4.1
3.1
3.0
2.5
2.2
2.2
Imports
JuI06·Dec06
OPeC-
16.8
15.5
10.5
8.0
4.7
2.9
2.4
2.1
2.0
2.0
1.9
13.1
7.8
l)Ource: ~ureau or tne wensus
Prices of imported goods, not seasonally adjusted or "nsa", increased 0.9 percent in the year
through the fourth quarter of 2006. Non-petroleum import prices rose 1.3 percent over this
WSums may
not be exact due to round'mg.
9
period, while petroleum import prices decreased 0.4 percent. Export prices rose 3.7 percent over
this period. The most recent trough in import and export price inflation occurred roughly at the
beginning of 2002. Since then non-petroleum import prices have risen 9.6 percent and export
prices 14.8 percent.
Foreign demand for U.S. financial assets remains strong. A major item financing the U.S.
current account deficit has been net private foreign purchases of long-term U.S. securities, which
totaled $950.5 billion in the twelve months ending March 2007.
Foreign investors owned $2.1 trillion of Treasury securities at the end of 2006, or 51.9 percent of
the public debt not held in Federal Reserve and U.S. Government accounts. This compares with
$2.0 trillion, at the end of December 2005. Foreign official institutions held $1.3 trillion in
Treasury securities at the end of June 2006, as they did at the end of June 2005. There are
around $20 trillion in U.S. securities of all kinds outstanding.
• Net International Investment Position
The U.S. net international investment position (NIIP) widened (with direct investment valued at
the market value of owner's equity) to a minus $2.5 trillion (20.4 percent of Gnp) at the end of
2005, the latest date for which data are available, from $2.4 trillion (20.9 percent of GOP) at the
end of 2004. A $1.1 trillion valuat~on adjustment, reflecting strong appreciation of foreign
stocks relative to U.S. equity, offset almost all the $785 billion widening attributable to financial
flows and the $394 billion widening due to exchange rate changes. The NIIP (with direct
investment valued at current cost) was a negative $2.7 trillion (21.6 percent of Gnp) at the end
of 2005 compared to a negative $2.4 trillion (20.2 percent of Gnp) position at the end of 2004.
The United States currently earns approximately the same amount on its foreign investments that
it pays out on foreigners' investments in the United States, even though the value of foreigners'
U.S. assets is around $2.5 trillion greater than the value of the U.S.-owned foreign assets. Net
earnings on direct investment have been large enough for many years to offset outflows of
income payments on other forms of international investment, but the difference between the two
has been narrowing and in 2006 net investment income turned into a marginal outflow. U.S.
residents earned $0.8 billion less on their investments abroad than they paid out on foreign
investments in the United States in 2006; in 2005 they earned $18 billion more on their
investment abroad than they paid out on foreign investments in the United States.
The NIIP is a critical measurement in analyzing the sustainability of the current account deficit.
A growing negative NIIP must stabilize as a percent of national output in the long-run, or it will
become impossible to service the external debt out of current or future production. It is generally
believed that a stable NIIP as a percentage of GDP requires that the balance on trade in goods
and services be close to zero. IS
IS The magnitude of the balance depends, among other things, on relative rates of return. For example, U.S.
residents earn a higher rate of return on their foreign assets than residents of foreign countries earn on their U.S.
assets. If this were to remain the case through the indefinite future, then the NIIP could stabilize with the United
States running a deficit on trade in goods and services. There is, however, no clear reason for this advantage to
10
• Financial Markets and the U.S. Current Account Balance
A surplus on the capital and financial accounts is, by balance of payments accounting definition,
the counterpart of a current account deficit. These flows finance that part of net capital
formation that is equal to the excess over domestic saving. The growth of the U.S. current
account deficit over more than a decade has been linked to high levels of domestic U.S. capital
formation compared to domestic U.S. saving. There are counterpart developments throughout
the world that are necessarily linked to this process, since the rest of the world must be running
an aggregate current account surplus, or a deficit on their capital and financial accounts, when
the United States is running a deficit on its current account.
A key feature in discussing global imbalances is the emergence, in the last decade, of a global
saving glut, by which is meant that saving outside the United States has grown relative to
investment 16. Saving rates in many emerging market economies, especially those in Asia, are
very high compared to investment rates, resulting in correspondingly large current account
surpluses. These high saving rates, in turn, may be partly associated with the demographic
consequences of aging and the need to save for retirement in the absence of well developed
public pension systems, and also with the lack of well developed financial systems allowing
consumers to diversify and hedge against risks (including through insurance products) or to
borrow (for example, mortgages). With rising oil prices, large current account surpluses of oil
exporting countries have reemerged. Ten major oil exporters l7 had a combined current account
surplus of over $400 billion in 2006.
Investment rates across the globe have been dampened by a range of factors over the last decade,
including low growth in some economies, the emergence of large service sectors which are less
capital intensive than many industries, excess capacity after the Asia crisis and the bursting of
the IT bubble, more efficient financial intermediation, and strong corporate profitability coupled
with a low propensity to reinvest earnings.
An increasingly efficient and supportive international financial system permits those countries
with an excess of saving to place the excess saving profitably in foreign assets, rather than
forcing adjustments to bring saving and investment into closer equilibrium in individual
countries. The pronounced tendency, over many years, of investors to prefer to invest in their
home country has weakened significantly over the past decade. ls
Financial markets have an indirect, but powerful, effect on current account balances. For
example, ifforeign demand for U.S. assets increases suddenly, asset prices - exchange rates,
interest rates, equity prices, etc. - will change to ensure asset market equilibrium. At that point,
the current account will not have changed and there will be no increased net transfer of assets to
continue indefinitely. The conclusion also depends on a number oftechnical assumptions, such as the rate of
nominal growth of GDP being equal to the nominal rate of interest.
16 Described in Bemanke, Ben S., The Global Saving Glut and the U.S. Current Account Deficit, Remarks at the
Homer Jones Lecture, St. Louis, Missouri, April 14, 2005.
17 Iran, Kuwait, Libya, Nigeria, Norway, Qatar, Russia, Saudi Arabia, United Arab Emirates, and Venezuela.
18 As described by former Federal Reserve Board Chairman Alan Greenspan in his speech, Current Account, to the
Economic Club of New York March 2, 2004.
11
foreign investors 19. However changes in these asset prices will affect imports, exports, saving
and investment so that the current account balance will be reduced over time 20• As a current
account deficit widens, there will be an increase in the net transfer of assets to foreign investors.
In practical terms, perceived high rates of return on U.S. assets, based on sustained strong
productivity growth especially relative to that of the rest of the world, sound U.S. economic
performance, a welcoming U.S. investment climate, and the deepest and most liquid capital
markets in the world have all combined to attract foreign investment. In turn, sustained external
demand for United States assets has allowed the United States to achieve levels of capital
formation that would have otherwise not been possible, and robust growth in investment has
been critical to non-inflationary growth of production and employment.
Tbe U.S. Dollar
In the second half of 2006, the dollar depreciated vs. the euro by 3.2 percent to $1.32, but
appreciated vs. the yen by 3.9 percent to ¥ 119. Until late November, the dollar traded in a
$1.25-1.28 range vs. the euro and gradually appreciated from ¥114 to ¥118.
The key factors in exchange rate movements in this period were shifts in market views regarding
the relative outlook for economic growth and the monetary policy cycle in the United States and
in other countries and a downward adjustment in market expectations regarding returns on U.S.
assets relative to foreign assets. Capital outflows from Japan weighed on yen exchange rates, as
did an increase in short-yen positions used to finance risk positions in other currencies and other
asset classes. Geopolitical tensions were also a factor at times, but this was more evident in oil
and gold prices than in exchange rates.
• The Federal Reserve raised the Fed funds target rate to 5.25 percent in June 2006 but did not
adjust its policy stance further for the rest of 2006 and thus far in 2007. Subsequent U.S.
economic data releases confirmed, on balance, that U.S. economic activity had moderated
and that declines in housing construction and some manufacturing were pronounced. After a
marked depreciation in the fall, the dollar was supported toward the end of the year when
strong sales and manufacturing data prompted an improvement in investors' outlook for U.S.
growth and a reversal of expectations for declines in dollar interest rates.
• The Bank of Japan (BOJ) raised its official policy rate to 0.25 percent in July 2006. At that
time and for a while thereafter, Japanese economic data supported a view in the market that
.further rate increases were likely by year-end. However, market expectations regarding the
extent and timing ofBOJ rate hikes changed after several disappointing Japanese economic
data releases late in the year, and the BOJ did not hike the rate again until February 2007.
Yields on yen-denominated claims remained quite low relative to yields in other currencies
and encouraged Japanese investors' demand for foreign assets. Evidence of increased use of
short yen positions to finance long positions in other currencies accumulated throughout most
of the third quarter of 2006. But in subsequent weeks there were signs that such positions
19 Or, if the U.S. current account were in surplus, there would be no decrease in the rate offoreign acquisition of
U.S. assets.
20 That is a current account surplus would narrow and a current account deficit would widen.
12
were being closed out amid reports of foreign central banks' interest in increasing their yen
reserves and of increased Japanese official interest in monitoring yen-financed "carry
trades.,,21
• After a sharp increase in May and June 2006, implied volatilities in major currencies and
other asset classes eased to or near historical lows in the latter half of the year, and the low
volatility environment favored risk positions financed in low interest rate currencies, notably
the yen. Volatilities briefly turned higher in late November and early December before
settling down again until late February. In late February and early March 2007 they again
rose sharply as market participants became concerned, inter alia, about the risk of a rapid
liquidation of yen-financed carry positions.
• The European Central Bank (ECB) raised its re-financing rate to 3.00 percent in August 2006
and indicated that further increases would be needed to forestall inflation risks in the Euroarea. There were hikes to 3.25 percent in October 2006,3.50 percent in December 2006,
3.75 percent in March 2007, and subsequently 4.00 percent in June 2007. In fall 2006, Euroarea economic data, notably Germany's IFO business climate survey and Q3 GDP, allayed
the market's summertime concern that Germany's impending corporate and consumer tax
increases would hurt economic growth. Interest differentials between the United States and
the Euro-area narrowed substantially throughout the second half of 2006.
• After mid-summer 2006, a number of other foreign central banks raised their interest rates
one or more times before the end of 2006 and in some cases continued to do so in 2007.
These interest rate increases tended to reinforce the market's sense that the monetary policy
cycles in the United States and in other countries were diverging.
Nominal Trade Weighted Dollar
Feb 25, 2CI02 -100
105
100
I
95
90
85
OITP
80
75
70
65~------------------------~~~~~~--~~~~~
~ ~ ~ ~ ~ ~ ~
~ ~
~ ~ ~ ~ ~
~ ~ ~ ~ ~
ee
;
a
21 The "carry trade" is roughly the practice of borrowing in low nominal interest currencies to invest in the assets of
currencies with higher nominal interest rates.
13
Country Analyses
Argentina
Argentina intervenes frequently in the foreign exchange market to manage the value ofthe peso
and build international reserves. Since repaying Argentina's entire $9.9 billion in IMF
obligations in January of 2006, .the central bank has more than rebuilt its stock of foreign
reserves. At end-December 2006, reserves stood at $32.0 billion, up $13.5 billion from the postIMF repayment reserve level of $18.5 billion.
During the second half of 2006, the peso appreciated 0.6 percent in nominal terms, from 3.084 to
3.066 to the dollar. For the entire 2006 calendar year, the peso depreciated 1.3 percent, from
3.026 to 3.066 to the dollar. Argentina's real effective exchange rate depreciated 0.3 percent
during the second half of 2006, due to depreciation of the peso against its non-U.S. trading
partners.
The central bank continues to buy dollars actively in the foreign exchange market. It then
partially sterilizes these purchases through the issuance of central bank paper. In order to rebuild
reserves following its large repayment to the IMP, the central bank stepped up intervention in the
second half of 2006, accumulating $6.5 billion, a 17.7 percent increase, over the last six months
of 2005. The increased dollar purchases in the second half of 2006 reflect changes in monetary
policy that give the central bank greater freedom for intervention. In particular, the monetary
program rules allow the central bank to target M2, instead of the monetary base. Despite the
central bank's sterilization measures, M2 growth accelerated to nearly 14 percent in the second
half of 2006 from just four percent over the first half of last year. Nominal interest rates on
central bank repo transactions rose by 25 basis points in the second half of 2006 to 8.25 percent
from 8.0 percent in the first half of 2006, but real interest rates remained negative with inflation
at 9.8 percent in 2006.
Argentina's economy continued its rapid expansion in 2006, driven by strong growth of private
investment in construction and durable equipment. Real GDP increased at a seasonally adjusted
annual rate of 8.6 percent during 2006, down slightly from 9.1 percent in 2005. Growth in real
GOP slowed to 7.5 percent in the fourth quarter of 2006 (saar) from 11.8 percent in the third
quarter, principally due to a drop in investment in construction near the end of 2006. Strong
growth and an accommodative monetary policy continued to put upward pressure on annual
inflation rates, although inflation moderated to 9.8 percent at year-end 2006 compared to 12.3
percent at year-end 2005. Administrative price controls on 70 percent of the items in the CPI
basket were the main reason for the decline in inflation.
Argentina's trade surplus increased by 7.1 percent in 2006 to $14 billion due to primarily to
higher world commodity prices and improved terms of trade (up 6.3 percent y/y in the fourth
quarter of2006). As a result, Argentina's current account surplus expanded to $8.1 billion (3.7
percent ofGDP) in 2006, versus $5.6 billion (3.0 percent ofGDP) in 2005. Lower interest
payments on external sovereign debt and higher tourism revenue also contributed to a higher
current account surplus. On an accumulated basis, foreign direct investment into Argentina fell
4.0 percent year-on-year to $4.8 billion during 2006. In 2006, the U.S. trade balance with
14
Argentina shifted into a surplus of $800.7 million, from a deficit of $461.7 mi1lion the prior year,
a net positive change of $1.26 billion.
Capital controls remain in effect on both local and foreign U.S. dollar inflows. Residents of
Argentina are limited in the amount of dollars they can bring freely into the country and
foreigners are required to keep dollar inflows in the country for a minimum of one year, with 30
percent held on deposit in an interest-free account at the central bank. Foreign direct investment
is required to remain in Argentina for 365 days.
Brazil
Brazil has a flexible exchange rate regime and relies on inflation targeting to guide monetary
policy. The real continued to strengthen during the second half of 2006, appreciating 1.4 percent
in nominal tenns, from 2.16 to 2.13 reals to the dollar (while the real effective exchange rate
appreciated 5.1 percent). The real has appreciated by 85 percent relative to the dollar since
reaching a low in October 2002, likely reflecting the downward overshooting during the 2002
crisis, structural improvement in export competitiveness, and, more recently, the six percent
improvement in the terms of trade in the last six months of 2006.
Brazil's external accounts have remained remarkably robust considering the strong recovery of
the real. On a seasonally adjusted basis, Brazil's current account surplus was $8.8 billion (1.6
percent ofODP) in the second half of 2006, up from $4.5 billion (0.9 percent ofGDP) in the first
half of the year, while the trade surplus rose from $21.7 billion (4.2 percent of GOP) to $24.4
billion (4.4 percent of GOP) over the same period. The U.S. trade deficit with Brazil narrowed
from $3.8 billion in the first half of 2006 to $3.3 billion in the second half of the year.
The strong real has supported the reduction of inflation in Brazil. The inflation outlook has
continued to improve over the past year, with year-on-year inflation at 3.3 percent in December
2006, down from 4.0 percent in June and below the central bank's 4.5 percent midpoint target for
2006. The central bank has stated it will maintain its same target range in 2007. Net
international reserves have increased rapidly since Brazil repaid its $15.5 billion obligation to the
IMF in December 2005. Gross reserves increased to $85.8 billion by December 2006 from $53.8
billion a year before, and have continued to accumulate at a rapid pace - reaching $109.5 billion
in March of 2007 - as the central bank purchased dollars in the spot market. The government's
goal of reserve accumulation is to smooth out exchange rate fluctuations and to improve the
country's external sovereign position. Gross reserves covered about 50 percent of gross external
debt in the fourth quarter of 2006, compared to 32 percent in the fourth quarter of2005. The
central bank has a broad objective of increasing reserves in the medium run, but has not
committed to a specific numerical target in tenns ofa reserve coverage ratio.
Strong export growth and investment contributed to a recovery of the Brazilian economy during
the second half of 2006 after a disappointing second quarter. A slowdown in export volumes and
consumption growth and continued strong growth of imports had resulted in lackluster real GOP
growth of 3.4 percent at an annualized rate in the first half of 2006 compared to the second half
of 2005. But a strong resumption of export and consumption growth in the second half of 2006,
together with continued robust investment growth, resulted in GOP growth of 5.7 percent over
15
the second halfofthe year and 3.7 percent growth for all of 2006, compared to 2.9 percent in
2005.
Brazil took several steps last year to liberalize its foreign exchange market. In July of 2006,
Brazil loosened its repatriation requirements for exporters, enabling them to keep up to 30
percent of their export revenue abroad and to hold the rest for up to a year. Previously, exporters
were required to repatriate all of their foreign currency earnings within seven months of their
receipt. Brazil now also allows the registration of foreign capital not previously eligible for
registration.
Mexico
Mexico has a flexible exchange rate regime. During the second half of 2006 the Mexican peso
appreciated 4.5 percent in nominal terms, from 11.4 to 10.9 pesos to the dollar. The broad real
trade-weighted effective exchange rate appreciated by 5.2 percent during the same period. The
real appreciation reflected, in part, increased market confidence in the new administration
following the close presidential elections of July 2, an improved outlook for advancing key
structural reforms, and relatively contained inflation.
Heavy external debt repayments during the second half of 2006 resulted in an $11.1 billion drop
in foreign exchange reserves from $78.7 billion at the end of June to $67.7 billion by the end of
December. Pemex, the state-controlled Mexican oil company, is obligated by law to sell its
foreign currency earnings to the Bank of Mexico to service the country's foreign debt. Reserves
accumulate, therefore, when the foreign currency obtained by the Bank of Mexico is greater than
foreign debt payments. The Bank of Mexico follows a transparent rule for selling these reserves.
Every 13 weeks, the Bank of Mexico retains half of the reserves accumulated during that period
and sells the other half evenly over the ensuing three months. This procedure is designed to
prevent uncertainty in the financial markets and minimize discretionary actions by the financial
authorities.
Mexico's seasonally adjusted current account deficit was $2.1 billion in the second half of2006
compared to a surplus of $368.5 million in the first half of 2006. The $2.5 billion reversal in the
current account balance reflects the fall in oil prices in the second half of2006. Mexico's trade
surplus with the United States for the second half of2006 was $32.8 billion, up slightly from
$31.3 billion in the first half of 2006. Mexico is the second largest supplier of oil to the United
States.
Also, the slowdown in the U.S. economy in the second half of the year contributed to a
deceleration of economic growth to a more moderate pace in the second half of the year. Real
GDP increased at seasonally adjusted annual rates of 2.7 percent and 1.9 percent during the third
and fourth quarters, respectively. At the same time, supply shocks on certain key food items
(mainly com and tortillas) caused a temporary spike in inflation, resulting in price levels above
the Bank of Mexico's three percent target. Year-on-year headline inflation was 4.1 percent in
December, compared with 3.2 percent in June.
16
Mexico does not maintain controls against most external capital inflows and outflows. It does,
however, maintain some restrictions against certain types of foreign investment, such as the
establishment of foreign bank branches within Mexico.
Venezuela
Venezuela maintains a pegged exchange rate. The official nominal exchange rate was 2,147
bolivars to the dollar at end-December 2006, unchanged since end-December 2005. The J.P.
Morgan trade-weighted real effective exchange rate appreciated by 4.4 percent during the second
half of 2006, largely due to Venezuela's high inflation rate.
The high inflation rate is largely the result of an accommodative monetary policy stance, with
real interest rates that are significantly lower than elsewhere in the region. In particular,
unsterilized reserve accumulation is contributing to monetary expansion and inflationary
pressures. The stock of central bank reserves increased to $36.6 billion at end-December 2006
compared to $31.2 billion at end-June 2006 and $29.6 billion at end-2005. The monetary base
expanded by 67 percent to end-December 2006 from the end-June 2006. Annual inflation
increased to 16.9 percent year-on-year at end-December 2006 from 11.8 percent year-on-year at
end-June 2006, significantly above the 90-day deposit rate of 10 percent seen through most of
2006. The combination of high inflation and a fixed exchange rate, which have contributed to
real exchange rate appreciation, has eroded Venezuela's competitiveness as evidenced by strong
import growth and falling non-oil exports in 2006.
Venezuela has a large current account surplus, equal to 14.9 percent ofGDP in 2006. Higher oil
prices account for much of the recent strong growth performance, the large current account
surplus, and foreign reserve accumulation, although oil prices did ease somewhat in late 2006.
Oil accounts for about one third of Venezuelan GOP, 90 percent of the country's exports and
close to halfofgovemment revenues. Real GDP rose by 10.3 percent in both 2005 and 2006,
driven primarily by strong growth in government expenditure exclusive of interest payments
(about 40 percent real growth) and private consumption (18.8 percent real growth) in 2006 as the
government sought to disperse the benefits of additional oil revenue.
The willingness of the government to spend quickly its extra oil revenue led to strong import
growth in 2006, which caused the current account surplus to shrink as a percent of GOP in 2006.
The current account surplus did rise in dollar terms to $27.2 billion (14.9 percent ofGDP) in
2006 compared to $25.5 billion (17.6 percent of GOP) in 2005, but this growth did not keep pace
with nominal GOP growth. Also, while petroleum exports rose by $10.4 billion to $58.4 billion
in 2006, this increase was largely offset by an $8.5 billion increase in goods imports in 2006.
The bilateral U.S trade deficit with Venezuela fell to $13.6 billion during the second half of
2006, down from $14.5 billion in the first half of 2006. The slightly lower bilateral trade deficit
primarily reflects increased U.S. exports to Venezuela, rather than lower oil prices.
Venezuela maintains extensive controls on capital inflows and outflows. These controls require
exporters to surrender their foreign exchange earnings to the government at the official exchange
rate.
17
The Euro-area
The value of the euro is market-determined, and the European Central Bank (ECB) has not
intervened in the foreign exchange market since November 2000 when it defended the euro
against further depreciation. The Euro-area's international reserves increased by $15 billion
between June 2006 and December 2006 reaching $184 billion.
Citing inflationary pressure, the ECB has continued to raise its main refinancing rate, currently
4.00 percent. The ECB's primary monetary policy target is an annual rate of inflation of less
than 2.0 percent. In the wake ofECB interest rate hikes and a narrowing of the dollar/euro
interest rate spread, the euro appreciated 3.3 percent in nominal terms against the dollar during
the second half of 2006, from $1.28 per euro to $1.32. Over the same period, the euro
appreciated 1.2 percent in real effective terms 22 • Thus far in 2007 the euro appreciated a further
1.8 percent against the dollar, reaching $1.34 on May 24.
The Euro-area's current account balance increased to a $8.6 billion surplus (0.2 percent ofGDP)
in the second half of 2006 compared to a $13.2 billion deficit (0.3 percent of GOP) in the first
half. The Euro-area's trade surplus with the U.S. declined during the second half of 2006
compared with the same period in 2005, to $46.2 billion from $48.7 billion.
CPI-measured inflation reached 1.9 peryent (y/y) in March 2007, relatively stable since
December 2006 despite a three percentage point V AT hike in Germany at the beginning of the
year. Euro-area growth increased to 2.8 percent in 2006, up from 1.5 percent in 2005. Growth is
broad-based with net exports, investment and private consumption all making significant
contributions. Unemployment has been falling since 2004, reaching a IS-year low of7.3 percent
in April. Expanding employment should support private consumption in the medium term.
The ECB has expressed concern about the pace ofM3 growth rate (the growth of the threemonth centered moving average, which reached 10 percent in February 2007). This is
significantly higher than the ECB' s comfort zone of four percent, a fact that underpinned the
market's correct expectations of a 25 basis point hike to four percent of the minimum bid for the
main refinancing rate in June 2007.
Germany
Germany's current account surplus increased from $57.4 billion (or 4.1 percent ofGDP) in the
first half of 2006 to $90.7 billion (or 6.1 percent of GOP) in the second half, largely due to strong
import demand from Russia and Asia. For all of2006, Germany's current account surplus was
$148.0 billion (5.1 percent ofGDP) as real exports of goods and services expanded 13.4 percent
and real imports of goods and services increased 11.9 percent. Germany ran a $23.3 billion
bilateral merchandise trade surplus with the United States in the second half of 2006, compared
to a $26.3 billion bilateral surplus in the second half of 2005.
Strong export growth helped propel strong German annual growth, which for 2006 almost tripled
to 3.0 percent from 1.1 percent in 2005. While net exports continue to drive growth, economic
22
Source: ECB. The index is based on producer price indices.
expansion did become more broad-based in 2006, with both investment (up five percent from
one percent in 2005) and private consumption (up 0.9 percent from 0.3 percent in 2005)
improving. Domestic demand growth increased to 1.5 percent during the second half of 2006
from 0.8 percent during the same period in 2005.
Spain
Although the stronger euro and declining net exports have restrained Spain's growth rate, it has
still been reasonably robust. Growth was an annual 3.8 percent in the second half of 2006 after
expanding at a 4.0 percent rate in the first half of the year. Growth has been driven by domestic
demand, in particular investment. Annualized consumption and investment growth were 5.1
percent and 6.3 percent, respectively, in the second halfof2006. Strong growth helped
unemployment to fall to 8.4 percent in the fourth quarter of 2006, down from 8.6 percent in the
second quarter of the year.
Inflation fell to 2.7 percent y/y in December 2006, down from 3.9 percent y/y in June. There are
concerns about overheating given the concentration of economic activity in the housing sector
and cost pressures resulting from record-low (for Spain) unemployment. Fiscally, the
government ran a budget surplus of 1.8 percent of GDP in 2006.
The principal factor behind Spain's widening current account deficit has been Spain's high level
of investment; gross fixed capital formation was 29.2 percent of GOP in the second half of 2006.
The current account deficit reached $60.6 billion (9.5 percent of GOP), up from $45.4 billion
(7.7 percent ofGDP) in the first half of the year. Goods imports increased 9.6 percent y/y, while
goods exports increased 8.4 percent y/y. Spain's bilateral surplus with the United States on trade
in goods was $1.3 billion in the second half of 2006, an increase of $366 million over the same
period in 2005. Spain's increasing trade surplus with the U.S. is largely related to higher
exports, in dollar terms, of refined fuel products to the United States.
The Netherlands
The Netherlands continues to post large current account surpluses. Its current account surplus
was $27.1 billion (7.9 percent ofGDP) in the second half of 2006, up $6.3 billion from $20.8
billion (6.8 percent ofGDP) during the second half of 2005. The Netherlands has trade and
services surpluses as well as a surplus on net income flows that more than offset a deficit in
transfers. Both the trade and income balances are influenced heavily by the large number of
international companies based in the Netherlands (e.g., Shell, Unilever, Phillips, and Mittal)
that have transformed the Netherlands into a major processing and trans-shipment point for
Europe. For the full year in 2006, the current account surplus was 8.7 percent ofGDP, up
from 7.7 percent in 2005. The Netherlands had a bilateral trade deficit with the United States,
which grew to $6.9 billion in the second half of 2006, up $1.8 bil1ion from the same period in
2005, due largely to aircraft sales.
GDP grew 2.9 percent (annualized) over the second half of 2006, driven largely by investment,
which increased 11.3 percent. Both private and public investment grew rapidly (12.7 percent
and 4.2 percent, respectively) due to several one-off factors (e.g., updating computer equipment,
19
vehicle purchases due to changes in subsidies, and airplane purchases). Headline inflation was
1.7 percent in December (y/y) while core inflation was 1.2 percent.
Norway
Norway has a freely floating exchange rate and a monetary framework targeting inflation. The
Norwegian kroner depreciated 0.3 percent against the dollar during the second half of 2006 while
the JP Morgan index of the real value of the kroner was unchanged over the period.
Norway is a major oil and gas exporter and a key player in the oil services industry. Its current
account surplus during second half of 2006 was $28.5 billion (16.8 percent of GDP), up a
nominal $5.0 billion from $26.1 billion (17.0 percent of GDP) in the second half of 2005.
Merchandise exports in the second half of 2006 were up 8.5 percent over the same period in
2005 while imports increased 14.8 percent. Norway had a bilateral trade surplus of $2.3 billion
with the United States in the second half of 2006, up $8.4 million from the corresponding period
in 2005. Foreign exchange reserves grew $7.4 billion to $56.8 billion during the second halfof
2006.
Norway's central bank reserves the right to intervene in foreign exchange markets to influence
the kroner but has not done so since January 1999; however, management of the Government
Pension Fund (GPF) - the custodian of Norway's oil and gas wealth portfolio - influences
currency developments. By investing the GPF's resources overseas, Norway reduces the
influence that oil and gas-related earnings inflows might have on the exchange rate. At the end
of2006, the GPF's market value was $284.9 billion (83 percent of total 2006 GDP, or 114
percent of non-oil and gas GDP) and growing rapidly. By law, the return on the GPF's
investments abroad can be used for current government consumption while the principal remains
as a retirement fund for future generations. However, some of the GPF is already being used to
service retirement benefits through the current government budget. Oil and gas production is
expected to peak in 2008 and halve by 2030, and revenue accruing to the GPF is inadequate to
meet the needs of a rapidly aging population. Consequently, there is increasing pressure to
reform the pension system to avoid the need to draw down GPF principal.
GDP increased 3.1 percent (at an annual rate) during the second half of 2006 compared to
the second half of 2005. Consumption grew by 4.6 percent during the same period while
fixed investment increased 12 percent, reflecting strong activity in the construction,
machinery and equipment and oil drilling sectors. Headline inflation was 2.2 percent
(annualized) during the period while core inflation was 1.1 percent. Monetary policy was
gradually tightened during the second half of 2006 as the key policy interest rate was raised
from 2.75 percent to 3.5 percent due to concerns about economic overheating.
Switzerland
Switzerland has a freely floating exchange rate and an inflation targeting monetary regime. The
Swiss franc appreciated one percent against the dollar and depreciated 2.9 percent against the
euro during the second half of 2006. The JP Morgan index of the real value of the Swiss franc
depreciated 2.2 percent during the same period.
20
Switzerland's large and persistent current account surplus is supported by robust exports,
services income (mostly banking fees derived from its role as an international banking center)
and income from overseas investments that support the financial sector.
According to the Swiss central bank, Switzerland posted a $33 billion current account surplus
(16.6 percent ofGDP) in the second half of 2006, up from $27.1 billion (15 percent of GOP) in
the same period in 2005. The trade surplus increased $1.8 billion (from $700 million to $2.5
billion) in the second half of 2006 compared to the corresponding period in 2005, while the
surpluses in the services and income accounts increased $1.3 billion (to $13 billion) and $1
billion (to $21.5 billion), respectively, during the same period. The surplus on trade in goods
accounted for 7.6 percent of the total current account surplus in the second half of 2006 while
surpluses on services and income accounted for 40 percent and 65 percent, respectively. The net
transfers balance deficit over the period accounted for -12.7 percent. Goods exports increased by
14 percent in the second half of 2006 over the corresponding period in 2005, while imports grew
by 11.4 percent. The U.S. trade surplus vis-a.-vis Switzerland was $63.2 million in the second
half of 2006, up from a deficit of $1.1 billion from the corresponding period in 2005. The
counterpart to the current account surplus is largely direct investment outflows, which are
estimated to have been $27.6 billion in the second half of 2006.
As a small open economy, Swiss economic conditions are heavily influenced by conditions in
the Euro-area, Switzerland's largest trading partner. Monetary tightening continued during the
second half of 2006 with the policy interest rate rising to 2.1 percent at the end of 2006, from 1.4
percent in June 2006 - which mirrored rate increases by the ECB. Nonetheless, Swiss interest
rates are low relative to those of other major currency countries including the euro. As a result,
the Swiss franc continues to be a significant funding source for "carry trades" in the region. This
tends to place downward pressure on a currency and helps explain the franc's depreciation
despite robust fundamentals. At the same time, countervailing forces that have traditionally
supported the franc have weakened. According to the IMF, the franc's status as a "safe haven"
currency has lessened and it has lost market share as an official reserve currency following
central bank's gold sales in 2005. Foreign exchange reserves rose from $36.2 billion to $38
billion during the second half of 2006.
GOP growth was estimated to be 1.9 percent (annualized) during the second half of 2006.
Consumption and fixed investment grew 2.1 percent and 5.6 percent, respectively, on an
annualized basis during the same period, while net exports grew 4.9 percent during the second
half of 2006 compared to the second half of 2005. During the second half of 2006, headline
inflation was 0.6 percent y/y, while core inflation was 0.8 percent y/y.
Russia
The exchange value of the Russian ruble is managed by the Central Bank of Russia against a
reference basket of the US dollar and euro. The U.S. dollar's and euro's shares in the basket are
55 percent and 45 percent, respectively. The central bank continues to manage closely the
exchange rate in an effort simultaneously to meet inflation targets and to limit real exchange rate
appreciation. The ruble appreciated two percent against the dollar during the second half of
21
2006. However, as a result of the strength of the euro, the Central Bank's nominal tradeweighted index of the ruble depreciated 0.5 percent in the second half of 2006 while its real
trade-weighted index appreciated by 0.5 percent. The ruble has continued to appreciate against
the dollar since the end of 2006, firming an additional 2.4 percent in 2007. The appreciation of
the real exchange rate also accelerated to 2.6 percent in the first quarter of 2007 as Russia's
inflation rate remains above that of its major trading partners.
The Central Bank of Russia's intervention to moderate exchange rate appreciation boosted total
international reserves to $303 billion at the end of 2006 from $182 billion at the end of 2005.
Net of valuation changes, Central Bank of Russia reserves rose $107.5 billion during 2006,
compared. with an increase of$61.5 billion during 2005. In addition, the balance of Russia's oil
stabilization fund rose to $89 billion at the end of 2006 from $43 billion at the end of2005.
A decline in oil prices, coupled with strong growth in imports, resulted in a decline in Russia's
current account surplus to $39.5 billion (not seasonally adjusted, or "nsa"), or 7.1 percent of
GOP, in the second half of 2006 compared to $41.7 billion, or 10.0 percent of GDP, in the
second half of 2005. Russia's bilateral trade surplus with the United States increased to $7.6
billion in the second half of 2006 compared to $5.4 billion in the second half of 2005. The net
inflow of private sector capital that began in the second half of 2005 continued in the second half
of2006, as international bank lending to Russian enterprises helped to compensate partially for a
year-end fall off in direct and portfolio investment flows. As a result, the financial accounts in
the balance of payments, exclusive of changes in reserves, posted a surplus of $1.7 billion during
the second half of 2006 compared to a $3.4 billion surplus in the second half of 2005.
In addition to Russia's current and financial account surpluses, declin~ng demand among Russian
households for foreign exchange, or "de-dollarization", also contributed to increased demand for
rubles in the foreign exchange market. Like most of the former Soviet Union, Russia has been
heavily dollarized and the domestic money supply can be thought of as having, in effect, ruble
and foreign denominated components. Fluctuations in the exchange value of the dollar can cause
Russian residents to buy or sell rubles, impacting the ruble-denominated portion of the domestic
money supply.
Indeed, "de-dollarization" partially explains the dissimilar behavior of inflation and the growth
in the large ruble monetary aggregate, M2. The increase in the cpr slowed from 10.9 percent
y/y in December 2005 to 9.0 percent y/y in December, compared to an end-2006 Central Bank of
Russia inflation target of9.0 percent. Growth in M2, by contrast, accelerated to 48.8 percent in
the 12 months through December compared with growth of 38.6 percent in 2005. While the fall
in inflation is largely attributable to a sharp deceleration in the growth of administered prices
which make up approximately 20 percent of Russia's CPI basket, the acceleration ofM2 growth
over the period can be explained by continued foreign exchange sales by Russian residents, the
limited effectiveness of Central Bank of Russia sterilization efforts and a strong increase in bank
credit to the real economy.
Real GOP growth accelerated to 6.7 percent y/y during the first half of 2006, little changed from
6.4 percent in 2005. Output growth has been supported by strong household spending and fiscal
22
easing as the government is spending a larger share of oil revenues ahead of the 2007-2008
election cycle.
.South Africa
The South African Reserve Bank's overall monetary policy framework is based on inflation
targeting and a floating exchange rate. It has, nevertheless, been operating in the market, since
March 2003, to purchase foreign exchange with the aim of building its foreign exchange
reserves. The Reserve Bank seeks to purchase foreign exchange when the market is active,
while not explicitly seeking to set any level for the rand, or to resist market movements. All
purchases of foreign currency for reserves are fully sterilized.
Although overall the rand appreciated 1.8 percent from end-June to end-December, it
experienced wide swings over the period, depreciating 11.9 percent from the middle of August to
the first of October then appreciating 9.7 percent though the end of the year. Commodity price
fluctuations and shifting investor sentiment pushed the rand to a three-year low at the start of the
fourth quarter, as they had done during the May-June 2006 period, in which the rand depreciated
16.3 percent against the dollar. The rand strengthened by end-December with improved
commodity prices, South African interest rate hikes, and renewed investor interest in emerging
markets.
Domestic demand continued to strengthen, supported by an 11 percent increase in private sector
credit expansion in the second half of 2006, and the current account deficit reached 6.4 percent
ofGDP in 2006 (annualized 5.7 percent in Q3 and 7.8 percent ofGDP in Q4). Growing capital
equipment imports and exceptionally high oil imports2 , combined with moderate export levels
in the final quarter of 2006, widened the deficit. Net financial inflows comfortably financed the
current account deficit and the central bank continued to increase its foreign reserves, which
increased seven percent to $25.6 million by end-December from end-June. Reserve levels
represent about five months import cover.
Robust demand also contributed to annualized 4.5 and 5.6 percent real GDP growth in Q3 and
Q4, respectively, and five percent for the year. Responding to perceived inflationary pressure,
fueled by private sector consumption growth, rising fuel prices, and rand depreciation, the central
bank raised interest rates 200 basis points to nine percent in the second half of 2006. Although
the full impact of the interest rate hikes wiIllikely reach into 2007, Q3 and Q4 inflation remained
within the bank's official 3-6 percent target band, at five percent,24 while consumer prices were
4.6 percent higher in 2006 than in 2005.
South Africa's imports from the United States increased 15 percent in 2006 over 2005 (to a total
of$4.5 billion) while South Africa's exports to the United States were up 28 percent to $7.5
billion.
23 The South African Reserve Bank attributed the current account deficit spike in 4Q06 to oil import timing,
predicting that the deficit would return to the five percent range in 2007.
24 The South African Reserve Bank's inflation target corresponds to CPIX inflation, which is cpr minus mortgage
interest.
23
South Africa ran a small fiscal surplus (0.8 percent of GOP) in FY06/07 (year·ending March 31)
- the country's first budget surplus since the 1994 transition. The FY07/08 budget calls for
another surplus, followed by modest deficits the following two years as the country ramps up
infrastructure expenditure. Better revenue collection and a favorable economic backdrop fueled
the fiscal improvement. The budget includes further capital control liberalization, continuing the
policy of gradually removing capital flow constraints. South African firms may now enter into
joint ventures outside Africa with a 25 percent stake (previously a 51 percent stake was
required); and companies may conduct trade dealings through a single foreign currency account
rather than multiple accounts as before.
Egypt
Egypt abandoned its formal peg to the U.S. dollar in 2003 and launched an interbank foreign
exchange market in late 2004. While Egypt technically allows its currency to move against the
U.S. dollar, it has maintained a de facto peg against the dollar since January 2005: daily volatility
has been low, and the pound has only gradually appreciated from 5.9 pounds per dollar, when the
peg began, to 5.7 pounds per dollar in early 2007. Between December 2005 and December
2006, the pound appreciated 0.4 percent in nominal terms; however, due to Egypt's relatively
high inflation (12.5 percent y/y in December), the real trade weighted effective exchange rate
appreciated by 4.1 percent.
The de facto peg serves to dampen exchange rate volatility while the Central Bank of Egypt
(eBE) lays the groundwork for greater currency flexibility. The CBE has a medium·term goal of
adopting a formal inflation targeting regime to guide monetary policy. This would require the
pound to float freely. In the meantime, the CBE is working to increase the transparency of its
policymaking and improve its ability to monitor prices and economic conditions.
Structural reforms implemented since 2004, along with a robust regional economy, helped
Egypt's economy to grow by 6.8 percent in the fiscal year ending in June 2006, with the IMF
projecting growth of 6.7 percent for the year ending in June 2007. Egypt has also received a
large influx of foreign capital, driven in part by the government's ambitious campaign to
privatize state·owned firms: net foreign direct investment reached a record $6.9 billion in the six
months ending in December 2006, more than double the $3.0 billion received during the same
period in 2005.
Rapid economic growth has been accompanied by rising inflation: the CPI rose 12.5 percent y/y
in December 2006, compared to a three percent increase during the same period in 2005. The
recent spike in inflation partly reflects the temporary impact of reduced government price
subsidies for energy and food. The monetary base (MO) grew by 10 percent in the year ending
December 2006, contributing to 15 percent growth in broad money (M2).
The current account surplus rose modestly to 2.5 percent of GDP in 2006, compared to 2.2
percent of GDP in 2005. This surplus came mainly from the strong surplus on the services
balance, including Suez Canal revenues and tourism, of 8.8 percent of GDP in 2006, and also
large net transfers of 5.4 percent ofGDP in 2006. By contrast, Egypt's trade deficit was 11.7
percent of GDP in 2006, while the bilateral trade deficit with the United States reached $1.7
24
billion, an increase over the $1 billion deficit in 2005. The CBE' s reserves grew by 19 percent
y/y to $26.1 billion at-end December from $21.9 billion a year earlier.
Saudi Arabia
High and rising oil prices over the last few years are the main cause of the country's high growth,
large current account surplus, and rapidly accumulating net foreign assets, but the government's
fiscal policy has also played some role. The Saudi Riyal has been unofficially pegged to the
dollar since 1986 (officially since 2003), so interest rates largely follow recent increases in the
United States. The Gulf Cooperation Council has set a goal of establishing a formal monetary
union by 2010, but it is still unclear how this will affect Saudi Arabia's exchange rate regime.
On a real trade-weighted basis, the Riyal depreciated 5.7 percent y/y to December 2006, which
was largely due to U.S. dollar depreciation and relatively low inflation in Saudi Arabia.
Saudi Arabia is one of the most oil-dependent economies in the world, with oil accounting for
around 50 percent ofGDP, almost 90 percent of export earnings, and over 80 percent of
government revenue. With high and rising oil prices over the past few years, real GOP growth
has averaged close to six percent, with average nominal GOP growth around 12 percent. Despite
strong economic growth, official CPl inflation was contained to less than one percent y/y on
average over 2002.2005, but did increase modestly to 2.9 percent y/y in December 2006 on the
back of strong food price inflation, which posted a 6.6 percent y/y increase to December 2006.
Saudi Arabia's current account surplus has soared over the past few years, but strong import
growth of26 percent y/y in 2006 caused the overall current account surplus to fall as a percent
ofGDP to 27.4 percent in 2006 compared to 29.3 percent in 2005. While oil export revenues
increased to $188.6 billion in 2006 from $161 billion in 2005 due largely to higher oil prices,
imports of goods and services increased by more, rising to $120.2 billion in 2006 from $88.2
billion in 2005. The bilateral trade surplus with the United States reached $23.9 bil1ion in 2006,
compared with $20.4 billion in 2005, due largely to higher oil prices.
The government's financial position continued to improve as oil revenue caused the budget
surplus to increase slightly to 20.3 percent ofODP in 2006 from 18.4 percent in 2005. The
government used much of that surplus to reduce total government debt, which fell to 28 percent
of GDP in 2006 and is down from 86 percent in 2003. If oil prices are stable, implementing the
government's plans to increase expenditure on social and infrastructure projects would reduce
these surpluses over time.
Due to the large current account surplus and fixed exchange rate, the net foreign assets of the
Saudi Arabian Monetary Agency rose to $255 billion in March 2007, providing over two years
of import cover, from $182 billion in March 2006. However, SAMA official reserves minus
gold actually fell over the same period from about $28 billion to about $27 billion.
Singapore
The Monetary Authority of Singapore (MAS) has a mandate to implement monetary policy with
the objective of maintaining price stability for sustainable economic growth. To achieve its
25
mandate, the MAS uses the exchange rate as its operational monetary policy tool, managing the
Singapore dollar (SGO) against an undisclosed basket of currencies of its major trading partners.
Since April 2004, the MAS has followed a policy of "modest and gradual" nominal appreciation
against this basket. On April 10, 2007, the MAS reaffirmed its policy stance.
In the second half of 2006, the SGn appreciated 3.2 percent against the U.S. dollar. (SGO
appreciation totaled 8.4 percent for 2006.) JP Morgan's nominal trade-weighted index of the
SGO appreciated 1.7 percent in the second half of last year. However, the real trade-weighted
index depreciated 4.8 percent over the same time period, reflecting a significant drop in
wholesale price inflation in Singapore in the last quarter of the year. Headline CPI inflation was
just under one percent in 2006. The economy continued to expand briskly, with growth at 7.9
percent (saar) in the fourth quarter of2006 following 3.9 percent (SAAR) in the third quarter.
High and increasing saving rates, accompanied by stable investment rates for Singapore in recent
years, have resulted in persistently large current account surpluses. For 2006, the current
account surplus reached 27.5 percent of GOP. Singapore's gross national saving rate, which has
exceeded 40 percent of ODP since 2004, is among the world's highest, and primarily reflects
extremely high corporate saving and, to a lesser extent, persistent budget surpluses. Meanwhile,
domestic investment remains around 20 percent of GOP. Corporate profits and government
savings - including profits from government-linked companies - are often invested overseas.
Driven by the large current account surplus and the managed exchange rate regime, reserves
increased by $8 billion in the second half of 2006, or about six percent of GOP. Total official
reserves were $138 billion at year-end, or just over 100 percent ofOOP. In addition, the
Singapore's Government Investment Corporation (GIC), which was established in 1981 to
manage fiscal surpluses and reserves in the face of chronic balance of payments surpluses, also
likely acquired additional foreign exchange. Singapore continues to run a bilateral trade deficit
with the United States, amounting to about $4.2 billion in the second half of the year, up from
$2.5 billion in the same period one year earlier.
India
India's exchange rate arrangement is a managed float. In the second half of 2006, the Reserve
Bank ofIndia (RBI) made U.S. dollar purchases totaling $5 billion, contributing to an overall
increase in foreign exchange reserves of$14 billion. In the first half of 2006, the RBI purchased
$15.6 billion, and foreign exchange reserves increased $25 billion. The rupee appreciated 4.0
percent against the dollar in the second half of the year. The JP Morgan real effective tradeweighted index ofthe rupee appreciated by 2.8 percent over the same period.
The RBI describes its monetary objectives as "maintaining price stability and ensuring adequate
flows of credit to productive sectors." These objectives are implemented by adjusting market
liquidity through repurchase ("repo") and reverse repo agreements, open market operations, and
the cash reserve ratio applied to banks.
India's economy grew 9.8 percent in the second half of 2006 from the second half of 2005,
driven by continued strong activity in the manufacturing and services sectors. Robust domestic
26
demand and increases in food prices put upward pressure on wholesale price inflation, which
was 5.7 percent y/y in December, up from 4.4 percent y/y one year earlier. In response to
inflationary pressures, the RBI increased policy rates by 25 basis points twice, in July and
October, and raised the cash reserve ratio by 25 basis points in December.
The current account deficit was a seasonally adjusted $2.7 billion (0.7 percent ofGDP) in the
second halfof2006 compared with $7.3 billion (1.9 percent ofGDP) in the first half. The U.S.
bilateral trade deficit with India was $6.0 billion in the second half of 2006, which is slightly
larger than in the same period one year earlier.
Capital inflows financed the current account deficit comfortably. Although large overseas
acquisitions by Indian companies drove up outward FDI, net foreign direct investment and
portfolio inflows were $10.2 billion in the second halfof2006 compared to $9.3 billion in the
second half of 2005. Gross FDI inflows in the second half of 2006 were $12.1 billion, $8.5
billion more than the year before. Higher FDI was driven by the strength of domestic economic
activity and was focused in the financial services, manufacturing, infonnation technology
services and construction sectors. There were strong portfolio inflows from foreign institutional
investors (FIIs}-particularly in equity markets between August and November 2006. During
December 2006, FIls registered outflows against the backdrop of global equity market volatility.
Indian commercial borrowings abroad were valued at $5.5 billion in the second half of 2006,
$2.4 billion higher than in the same period in 2005.
Japan
Japan maintains a floating exchange rate regime. The Yen is widely traded in foreign exchange
markets, with total average daily volume of $425 billion (dollar equivalent). Japanese authorities
have not intervened in the foreign exchange market since March 2004.
Japan's economic recovery continues, but it has not proved sufficiently robust for the Japanese
economy to durably exit price deflation. Although the recovery is now in its sixth year, nominal
GDP still remains below its 1997 peak. Economic growth has accelerated modestly from 0.3
percent in the first year of the recovery (2002) to 2.2 percent in 2006. Although GDP growth
increased to a 3.3 annual rate in the first quarter of 2007, domestic demand growth was a more
subdued 1.4 percent, the same as the average rate for 2006. Growth last year was increasingly
reliant on business investment and domestic demand (contributing 1.4 percent) but net exports
also contributed 0.8 percent to overall growth. Private consumption contracted sharply in Q3
2006, but rebounded in the final quarter of 2006, to move above 2005 levels. Consumer prices,
which rose 0.5 percent y/y during the second half of 2006, began to decline once again at the
start of 2007. The CPI fell 0.1 percent y/y in March 2007, while the CPI, excluding fresh food,
dropped 0.3 percent y/y.
With the exit from deflation not yet complete, the Bank of Japan (BOJ) continues to maintain an
accommodative monetary policy stance. On July 14, 2006, the BOJ raised overnight interest
rates from zero to 0.25 percent. The BOJ took another step on February 21, 2007, raising
interest rates another 25 basis points to 0.50 percent.
27
Japan's trade and current account surpluses increased in the second half of 2006 as faIling oil
prices helped reduce the import bill. As a share ofGDP, Japan's current account surplus stood at
4.1 percent in the second half of 2006 compared to 3.8 percent in the second halfof2005. Less
than half of the current account surplus is due to trade in goods and services. Rather, net income
inflows from Japan's overseas direct and portfolio investment account for more than half of the
external surplus. The U.S.'s bilateral deficit with Japan widened by $4.5 billion to $45.4 billion
in the second half of the year compared with the same period in 2005.
Gross flows of private capital remained very large in the second half of 2006, although the net
outflow (the sum of net domestic and foreign outflows) slowed to $47.1 billion in JulyDecember 2006, compared to outflows of$54.4 billion over the first six months of2006.
Japanese investor outflows have been supported by household demand for overseas bonds and
equities. A wide interest rate gap between the U.S. and Japan remains, and investors continue to
make use of short-term interest carry trades.
The yen weakened 3.8 percent versus the dollar over the July to December 2006 period, closing
at ¥119.07 on December 29. The yen has further weakened slightly in 2007, depreciating to
¥12l by early June. Indexes of the real effective value ofthe yen have been weakening for some
years as these indices have been dominated by the differential in inflation between Japan - which
has experienced persistent deflation since 1998 - and its trading partners. The BOJ index
indicates that the yen is at its weakest level in roughly 20 years. The BOJ index depreciated 3.3
percent over the second half of 2006, and was 3.3 percent weaker compared to December 2005.
It has weakened further over the first five months of 2007.
Japan's foreign exchange reserves continue to rise, reflecting interest earned on reserves and
valuation effects. 25 • Gold and foreign exchange reserves totaled $895.3 billion at the end of
December 2006, up from $864.9 biUion at end-June and $846.9 billion at end-December 2005.
Reserves rose further to $908.9 billion at end-March 2007.
South Korea
South Korea's exchange rate has exhibited a high degree of flexibility on both a day-to-day basis
and over time, although the authorities have carried out intervention operations. Over the past
two years, the average daily fluctuation of the Korean won26 has been similar to that of the euro
and the Japanese yen. The won appreciated 3.2 percent against the dollar in the last half of 2006,
and by more than 10 percent from its December 31, 2005 value. The won appreciated 30.3
percent against the dollar from February 27,2002, when the Federal Reserve Board's Index of
the dollar's nominal trade weighted value reached its most recent peak, through May 10,2007.
During that period, the dollar depreciated 36.0 percent against the euro, 28.6 percent against the
pound sterling, and 31.2 percent against the Canadian dollar. The won has also appreciated in
real effective terms, strengthening 5.7 percent by end-2006 versus end 2005, but has since
weakened 3.0 percent from the beginning ofthis year through March 2007.
Upward valuation adjustments are the result of increases in the dollar value of non-dollar currencies that Japan
holds as reserves.
26 As measured by the average absolute value of the daily percentage change in the closing price ofa currency.
2S
28
Foreign exchange reserves increased $28.4 billion (13.5 percent) in 2006, reaching $238.4
billion, almost equal to South Korea's total foreign debt of $263.4 billion. The pace of growth in
foreign exchange reserves over the second half of the year ($14.4 billion) was slightly less than
in the first half($15.3 billion). Over the first three months of2007, foreign exchange reserves
have grown $5.0 billion to $243.4 billion.
South Korea's economy continues to perform well, with real GDP growth of5.0 percent in 2006,
after 4.2 percent growth in 2005. The Bank of Korea (BOK) has used inflation targeting since
1998, and its current inflation target for the period 2007-2009 has been set as a range of3.0±0.5
percent in terms ofthe three-year average of annual consumer price inflation. The overnight call
rate is the major monetary policy instrument of the BOK. Consumer price inflation ~ at 2.2
percent in March 2007 ~ is below the central bank's target range. South Korea's flexible
exchange rate regime, under which the won has appreciated steadily since 2003, has contributed
significantly to containing inflation. Despite substantial nominal and real appreciation of the
South Korean won over this period, exports grew by close to 15 percent in 2006, after a 12
percent increase in 2005.
Rapid growth of imports caused the trade surplus to contract by $6.6 billion in 2006 to $16.6
billion, with the trade surplus with the U.S. declining by $1.2 billion to $9.5 billion. South
Korea runs a surplus in merchandise trade, but has a substantial and growing deficit in services.
Driven by a rising net outflow of tourists and students, the services deficit reached a record $18.8
billion in 2006. Spurred by declining balances in goods and services trade, Korea's current
account surplus fell sharply in 2006 to just $6.1 billion (0.7 percent of GDP), down from $15.0
billion in 2005 and $28.2 billion in 2004 (when it was 4.1 percent of GDP). Korea depends
heavily on petroleum imports, and the trade balance is sensitive to world oil prices. While down
overall in 2006, South Korea's trade and current account surpluses expanded in the final quarter
of the year due to a sharp drop in the import bill as oil prices fell.
China
The Chinese economy continued to grow rapidly during 2006, with GDP growth of 10.7 percent
for the year. Growth accelerated during the first quarter of 2007, reaching a higher than
anticipated 11.1 percent. At the same time, internal imbalances within the Chinese economy,
which are of concern to the Chinese authorities and are the focus of the most recent Five-Year
Plan, continued to grow more severe.
Growth continues to rely on net exports and investment. In 2005, net exports and investment
contributed 26 percent and 38 percent of GDP growth, respectively. Net exports have been
rising as a share ofGDP in recent years, reaching a record 7.3 percent ofGDP in 2006. A
preliminary estimate indicates that net exports contributed about one fifth ofGDP growth in
2006. The expansion of Chinese net exports continued in the first quarter of 2007. The trade
27
surplus for the quarter was $46.5 billion, double the surplus in IQ2006. China's current
account surplus rose to a record $249.9 billion in 2006 -55 percent above the 2005 level and
Special features, e.g. anticipation oflower export tax rebates, may explain some of the rapid growth in the trade
surplus in the first quarter.
27
29
9.0 percent of China's GOP. China's current account surplus has been rising as a share of GOP
since 2001, but the increase has been particularly sharp in the last two years.
Investment as a share of GOP has risen along with net exports' share of GOP. China's
investment rate rose in each of the five years to 2005, reaching 42.7 percent of GOP. Investment
maintained this elevated level in 2006. Investment is supported by China's high national saving
rate, which was a record 52 percent of GOP in 2005. 28 Since the beginning of the refonn era,
most booms and slowdowns in the Chinese economy have been associated with fluctuations in
investment, and the rising share of investment in GOP increases the potential amplitude of these
swings. The rapid growth of investment and GOP in the first quarter of 2007 and the
acceleration of consumer price inflation have raised anew concerns about the possibility of
overheating, industrial overcapacity, the potential build-up of new non-perfonning loans, and
asset bubbles. A rapid unwinding ofthese conditions could lead to an abrupt slowdown (a "hard
landing") in the Chinese economy.
China's tightly managed exchange rate regime is a substantial obstacle to the resolution of
economic imbalances that foster China's high savings, high investment, and large trade
surpluses. China maintained a de facto fixed exchange rate against the dollar from 1997 until
July 2005. On July 21, 2005, the Peoples Bank of China (PBOC) revalued its currency, the
renminbi, by 2.1 percent and announced the adoption of a new managed floating exchange rate
regime. Since the initial revaluation, the renminbi has been tightly managed against the U.S.
dollar, with limited fluctuation on a daily basis. The policy limit on daily movement above or
below the morning "reference rate" was 0.3 percent until May 18,2007, when the PBOC
widened the limit to 0.5 percent. So far, intra-day movements of the RMB exchange rate have
rarely approached the limits of the original 0.3 percent band. In the first year under the managed
basket regime (July 22, 2005 to July 22, 2006), the maximum daily movement on either side of
the reference rate averaged 0.04 percent during the course of trading. The RMBIUSO rate has
has experienced slightly more movement since, averaging 0.1 percent daily divergence from the
morning reference rate.
The renminbi appreciated 2.4 percent against the U.S. dollar in the second half of 2006. This
was the largest half-yearly renminbi appreciation since the new exchange rate regime began in
July 2005. The renminbi appreciated 6.5 percent against the Japanese yen and depreciated by 0.8
percent against the euro during this same period as these currencies moved against the US dollar.
The IMF index of China's nominal effective exchange rate appreciated by 1.3 percent in the
latter half of 2006. China's real effective exchange rate (i.e., the average movement of the
renminbi against the currencies of China's trading partners, adjusted for movements in domestic
prices), gained 2.7 percent in the second half of 2006 on the back of rising domestic inflation.
By the same indicator, China's currency appreciated 0.9 percent in real effective tenns from July
2005 to December 2006.
During the second half of 2006, the People's Bank of China (PBOC) continued to intervene
heavily in China's foreign exchange market. The PBOC's foreign exchange reserves climbed by
28
With national saving calculated as the sum of investment and the current account balance.
30
$247.5 billion in 2006 and reached $1.066 trillion at end-2006. 29 China's large trade surplus was
the primary source of net foreign demand for renminbi, although net foreign direct investment
also contributed to foreign demand for the currency. China's foreign exchange reserves
continued to grow very rapidly in the first part of 2007, with total reserves reaching $1.2 trillion
by end-March. The reserve increase in the first quarter of 2007 was in part due to the unwinding
of foreign exchange swap contracts that the PBDC had entered into with Chinese banks as well
as the rapid growth ofthe trade surplus. 3o
In the 11 th Five-Year Plan launched in early 2006, Chinese authorities set forth policy priorities
aimed at curbing China's domestic and external economic imbalances. Chief among these policy
goals was bringing about a shift in the composition of China's aggregate demand to rely less on
investment and exports and more on domestic consumption. Despite this high level attention, the
outcome for 2006 shows that the role of consumption continued to diminish and the shares of
national saving, investment and net exports in GDP further increased.
Slow implementation of market-based tools for domestic macroeconomic management is a key
reason that China's economy grew more imbalanced in 2006. Typically, in an economy as large
as China's, the central bank's main goals are to maintain domestic growth and price stability. In
China's case, the primary task ofthe PBoe is to manage the exchange rate and absorb the large
amount of domestic liquidity that results from the net inflow of foreign exchange into China.
This ample supply of funds has contributed to low interest rates, high credit and investment rates,
and increased risk of a "boom-bust" cycle.
An autonomous monetary policy, with greater exchange rate flexibility, would give the PBOe
better control over domestic credit and investment, and allow the PBOC to further liberalize
interest rates and develop the monetary policy transmission mechanism, thus enabling improved
credit allocation and reducing the risks of bubbles in asset prices. More effective monetary
policy would help rebalance the Chinese economy towards greater household consumption,
absorbing the impacts of increased government spending on education and social safety nets to
prevent overheating. (Increases in fiscal outlays, as called for in the 11 th Five-Year Plan, will
help to reduce households' "precautionary saving" for medical care, education, and retirementand bring down excessive national saving.)
However, with current policy measures and constrained movement of the exchange rate, China's
growth grew more unbalanced in 2006. As Premier Wen liabao said before the National
People's Congress in March of this year, "the biggest problem in China's economy is that the
growth is unstable, imbalanced, uncoordinated and unsustainable." This sentiment was echoed in
a statement by National Development and Reform Commission (NDRC) Chairman Ma Kai in
the same month when he said, "transformation of the nation's growth structure is an extremely
urgent task."
29 The PBOC has conducted an undisclosed amount of foreign exchange swaps with Chinese commercial banks in
recent years as a domestic liquidity management measure. One effect of these swaps is that the PBOC's reported
currency reserves are smaller than they otherwise would be until the swaps unwind.
30 According to the 2006 annual reports of Bank of China, China Development Bank, and China Construction Bank,
currency swaps conducted by these institutions with the PBOC exceeded US$ 70 billion. See in the China Securities
Journal (Chinese) :r:M;$, ~&:f."E.~"~ ffJf!jiM~700~1Z.~j[;, t:pi..iE~ : 2007-04-17, at
<http://www.cs.com.cnlyhl02/200704/t20070417_1087175.htm>
31
The leadership seems to be cautiously recognizing the benefits of a more flexible exchange rate.
In January at the National Financial Sector Work Conference, Premier Wen said "a perfect
exchange rate regime should consider our country's economic situation and the ability of the
economy and companies to bear such changes and ensure there are no big fluctuations in the
economy." And in the same month, a research agency under the Ministry of Commerce, an
agency historically averse to increased renminbi flexibility, issued a report stating that the
renminbi was undervalued and that "continued, progressive and moderate appreciation of the
renminbi would help regulate China's yawning trade surplus." 31 However, the report suggested
that renminbi appreciation would also have negative effects in China, particularly for farmers
and unskilled laborers and those in the central and western regions.
China continues to take steps, though at a slow pace, aimed at reforming currency and monetary
policy to eventually move towards a more freely-tradable and market-determined exchange rate.
Currency market and financial sector reforms provide needed infrastructure for foreign exchange
trading and hedging. China has now authorized 22 banks (both foreign and domestic) to act as
market makers in the foreign exchange market. While in 2005 almost all foreign exchange
transactions were with the Chinese authorities, now over 80 percent of all spot trades are
conducted by private parties. The transaction volume in foreign exchange swaps, introduced in
April 2006, reached $1 billion per day one year later, evidencing a rapid rise in the use of foreign
exchange hedging. In January 2007, China launched SHIBOR (Shanghai InterBank Offer Rate)
to create a benchmark yield curve for pricing financial instruments, including foreign exchange
derivative products, as well as to enable the PBOC to monitor domestic liquidity conditions. In
an effort to increase two-way capital flows, China announced on May 11,2007, that QDII
(Qualified Domestic Institutional Investor) license holders would be allowed to invest half of
their funds in overseas equities. (QDII's were previously limited to bonds and other fixed
income instruments). On May 23, China announced that the quota for QFIIs (Qualified Foreign
Institutional Investors) would be increased from $10 billion to $30 billion.
At the second session of the U.S.-China Strategic Economic Dialogue (SED) held in Washington
on May 22 and 23, Chinese and U.S. officials discussed China's reform progress in detail.
Chinese authorities reiterated the priority they place on shifting the composition of economic
growth towards domestic consumption and correcting imbalances in the economy and the role
that exchange rate reform plays in that process.
Despite the progress that China has made and the continued public commitment to reform,
China's exchange rate is undervalued against the U.S. dollar, even in the judgment of domestic
observers. Prolonged, one-way intervention in foreign exchange markets by the central bank, an
unprecedented amount of foreign exchange reserve accumulation, and a rapidly increasing
current account surplus are clear indicators of fundamental renminbi undervaluation. While
China has taken some steps to increase the flexibility of the renminbi, the pace of appreciation
that the authorities have allowed is much too slow and should be quickened.
31 Website of the Ministry of Commerce (English), 1117/2007, "Report: RMB Estimated to Keep Gaining This
Year," Xinhua.
32
Although the renminbi is undervalued and market sentiment clearly favors appreciation,
Treasury concluded that China did not meet the technical requirements for designation under the
terms of Section 3004 of the Act during the period under consideration. Treasury was unable to
determine that China's exchange rate policy was carried out for the purpose of preventing
effective balance of payments adjustment or gaining unfair competitive advantage in
international trade.
Taiwan
Taiwan operates a managed floating exchange rate regime. According to the central bank's
official policy statement, the exchange rate is market-determined except in instances when "the
market is disrupted by irregular factors" and the centra] bank intervenes. Throughout the second
half of2006, the Taiwan dollar (NT$) remained within the 31-35 NT$/USO trading range in
which it has fluctuated for more than five years. After ending 2005 at 33.291USD and
appreciating 2.6 percent to end the first halfof2006 at 32.44IUSO, the NT$ depreciated 0.5
percent to end the year at 32.59IUSD. The NT$ ended March 2007 at 33.06IUSO, having
depreciated another 1.4 percent from its end-2006 value.
Broad money supply (M2) grew 6.13 percent over 2006. The central bank raised interest rates
by 50 basis points, with the discount lending rate ending the year at 2.75 percent; required
reserve ratios remained unchanged over the year. The central bank continued its practice of
sterilizing nearly all of its interventions.
Taiwan has experienced sluggish domestic demand growth and low inflation or falling prices
since a sharp decline in fixed investment spending led to a short recession that began in the
fourth quarter of2000. However, strong export growth has allowed Taiwan to achieve annual
real GOP growth rates between three and six percent since the recession ended. Growth in
Taiwan has been highly dependent on world market growth and demand for Taiwan's exports.
Real GOP growth slowed from 6.3 percent at an annual rate in the last half of 2005 to 3.0 percent
in the first half of2006, as net export growth slumped. GOP growth then recovered to 6.2
percent in the second half of 2006, as net exports recovered and contributed 3.3 percent to GDP
growth. Taiwan's exports are heavily concentrated in sales of electronics to China, Japan, and
the United States, meaning that small fluctuations in either overall demand in these three large
economies or global demand for electronics can lead to significant fluctuations in Taiwan's
income from net exports.
Inflation also continued to remain very low, with prices falling by some measures, throughout
2006. Consumer prices, excluding food and energy, rose by 0.5 percent y/y in the second half of
2006, while Taiwan's GOP deflator declined by 1.2 percent in the second half of 2006. Prices
have remained very weak in 2007; consumer prices excluding food and energy were 0.1 percent
lower at end-March 2007 than at end-2006.
Taiwan's current account surplus rose from $10.4 billion (5.9 percent of GOP) in the first half of
2006 to $14.8 billion (8.2 percent of GOP) in the second half of 2006, reflecting a widening
surplus in goods trade, a narrowing deficit in services trade, and growth in the inconie surplus.
33
Since the second half of2005, Taiwanese residents have increased their demand for foreign
assets while foreign investors have eased their demand for Taiwan dollar assets, reducing upward
pressure on the Taiwan dollar exchange rate. Net accumulation of foreign exchange reserves,
which averaged nearly $29 billion a year from 2001 to 2005, consequently slowed to $2.7 billion
in the first half of 2006, and $3.4 billion in the second half of 2006. Total foreign reserves stood
at $260 billion at mid-year, and $266 billion at year's end 2006. Total foreign reserves rose by
just $1 billion in the first quarter of 2007 to reach $267 billion at end-March 2007.
Malaysia
Nearly two years after its move off a fixed U.S. dollar peg, Malaysia is progressing towards a
more flexible exchange rate regime. Since the initial revaluation on July 21,2005, the ringgit
has appreciated steadily against the dollar. Daily exchange rate volatility has increased since
mid-2006, and Malaysia took further steps to relax foreign exchange controls in April 2007.
Structural imbalances still persist in the Malaysian economy. The current account surplus
remains very large, and the level of foreign exchange reserves has increased significantly over
the past year. Nevertheless, there are signs that private consumption and fixed investment levels
are rising, which, with a more flexible exchange rate, should lead to more balanced growth in the
coming years.
Malaysian authorities have intervened in foreign exchange markets in both directions - buying
the ringgit to limit depreciation and accumulating foreign reserves to fend off upward pressure.
Though Malaysia's authorities have intervened heavily in times of strong pressures on the
currency, the ringgit has recently been appreciating at a faster pace than in the 14 months
following the initial revaluation. Since the initial 1.4 percent revaluation in July 2005, the ringgit
continued to appreciate steadily over the course of 2006, rising by 6.6 percent in nominal terms.
The average daily fluctuations against the dollar have also increased from 0.05 percent in the
second half of 2005 to 0.16 percent in the first half of 2006 and 0.18 percent in the second half of
the year. The ringgit has appreciated by an additional three percent in nominal terms since the
beginning of2007, as a result of strong portfolio flows into the local stock market. The
authorities have stated that they will continue efforts to moderate excessive volatility in the
exchange rate, but reiterated that long-term fundamentals should drive the value of the ringgit.
Malaysia continues to relax the capital controls put in place in the aftermath of the Asian crisis in
1998, and has more recently begun to relax controls that pre-dated the crisis. In March 2007, the
central bank, Bank Negara Malaysia, announced changes to the foreign exchange rules that
liberalize capital flows in both directions. The measures, which took effect on April 1, allow
greater flexibility for onshore banks to engage in foreign exchange activity by abolishing limits
on net open positions and increasing the scope of allowable activity; provide non-residents with
greater access to ringgit assets and financial products; and allow residents to engage in foreign
currency transactions. However, offshore trading ofthe ringgit remains prohibited.
Malaysia'S economy has maintained a strong rate of growth, averaging nearly 6.0 percent yly
Dver the past four years. In 2006, despite weaker external demand, real GDP grew 5.9 percent
yly, driven by domestic consumption, which contributed 3.5 percentage points of the growth, and
rising investment spending, which added an additional 1.7 percentage points to growth. Private
sector demand was a key driver, supported by improving business sentiment and rising job
creation. Inflation rose in the first half of 2006, peaking at 4.8 percent yly in March, following
increases in administered fuel prices earlier in the year, but steadily decelerated over the second
half, ending the year at 3.1 percent y/y. The 3.6 percent inflation rate for 2006 was the highest
rate since 1998. For the first four months of 2007, inflation declined further to an average of 2.4
percent. Given relatively low inflationary pressures, the central bank has maintained the
overnight policy rate at 3.5 percent since April 2006.
Exports have been a key source of growth, with the export share ofGDP exceeding 120 percent,
greater than the average of its regional peers. 32 Electronic exports account for nearly half of
Malaysia's total exports, and the United States is Malaysia's primary export destination for
electronic goods. (Malaysia is the United States' 11 th largest trading partner.) This closely ties
Malaysian export performance to economic conditions in the United States. In the second half of
2006, export growth slowed to 14.1 percent yly from 23.1 percent in the first half of the year, and
fell further in the first quarter of 2007 to 7.7 percent yly due to weak external demand. The
increase in intermediate imports kept pace with exports given that they make up 70 percent of
total imports, but demand for other import goods has been relatively robust due to stronger
domestic demand.
As a net oil exporter, Malaysia has significantly benefited from recent high oil prices, and the
rise in oil prices has contributed to further growth of Malaysia's already large current account
surplus. In 2006, the current account surplus was $25.6 billion, over 16 percent of GOP, with the
non-oil current account surplus at 13 percent ofGDP. Except for Singapore, Malaysia runs the
highest current account surplus as a percentage of GOP of emerging market countries in Asia.
Significant capital outflows, reflecting greater overseas investment by Malaysian firms and debt
repayments, have, to a large extent, offset the large current account surplus. Nevertheless,
Malaysia's external position remains strong, as reserves stood at $82.5 billion at the end of2006,
roughly six months of import cover. Reserves increased by $3.7 billion in the second half of
2006, as compared to $8.3 billion in the first half. Reserves have continued to accumulate in
2007, and were $88.6 billion as of end-March, a seven percent year-to-date increase.
Total investment continues to recover from its post-Asian crisis collapse, but has yet to return to
pre-crisis levels. Private fixed capital investment has increased by 28 percent since 1999 and has
continued to recover steadily over the past two years. However, investment in Malaysia as a
share of GOP is still well below what it was in the early 1990s - long before the run-up to the
Asian financial crisis. In 2006, gross fixed capital formation was 27 percent of GDP compared
to an average of almost 40 percent over the 1990-1994 period.
32 Malaysia, like many economies in East Asia, imports components for further processing and assembly. This is the
reason that total exports (but not value-added in export industries) are larger than GDP.
35
Appendix 1
Patterns of Indicators
Appendix 1 in each of the Reports to the Congress on International Economic and Exchange
Rate Policies since the autumn of2005 discussed the use of indicators in considering the
question of whether "countries manipulate the rate of exchange between their currency and the
United States dollar for purposes of preventing effective balance of payments adjustments or
gaining unfair competitive advantage in international trade".J Those appendices stressed that, in
considering the question of designating countries as manipulators, a range of indicators needs to
be assessed. While an individual indicator - such as a reserve or a current account position may yield important infonnation, it will not in and of itself provide a comprehensive picture ofa
country's economic situation or external position. Rather, it is the pattern of change in indicators
that, when examined in terms of economic conditions in a specific country and the global
economic environment, typically provides the most useful information. Indeed, the countries
included in this analysis include a number, designated with asterisks, whose exchange rates are
wholly market determined. This appendix updates the indices considered in previous reports.
Table
IliaU<Ii AraDia
Singapore
Venezuela
Norway'
Malaysia
Swilzalland '
Russia
Sweden '
China
Taiwan
Gennany'
Japan •
Canada '
Korea
EuroA188 '
MeJico·
India
Thailand
UnMeeI Kingdom'
AusiraUa'
United States'
Turkey'
Spain'
Portugal'
Current Account Balance
level
Change
over period
(%GDP)
(%GCP)
2006
2002-2006
27.4
21.
27.5
13.7
14.9
6.7
16.7
4.1
17.1
8.7
17.3
8.9
1.8
10.2
7.4
2.1
7.1
9.S
6.7
-2.0
3.1
5.0
1.1
3.9
0.0
1.7
-0.3
0.7
-0.1
-0.9
-().2
2.0
-2.8
-1.3
-2.2
1.5
-1.8
-3.4
-1.7
-5.4
-2.0
-6.5
-7.4
-S.2
-5.4
-8.6
-1.3
-9.4
Retiolo
2006GDP
(%)
Dec 2006
}2
Foreian Exchanae Reserves
Ratio to short-term
Change
e)(!emaldebl
in reserves
(%)
7.5
103.1
15.9
16.8
54.8
9.9
29.9
6.2
40.6
74.3
na
20.0
2.6
26.8
1.7
9.0
20.7
31.6
1.6
7.0
0.3
IS.B
na
na
Real Effective
Exchange Rate
(% appreciation)
(%)
DeeD5 10 Dee06
0ec2006
7.9
218.0
17.8
133.2
636.4
23.4
21.1
40.7
370.2
17.8
8.9
5.5
517.2
68.1
13.4
12.6
30.2
1333.2
838.9
2.7
na
na
5.8
229.3
8.3
16.6
13.5
238.3
10.1
3.9
3.3
248.2
29.9
382.6
29.0
451.1
8.5
1.6
28.9
26.1
8.2
2.4
20.8
137.9
na
na
na
na
Feb02 - MarD7
External Sector
Contribution to
Growth Rate
(Average %)
2004-2006
-=22.7
-4.~
15.2
lB.2
22.5
-10.4
-8.5
37.4
5.1
-2.0
-7.0
na
-13.6
11.6
21.4
24.2
-5.3
0.0
15.0
0.9
40.3
-22.0
11.8
na
na
2.8
-9.1
-2.1
-0.5
0.7
-2.2
1.5
3.5
1.9
0.9
0.7
-1.5
2.1
0.1
-().B
0.3
0.7
-0.4
-1.5
-().3
-2.3
-1.8
-0.2
Relative Dependence
of GOP Growth
on External Sector
(Average %)
2004-2006
-15.
-2.1
-31.2
-7.3
-7.2
-0.9
-11.1
-0.8
-3.5
-1.1
0.3
-1.0
-6.0
-0.5
-1.9
-5.2
-B.O
-3.9
-3.4
-5.9
-4.1
-11.8
-7.2
-1.5
I The Omnibus Trade and Competitiveness Act of 1988 states, among other things, that: "The Secretary of the
Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the
International Monetary Fund, and consider whether countries manipulate the rate of exchange between their
currency and the United States dollar for purposes of preventing effective balance of payments adjustments or
raining unfair competitive advantage in international trade."
The "Contribution to Growth of the External Sector" is calculated as the annual change in real net exports (in the
National Income and Product Accounts) as a percent of real gross domestic product. The "Relative Dependence of
GDP Growth on the External Sector" is measured as the external sector's contribution to GOP growth minus the
contribution of the growth in domestic demand. This dependency measure reflects the view that a country will be
generally more concerned about the contribution of the external sector to GOP growth if the contribution of the
domestic sector to GOP growth is relatively small. For example, Singapore's external sector contributed 2.8 percent
to average GOP growth during 2004·2006 while domestic ?emand contribute.d 4_9 perc~nt. China's ext~rnal sector
contributed 3.5 percent to average GDP annual growth dunng 2004·2006 whlle domestIc demand contrIbuted 6.9
percent. Turkey's external sector subtracted 2.3 percent from average GOP growth during this period while domestic
The same methodology used in the previous reports is used below to examine more closely the
patterns of indicators by assigning qualitative values of low, medium, or high (numerically 0, 1,
or 2) to the indicators and constructing indices based on alternative weighting schemes which
give different emphasis to the various indicators. The three schemes are:
• A focus on changes in current account balances, foreign exchange reserves, and real effective
exchange rates, assigning each a one third weight.
• A focus on current account balances, changes in current account balances, changes in foreign
exchange reserves, changes in real effective exchange rates, and relative dependence of GDP
growth on the external sector, assigning each a one fifth weight.
• A focus on current account balances, changes in current account balances, and relative
dependence of GDP growth on the external sector, assigning each a one third weight.
The three weighting schemes yielded the following rankings, ordering first by score then
alphabetically:
Schemel
China
Malaysia
Saudi Arabia
Switzerland •
Japan *
Mexico"
Russia
Singapore
Venezuela
India
Norway·
Sweden"
Taiwan
United Kingdom'
Australia'
canada'
EuroArea'
Germany·
Korea
Thailand
Turkey'
Portugal·
Spain'
1.7
1.7
1.7
1.7
1.3
1.0
1.0
1.0
1.0
0.7
0.7
0.7
0.7
0.7
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.0
0.0
Scheme"
Switzerland ,.
China
Japan •
Malaysia
Saudi Arabia
Singapore
Sweden"
Germany •
Russia
Taiwan
Venezuela
Korea
Norway'
Mexico •
Thailand
United Kingdom ,.
Canada'
Euro Area·
India
Australia·
Portugal'
Turf<ey"
Spain·
1.B
1.6
1.4
1.4
1.4
1.2
1.2
1.0
1.0
1.0
1.0
0.8
O.B
0.6
0.6
0.6
0.4
0.4
0.4
0.2
0.2
0.2
0.0
Scheme III
Switzerland *
China
Germany·
Singapore
Sweden·
Japan'
Malaysia
Saudi Arabia
Venezuela
Korea
Norway •
Russia
Taiwan
Thailand
Canada •
EuroArea ,.
Mexico·
Portugal·
United Kingdom •
AustraHa·
India
Spain·
Turkey •
2.0
1.7
1.7
1.7
1.7
1.3
1.3
1.3
1.3
1.0
1.0
1.0
1.0
0.7
0.3
0.3
0.3
0.33
0.3
0.0
0.0
0.0
0.0
*represents currencies that are wholly market determined.
There are some notable changes in the rankings since the last report.
• The Swiss franc is an independent floating currency, and Swiss authorities have not
intervened in the foreign exchange market. A marginal increase in Switzerland's relative
dependence ofGDP growth on the external sector raised it to the highest bracket in this
category. This was sufficient, in light of its already large and growing current account
surpluses, to raise Switzerland to the top of all three schemes. Switzerland's current account
surplus reflects significant surpluses in trade in financial services and investment income.
demand contributed 9.5 percent. The "Real Effective Exchange Rate" is JP Morgan's Broad Real Effective
Exchange Rate Index.
2
• A significant increase in the growth in China's current account surplus and in China's
dependence on the external sector for growth raised China to the top, or near the top, of all
three schemes.
• A marginal increase in the relative dependence of GDP growth on the external sector edged
Japan into the highest bracket of that category, while a small increase in the rate of reserve
accumulation put it into the middle bracket of that category. These had the effect of raising
Japan in all three schemes. Both changes were small, the increase in reserves reflecting
interest earned on existing reserves and valuation effects. Japan maintains a floating
exchange rate regime. The Yen is widely traded in foreign exchange markets and Japanese
authorities have not intervened in this market since March 2004.
• Reduced dependency of growth on the external sector dropped Singapore's rankings in
schemes II and III.
3
Appendix 2
China's Trade Data
In recent years. attention has focused on differences in the figures reported for China's trade
surplus by China and by its trading partners. Over the past decade, Chinese-reported trade data
shows lower Chinese global trade surpluses than the data on the total trade deficit with China
reported by China's trading partners. For example, in the data set used for this analysis China's
trnde in goods surplus was $423.3 billion. but was $116.5 billion in 2005 according to Chinese
data. 1 Much of this discrepancy is due to differences in destination country assignment in
Chinese and partner country trade data. Two adjustments, described below, to make Chinese and
partner country trade data comparable eliminate most, but not all, of the discrepancy.
Several important adjustments are needed to make Chinese and partner country trade data
comparable, namely for the transshipment of goods through Hong Kong and inclusion of
shipping charges. 2 When these adjustments are made, discrepancies between the bilateral trade
data of China and its trading partners are greatly reduced. In 2005, making these two
adjustments reduces the discrepancy between what China reports as its global trade surplus and
what partner countries report from $307 billion to $91 billion. 3
The fact that discrepancies remain after this adjustment is not surprising. Importantly, remaining
discrepancies cannot be attributed as errors by either of the tradingj'artners. A country's trade
data differs from its partner country's data for a variety of reasons. Differences in the
classification of goods, timing, exchange rate fluctuations, geographic coverage and other factors
result in data sets that vary with one another. Additionally, in countries with closed capital
accounts such as China, it is common for asset holders to find ways to circumvent controls by
using over- and under-invoicing of trade transactions to move capital across borders, which can
skew the recorded trade statistics.
Reconciling China's Trade Data and Partner Country Data
The simplest adjustment that must be made to make country and partner trade data compatible is
an adjustment for insurance and freight. 5 Most countries, including China, report exports on a
IFor the period 1997-2005, 107 of China's trading partners reported data for bilateral trade with China to the UN
Comtrade database. Those 107 countries form the basis of this analysis. At the time of data collection, 3 ofthese
countries had not yet reported trade flows with China for 2004 and 14 had not yet reported for 2005.
2 This analysis closely follows the bilateral trade data reconciliation methodology as described in Fung, K.C., and
Lau, LJ., "Adjusted Estimates of United States-China Bilateral Trade Balances: 1995-2002," Journal of Asian
Economies, Vol. 14, Apr., 2003, p. 489-496. One exception is that in this analysis, China's import data is deemed to '
capture both direct and indirect exports.
J These levels indicated for China's trade surplus are useful for illustrating the relative changes between nonadjusted and adjusted data. However, these levels do not purport to present a more accurate reading of the absolute
level of China's trade surplus because the sample set of China's trading partners does not necessarily fully reflect
the fun composition of China's trade flows.
4 See Yeats, Alexander J., "Are Partner Country Statistics Useful for Estimating "Missing" Trade Data?", World
Bank Policy Research Paper 1501, August 1995, and Makhoul, Basim and Otterstrom, Samuel M., "Exploring the
Accuracy ofInternational Trade Statistics," Applied Economics, 1998,30,1603-1616.
S Import data from China Customs and the UN Comtrade database are reported c.i.f.
"free-on-board" (f.o.b.) basis, while imports are reported on a "cost-insurance-freight" (c.i.f.)
basis. 6 The estimate used here is that insurance and freight adds about 5 percent to the cost of
exported goods. 7
The most significant adjustments needed to reconcile Chinese and partner-country trade data are
for trade that flows through Hong Kong and for the costs of insurance and freight. Hong Kong is
an important transshipment trade center in Asia where many goods are imported and then "reexported" from one country to another. Re-export goods are goods that pass through Hong Kong
without having undergone "a manufacturing process which has changed permanently the shape,
nature, form or utility of the product," though these may be repackaged and marketed in Hong
Kong. 8 From 1997 to 2005, Hong Kong's re-exports of Chinese goods to overseas destinations
amounted to one third of China's total reported exports. In 2005, the value of U.S. goods reexported to China through Hong Kong was 14% of total reported u.s. exports to China.
Correcting for the influence of Hong Kong transshipment trade is made possible by using official
Hong Kong data on re-exported goods by country of origin and destination. However, because
Hong Kong re-exporters add a markup to goods that they handle, which does not reflect a
Chinese or partner country export, the markup must be subtracted from bilateral trade values
between China and its trading partners. Re-export markups are measured in an annual survey
taken by Hong Kong Customs officials.
The following section outlines the adjustments needed to reconcile Chinese and partner-country
trade statistics. What we do below is adjust both Chinese and partner country trade data to the
f.o.b. value at the point of original export of goods, in order to make the two sets of data
comparable. The section begins with China's outbound trade (China's exports and partner
imports) then describes adjustments for China's inbound trade (China's imports and partner
exports), accompanied by Figure 1. The upper portion of Figure I shows outbound trade, the
lower, inbound trade.
U.S. exports are reported "free-along-side" (fa.s.), that is, not yet loaded onto vessels for shipment.
See Schindler J. and Beckett, D. "Adjusting Chinese Bilateral Trade Data: How Big is China's Trade Surplus",
International J~urnal ofApplied Economics. vol. 2 (September 2005) for a discussion of c.iJ. charges in Chinese
trade. The estimate used in this analysis for c.iJ. charges is a simple 5%: between the standard lO% used in IMF
Direction of Trade Statistics and the lower levels shown in Schindler and Beckett.
8 Hong Kong Census and Statistics Department, "Concepts and Me~hods"
.
.
..
http://www.censtatd.gov.hk/hong kong statistics/statistics by SUblcct/concept/external tradchndcx.lsp. Chmese
goods re-exported through Hong Kong are often part of a manufacturing process outsourced from Hong Kong.
6
7
2
China's Outbound Trade
Because Chinese Customs does not know the final destination of most goods exported to Hong
Kong, Hong Kong is the recorded export destination for Chinese goods that pass through Hong
Kong, even for goods that are re-exported. Therefore, the reported figure for China's exports to
its partners (I in Figure 1) does not
Figure 1
capture goods that are transshipped
via Hong Kong (2 and B in Figure
The Role of Hong Kong in PRe Trade
1). To correct China's export figure,
the figure for re-exports to that
particular trading partner (B in
Figure 1) are added to China's
PAR1l'IER
export figure, less the markup added
in Hong Kong. In addition, an
approximated 0.8% c.i.f. fee is
II
subtracted for travel between China
II
and Hong Kong.
From the partner country's
perspective, adjustments are slightly different. Partner country customs officials can identify
China as the country of origin through goods documentation when Chinese goods are imported,
even ifthey have passed through Hong Kong. The partner's trade data include A and Bin
Figure 1. However, the partner's data includes c.i.f. costs, as well as the Hong Kong markup.
These are subtracted from the reported partner country import data to make partner data on
imports from China comparable with (adjusted) Chinese data on exports to partners. This
procedure "looks through" Hong Kong to the original Chinese source of goods that are reexported through Hong Kong, and adjusts their value accordingly to f.o.b. China.
China's Inbound Trade
Similar to its partners, China is able to identify imports from partner countries that pass through
Hong Kong (3 in Figure 1). However, these import values include the Hong Kong markup,
which must be subtracted, along with the corresponding c.i.f. charges for trade that occurs
through Hong Kong as well as trade directly with the partner.
From the partner's perspective, partner customs authorities do not know the final destination of
most goods destined to Hong Kong, so those goods (C in Figure I) are recorded as exports to
Hong Kong even if they end up in China. To make partner data comparable with Chinese data,
the value of partner country goods re-exported to China (3 in Figure 1) must be added to
partner's reported exports to China, less the markup.
Other Adjustments and Remaining Differences
In order to reconcile China's trade data with that of its partners, additional adjustments are
necessary for China's reported trade with itself and for China's trade with Hong Kong, which is
a separate customs zone from the mainland. First, Chinese trade data are peculiar in that there is
3
an entry for imports from China, and as there are no entries for exports to China, this has the
effect of reducing China's reported global trade surplus. In 2005, Chinese imports from China
were $55 billion. This quirk in the data is explained in large part by goods that are exported to
Hong Kong and then re-exported back into China. Recall that China Customs does not know the
final destination of good exported to Hong Kong, but can identify the origin of imports. So,
Hong Kong data for re-exports from China to China, adjusted with the markup for outward trade,
is used to create an estimate for China's exports to itself. This adjustment further reduces the
trade balance discrepancy between Chinese and partner data. 9
Second, the reported trade data for trade flows between China and Hong Kong's domestic
economy (exports produced in Hong Kong and imports consumed in Hong Kong) are difficult to
fully reconcile, and are excluded because they are not material to this analysis. For example,
Hong Kong's re-exports of Chinese goods to the world (less the markup) exceed China's
reported exports to Hong Kong (though this difference has gotten progressively smaller since
2000). As such, it is impossible to derive an estimate for Chinese exports that stay in Hong
Kong. lO Since the aim of this analysis is to reconcile China's trade data with other trading
nations, China-domestic Hong Kong trade is not essential to this analysis and so is excluded
from the overall final balances.
Findings
This analysis corroborates the findings of several other studies that have attempted to reconcile
China's trade data with that of its partners and also conclude that adjustments for Hong Kong's
re-export trade and for the costs of insurance and freight are necessary. When these adjustments
are made, much of the discrepancy between the two sets of trade data is eliminated, as shown in
Figures 2 and 3. For example, in 2005, the discrepancy between Chinese and partner data was
$306.8 billion as published, but reduced to $91.0 billion when the requisite adjustments were
made. While some discrepancy remains, it is also true that limitations on the available data make
it impossible to adjust Chinese and partner country trade data so that they are fully comparable.
Timing and valuation adjustments will affect the two sets of data, as well as trade with China that
is conducted through Taiwan and Macao. At the same time, discussions on the true size and
importance of the discrepancy between Chinese and partner country data should not obscure the
fact that, by any measure, including Chinese data, China's global trade surplus and its global
current account surplus have grown very large in recent years.
9 A "one-day tour in Hong Kong" is often a means to take advantage of tax loopholes and differences in domestic
and foreign trade taxes, such as collecting export rebates without actually exporting any goods overseas. See in
Chinese Bfll)t"iW, J@i~1I!1¥J~~ (Bubbles in the Trade Surplus), 211ittD~~i1HIli!:, 2007-03-13,
(h l tp: / /WWIV. 11;111 rilllgdil i 1v. COlli. ('11/ i j/:2007(l:1 IL'zli!20070:\ 1:',000'1. iISP>
10 Hong Kong presents an ideal location for Chinese portfolio diversification and it is possible that China-domestic
Hong Kong trade is distorted by financial flows moving through the current account, which could be achieved
through the under-reporting of exports or over-reporting of imports. Additionally, Chinese funds are reportedly
taken out of the country and then reinvested in China as foreign funds in order to take advantage of the favorable tax
treatment for foreign investors, referred to as "round-tripping" of funds. Trade transactions present one possible
vehicle to evade capital controls on the outward flow of funds from China.
4
Figure Z
FlgureJ
China's Trade Balance as Reported
China's Adjusted Trade Balance
400,000 • Partner ReporIed
~
350,000
[]~~- ------- -------- ---- ----,
300000
2.50.000
-"--_ .._.-_ ..._-' ------,- .---- _..... " . .
- - - - - - - ___--tl...
- - - - ---------- ------- --29),000
200,000 -1---------...__-__,--___
15»,000
100,000
50,000
--
150,000
~f--~'=-
. --_ .. _---_.
+----
100,000 -
__
__=--i__--II---__
50.000
1997 19911 19119 200D 2001 2002 2003 2004 2005
L -_ _ _ _ _ _ _ _ _ _ _ _
_. --- - - .. _-_. --_ ... -
~,(Q)
-----
1997 1998 19119 200D 2001 2D02 2003 2004 2005
----'
Source: UN COIIIIJ'Qde, Chins Customs, GTI World Trade At/IU, IMP DOT
5
Appendix 3
Sovereign Wealth Funds
The exceptionally rapid and sustained increase in global foreign exchange reserves since 2001
l
has been well-documented. The accumulation of official reserves far beyond established
benchmarks of reserve adequacy has led an increasing number ·of countries to establish, or
consider the establishment of, Sovereign Wealth Funds (SWFs). Appendix 4 is intended as a
brief overview of SWFs and related issues.
What is a Sovereign Wealth Fund?
There is no single, universally accepted definition of a SWF. This appendix will use the tenn
SWF to mean a government investment vehicle which is funded by foreign exchange assets, and
which manages those assets separately from the official reserves ofthe monetary authorities (the
Central Bank and reserve-related functions of the Finance Ministry).2 SWF managers typically
have a higher risk tolerance and higher expected return than traditional official reserve managers.
SWFs generally fall into two categories based on the source of the foreign exchange assets:
• Commodity funds - Commodity funds are established through commodity exports (either
owned or taxed by the government). They serve different purposes, including stabilization of
fiscal revenues, inter-generational saving, and balance of payments sterilization. Given the
recent extended sharp rise in commodity prices, many funds initially established for fiscal
stabilization or balance of payments sterilization purposes have evolved into savings funds.
Savings funds may invest in a broader range of assets than stabilization funds, which
typically focus on liquid, relatively secure assets.
• Non-commodity funds - Non-commodity funds are typically established through transfers of
assets from official foreign exchange reserves. Large current account surpluses (in some
cases complemented by capital account surpluses) have enabled non-commodity exporters
(particularly in Asia) to transfer "excess" foreign exchange reserves to stand-alone funds.
Since commodity SWF assets often derive from foreign currency accruing directly to the
government, the foreign currency is not converted to domestic currency, does not enter the
domestic economy, and therefore does not need to be sterilized through the issuance of domestic
debt to avoid unwanted inflationary pressures. In contrast, non-commodity SWFs assets often
derive from at least partially sterilized exchange rate intervention and may therefore be thought
of more as "borrowed funds ...3
I See, for example, ''The Adequacy of Foreign Exchange Reserves", Annex 3 of the December 2006 Semi-annual
Report on International Economic and Exchange Rate Policies.
2 This definition is meant to differentiate SWFs, funded from the start by net foreign assets (through commodity
exports or exchange rate intervention) from, for example, ordinary domestic pension funds which are initially
funded in domestic currency but which may then diversify internationally. However, the two types of funds do
share certain common characteristics and not all analysts distinguish between them.
3 See "International Reserve Diversification and Disclosure", speech by Mr. Malcolm Knight, General Manager of
the BIS, to the Swiss National BanklInstitute for International Economics Conference, Zurich, September 8, 2006.
http://www.bis.org/spccchcs/sp06090X.htm
SWFs are also not a new phenomenon, even if they have recently gained in prominence. Two of
the largest such funds were founded over 25 years ago - the Abu Dhabi Investment Authority
(ADIA) in 1976 and Singapore's Government Investment Corporation (GIC) in 1981.
What Distinguishes Sovereign Wealth Funds from Official Reserves?
The IMF's Balance ofPayments Manual defines reserve assets as "those external assets that are
readily available to and controlled by the monetary authorities for direct financing of payment
imbalances, for indirectly regulating the magnitude of such imbalances through intervention in
exchange markets to affect the currency exchange rate, and for other purposes".4
Key issues in determining whether SWF assets can be considered as official reserve assets
include their liquidity and marketability as well as whether there is some legal or administrative
guidance that would preclude the assets from being readily available to the monetary authorities
to meet a balance of payments need. 5
Whether a given foreign exchange asset can be classified as a reserve asset has to be assessed on
a case-by-case basis:
• In some cases, SWF assets may be invested in liquid and marketable instruments and the
monetary authorities retain a clear legal right to call upon those assets to meet a balance of
payments need. These SWF assets are likely to be classified as official reserves.
• In many other cases, however, SWF assets may be invested in less liquid instruments and/or
the monetary authorities may not have a clear legal right to call upon them. These SWF
assets would not be classified as official reserves. 6
As SWF assets fall out of reserves, even if perfectly appropriate from a statistical perspective,
they also risk falling out of the mechanisms that the international financial system has for
reserves transparency. The two principal such mechanisms (both voluntary) are the IMF's
aggregate quarterly Currency Composition of Official Foreign Exchange Reserves (COFER)
database and the Data Template on International Reserves and Foreign Currency Liquidity
(Reserves Template), part of the IMF's Special Data Dissemination Standard (SDDS). 119
countries currently participate in COFER, and 64 countries subscribe to the SDDS.
How Large are Sovereign Wealth Funds?
Because relatively little is known about most SWFs, market estimates of their size vary widely.
Market estimates of aggregate assets of known SWFs range from $1.5 - 2.5 trillion. This
compares (and is in addition) to the roughly $5.1 trillion in official foreign exchange reserves as
Balance a/Payments Manual V, 1993, paragraph 424.
Balance of Payments Manual VI;http://www .imforg/cxtcrnali[mbsln/bopi2007ibopman6.htlll. See also
Antonio Galicia-Escotto, IMF Committee on Balance of Payments Statistics Reserve Experts Technical Group
Issues Paper #5, "Investment Funds," December 2005. hltp:il.w\Vw.imf.org/cxlcrnal!np!sta;bl~p/pdf{rcs~c~5.pd.f:
6 Indeed, the same would apply to foreign exchange assets managed by the Central Bank or Fmance MIniStry If
invested in less liquid, less marketable instruments.
4 IMF,
5 Draft IMF
2
of end-January 2007. SWF assets are also currently fairly concentrated. By some market
7
estimates, four funds account for around two-thirds of total SWF assets. In addition, market
estimates currently attribute approximately two-thirds ofSWFs assets to commodity funds and
the remaining one-third to non-commodity funds.
Market analysts have also projected various upward paths for global official reserves and SWF
assets, though these paths are inherently uncertain - and not just because of the individual
country decision whether to allocate a given increase in external assets to official reserves or a
SWF. For non-commodity SWFs, much will depend on how successful Asian emerging markets
in particular are in shifting to increased exchange rate flexibility. Commodity SWF asset
accumulation is largely dependent upon the price of oil and the ability of oil exporters to rapidly
formulate and implement investment plans. The IMF projects that oil exporters' aggregate
current account surplus will roughly halve from 1% of global GDP in 2006 to 0.5% in 2009. 8
How are SWF Assets Invested?
Public disclosure of investment management strategy varies widely and individually by SWF,
but overall is quite limited.9 Though SWFs are still considerably smaller than official reserves,
their growing size means that their investment allocations will be increasingly important to
global financial markets. SWF assets may be invested in a broad range of asset classes,
including government bonds, agency and asset-backed securities, corporate bonds, equities, real
estate, derivatives markets, alternative investments, and foreign direct investment. IO This raises
the question of whether the development of operational best practices, focused on governance,
transparency, and accountability, would benefit the international financial system.
'The UAB's ADIA, Norway's Government Pension Fund-Global, Singapore's OlC, and Russia's Oil Stabilization
Fund.
s IMF World Economic Outlook, April 2007, p. 16. Oil exporters are defined ~s ~lgeria, ~~ola, Azerbaijan,
Bahrain, Republic of Congo, Ecuador, Equatorial Guinea, Gabon, Iran~ KuwaIt, LIb~a, NIgerIa, Norway, Oman,
Qatar, Russia, Saudi Arabia, Syrian Arab Republic, Turkmenis~, UOlted Ara~ E~Illrates, Vene.zuel~, and Yemen.
9 Norway's Government Pension Fund-Global is broadly recogm.ze~ as exemphfymg b~st practices III transparency.
10 As noted earlier, the same applies to reserves invested in less lIqUId, less marketable Instruments.
3
June 14,2007
HP-457
Remarks by Treasury Secretary Paulson on
Targeted Financial Measures to Protect Our National Security
Good morning. Thank you, Hank, and thank you to the Council on Foreign
Relations for hosting us. It is a pleasure to be with you.
New York is the heart of the world's financial system and Treasury Secretaries
often come here to talk about the role that system plays in our economic health.
Today, I want to talk about something a little different - the financial system's
Importance to our national security.
Th~o~ghout
hist?ry, Treasury Secretaries have focused their efforts on promoting
poliCies and actions to help ensure the safety and soundness of our financial
system .. Today, the Secretary must focus on the security of the financial system, as
well as Its safety and soundness.
Global financial flows are growing rapidly and greatly exceed the trade in goods and
services. This is a positive trend; open finance and free trade enhance the
economic security and prosperity of people in this country and around the world.
But bad actors seek to abuse this global financial system to support their illicit
purposes. The world of finance and the world of terror and weapons proliferation
intersect through the same system that spreads prosperity at home and abroad.
National security is not only an integral part of my job; it is also a sobering one. Our
enemies are determined, and there are significant threats that aren't going away
anytime soon. As part of the National Security Council, I work with the President
and his Cabinet to address these threats. Treasury is now a key pillar of the
President's national security and foreign policy strategy.
An integrated world economy presents challenges and opportunities. The challenge
and importance of protecting the integrity of our global financial network have never
been greater. Our financial system also presents us with enormous opportunities
because technology and integration have made it more difficult for anyone using the
financial system to hide. This makes financial intelligence a particularly valuable
tool to detect and disrupt bad actors. Recognizing this, Congress and the President
have provided an expanded set of tools that allow innovative and more focused
uses of financial intelligence. These targeted financial measures are proving to be
quite effective, flying in the face of a widely-held historical view that dismisses
sanctions as ineffective, harmful to innocents, or both.
There are certainly times when that conventional wisdom is true, particularly with
broad, country-wide sanctions that are perceived as political statements. It can be
difficult to persuade other governments and private businesses to join such
sanctions. Even when other governments agree with us politically, they generally
tend to be unwilling to force their nation's businesses to forego opportunities that
remain open to others. When the private sector views such broad sanctions as
unwelcome political barriers to trade, companies are unmotivated to do more than
what is minimally necessary to comply. Indeed, history is replete with examples of
partiCipants in the global economy working to evade such sanctions while their
government turns a blind eye.
The dynamic is different when we instead. impose fi.nan.ci~I.~easures specifically
targeted against those individuals or entities engaging In IlliCit conduct. When we
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2 01'7
use reliable financial intelligence to build conduct-based cases, it is much easier to
achieve a multilateral alignment of interests. It is difficult for another nation, even
one which is not a close political aUy, to disagree with targeted measures to isolate
actors who are demonstrably engaged in conduct that threatens human rights or
global security. And multilateral support is critical to the success of financial
measures in today's world.
When we use targeted financial measures aimed at explicit wrongdoing, the private
sector around the world tends to support these measures thereby amplifying their
effectiveness. Rather than grudgingly complying with, or even trying to evade our
sanctions, we have seen the banking industry in particular voluntarily go above and
beyond their legal requirements because they do not want to do business with
terrorist supporters, money launderers or proliferators. This is a product of good
corporate citizenship and a desire to protect their institution's reputation.
Once some in the private sector decide to cut off those we have targeted, it
becomes an even greater reputational risk for others not to follow, and so they often
do. Such voluntary implementation by the private sector 'In turn makes it even more
palatable for governments to impose similar measures, thus creating a mutuallyreinforcing cycle of public and private action. In the end, if we do our jobs well,
especially by sharing critical information with the key governmental and private
sector parties around the world, there is the potential for us to create a multilateral
coalition to apply significant pressure on those who threaten our security.
Because we are learning to apply our tools in this way, our financial actions have
produced demonstrable impacts on threats ranging from terrorist groups to
narcotics cartels, and on dangerous regimes in North Korea and Iran. This new
strategy uses conduct-based, intelligence-grounded, targeted financial measures to
harness the power of the private sector and form the basis of multilateral coalitions,
adding an innovative financial dimension to our national security effort.
Treasury can effectively use these tools largely because the U.S. is the key hub of
the global financial system; we are the banker to the world. We understand that
maintaining this standing, which makes our strategy possible, requires focused and
fact-based action, so that the private sector and other governments are most likely
to amplify our measures.
Financial Intelligence
The starting point for Treasury's approach to targeted financial measures is
information. To identify and act against threats, we need specific, current. and
reliable intelligence. And the global financial system is a rich source of the
information we need.
Illicit actors who otherwise try to avoid detection often use the formal financial
system because there is no good alternative and, in many cases, no alternative at
all. Proliferation networks need import and export financing to buy materials and
equipment. Rogue nations depend on the financial system for everything from
holding reserves to currency transactions. Terrorist networks use the system to
raise and move funds when more opaque alternatives are too cumbersome or risky.
These transactions typically leave a trail of detailed information which we can follow
to identify key actors and their networks. Opening an account or initiating a funds
transfer requires a name, an address, a phone number; identification information
that does not lie. Unlike a phone call or conversation that essentially disappears if
it's not captured at the moment it occurs, the financial system produces records that
tend to survive.
In 2004, Treasury became the first finance ministry in the world to develop in-house
intelligence and analytic expertise to use this information. We now work with the
broader intelligence community, requesting the data necessary to understand the
financial networks that threaten our national security. Treasury then evaluates this
information with an eye towards potential action - be it a designation, an advisory to
the private sector, or a conversation to alert other finance ministers to a particular
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threat or bad actor.
It is also critical that the government handle and use the information it gathers
appropriately. As Treasury implements these efforts to help protect national
security, we simultaneously take rigorous steps to protect privacy and preserve civil
liberties. We seek to discover those who are abusing the system, keeping in place
sufficient controls and safeguards to protect those who are not.
Innovative Use of Financial Authorities
When considering how best to approach a threat, Treasury draws on an array of
powerful authorities. Some are very old, such as the Trading with the Enemy Act,
originally passed in 1917. Some are much newer, such as the authority to cut off
access to the US. financial system for an entity that is "of primary money
laundering concern" under Section 311 of the PATRIOT Act.
The innovative use of these authorities against national security threats is fairly
recent. We have drawn on lessons learned from earlier programs aimed at
Colombian drug cartels. Over the last ten years, as these cartels, their associates
and financial holdings have appeared on a Treasury list designating them as
narcotic traffickers, U.S. banks have frozen their accounts and assets. Colombian
and other countries' banks have then followed suit, refusing to hold or move their
money. When given good Information, honest bankers won't do business with these
criminals. Treasury has designated over 1,400 individuals and companies, and
caused the disruption or seizure of more than $1 billion in proceeds related to these
cartels. The cartels refer to being placed on the Treasury list as "muerte civil" or
civil death
Since September 11th, Treasury has been applying these lessons in a more
focused effort against global terrorist threats, beginning with a September 23, 2001
Executive Order that authorized the identification and designation of terrorists and
their facilitators worldWide. We have based our actions on clear evidence and
encouraged the private sector and other nations to follow suit. Under a U.N.
resolution, worldwide, targeted sanctions are now in place against members and
supp0i1ers of al Qaida and the Taliban. The European Union and other nations
have Joined the United States in designating the terrorist group Hamas, and the
United Nations has designated individuals responsible for the genocide in Darfur.
The targeted financial measures used against terrorists and their supporters are
likely to be as effective in combating proliferation networks. While terrorist
organizations may attempt to shift their financial dealings to informal networks or
cash couriers, proliferators tend to depend upon access to the formal financial
system, where our controls and visibility are greatest. Those seeking to procure
items for a nuclear program, for example, often seek to disguise their efforts by
making the transaction appear to be for a legitimate commercial purpose. Those
who partiCipate in a proliferation transaction because of profit, rather than ideology,
are susceptible to being deterred from such transactions if we can credibly threaten
to publicly expose and isolate them. Recognizing this fact, in 2005, President Bush
took a visionary first step---issuing a new Executive Order authorizing Treasury to
target proliferators and their support networks, just as we do terrorists.
The consequences of these targeted measures can be seen on a number of levels,
some obvious and some less so. Most directly, when the U.S. designates a terrorist
supporter or a weapons proliferator, U.S. entities and persons, wherever located,
must freeze the target's assets and stop doing business with them Given the U.S.
financial system's prominence, this can have a severe impact. All major US. and
foreign banks have offices dedicated to protecting their institutions from infiltration
by illicit money Our designations let these officials know who they need to protect
against.
These measures have also led to a base of international, private sector support.
Reputable banks around the world don't want to hold accounts for terrOrists and
proliferators any more than U.S. banks do. My strong view, based on personal
experience, IS that the major financial institutions, and the indiViduals who run them,
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Page 4 ori
care deeply about the integrity of the financial system and the reputations of the
institutions they run. They genuinely want to be good corporate citizens and want
nothing to do with illegal behavior. Additionally, a lack of vigilance on their part is
not worth the risk of a regulatory action.
These institutions, which are, in a sense, the true gatekeepers of the financial
system, have also become more effective in detecting and combating illicit money
flows. As a result, they have made us all safer, and they have become sounder and
stronger. We strive to make information-sharing a truly two-way street by expanding
and improving the information we provide, to help them make better-informed
deciSions about their customers.
The information the financial sector shares with the government is critically
important to our efforts, and they do so under obligations that they sometimes
perceive as unduly burdensome. We will continue to work to ensure that the
security benefits justify the regulatory obligations, and will make adjustments as
warranted. If we communicate well with the private sector, I believe that we can
make our regulations more efficient and simultaneously be more effective in
protecting our national security.
Targeted Financial Measures in Action
The impacts of these new financial measures are evident around the world. I would
like to highlight a few notable examples.
Terrorism
Treasury continues,an intensive effort to track and disrupt terrorist financing that
has been effective on several levels. This effort has involved government-wide
cooperation, applying law enforcement, military, intelligence, and financial tools
depending on the target and the situation. While individual terrorist attacks may be
inexpensive to carry out, global terrorist groups need large sums of money to pay
operatives, to recruit and train members, to acquire false documents and travel. By
exploiting the financial intelligence generated by that activity and combining it with
other available information, we have made progress in mapping these terrorist
networks. In many ways, that has been the Treasury Department's most important,
but least visible, contribution to th·e fight against terrorist groups.
Our actions have had additional disruptive effects. We have frozen assets and
closed off conduits, such as terrorist-supporting charities in the United States.
Some international entities have shut down simply by virtue of being publicly
designated and exposed. When we restrict the flow of funds to terrorists groups or
disable a link in their financing chain, they then have to shift their focus from
planning attacks to concern about their financial viability. These designations may
also have a deterrent effect on the financiers who want to keep one foot in the
legitimate business world while supporting murder and violence on the side.
When the target provides support to al Qaida or the Taliban, we have perhaps the
best example of a multilateral program of targeted financial measures: a U.N.
Security Council list that requires all member states to freeze the assets of
designated actors. Even when we don't have that multilateral regime, such as in the
case of financial supporters of Hizballah or the Palestinian Islamic Jihad, we have
found that our designations make an impact beyond their formal, legal reach, as
many banks around the world, who are not obliged to do so, screen their customers
and transactions against our list of deSignated terrorist supporters.
North Korea
In North Korea, we have used targeted financial measures to help protect the U.S.
financial system from the DPRK's illicit financial conduct. We used our authorities to
deSignate several North Korean entities involved in its weapons programs. Because
it served as a primary conduit for North Korean illicit actors to access the
international financial system, we have also cut off Macau-based Banco Delta
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Asia's access to the U.S. financial system.
The real impact, however, has come from the information made public in
conjunction with these actions. Worldwide, private financial institutions decided to
terminate their business relationships with the designated entities as well as others
suspected of engaging in similar conduct. The result is North Korea's virtual
isolation from the global financial system. The effect on North Korea has been
significant because even the most reclusive regime depends on access to the
international financial system
It is clear to everyone in the world today that the U.S. government takes very
seriously its responsibility to preserve the security of the financial system and
protect it against abuses of WMD proliferation, money laundering and other illegal
activities. We have potent tools that can change behavior. In this case, our financial
measures are part of a wider campaign to change North Korean behavior, including
the State Department-led effort to bring about a de-nuclearized Korean Peninsula.
Iran
We are currently in the midst of an effort to apply these same lessons to the very
real threat posed by Iran. It is well known that Iran is pursuing nuclear weapons in
violation of international agreements and channeling hundreds of millions of dollars
to terrorist groups. Still, when I was first briefed on the details, I was surprised to
learn the extent to which Iran was exploiting global financial ties to pursue and
finance its dangerous behavior, and the extent to which reputable financial
institutions were being drawn into these schemes. Financial institutions that would
exercise extreme caution to avoid even small-time crooks were unknowingly
handling the money of Iran's proliferation front companies. I knew that the people
who run these financial institutions would be shocked and disturbed, to say the
least, if they were aware of the facts.
So, to combat the Iranian threat, we embarked on a strategy that combines the use
of intelligence-based targeted financial measures with a concentrated outreach
strategy to inform financial leaders, in governments and, especially in the private
sector, of what was happening. Treasury put together a briefing describing the
range of Iran's deceptive financial conduct. We explained how Iran uses front
companies and other mechanisms that make it difficult, if not impossible, for
businesses dealing with Iran to "know their customer" or counterparty. We also
explained how the Iranian regime uses its state-owned banks to pursue its missile
procurement and nuclear programs, as well as fund terrorism. Repeatedly, stateowned Iranian banks, including the Central Bank of Iran, ask other financial
institutions to remove their names from global transactions. This practice aims to
evade risk-management controls and threatens to involve responsible financial
institutions in transactions they would never knowingly handle.
At around the same time, in September 2006, Treasury cut Iran's state-owned Bank
Saderat off from any direct or indirect access to the U.S. financial system, and
publicly disclosed some of the information underlying that decision, including that
the Central Bank of Iran was sending money through Bank Saderat to Hizballah.
We also disclosed evidence that Bank Saderat was providing financial services to
other terrorist groups such as the Palestinian Islamic Jihad and Hamas. Almost
immediately, financial institutions around the world began to adjust their business
with all Iranian state-owned banks and with Bank Saderat, specifically. The private
sector, when presented with our solid evidence, IS able to act much more quickly
than governments who often lack the necessary authority or the political will to take
action on their own.
As part of our outreach, we shared extensive information with some of our allies
about another Iranian state-owned bank, Bank Sepah, which was providing
financial services to Iranian missile firms and trying to disguise its activities. It was
our hope that another nation would take the lead in pursuing an action against Bank
Sepah, especially when we learned that one of our allies had independently
corroborated the information we had shared. Due to a lack of legal authorities and
political will, that did not happen. So, in January of this year, we unilaterally
designated Bank Seoah as a facilitator of Iranian oroliferation.
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Other nations often seem to lack the political will to take unilateral actions, and our
goal has always been multilateral action. To that end, our outreach eventually
proved to be successful when our allies joined us in persuading the United Nations
Security Council to blacklist Bank Sepah in its most recent resolution against Iran.
Now the entire world must freeze Bank Sepall's assets, and isolate it from the
global financial system.
As a result of our outreach and targeted measures, financial institutions around the
world are more sensitive than ever about the very substantial risks posed by doing
business with Iran. Most of the world's top financial institutions have now
dramatically reduced their Iranian business or stopped it altogether. For the most
part. they are not legally required to take these steps but have decided, as a matter
of prudence and integrity that they do not want to be the bankers for such a regime.
To those banks that have decided to stop dollar-based business, but continue to
transact Iran's business in other currencies, I would say that the risk of transacting
Iran's business is present in every currency. The engagement of Iran's statecontrolled banks and its Central Bank In advancing the regime's policies should be
cause for great concern to financial institutions around the world.
Due to our State Department's outstanding work, the UN has passed two
unanimous Security Council resolutions sanctioning Iran, and is working on a third.
As we approach this next resolution, we are increasi ngly focused on the role of
Iran's Revolutionary Guard Corps (IRGC). The IRGC, a paramilitary arm of the
regime, has been directly involved in the planning and support of terrorist acts, as
well as funding and training other terrorist groups to pursue the military objectives of
the regime. Based on its role in proliferation activities, the UN has targeted IRGC
companies and officials in recent resolutions. The IRGC is so deeply entrenched in
Iran's economy and commercial enterprises, it is increasingly likely that if you are
doing business with Iran, you are somehow doing business with the IRGC.
In a country where the regime uses its state-owned banks, military entities, and
state-run industries to fund, faCilitate, and conceal its WMD and missile programs,
the eyes of the world will inevitably turn to the decision maker, the regime itself, and
demand that it be held accountable. By approaching the Iran issue the way we
have, focusing intensely on specific illicit conduct and making the private sector a
partner in the effort, we are in a better position to discuss broader measures with
our allies. While the financial isolation of the entire regime may impose costs on our
partners and on us, it would be far less costly than a nuclear-armed Iran.
The Way Forward
As these examples show, the innovative use of targeted financial measures has
advanced our national security, but there are gaps in this effort that must be filled.
One of the greatest challenges of this century will be to keep the most dangerous
weapons out of the hands of dangerous people. As I travel and meet with my
colleagues in finance ministries around the world, everyone acknowledges that we
must find effective ways to deal with these threats, short of military measures. Yet
other nations are not moving quickly enough to accomplish this goal.
Specifically, nations must implement the laws necessary to give their finance
ministries the authority to access and use intelligence, and they must move to
integrate financial and security functions. This will enable further cooperation and
multilateral action, which is in the world's best interest. And, these authorities must
be available for use against terrorist financing, money laundering and the
dangerous, emerging practice of proliferation financing
Although there has not been a terrorist attack on American soil since 9/11, terrorists
have struck London, Madrid, Jakarta, Mumbai, Amman, Bali, and Istanbul. Several
of our key allies who support the global effort against terrorism have yet to take
such basic steps as adequately criminalizing money laundering and terrorist
financing. An even greater number of countries have failed to develop the national
authorities and capabilities necessary to apply targeted financial measures to any
terrorist group other than AI Qaida and the Taliban We have a shared responsibility
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Page 7 of 7
for our mutual security, and our allies, who confront risks at least as great as those
confronting the United States, must find the political will to enact the authorities they
need to join in effective multilateral action. These authorities may not deal a knockout-punch, but they can and will produce results and change behavior.
My finance ministry counterparts and I have the same responsibility: to broaden our
role beyond economic stewardship and become valuable contributors to help
ensure our countries' and our citizens' security. In performing these dual roles we
seek essentially the same end: preserving the global financial system's integrity,
which will enhance economic security and prosperity for people around the world.
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June 14,2007
HP-458
Fact Sheet: Targeted Financial Measures to Protect our National Security
"Treasury's strategy uses conduct-based, intelligence-grounded, targeted financial
measures to harness the power of the private sector and form the basis of
multilateral coalitions, adding an innovative financial dimension to our national
security effort"
- Treasury Secretary Henry M. Paulson, Jr,
June 14, 2007
Protecting National Security and Strengthening the Global Financial System
"The challenge and importance of protecting the integrity of our global financial
network have never been greater, Our financial system also presents us with
enormous opportunities because technology and integration have made it more
difficult for anyone using the financial system to hide. Illicit actors who otherwise try
to aVOid detection often use the formal financial system because there is no good
alternative and, in many cases, no alternative at aiL
These transactions typically leave a trail of detailed information which we can follow
to identify key actors and their networks. The starting point for Treasury's approach
to targeted financial measures is information, And the global financial system is a
rich source of the information we need. Recognizing this, Congress and the
President have provided an expanded set of tools that allow innovative and more
focused uses of financial intelligence. These targeted financial measures are
proving to be quite effective.,. We have based our actions on clear evidence and
encouraged the private sector and other nations to follow suit
These measures have also led to a base of international, private sector support.
When we use reliable financial intelligence to build conduct-based cases, it is much
easier to achieve a multilateral alignment of interests. It is difficult for another a
nation, even one which is not a close political ally, to disagree with targeted
measures to isolate actors who are demonstrably engaged in conduct that
threatens human rights or global security. And multilateral support is critical to the
success of financial measures In today's world. "
- Treasury Secretary Henry M Paulson, Jr.
Treasury Efforts to Combat Terrorism
"Treasury continues an intensive effort to track and disrupt terrorist financing that
has been effective on several levels. This effort has involved government-wide
cooperation, applying law enforcement, military, intelligence, and financial tools
depending on the target and situation. While individual terrorist attacks may be
inexpensive to carry out, global terrorist groups need large sums of money to pay
operatives, to recruit and train members, to acquire false documents and travel. By
exploiting the financial intelligence generated by that activity and combining it with
other available information, we have made progress in mapping these terrorist
networks."
- Treasury Secretary Henry M Paulson, Jr,
(hp45~,htl11
7/S/2007
Page 2 01'4
Since September 11, 2001, Treasury has engaged in a more focused effort against
global terrorist threats, beginning with a September 23, 2001 Executive order that
authorized the identification and designation of terrorists and their facilitators
worldwide.
•
When the United States designates a terrorist supporter, U.S. entities and
persons - wherever located - must freeze the target's assets, block all
transactions, and stop conducting business with the designated entity.
• The Treasury's Office of Foreign Assets Control has designated 470
individuals and entities as terrorists, their financiers or facilitators, since
Executive Order 13224 was issued.
• Over 40 of these designations have targeted charities, exposing and
disrupting a conduit used by groups such as al Oaida, Hamas, Palestinian
Islamic Jihad and Hizballah to funnel funds and exploit charitable giving to
advance terrorism.
• The U.S. designated Adel Batterjee, one of the world's leading terrorist
financiers, who employed his private wealth and a host of charitable fronts
to fund al Qaida. Following the U.S. action, the United Nations followed
suit, leading to a worldwide freeze of his assets, including in his home
country of Saudi Arabia.
These designations often make an impact beyond their legal reach, as many banks
around the world screen their customers and transactions against the U.S. list of
designated terrorist supporters, even though they are not obligated to do so.
Treasury cut off Iran's Bank Saderat from the US. financial system in September
2006, due to its facilitation of transactions flowing from Iran to Hizballah, Hamas,
and other terror groups.
The USA PATRIOT Act of 2001 amended the Bank Secrecy Act to strengthen the
anti-money laundering (AML) controls of U.S. financial institutions, with new
safeguards to counter terrorist financing and other illicit financial activity.
.
•
The Act gives Treasury expanded authority to regulate the financial services
community and share information with partners in the financial sector.
• Section 311 of the PATRIOT Act authorizes the Treasury to protect the U.S.
financial system from abuse from foreign jurisdictions, banks, or classes of
transactions that are found to be of "primary money laundering concern."
The Treasury Department has coupled its domestic actions with coordinated
multilateral efforts and engagement of the international financial community.
Through bilateral cooperation and multilateral action by the United Nations, more
than 170 countries have implemented blocking orders to freeze the assets of
terrorists.
• These authorities allow the United States to effectively implement our
international obligations under United Nations Security Council Resolutions
1267 and 1373, which respectively target the networks supporting al Oaida,
the Taliban, Usama bin Laden, and global terrorists.
Treasury Efforts to Combat Proliferation
"The targeted financial measures used against terrorists and their supporters are
likely to be as effective in combating proliferation networks. Those who participate
in a proliferation transaction because of profit, rather than ideology, are susceptible
to being deterred from such transactions if we can credibly threaten to publicly
expose and isolate them."
- Treasury Secretary Henry M. Paulson, Jr.
In 2005, President Bush issued a new Executive order authorizing Treasury to
target proliferators and their support networks in the same way terrorists and their
supporters are targeted.
lttP://www.tre:.l~.~ov/preSs!releases!hp458.htm
7/5/2007
Page 3 of 4
• A d~signation under Executive Order 13382 freezes any assets the
designee may have under U.S. jurisdiction, denies the targeted entities
access to the U.S. financial and commercial systems and puts the
internation~1 ~mmunity on notice about the threat posed to global security.
• These prohibitions have a powerful effect, as the financiers and facilitators
of proliferation networks tend to have commercial presences and accounts
around the world that make them vulnerable to exactly this kind of financial
action.
Since E.O. 13382 was issued, the Treasury Department has designated 41
proliferators and their supporters involved in North Korean, Syrian and Iranian
proliferation efforts.
• Bank Sepah. the fifth largest Iranian state-owned bank was designated by
the Treasury under E.O. 13382 on January 9,2007 for providing financial
services to Iran's missile program.
• Including Bank Sepah. the Treasury has acted against 19 entities and
individuals supporting Iran's proliferaijon programs.
As a result of Treasury's outreach and targeted measures. financial institutions
around the world are more sensitive than ever about the very substantial risks
posed by doing business with Iran.
Treasury has also designated several North Korean entities involved in weapons
programs. And even greater impact has come from the information made public in
conjunction with these actions. Worldwide, private financial institutions decided to
terminate their business relationships with the designated entities as well as others
suspected of engaging in similar conduct. The result is North Korea's virtual
isolation from the global financial system.
These multilateral efforts have yielded critical success in the fight against
proliferation financing.
• United Nations Security Council Resolution 1540 calls on all states to
develop and implement authorities to combat proliferation. including by
denying proliferators and their supporters access to the financial system.
• North Korea: The Security Council has required specific financial action
against North Korean proliferators. United Nations Security Council
Resolutions 1695 and 1718 obligate states to prevent the flow of financial
and economic resources to, and freeze the assets of, entities involved or
supporting North Korean WMD and missile proliferation.
• These financial measures are part of a wider campaign to change North
Korean behavior. including the State Department-led effort to bring about a
denuclearized Korean Peninsula.
• Iran: The United States and our allies worked together to unanimously pass
United Nations Security Council resolution 1747 on March 27. 2007 to
blacklist Bank Sepah. Resolution 1747 reaffirms and expands UN Security
Council Resolution 1737 of December 2006. These resolutions target Iran's
nuclear and missile programs. and among other requirements, obligate
states to freeze the assets of named entities and individuals aSSOCiated with
those programs. Now the entire world must freeze Bank Sepah's assets,
and isolate it from the global financial system.
The Way Forward
·One of the greatest challenges of this century will be to keep the most dangerous
weapons out of the hands of dangerous people: As I travel and meet with my
COlleagues in finance ministries around the world, everyone a~.knowledges that we
must find effective ways to deal with these threats, short of military measures. Yet
other nations are not moving quickly enough to accompliSh this goal."
- Treasury Secretary Henry M. Paulson, Jr..
nttp:I/WWW.tre~s.gov/press/release~/htIl5g.htm
./5/2007
Page 4 of4
Since 9111, terrorists have struck a number of cities around the world, including
London, Madrid, Jakarta, Mumbai. Amman. Bali and Istanbul. Several of our allies
who support the global effort against terrorism have yet to take basic steps. such as
adequately criminalizing money laundering and terrorist financing.
·Specifically, nations must implement the laws necessary to give their finance
ministries the authority to access and use intelligence, and they must move to
integrate financial and security functions. And, these authorities must be available
for use against terrorist financing, money laundering and the dangerous, emerging
practice of proliferation financing.
My finance ministry counterparts and I have the same responsibility: to broaden our
role beyond economic stewardship and become valuable contributors to help
ensure our countries' and our citizens' security. In performing these dual roles we
seek essentially the same end: preserving the global financial system's integrity,
which will enhance economic security and prosperity for people around the world,"
- Treasury Secretary Henry M. Paulson, Jr.
lttp:II~.trE'4S.gov/presslreleaseslhJA~8.htm
15/2007
Page 1 01'3
June 14, 2007
HP-459
Assistant Secretary for Financial Markets Anthony W. Ryan
Remarks before the Treasury Markets Practice Group
at the Federal Reserve Bank of New York
New York City- Good morning. Let me begin by expressing my thanks for inviting
me to join you today.
Collectively, everyone here shares the privilege of working in the best capital
markets in the world. With such a privilege comes responsibility. To maintain our
leadership status and to accrue the associated benefits, certain characteristics must
define our marketplace. These include investor confidence, market integrity, and
competitiveness. We must also recognize that the responsibility for maintaining
and strengthening these traits is borne by both the public and private sectors.
We all have a role to play in enhancing the competitiveness of our capital markets.
In doing so, we leverage the important contribution that competitive and efficient
capital markets make to our nation's economy. Such efforts also bring direct
benefits to investors and users of capital.
Competitive capital markets foster innovation and serve to attract investors, capital,
and talent. In turn, these advantages reinforce and strengthen the competitive
position of our economy and improve the lives of all Americans. The confidence
displayed by global investors in our deep, liquid markets IS a direct byproduct of the
integrity and transparency of our markets.
Certainly all of that is true when we focus on the U.S. Treasury marketplace. As the
Assistant Secretary of the U.S. Treasury for Financial Markets, I can assure you
how much we value the symbiotic relationship that we have with Treasury market
participants. Because our operating principles of transparent, regular, and
predictable debt management practices are well established, buyers of Treasury
securities come to us in greater numbers, bid with more confidence, and in larger
amounts. Our predictability, coupled with our unitary finanCing approach to debt
issuance, increases the depth and liquidity of the Treasury marketplace and results
in lower cost borrowing for the government.
.
For investors, the U.S. Treasury market represents a safe, broad and liquid
universe for investing their capital. U.S. Treasury securities are the global standard
by which all other fixed income instruments are valued. In addition to its risk free
status, the Treasury market is diverse. Instruments range across the entire
investment spectrum: from bills to notes to bonds. Due to this range of options,
buyers can select the securities that best meet their objectives.
In addition, the Treasury market enables investors to diversify their exposure across
nominal and real securities, and hence their exposure to the risk of inflation.
Treasury inflation protected securities (TIPS) currently exceed $400 billion in
market value and span the yield curve out more than 10 years. As a result of the
presence of these instruments, the market pricing of inflation risk is now better
quantified dynamically through the actions of market participants Even if investors
do not invest in TIPS, they benefit from the additional information provided to the
marketplace by the presence of these securities. TIPS are integral to both the
Treasury portfolio and market participants and our commitment to the program
remains strong.
7/5i~O()7
Page 2 of3
~~iti~nal benefits to investors incfude.scale and liquidity. Treasury issues over $4
tr!II!On In marketa~le debt e~ch year, with trading volume exceeding over $500
billion per day. With the eXistence of robust swaps, options, and futures trading
based off of the cash market in Treasuries, investors have the benefit of additional
liquidity and flexibility.
Just as open economies are best suited to grow, the same can be said of capital
mar~ets. Open investment and the free flow of capital are essential to healthy
capital markets. Let me take this opportunity to assure investors from around the
world that they are welcome in our markets. Just last month. President Bush
released his Open Investment Policy. He stated that, "The United States
unequivocally supports international investment in this country and is equally
committed to securing fair, equitable, and nondiscriminatory treatment for U.S.
investors abroad."
Certainly we have embraced this philosophy as it relates to the U.S. Treasury
marketplace. Our market is truly global and buyers of our securities are
increasingly diverse.
My comments this morning have been about the importance and benefits of
competitive capital markets. I'd now like to discuss one way we can approach this
important goal.
As policymakers, we need our regulatory environments to be optimally positioned in
order to allow our markets and our economy to compete. However, regulatory
approaches, like the markets themselves, must be flexible, dynamic, and globally
oriented.
As partiCipants within the Treasury marketplace, we all recognize that by
comparative standards, our marketplace is lightly regulated. This is a direct resuH
of the operating integrity. transparency, and sound practices that characterize the
actions of both the Treasury debt managers and the various market participants.
Every stakeholder benefits from the current regulatory regime. and thus has strong
incentives to act in accordance with principles that enhance the stability and
integrity of the marketplace. By doing so, participants will help to ensure that the
liquidity, efficiency, and quality of our market remains the finest in the world.
From a regulatory perspective in the U.S., we have historically largely relied on
rules. There are clear benefits to knowing and following the rules, but we should
not limit ourselves by creating and relying on an ever expanding rulebook. Given
the pace, scale, and complexity of the global capital markets in which we operate
and compete, we will by necessity need to complement our rules by developing,
applying, and conSistently updating principles and best practices to meet well
defined objectives.
The introduction of the principles-based framework outlined by the Treasury Market
Practices Group (TMPG) is encouraging. The principles and guidelines comprising
the document lay a strong foundation for all stakeholders. In particular, the
document provides a framework for market partiCipants to evaluate and enhance
their current activities in the secondary markets and to fulfill their responsibilities as
stakeholders in the Treasury market. The guidelines are practical, and possess the
flexibility to deal with the global and dynamic environment in which stakeholders
operate.
There are Significant benefits in having guidelines and clearly defined practices
complement regulations. I should add it is not just registered broker-dealers who
are encouraged to subscribe to these guidelines. All Treasury market participants
should adopt and implement them and should hold each other accountable. We all
benefit from the high confidence in and integrity of the Treasury market and we all
stand to lose significantly if that integrity is challenged.
It is important to recognize that while much effort went into developing the practices
compriSing the document, the real test comes with how stakeholders c?,~ectively
apply these practices. Success will be determined by how market partICipants
Ittp:llwww.tre;!s.gov/preSslrelease!Jhp~~9.htm
7/5/2007
Page 3 of 3
interpret and implement these practices, and how market practices evolve from this
point forward. The introduction of these practices represents another step in the
continual process of enhancing our Treasury market. Surely more steps will follow
as participants contribute to efforts that serve to define, update and enhance these
practices.
The practices put forth by the TMPG represent a positive development as the
application of principles creates flexibility, as well as place pressure on all
participants to follow their spirit an~ intent. While these practices and guidelines
complement existing rules, we will of course continue to monitor the markets.
Along with us, each of you can help ensure liquid and efficient Treasury markets.
I want to recognize Tom Wipf for his leadership and for chairing the TMPG and
guiding the group to develop these best practices. Tom. I look forward to the panel
discussions, and thank you and the others on the Treasury Market Practices Group
for your efforts and initiative. I also want to acknowledge SIFMA for its many
constructive contributions, efforts, and its ongoing initiatives aimed at further
enhancing the U.S. Treasury market. All of this strikes at the core of collective
responsibility.
Let me conclude my remarks by stating how grateful we are at the U.S. Treasury
Department for the numerous contributions made by the Federal Reserve Bank of
New York and for its efforts in enhancing the treasury marketplace.
Our combined efforts serve to enhance investor confidence by improving the
integrity, efficiency, orderliness, and competitiveness of the U.S. Treasury market.
In doing so, we facilitate our economy's ability to compete and thrive.
Thank you.
ttp:/Iwww.tre.4s.gov/press/reteaSel:!lllF159.htm
5!2007
HP-460:
Trea~U1y
Page 1 01'3
IlIlelllaliunal Capital (TIC) Data for April
--~ -=~..;:;::=::,,:=:..:-;- .::...:,:~-
c~~PR~!~~!,~90,M":
FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file be/ow.
To view or print the PDF content on this page, download the free
I\cJ()iJ(''''~ Acm/Jdi";; RU.lC/C{1';j.
June 15, 2007
HP-460
Treasury International Capital (TIC) Data for April
Treasury International Capital (TIC) data for April are released today and posted on the U.S. Treasury web site (www.treasgov!tlc). Th
will report on data for May, is scheduled for July 17, 2007.
Net foreign purchases of long-term securities were $84.1 billion.
• Net foreign purchases of long-term U.S. securities were $97.4 billion. Of this, net purchases by foreign official institutions were:
purchases by private foreign investors were $72.1 billion.
• U.S. residents purchased a net $13.3 billion of long-term foreign securities.
Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $76.5 billion.
Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $25.~
holdings of Treasury bills decreased $28.6 billion.
Banks' own net dollar-denominated liabilities to foreign residents increased $61.2 billion.
Monthly net TIC flows were $111.8 billion. Of this, net foreign private flows were $93.6 billion, and net foreign official flows were $18.2 I
TIC Monthly Reports on Cross-Border Financial Flows
(Billions of dollars, not seasonally adjuste41
2005
12 Months Through
2006 Aor-06 Apr-07
Jan-07 Feb-I
Foreigners' Acquisitions of Long-term Securities
I
2
3
Gross Purchases of Domestic U.S. Securities
Gross Sales of Domestic U.s. Securities
Domestic Securities Purchased, net (line I less line 2) /1
17157.5 21101.7
16145.9 19963.5
1011.5 1138.2
18088.8
17025.7
1063.1
23179.0
22003.9
1175.1
1819.4
1702.6
116.7
203~
1955
79
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds. net
Equities, net
891.1
269.4
187.6
353.1
81.0
941.6
128.0
196.9
472.2
144.5
909.9
147.2
214.1
416.5
132.1
971.1
184.6
165.5
477.7
143.3
104.4
20.4
20.0
40.7
23.3
67
9
10
11
Official, net 13
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
120.4
68.7
31.6
196.6
69.6
92.6
153.2
75.8
43.5
204.0
51.4
120.8
12.3
12
-5.3
15.8
2
4
lttp:/lwww.tre..~.gov!press/releaSeS/1!1;f160.htm
1~
-2
41
12
7/5/2007
HP-460: Treal)U1Y JlIlCIIMlional CapItal (TIC) Data Itl!' April
12
13
14
15
16
17
18
Corporate Bonds, net
Equities, net
Gross Purchases of Foreign Securities from U.S. Residents
Gross Sales of Foreign Securities to U.S. Residents
Foreign Securities Purchased, net (line 14 less line IS) 14
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
Page 2of3
28.6
5.8
26.5
7.4
31.8
0.0
2.4
-0.6
3700.0 5572.2
3872.4 5819.4
-172.4 -247.1
4305.2
4491.8
-186.6
6360.8
6639.4
-278.6
558.6
576.2
-17.6
62~
-45.1
-127.3
-139.8
-107.4
-50.2
-136.4
-174.0
-104.7
-4.8
-12.8
-4
-H
19.1
1.0
(
605
-20
19
Net Long-Term Securities Transactions (line 3 plus line
839.1
891.1
876.5
896.5
99.2
5~
20
Other Acquisitions of Long-term Securities, net IS
-140.0
~153.3
-149.5
-155.1
-15.1
-1~
699.1
737.8
727.0
741.3
84.0
44
-47.6
-58.9
-15.6
-43.3
134.4
-9.0
16.0
-25.0
-50.2
-49.9
-16.9
-33.0
157.0
-10.1
9.1
-19.2
17.9
1.2
-3.3
4.5
20
!
4
C
11.4
10.6
0.8
143.4
163.2
-19.8
-0.3
14.8
-15.1
167.1
168.2
-l.l
16.7
20.4
-3.7
15
14
I
16.4
167.1
358.3
-60.1
-16.0
3;
667.9 1039.3
1035.1
838.3
85.9
103
937.0
98.1
630.5
207.8
60.6
25.3
32
21
22
Net Foreign Acquisition of Long-Term Securities
(lines 19 and 20):
27
28
Increase in Foreign Holdings of Dollar-denominated ShortU.S. Securities and Other Custody Liabilities: 16
U.S. Treasury Bills
Private, net
Official, net
Other Negotiable Instruments
and Selected Other liabilities: 17
Private, net
Official, net
29
Change in Banks' Own Net Dollar-Denominated Liabilities
23
24
25
26
30 Monthly Net TIC Flows (lines 21,22,29) /8
of which
31
Private, net
32
Official, net
/1
12
13
/4
15
16
17
/8
580.6
87.3
897.7
141.6
7C
Net foreign purchases of U.S. securities (+)
Includes international and regional organizations
The reported division of net purchases of long-tenn securities between net purchases by foreign official institutions and r
of other foreign investors is subject to a "transaction bias" described in Frequently Asked Questions 7 and 10.a.4 on tJ
Net transactions in foreign securities by U.S. residents. Foreign purchases of foreign securities = U.S. sales offoreign se
Thus negative entries indicate net U.S. purchases of foreign securities, or an outflow of capital from the United State~
indicate net U.S. sales offoreign securities.
Minus estimated unrecorded principal repayments to foreigners on domestic corporate and agency asset-backed securitie:
estimated foreign acquisitions oru.s. equity through stock swapsestimated U.S. acquisitions of foreign equity through stock swaps +
increase in nonmarketable Treasury Bonds and Notes Issued to Official Institutions and Other Residents of Foreign C
These are primarily data on monthly changes in banks' and broker/dealers' custody liabilities. Data on custody claims an
quarterly and published in the Treasury Bulletin and the TIC web site.
"Selected Other Liabilities" are primarily the foreign liabilities of U.S. customers that are managed by U.S. banks or brol
TIC data cover most components ofintemational financial flows, but do not include data on direct investment flows, whi
and published by the Department of ~ommerce's Bureau of Economic Analysis. In addition to the monthly data Surr
~ttP://www.tre~s.gov/press/releaseSl11p·1.60.htm
7/S/2007
HP-460: Trei:a~wy Ililermdiullal Capital (TIC) D~lla for April
Page 3 of3
TIC collects quarterly data on some banking and nonbanking assets and liabilities. Frequently Asked Question I on t
site describes the saJpe olTle data collection.
REPOlUS
• (PDF) TIC Monthly RelJOrts on Cross-Border Financial Flows (Billions of dollars, not seasonally adjusted)
p:IJWWW.~.gov/press/releases/fi~.htm
7/5/2007
'r
u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL 9 AM EDT, June 15,2007
CONTACT Ann
Marie Hauser, (202) 622-2960
TREASURY INTERNATIONAL CAPITAL DATA FOR APRIL WITH CONGRESS TO
RELIEVE LIBERIA'S DEBT BURDEN
Treasury International Capital (TIC) data for April are released today and posted on the U.S.
Treasury web site (www.treas.gov/tic).Thenextrelease.whichwillreportondataforMay.is
scheduled for July 17,2007.
Net foreign purchases oflong-term securities were $84.1 billion.
•
Net foreign purchases oflong-term U.S. securities were $97.4 billion. Of this, net purchases
by foreign official institutions were $25.3 billion, and net purchases by private foreign
investors were $72.1 billion.
•
U.S. residents purchased a net $13.3 billion oflong-term foreign securities.
Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have
been $76.5 billion.
Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and
other custody liabilities decreased $25.9 billion. Foreign holdings of Treasury bills decreased $28.6
billion.
Banks' own net dollar-denominated liabilities to foreign residents increased $61.2 billion.
Monthly net TIC flows were $111.8 billion. Ofthis, net foreign private flows were $93.6 billion,
and net foreign official flows were $18.2 billion.
-30-
TIC Monthly Reports on Cross-Border Financial Flows
(Billions of dollars, not seasonally adjusted)
2005
2006
12 Months Throul!h
Aor-06
Apr-07
Jan-07
Feb-07
Mar·07
Apr-07
Foreigners' Acquisitions of LonE-term Securities
I
2
3
Gross Purchases of Domestic U.S. Securities
Gross Sales of Domestic U.S. Securities
Domestic Securities Purchased, net (line I less line 2) II
17157.5 21101.7
16145.9 19963.5
1011.5 1138.2
18088.8
17025.7
1063.1
23179.0
22003.9
1175.1
ISI9.4
1702.6
116.7
2035.4
1955.5
79.9
2709.3
2610,7
98.6
2028.4
1931.0
97.4
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
891.1
269.4
187.6
353.1
81.0
941.6
128.0
196.9
472.2
\44.5
909.9
147,2
214.1
416.5
132.1
971.1
184.6
165.5
477.7
143.3
104.4
20.4
20.0
40.7
23.3
67.3
16.4
-2.1
41.0
12.1
77.8
29.1
-1.0
41.3
8.4
n.1
-9,0
22.4
30.6
28.1
9
10
OffICial, net 13
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities. net
1l0.4
6S.7
31.6
19.1
1.0
196.6
69.6
92.6
2S.6
5.8
153.2
75.8
43.5
26.5
7.4
204.0
51.4
120.8
31.S
0.0
12.3
-5.3
Is.S
2.4
·0.6
12.6
2.2
4.5
5.6
0.3
20.8
1.4
16.1
2.9
0.4
25.3
9.4
13.7
2.9
-0.7
3700.0
3872.4
-172.4
5572.2
5819.4
-247.1
4305.2
4491.8
-186.6
6360.8
6639.4
-278.6
55S.6
576.2
-17.6
605.6
626.2
-20.6
719.4
766.8
-47.4
63S.6
651.9
-13.3
45.1
-127.3
-139.8
-107.4
-50.2
-136.4
-174.0
-104.7
-4.8
-12.8
-4.0
-16.6
-39.7
·7.7
-5.9
-7.4
11
12
13
14
15
16
17
18
Gross Purchases of Foreign Securities from U.S. Residents
Gross Sales of Foreign Securities to U.S. Residents
.·oreign Securities Purchased, net (line 14 less line IS) 14
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
19
!'IIet Long-Term Securities Transactions (line 3 plus line 16):
839.1
891.1
876.5
896.5
99.2
59.3
5l.2
84.1
20
Other Acquisitions of Long-term Securities, net /5
-140.0
-153.3
-149.5
-155.1
-15.1
-IS.O
-11.3
-7.6
699.1
737.8
727.0
741.3
84.0
44.3
39.9
76.5
-47.6
-58.9
-15.6
-43.3
134.4
-9.0
16.0
-25.0
-50.2
-49.9
-16.9
-33.0
157.0
-10.1
9.1
-19.2
17.9
-3.3
4.5
20.8
S.3
4.8
0.4
18.7
20.4
7.3
III
-25.9
-28.6
-11.7
-17.0
11.4
10.6
0.8
143.4
163.2
-19.8
-0.3
14.8
-15.1
167.1
168.2
.1.\
16.7
20.4
-3.7
15.6
14.6
1.0
-1.7
-4.5
2.7
2.7
3.5
·0.8
16.4
167.1
358.3
-60.1
-16.0
37.8
-28.5
61.2
667.9
1039.3
1035.1
838.3
85.9
10J.O
30.1
111.8
580.6
87.3
897.7
141.6
937.0
98.1
630.5
207.8
60.6
25.3
70.1
32.9
1.9
28.2
93.6
18.2
21
22
Net Foreign Acquisition of Lonl:-Term Securities
(lines 19 and 20):
27
28
Increase in Foreign Holdings of Dollar-denominated Short-term
U.S. Securities and Other Custody Liabilities: /6
U.S. Treasury Bills
Private, net
Official, net
Other Negotiable Instruments
and Selected Other Liabilities: 17
Private, net
Official. net
29
Change in Banks' Own Net Dollar-Denominated Liabilities
23
24
25
26
30 Monthly Net TIC Flows (lines 21,22.29) 18
orwhich
31
Private, net
32
Official, net
/1
12
13
14
IS
16
17
/8
1.2
Net foreign purchases of U.S. securities (+)
Includes international and regional organizations
The reported division of net purchases of long·tenn securities between net purchases by foreign official institutions and net purchases
of other foreign investors is subject to a "trdnsaction bias" described in Frequently Asked Questions 7 and 10.a.4 on the TIC web site.
Net transactions in foreign securities by U.S. residents. Foreign purchases offoreign securities = U.S. sales offoreign securities to foreigners.
Thus negative entries indicate net U.S. purchases offoreign securities, or an outflow of capital from the United States; positive entries
indicate net U.S. sales of foreign securities.
Minus estimated unrecorded principal repayments to foreigners on domestic corporate and agency asset-backed securities +
estimated foreign acquisitions of U.S. equity through stock swapsestimated U.S. acquisitions offoreign equity through stock swaps +
increase in nonmarketable Treasury Bonds and Notes Issued to Official Institutions and Other Residents of Foreign Countries.
These are primarily data on monthly changes in banks' and broker/dealers' custody liabilities. Data on custody claims are collected
quarterly and published in the Treasury Bulletin and the TIC web site.
"Selected Other Liabilities" are primarily the foreign liabilities of U.S. customers that are managed by U.S. banks or broker/dealers.
TIC data cover most components of international financial flows, but do not include data on direct investment flows, which are collected
and published by the Department of Commerce's Bureau of Economic Analysis. In addition to the monthly data sumrnarized here. the
TIC collects quarterly data on some banking and nonbanking assets and liabilities. Frequently Asked Question I on the TIC web
site describes the scope of TIC data collection.
2
Page 1 01'2
June 15, 2007
HP-461
Treasury Action Targets Individuals Involved in Iran's Nuclear Program
The U.S. Department of the Treasury today designated two Iranian individuals,
Mohammad Qannadi and Ali Hajinia Leilabadi, for their involvement in Iran's
nuclear program.
"Even individuals who are active in Iran's nuclear program are going to be held to
account for their conduct and isolated by the international financial community,"
said Stuart Levey, Under Secretary for Terrorism and Financial Intelligence.
This action was taken pursuant to Executive Order 13382, an authority aimed at
freezing the assets of proliferators of weapons of mass destruction (WMD) and their
supporters. Designations under E.O. 13382 are implemented by Treasury's Office
of Foreign Assets Control (OFAC), and they prohibit all transactions between the
designees and any U.S. person and freeze any assets the designees may have
under U.S. jurisdiction.
Mohammad Qannadi acts or purports to act for or on behalf of the Atomic Energy
Organization of Iran (AEOI). The AEOI manages Iran's overall nuclear program and
reports directly to the Iranian president. Identified by President George W. Bush in
the Annex to E.O. 13382, the AEOI is the main Iranian institute for research and
development activities in the field of nuclear technology, including Iran's centrifuge
enrichment program and experimental laser enrichment of uranium program.
Ali Hajinia Leilabadi acts or purports to act for or on behalf of the Mesbah Energy
Company, an AEOI subordinate designated by OFAC in January 2006. Mesbah has
been used to procure products for Iran's heavy water project. Heavy water is
essential for Iran's heavy-water-moderated reactor project, which will provide Iran
with a potential source of plutonium well-suited for nuclear weapons. Heavy water is
believed to have no credible use in Iran's civilian nuclear power program, which is
based on light-water reactor technology.
The AEOI and Mesbah Energy Company are both named in the Annex to United
Nations Security Council Resolution (UNSCR) 1737 for their involvement in Iran's
nuclear program. Mohammad Qannadi and Ali Hajinia Leilabadi were also both
included in the Annex to UNSCR 1737 for their respective roles with AEOI and
Mesbah. The UN identified Qannadi as AEOI's Vice President for Research and
Development, while identifying Leilabadi as the Director General of the Mesbah
Energy Company.
In August 2006 the Iranian President awarded government medals to Qannadi,
Leilabadi, and 12 other individuals, for their contributions in the field of nuclear
technology. Qannadi received the second medal for research for his role as AEOI
research and technology deputy. Leilabadi was awarded the third medal of
excellence in management for his role as director and deputy manager of Mesbah.
Background on E.O 13382
Today's action builds on President Bush's issuance of E.O. 133820n J~ne 29,
2005. Recognizing the need for additional tools to combat the proliferation of WMD,
the President signed the E.O. authorizing the imposition of strong financial
sanctions against not only WMD proliferators, but also entities and individuals
providing support or services to them.
Ittp:llwww.trea~.gov/press/relea~es/lrp461.htl11
7/51'2007
In the Annex to E.O. 13382, the President identified eight entities operating in North
Korea, Iran, and Syria for their support of WMD proliferation. E.O. 13382 authorizes
the Secretary of the Treasury. in consultation with the Secretary of State, the
Attorney General, and other relevant agencies. to designate additional entities and
individuals providing support or services to the entities identified in the Annex to the
Order.
In addition to the entities identified in the annex of E.O. 13382, the Treasury
Department has designated 29 entities and four individuals as proliferators of WMD.
specifically:
• Eight North Korean entities on October 21, 2005;
• Two Iranian entities on January 4, 2006;
• One Swiss individual and one Swiss entity tied to North Korean proliferation
activity on March 30, 2006;
• Four Chinese entities and one U.S. entity tied to Iranian proliferation activity
on June 8, 2006;
• Two Iranian entities on July 18,2006;
• Three Syrian entities on January 4, 2007;
• One Iranian entity, one British entity, and one individual tied to Iranian
missile proliferation on January 9, 2007;
• Three Iranian entities on February 16, 2007; and
• Three Iranian entities on June 8, 2007; and
• Two Iranian individuals on June 15, 2007.
The designation announced today is part of the ongoing interagency effort by the
United States Government to combat WMD trafficking by blocking the property of
and prohibiting transactions with entities and individuals that engage in proliferation
activities and their support networks.
- 30-
hltpJlwww.trea.i.gov!press!releaSeslhp461.htm
7/5/2007
Page 1 of 3
June 15, 2007
hp462
Treasury Designates AI Qaida, L1FG Operatives
The U.S. Department of the Treasury today designated three Libyan individuals
who are members of both al Qaida and the Libyan Islamic Fighting Group (LlFG).
Teday's action was taken pursuant to Executive Order 13224, which is aimed al
prohibiting transactions with terrorists and their supporters and freezing their
assets.
"These terrorists execute roles throughout al Qaida and LlFG, from recruitment to
military training to procurement of explosive components," said Adam J. Szubin,
Director of the Office of Foreign Assets Control (OFAC). "We are publicly holding
them to account for their dangerous actions."
Identifying Information
Nur AI-Din AI-Dibiski
•
•
•
•
•
•
•
•
•
AKAs: Salem Nor Eldin Amohamed al-Dabski
Salim Nur ai-Din al-Oabski
Salim Nur ai-Din al-Dabaski
Abdallah Rajab
Abdullah Ragab
Abu ai-Ward
.Abd ai-Ward
Abu al-Wurud
Abu Naim
DOB: circa 1963
POB: Tripoli, Libya
PASSPORT: 1990/345751 (Libya)
Nur ai-Din al Dibiski traveled to Afghanistan in the early 1990s, where he joined al
Qaida and received military training in al Qaida's camps. Dibiski is believed to be a
senior member of the LlFG and a member of that terrorist group's military
committee. Dibiski also joined the LlFG while he was in Afghanistan, and as of
August 2005 was identified as a member of the L1FG in Iran.
Sa'id Yusif Ali Abu Azizah
•
•
•
•
•
•
•
•
•
AKAs: Said Youssef Ali Abu Aziza
Sa'id Yusif Ali Abu Azizat
Sa'id Yusif Abu Aziz
Sa'ud Abu Aziz
Abu Therab
Abu Thurab
Abu Turab
Abdul Hamid
Abd ai-Hamid
Ittp:l/www.trea~.gov/press/releaseslhp4&2.htm
7/5/2007
la1!C 2 of 3
DOB: 1958
POB: Tripoli, Libya
PASSPORT: 871437555 (libya)
Sa'id Yusif Ali Abu Azizah is a member of and recruiter for al Qaida, and was
responsible for al Qaida's publications and mass media operations. Azizah, who
underwent terrorist training in an al Qaida training camp, supervised one of bin
Laden's guesthouses in Peshawar, Pakistan.
Azizah joined the LlFG in 1995. Azizah has long been involved in recruiting new
LlFG members and sending them to Afghanistan for military training and combat
experience. On behalf of LlFG, Azizah has focused on the return of recruits to Libya
to conduct operations against the government.
Azizah was identified as a member of al Qaida in Canada in 2003, and became the
leader of the LlFG in Canada in 2004.
'Ali Sulayman Mas'ud 'Abd AI·Sayyid
•
•
•
•
•
•
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
Aly Soliman Massoud Abdul Sayed
Mohamed Osman
Ibn al-Qayyim al-Jawziyyah
Ibn al-Qayyim
Ibn EI Qaim
AI-Zawl
DOB: 1969
POB: Tripoli, Libya
PASSPORT: 96/184442 (Libya)
'Abd al-Sayyid is one of al Qaida's early members and is reportedly a member of
the al Qaida military committee. He was assigned by al Qaida's leadership to
deliver messages to al Qaida members in Libya that contained instructions for
terrorist plots in Libya. 'Abd al-Sayyid was also tasked by LlFG to enter Libya
secretly, and was involved in arming an al Qaida group in libya.
'Abd al-Sayyid was at one time in charge of al Qaida activities in Yemen, where he
tasked one al Qaida operative to obtain electrical"igniters" for explosives. In 1993,
'Abd al-Sayyid coordinated with a lIFG member to bring an explosives expert to
Yemen to make an improvised explosive device to be catapulted on the U.S.
Embassy in Sanaa.
'Abd al-Sayyid later returned to Sudan, where he was in charge of al Qaida
operations and was a regional LlFG leader. He followed orders of the UFG
leadership, particularly LlFG leader and Specially Designated Global Terrorist
(SDGT) Abd ai-Rahman al-Faqih. 'Abd al-Sayyid also received funds from a
Switzerland-based LlFG member.
In 2003, 'Abd al-Sayyid received explosives detonators from a LlFG security
committee member in Sudan and was involved in planning an attack on the
Sudanese president and vice president
- 30-
p:llwww.trea.~.gov/prcsslrclcasesJhp4(.2.htm
7/5/2007
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June 15, 2007
HP-463
United States Terminates Estate and Gift Tax Treaty with Sweden
Washington, D,C.--The Treasury Department today announced that on June 7,
2007 the United States delivered to the Government of Sweden a notice of
termination of the tax treaty between the two countries with respect to estates,
inheritances, and gifts.
In accordance with the provisiDns of the treaty, the notice of termination provides
that the treaty will cease to have effect as of January 1, 2008, At the time the treaty
was signed, Sweden maintained a tax on inheritances and gifts. Sweden has since
abolished this tax such that the treaty is no longer needed to prevent double
taxation with respect to taxes on estates, inheritances and gifts.
-30REPORTS
•
Termlnallon Note
lttp:/lww w.treai..goy/press/releaseslhp46•. htm
7/512007
DEPARTMENT OF STATE
WASHINGTON
June 7,2007
Excellency:
I have the honor to refer to the Convention Between the Government ofthe
United States of America and the Government of Sweden for the Avoidance of
1
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes oQ,
Estates, Inheritallces, and Gifts signed at Stockholm June 13, 1983.
In accordance with the provisions of the Convention, I have the honor to
infom you that the Government ofthe United States of America hereby gives
notice of termination of the Convention. The Convention shall cease to have effect
on January I, 2008, but shall continue to apply in certain respects specified in
Article 15 of the Convention"
Accept, Excellency, the renewed assurances of my highest consideration.
For the Secretary of State:
His Excellency
Gunnar Lund,
Ambassador of Sweden.
DlPLOMATIC NOTE
Page 1 of 1
I
June 18. 2007\
hp-464
Statement by Secretary Paulson on IMF Revision of Exchange Rate
Surveillance Framework
Washington, nC··Treasury Secretary Henry M. Paulson, Jr. today issued the
following statement on International Monetary Fund Managing Director De Rato's
announcement that the Fund revised its framework for exercising surveillance over
members' exchange rate policies:
"The United States welcomes the revision, and I want to commend particularly
Managing Director De Rato for his leadership on this important issue. The revised
decision sends a strong message that the IMF will put exchange rate surveillance
back at the core of its duties and rigorously implement its rules on exchange rate
surveillance going forward. The revised decision also demonstrates that the IMF is
serious about reforming itself and enhancing its legitimacy and relevance in loday's
global economic and financial system."
-30-
Ittp:!lww w.treas.goy/presslreleaseslhp464.htm
7!SI2007
Page 1 of 5
June 18, 2007
2007-6-18-16-36-55-11092
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.s.
reserve assets totaled $65,378 million as of the end of that week, compared to $65,624 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
II
I
I
IIJune 15, 2007
I
IA. Official reserve assets (in US millions unless otherwise specified)
I
IIEuro
IIYen
IITotal
1(1) Foreign currency reserves (in convertible foreign currencies)
II
II
11 65 ,378
I(a) Securities
11 12 ,770
11 10 ,268
11 23 ,038
lof which: issuer headquartered in reporting country but located abroad
II
II
110
I(b) total currency and deposits with:
II
II
l(i) other national central banks, BIS and IMF
11 12 ,838
Iii) banks headquartered in the reporting country
II
II
11 0
II
11 0
110
lof which: located abroad
I(iii) banks headquartered outside the reporting country
II
1(2) IMF reserve position
114,457
1(3) SDRs
11 8 ,954
(0) gold (including gold deposits and, if appropriate, gold swapped)
11 11 ,041
I--volume in millions of fine troy ounces
11 261 .499
1(5) other reserve assets
II
5,050
11 17 ,888
11
lof which: located in the reporting country
I
0
I
I
0
(specify)
I--financial derivatives
t-Ioans to nonbank nonresidents
E-other
[s. Other foreign currency assets (specify)
--securities not included in official reserve assets
JI
tdepoSits not included in official reserve assets
--loans not included in official reserve assets
Ji
--financial derivatives not included in official reserve assets
II
--gold not included in official reserve assets
II
[-other
II
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
lttp:llwww.treCls.goy/prcss/rclcascs!2GCf761816365511092.htl11
7/512007
Pag~
[
II
II
Foreign currency loans, securities, and deposits
I-outflowS (-)
I
I--inflows (+)
I
II
I
II
IIMaturity breakdown (residual maturity)
[
I11.
2 01'5
EJ
Up to 1 month
II
II Principal
II Interest
I
More than 3
More than 1 and
months and up to
up to 3 months
1 year
II
II
II
Ilprincipal
IIlnterest
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (includin~ the forward leQ of currency swaps)
(a) Short positions ( - )
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--innows related to reverse repas (+)
-trade credit (-)
I
I
I
--trade credit (+)
II
--other accounts payable (-)
II
-other accounts receivable (+)
II
I
II
II
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
I
I
I1
1. Contingent liabilities in foreign currency
I~) Collateral guarantees on debt falling due within 1
year
EJ
II
I
More than 3
More than 1 and
months and up to
up to 3 months
1 year
Up to 1 month
II
I
II
lIb) Other contingent liabilities
2. Foreign currency securities issued with embedded
options (puttable bonds)
II
II
Maturity breakdown (residual maturity. where
applicable)
II
I
[3. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, BIS. IMF. and
other international organizations
II
E-other national monetary authorities (+)
balS (+)
EIMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
r
II
lttp:IIWWw.trcas.gov/press/releases/200761816365511092.htm
7/512007
Page 3 of 5
II~C) with banks and other financial institutions
headquartered outside the reporting country (+)
II
~ndrawn, unconditional credit lines provided to:
II
(a) other national monetary authorities, BIS, IMF, and
other international organizations
I
tother national monetary authorities (-)
"
"
E-SIS (-)
/I
/I
I
II
/I
I
I
II
II
I
I--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
(e) banks and other financial institutions headquartered
outside the reporting country ( - )
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I(a) Short positions
I
II
II
I
I
I
I
I
I
\I
I(il Bought puts
I(ii) Written calls
I(b) Long positions
I
I(i) Bought calls
I(ii) Written puts
IPRO MEMORIA: In-the-money options
11
/I
1(1) At current exchange rate
I(a) Short position
I(b) Long position
I
1(2) + 5 % (depreciation of 5%)
I
II
I(a) Short position
I(b) Long position
1(3) - 5 % (appreciation of 5%)
I(a) Short position
I(b) Long position
1(4) +10 % (depreciation of 10%)
II
II
II
I
II
II
I
I
II
I(a) Short position
I(b) Long position
1(5) - 10 % (appreciation of 10%)
I(a) Short position
I(b) Long position
1(6) Other (specify)
I(a) Short position
I
kb) Long position
I
IV. Memo items
[
(1) To be reported with standard periodicity and timeliness:
(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestiC
nttp://www.treas.gov/press/releasesf200761gJ6365511092.htm
I
I
I
I
7/5/2007
Page 4 of 5
~urrency)
II
tnondeliverable forwards
I
I
I
[ -short positions
[ --long positions
E-other instruments
ffc) pledged assets
I--included in reserve assets
[included in other foreign currency assets
I(d) securities lent and on repo
I--Ient or repoed and included in Section I
I--Ient or repoed but not included in Section I
I--borrowed or acquired and included in Section I
I-borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I--forwards
I--futures
I-·swaps
I-options
I-·<Jther
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
./
I
I
II
I(b) long positions (+)
I--aggregate short and long pOSitions of options in foreign currencies vis-a-vis the domestic currency
I(a) short positions
l(i) bought puts
I(ii) written calls
I(b) long positions
l(i) bought calls
l(ii) written puts
1(2) To be disclosed less frequently:
I(a) currency composition of reserves (by groups of currencies)
1165,378
I--currencies in SDR basket
1165,378
I--currencies not in SDR basket
I--by individual currencies (optional)
II
II
I
II
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-
to-market values, and deposits reflect carrying values.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the offiCial SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.s. Treasury to IMF data for the prior month
lltp:/lwww.treas.gov/press/releasesI200761816365511092.htm
7/5/2007
Page 5 of 5
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
IltP:!!www.treas.gov/preSS/releases/200 761816365511092.htm
7/5/2007
Page 1 of 1
June 18, 2007
HP-465
Financial Literacy Commission Hosts Boston Meeting on Homeownership
Boston- The Financial Education and Literacy Commission, chaired by the U.S.
Treasury Department, visited Boston, Mass., today for a discussion on successful
financial education programs to improve homeownership.
"Homeownership is a Journey not a destination. Good homeownership counseling
services need to be available before, during and after the purchase transaction,"
said Treasury Deputy Assistant Secretary for Financial Education, Dan lannicola,
Jr., who attended today's conference. "The community groups we me! with today
understand this and that is why they're making a difference here in Boston and the
surrounding areas."
Treasury and the U.S. Department of Housing and Urban Development led a
discussion with financial institutions, lenders, policymakers, community
organizations and counseling agencies on how public-private sector partnerships
can better deliver grassroots counseling and training programs. Representatives
from the Federal DepOSit Insurance Corporation also attened the event, which was
part of broader national and regional efforts to highlight National Homeownership
Month.
The discussion focused on helping home-buyers better understand the terms of
their mortgages to help them stay in their homes. Homeownership counseling can
reduce 90 day mortgage delinquencies by 19 percent, according to a 2001 study.
Today's meeting was part of the Financial Literacy and Education Commission's
national strategy for improving Americans' understanding of issues like
homeownership, credit management, and retirement savings. The report, released
in 2006, and other free homeownership counseling publications can be found at
MyMoney go'l.
-30-
~ltP://www.tress.goy/press/reJeases/hp465.htm
7/5J2007
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June 19, 2007
hp-466
Treasury Seeks Nominations for Auditing Committee
Washington - The Treasury Department issued a notice in the Federal Register
this week seeking nominations of individuals to serve on the Advisory Committee
on the Auditing Profession. Secretary Henry M. Paulson, Jr. announced his
intention to create the committee last month to assist Treasury in examining the
sustain ability of a strong and vibrant auditing' profession, as part of the first stage of
the Secretary's capital markets competitiveness initiative.
Treasury will select 15 to 21 committee members representing the views of nongovernment entities or groups having an interest in the audifing profession, such as
auditors, investors, public companies, and other financial market participants. The
Department also requested names of professional and public interest groups that
should be represented on the committee.
The public committee will evaluate and make recommendations to strengthen the
auditing profession. which the Department expects the committee to release within
a year. All full committee meetings will be open to the public.
Topics the committee is expected to consider include: the auditing profession's
ability to attract and retain the human capital necessary to meet developments in
the business and financial reporting environment; audit market competition and
concentration; and the financial resources of the auditing profession, including the
effect of existing limitations on auditing firms' structure; as well as those factors
affecting audit quality.
Treasury will direct the committee to conduct its work with a view to furthering
Treasury's mission to promote the conditions for prosperity and stability in the
United States and the rest of the world and to predict and prevent, to the extent
possible, economic and financial crises.
Nominations should be sent to tlcapl11cl11bcrship@do.treas.govortothe Advisory
Committee on the Auditing Profession Membership, Office of Financial Institutions
Policy, Department of the Treasury, Main Treasury Building, Room 1418, 1500
Pennsylvania Ave., NW, Washington, D.C. 20220. Nominations are due by July 11.
-30REPORTS
• Federa! Register Notice
http://www.tre?.:;.gov/press/rclcaseslhp466.htm
7i5/2007
33560
Federal Register/Vol. 72, No. 116/Monday, June 18, 2007/Notices
CFR 1152.29 must be filed by June 28
2007. Petitions to reopen or requests for
Surface Transportation Board
public use conditions under 49 CFR
1~52.28 must be filed by July 9, 2007,
[STB Docket No. ~3 (Sub-No. 243X)]
With the Surface Transportation Board,
395 E Street, SW., Washington, DC
Union Pacific Railroad Company20423-0001.
Abandonment Exemption-in DeKaIb
A copy of any petition filed with the
County,IL
Board should be sent to UP's
Union Pacific Railroad Company (UP) rep~esentative: Mack H. Shumate. Jr.,
has filed a notice of exemption under 49 Umon Pacific Railroad Company, 101
CFR 1152 SubpartF-Exempt
North Wacker Drive, Room 1920,
Abandonments to abandon a 2.3-mile
Chicago, IL 60606.
portion of its Barber Greene Spur, from
If ilie verified notice contains false or
milepost 23.5 to milepost 25.8, in
misleading information, the exemption
DeKalb County, IL. The line traverses
is void ab initio.
UP has filed environmental and
United States Postal Service Zip Code
historic reports which address the
60115.
effects, if any, of the abandonment on
UP has certified that: (1) No local
the environment and historic resources.
traffic has moved over the line for at
SEA will issue an environmental
least 2 years; (2) there is no overhead
assessment (EA) by June 22, 2007.
traffic on the line; (3) no formal
complaint filed by a user of rail service Interested persons may obtain a copy of
the EA by writing to SEA (Room 1100,
on the line (or by a state or local
Surface Transportation Board,
government entity acting on behalf of
such user) regarding cessation of service Washington, DC 20423-0001) or by
over the line either is pending with the calling SEA, at (202) 245-0305.
Board or with any U.S. District Court or [Assistance for the hearing impaired is
available through the Federal
has been decided in favor of
Infonnation Relay Service (FIRS) at 1complainant within the 2-year period:
800-877-8339.) Comments on
and (4) the requirements of 49 CFR
environmental and historic preservation
1105.7 (environmental report), 49 CFR
1105.8 (historic report), 49 CFR 1105.11 matters must be filed within 15 days
after the EA becomes available to the
(transmittal letter), 49 CFR 1105.12
public.
[newspaper publication), and 49 CFR
Environmental, historic preservation,
1152.50[d)(1) [notice to governmental
public use, or trail use/rail banking
agencies) have been met.
As a condition to this exemption, any conditions will be imposed, where
appropriate, in a subsequent decision.
employee adversely affected by the
Pursuant to the provisions of 49 CFR
abandonment shall be protected under
1152.29[e)(2),
UP shall file a notice of
Oregon Short Line R. Co.consummation with the Board to signify
Abandonment-Goshen, 360 I.C.C. 91
that it has exercised the authority
(1979). To address whether this
granted and fully abandoned the line. If
condition adequately protects affected
consummation has not been effected by
employees, a petition for partial
UP's filing of a notice of consummation
revocation under 49 U.S.C. 10502(d)
by July 18, 2008, and there are no legal
must be filed.
or regulatory barriers to consummation,
• Provided no funnal expression of
the authority to abandon will
mtent to file an offer of financial
automaticallr
expire.
assistance (OF A) has been received, this
Board decisions and notices are
exemption will be effective on July 18,
available on our Web site at http://
2007. unless stayed pending
reconsideration. Petitions to stay that do www.stb.dot.gov.
Decided: June 8, 2007.
not involve environmental issues,!
By the Board, David M. Konschnik.
formal expressions of intent to file an
Director, Office of Proceedings.
OFA under 49 CFR 1152.27[c)(2),2 and
trail use/rail banking requests under 49 Vemon A. Williams,
Secretary.
1 The Boan! will grant a stay if an infonned
[FR Doc. E7-11483 Filed 6-15-07; 8:45 amI
DEPARTMENT OF TRANSPORTATION
dacJaion on environmental issues (whether raised
BlWNG CODE ..... 5-01-P
by a party or by the Board's Section of
Envlrolllllllntal Analysis [SEA) in its independent
InVlllltlption) cannot be made before tha
exemption's effective date. See Exemption of OutDEPARTMENT OF THE TREASURY
o/-5ervice Rail lines. 51.G.C.2d 377 (1989). Any
request for a stay should be filed as soon as possible Advisory Committee on the Auditing
10 that the Board may tate appropriate action before
Profession
the exemption's effactive date.
'Bach OFA must be accompanied by the filing
AGENCY: Department 01 the Treasury,
fee, which Is cummtly set at $1,300. See 49 CPR
11102.2[Q(25}.
Departmental Offices.
ACTION: Notice of intent to establish;
request for nominations.
SUMMARY: The Department of the
Treasury [the "Department") intends to
establish the Advisory Committee on
the Auditing Profession (the
"Committee") to assist the Department
in evaluating the sustainability of a
strong and vibrant auditing profeSSion.
The Department is seeking nominations
of individuals to be considered for
selection as Committee members, and
names of professional and public
interest groups that should be
represented on the Committee.
DATES: Nominations must be received
on or before July 11, 200?
ADDRESSES: Nominations should be sent
to ACAPmembership@do.treas.govor
Advisory Committee on the Auditing
Profession Membership, Office of
Financial Institutions Policy,
Department of the Treasury, Main
Treasury Building, Room 1418,1500
Pennsylvania Avenue, NW.,
Washington, DC 20220.
FOR FURTHER INFORMATION CONTACT:
Gerry Hughes, Financial Analyst, or
Timothy M. Hunt, Financial Analyst,
Office of Financial Institutions Policy,
Department of the Treasury, 1500
Pennsylvania Avenue, NW.,
Washington, DC 20220, (202) 927-6618
(not a toll-free number).
SUPPLEMENTARY INFORMAnON: In
accordance with the requirements of the
Federal Advisory Committee Act, 5
U.S.C. App. II, the Department is
publishing this notice that the
Department intends to establish the
Committee. The Committee's objective
will be to provide infonned advice and
recommendations to the Department on
the sustainability of a strong and vibrant
public company auditing profeSSion.
The Committee's charter is expected to
direct it to consider, among other things,
the auditing profesSion's ability to
attract and retain the human capital
necessary to meet developments in the
business and financial reporting
environment; audit market competition
and concentration; and the financial
resources of the auditing profession,
including the effect of existing
limitations on auditing firms' structure.
A resilient and quality public company
auditing profession is essential to the
strength of the nation's capital markets.
Auditors oversee the integrity of
financial reporting and disclosure,
critical to investor confidence and
market efficiency. Because ofthe
importance of the auditing profession to
the prosperity and stability of the
capital markets in the United States and
the rest of the world, the Department
Federal Register/Vol. 72, No. 116/Monday, June 18, 2007/Notices
affirms that the Committee is necessary
and in the public interest.
The Committee will be directed to
conduct its work with a view to
furthering the mission of the
Department, a8 the steward of the
economic and financial systems of the
United States, to promote and encourage
the conditions for prosperity and
stability in the United States and the
rest of the world and to predict and
prevent. to the extent possible,
economic and financial crises. The
charter will provide that the
Committee's duties are solely advisory
and only extend to the submission of
advice or recommendations to the
Department. The Committee is expected
to meet at such intervals as necessary to
carry out its duties. The charter is
expected to provide that the fuJI
Committee will meet no more than eight
times. Moetings of subgroups of the full
Committee may occur more frequently.
To achieve the Committee's objective,
the Department will assure that tho
Committee reflects balanced
membership and includes a crosssection of between 15 and 21 members
representing the views of nongovernment entities or groups having an
interest in the auditing profession. such
as auditors. investors. public
companies. and other financial market
participants. In order to select
Committee members who represent the
greatest range of interest in the auditing
profession, the Department is soliciting
suggestions for potential Committee
members from a variety of sources,
33561
including, but not limited to.
profeSSional and public interest groups.
Nominations should describe and
document the proposed member's
qualifications for Committee
membership. In addition to individual
nominations, the Department is
soliciting the names of professional and
public interest groups that should have
representative members participating on
the Committee. Committee members
will Dot receive compensation, but they
will be reimbursed for travel expenses
consistent with governing Federal law
and regulations.
Dated: June 8. 2007
Taiya Smith.
Executive Secretary.
lFR Doc. E7-11700 Filed 6-15-07; 8:45 am]
BILLING CODE 4811-42-1'
Page 1 of 1
June 19, 2007
HP-467
US Treasuer to Deliver Remarks for National Homeownership Month
u.s. Treasurer Anna Escobedo Cabral will deliver keynote remarks Thursday
before the New Mexico Mortgage Lenders Association as part of National
Homeownership Month. Treasurer Cabral's remarks will focus on the importance of
financial literacy and homeownership. The following event is open to media:
WHO
Treasurer Anna Escobedo Cabral
WHAT
Remarks on Financial Literacy and Homeownership
WHEN
Thursday, June 21, 1:00 p.m. MDT
WHERE Sheraton Albuquerque Uptown Hotel
2600 Louisiana Boulevard NE
Albuquerque, NM
-30-
Ittp:llwww.treas.gov/preSS/releases/h~1)7.htl11
7/5/2007
Page I of I
June 19, 2007
HP-468
Secretary Paulson to Visit FinCEN
Treasury Secretary Henry M. Paulson. Jr. will visit the Financial Crimes
Enforcement Network (FinCEN) to discuss FinCEN's continued efforts to protect the
financial system from abuse by money launderers, terrorists, and other criminals.
The Secretary will also discuss how FinCEN is working to administer the Bank
Secrecy Act (BSA) in a more efficient and effective manner.
Secretary Paulson's remarks will be followed by a pen-and-pad briefing with
FinCEN Director James H. Freis, Jr.
Who
Secretary Henry M. Paulson, Jr.
What
Remarks on Protecting the Financial System and Effective Implementation of the
Bank Secrecy Act
When
Friday, June 22,10:00 a.m. EDT
Where
Financial Crimes Enforcement Network (FinCEN)
Vienna, VA
Note
Media must RSVP with Steve Hudak at Steve.Hudak@fincen.gov or (703) 9053770.
.ttp:l/www.trea~.gov/preSS/releasesfhp%8.htl11
7iS/2007
Page I of~
June 20, 2007
HP-469
Testimony of Treasury Secretary Henry M. Paulson, Jr.
before the House Committee on Financial Services
on the State of the International Financial System
Washington, DC -- Thank you, Chairman Frank. Ranking Member Bachus and
Committee members, for the opportunity to appear today to discuss the state of the
international financial system.
The Bush Administration is committed to strengthening U.S. and global economies
by promoting domestic and international growth. Our policies encourage openness,
competition. financial stability, and development, both at home and abroad.
As countries around the world have reformed and opened their economies, global
integration has provided businesses greater access to markets around the world.
more choices for consumers, and reduced the prices of goods and services, which
is a real benefit, especially to those with lower incomes in the United States and
abroad.
Our aim is to help ensure that more people share in the benefits created by
economic growth and trade opportunities, to help every nation reduce poverty and
build a strong middle class.
To further expand on these points, my testimony will touch on the following:
• The economic outlook for the U.S. and the global economy.
• Contributions that the U.S. and other economies have made toward global
re-balancing and additional steps that are required.
• The vital importance of continued U.S. openness to foreign investment and
trade, while ensuring national security, to keep our economy dynamiC and
competitive; and the imperative of addressing anxieties about globalization
and successfully concluding the Doha trade round.
• Why the international financial institutions are key instruments through
which to pursue U.S. economic interests abroad and what needs to be done
to maintain their relevance and credibility. On the IMF side, this includes an
overhaul of governance structure.
• The importance of multilateral debt and development initiatives, which serve
U.S. interests - both moral and practical- by lifting people out of poverty.
promoting private-sector led growth, helping rebuild war-torn societies.
• How the Treasury is working bilaterally and multilaterally to detect and
disrupt financial networks related to money laundering, terrorism, WMD
proliferation.
• How Treasury's international assistance program supports the achievement
of many of these goals.
U.S. and Global Economic Developments
A strong U.S. economy benefits the international economy, and tile U.S. economy
is strong. Most recent data show that employers are hiring more than 100,000
people per month, businesses are starting to invest again and consumers are
spending at a healthy pace.
The global economy continues to be very robust, with sustained strong growth from
2003 through 2006 In 2006. global GOP grew 5.4 percent, the highest rate of
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growth in oller 30 years. The International Monetary Fund (IMF) projects continued
strong growth. at about 5 percent, in 2007 and 2008. The U.S. and China are key
engines of global growth, accounting for over 40 percent of world growth for the
past 5 years. Emerging markets and developing countries have made a huge
contribution to global growth, growing, on average. 4.8 percentage points faster
than the advanced economies from 2003 through 2006. And with both Europe and
Jap~n al~o experiencing faster growth, the global economy is now firing on all
engines In a way that produces better balance, more sustained growth, and
expanding opportunities.
At the same time there has been a substantial increase in the amounts of funds
invested across borders, a near doubling in cross·border investment flows since
2000 to $6 trillion annually. Not surprisingly. given the depth, liquidity and
attractiveness of our financial markets, the U.S. has attracted international
investment that has enabled us to achieve higher rates of growth. higher levels of
capital formation, and greater job creation than would have been possible
otherwise.
The issue of global imbalances remains on the international agenda. Some
historical perspective is useful in this discussion. Global imbalances have evolved
and developed over a long time period and are the result of a myriad of global
forces, including the massive amounts of international investment mentioned earlier
and the relative attractiveness of U.S. financial markets to foreign investors.
Another reason is the conSistently faster pace of demand growth in the United
States relative to our foreign partners.
However, progress is being made, as suggested in last week's release of first
quarter 2007 data showing the U.S. current account deficit has declined to 5.7
percent of U,S. GOP, down from a peak of 6.8 percent in the fourth quarter of 2005.
Our partners are growing faster, particularly in Europe, where demand has
strengthened. We continue to seek further re·balancing of global demand through
stronger demand growth in Japan and Europe, as well as by oil exporting
economies and China.
We are doing our part. The U.S. fiscal position continues to improve. The FY 2006
federal budget deficit was $248 billion, $70 billion less than in FY2005. This is
considerable progress and we are on track to further reduce the deficit in 2007. As
a share of GOP, the defiCit amounted to 1.9 percent in FY 2006, down from a recent
peak of 3.6 percent in FY 2004 and below the 40·year average of 2.3 percent. The
U.S. labor market remains healthy with a low unemployment rate. steady job gains
and solid real wage growth. Core measures of inflation appear to be contained,
although energy and food price increases continue to boost the headline inflation
figures.
In sum. global economic growth is widespread and moving at a faster pace than in
the 1980s or the 1990s. Inflation is down, fiscal positions have improved. and
vulnerabilities have been reduced. We still have work to do, however, to further rebalance global demand, expand global trade and open markets.
The Strategic Economic Dialogue with China
Since becoming Secretary, I have emphasized the United States' economic
relationship with China. Rapid growth in Chil')a has helped power the global
economy. And. as a major global economic partiCipant, China must address the
need for structural reform.
Our relationship with China is multi·faceted. and we welcome China's growth and
integration into the world economy. As our relationship with ~hina matures,
tensions will naturally emerge. Less than one year ago, PreSident Bush and
President Hu established the Strategic Economic Dialogue. which is a focused and
effective framework for addressing issues of mutual concern. The first SED meeting
was held in Beijing in December, and the second one was held last month here in
Washington. We have tangible results to sh~w for our wor~ so f~r. such. as
agreements in civil aViation, energy, the enVIronment and finanCial services.
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7iS/2007
Page 3 ofS
Through the SED, which allows us to speak to senior Chinese officials with one
voice, avoiding the stove-piping that had sometimes characterized past
discussions, we can work to strengthen the U.S. - China economic relationship. It is
very important to both of our countries that we get this right.
The United States supports a stable and prosperous China; a stable and
prosperous China will be a growing market for U.S. goods and services, even if it
will be an economic competitor at times. We are not afraid of the competition; we
welcome it, because competition makes us stronger. It is in our interest to support
China's continuing efforts to reform and open its economy. Our policy
disagreements are not about the direction of change, but about the pace of change.
You recently received the foreign exchange report, which emphasizes the need for
stronger, faster action from China. Treasury did not determine that China's
eXChange rate policy was carried out for the purpose of preventing effective balance
of payments adjustment or gaining unfair competitive advantage in international
trade. But, Treasury continues to press the Chinese to increase the flexibility of their
exchange rate.
Although they have taken some steps towards greater flexibility in the short term,
they need to accelerate that movement and move more quickly to a marketdetermined eXChange rate in the medium term. While currency reform is not going
to eliminate our trade deficit, a market-determined exchange rate that reflects the
underlying fundamentals of the Chinese economy is an important ingredient to
sustainable, balanced economic growth in China, which is critical to continued
stable growth around the world. The huge inflow of liquidity under the current
eXChange rate policy undermines the effectiveness of China's monetary policy and
fuels excessive growth in credit, which itself poses significant risks for the Chinese
economy's performance. The risk that China now faces is moving too slowly on
exchange rate reform, rather than moving too quickly.
Rebalancing China's growth to be less dependent on exports is key to reducing
China's trade surplus, and assuring that China can continue to grow in the future
without generating large imbalances. Moving more quickly to embrace competition
and market principles will also spread the benefits of China's growth to all of
China's people. Just as important is addressing the structural reasons why Chinese
households save so much and consume so little. Precautionary savings rates would
likely decrease, and consumption increase, if there were a stronger social safety
net. Competitive retail financial services would allow the Chinese public to insure
against risk, finance major expenditures like education, and garner a higher return
on their savings. Investments driven by market signals and expected profitability,
rather than by administrative guidance, combined with a reduction in precautionary
savings, would shift the economy from its infrastructure and export manufacturing
focus and spread prosperity more widely. This can only be beneficial, and China's
consumption and import level can only increase.
We will have our third SED meeting in December. Between now and then, we will
continue to actively work on the trade agenda, on opening markets, increasing
transparency and innovation, rebalancing growth and promoting energy effiCiency
and security, as well as environmental protection measures. We will continue our
focus on financial services, moving at a faster pace towards a market-driven
currency and expanding U.S. access in the services sector. We have room to be
more creative and accomplish a good deal more.
Promoting Open Trade and Investment
A central U.S. policy priority is promoting further opening to international trade while
addressing the sources of globalization anxieties. I have been and will continue to
be an outspoken advocate for maintaining and extending open trade. This is
fundamental to the long term competitiveness of the U.S. economy. As the world
opens its doors, we must resist the sentiment that favors economic isolationism;
this is not the time to retreat from the principles which have made America so
strong and competitive.
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Page 4 of8
We have worked hard to open markets and liberalize trade, in order to promote
e~ono~ic.wowth and ~evelopment worldwide. Free trade agreements (FTAs) also
bnng significant benefits to Americans and the American economy as well as to our
FTA partners. Over the last six years, the Administration has put free trade
agreem~nts into effect with ten countries. Agreements with the Dominican Republic,
Costa Rica and Oman have passed Congress and await implementation.
The Administration is working hard to complete the Doha round. which has the
potential to lift hundreds of millions out of poverty. Last month, congressional
leaders and the Administration reached bipartisan agreement on labor,
environmental and other issues related to pending free trade agreements with Peru,
Panama, Colombia and Korea. We are hopeful that congressional approval of these
agreements will soon unlock their important benefits.
Openness to trade and competition fuels economic dynamism, innovation, and
deployment of new technologies that raise standard of living and productivity across
the globe. Countries which have opened up to international competition have
prospered, while others have been left behind. But a dynamic economy does create
dislocations and change, and we must help workers succeed amidst this change.
However, we cannot turn back the clock; the global economy is here to stay.
A successful Doha round would expand trade in agriculture, manufactured goods
and services. The World Bank estimates that full liberalization of global
merchandise trade alone would increase annual global income by $287 billion (0.7
percent of global GOP) and lift 65 million people out of poverty by 2015. Agriculture
in particular is crucial for developing countries, especially for the poorest ones. On
average, agriculture represents 40 percent of GDP, 35 percent of exports, and 5070 percent of total employment in the poorest developing countries
Financial services are particularly important for developing countries because they
are linked to increased economic growth and development. A Doha Round without
significant liberalization in these areas would be a missed development opportunity.
Capital markets are the lifeblood of an economy. They connect those who need
capital with those who invest or lend capital. They playa vital role in helping
entrepreneurs implement new ideas and businesses expand operations, creating
new jobs. Financial sector openness has been shown to increase growth rates by
over one percentage point in developing countries and to help the poor
disproportionately, making commitments in the financial sector a win-win
proposition. Cross-country analysis shows that greater involvement by private and
foreign banks leads to more efficient lending and higher growth.
Foreign Direct Investment
On May 10, 2007, President Bush reaffirmed our nation's commitment to "open
economies that empower individuals, generate economic opportunity and prosperity
for all, and provide the foundation for a free society." A free and open international
investment regime is vital for a stable and growing economy, both here at home
and throughout the world. Foreign investment in the United States strengthens our
economy, improves productivity, creates jobs, and spurs healthy competition.
Thank you, Chairman Frank, Ranking Member Bachus and Committee members
for your efforts to improve and strengthen the CFIUS process. Your bill will
contribute to creating a sound process to assess national security risks in those
limited investments where they may arise, while signaling to the rest of the world
that the United States remains open for investment. The CFIUS process has
historically applied to less than 10 percent of foreign acquisitions of U.S. firms and
the vast majority of reviews take place without controversy.
Modernizing the International Financial Institutions
We have a strong stake in maintaining the credibility, relevance and legitimacy of
the IFls. The IFls are indispensable to promoting the United States' global
economic interests. which cannot be effectively pursued through bilateral means
alone.
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As you know, the President has nominated Ambassador Robert Zoeflick to be
Wodd Bank president. Positive feedback from my extensive consultation with
foreign ministers around the world reinforced our confidence in Ambassador
Zoellick's ability to lead the Bank's vital mission of economic growth. I believe he
will rightly keep Africa at the center of the Bank's focus and continue the vital
campaign to fight corruption and reduce poverty.
At the IMF, we have reached an important moment for reform. Failure to follow
through will undermine the credibility and legitimacy of the IMF. Within the past
days, the IMF took action to update its operational framework for its surveillance
over members' exchange rate policies. The U.S. has been a strong voice in favor of
such reform.
The IMF's exchange rate surveillance framework was 30 years old and badly
needed updating to reflect developments such as the tremendous rise in
international capital flows and increased prevalence of freely floating exchange
rates. The reform will permit firmer surveillance in areas such as insufficiently
flexible exchange rate regimes or weak macro8QOnomic policies which do not
adequately support the exchange rate regime. The U.S. wiU continue to emphasize
that for the reform to be meaningful, it must be carried through in the day-to-day
surveillance work undertaken by staff. Nothing is more important for the relevance
of the IMF than rigorous execution of its most fundamental responsibility.
Firm, muHilateral-based exchange rate surveillance has the potential to be a strong
complement to bilateral diplomacy. A multilateral approach places exchange rate
issues in a broader. less politically-charged context where the win-win aspects of
reform can be more persuasively emphasized.
The United States has led the call for reforms of the IMF's governance structure so
that it better reflects the world economy in which we live. The chief goal of
governance reform must be to boost the voting share of dynamic emerging market
economies. Major emerging market economies produce an increasing share of
global output. and will increasingly drive global growth. Reform can and should be
accomplished while protecting the voting share of the poorest countries. The U.S.
has demonstrated its commitment to reform by offering to forego the additional
quota which would otherwise be due to us. We continue to call on Similarly situated
oountries to follow our lead.
Supporting Economic Growth In Developing Countries
This administration has pursued a proactive reform agenda on development.
President Bush has made a strong case for why international development
assistance is squarely in the U.S. Interest. Treasury supports these international
development objectives through active leadership in the multilateral development
banks (MDBs) and international debt initiatives. Lifting unsustainable debt burdens
from the poorest countries allows a greater focus on economic growth and frees up
resources that can be spent on poverty-reduction priorities.
In 2005 the G-8 agreed to support a multilateral debt relief agreement to cancel up
to $60 billion in debt obligations owed to the World Bank's International
Development Association (IDA), the African Development Bank and the IMF by
countries eligible for the Heavily Indebted Poor Countries (HIPC) Initiative. In
response to U.S. leadership, the Inter-American Development Bank. has followed
suit. agreeing to provide additional debt reduction to Its five most heavily-indebted
borrowers: Bolivia, Guyana. Haiti, Honduras and Nicaragua. with debts totaling $3.4
billion.
The U.S. seeks to preserve the gains made under these historic debt relief
initiatives, and to end the hlend and forgive" cycle that has plagued many of the
poorest countries in recent decades. This will require not only prudent debt
management by borrowing countries, but greater attention by lenders to responsible
lending policies and practiCes.
A key tool is the joint World BankllMF Debt Sustainability Framework, the DSF. for
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715/2007
Page 6 Df ~
low-income countries, a forward-looking assessment of potential risk of debt
distress. OSF must be put to use not only by borrowers to promote prudent
management of new debt, but also by lenders, beyond the MOBs. It should include
explicit guidance on recommended level of concessionality of lending.
We are concerned that some commercial creditors and non-OECO bilateral
creditors have increased non-concessionallending to Low-Income Countries
following the extension of debt relief, in effect "free riding" on the debt relief for
these countries paid for by others. We are working within various forums, including
the OECO Export Credit GrouP. to explore how use of the OSF might be expanded
to other creditors. We are also working to engage the G-20 on a "Charter for
Responsible Lending" to promote collaboration with emerging creditors. In this
context, we are also working to help HIPCs avoid costly litigation.
Largely through U.S. leadership, the MDBs have been making significant progress
in support of our international policy priorities: promoting private sector-led growth,
reducing poverty, fighting corruption, and aSSisting post-conflict countries in
rebuilding their war-torn economies.
We are now engaged with our donor partners around the world in replenishment :
negotiations for the International Development Association, the concessional arm 01
the World Bank and the African Development Fund. Successful negotiations are
particularly important for Africa, which receives half of the lOA's resources. U.S.
leadership is essential to advance the following key objectives:
• Making sure the institutions measure, report and demonstrate results
concretely and consistently; and continue to allocate more resources to
countries that are reforming and performing well;
• Improved work in fragile states such as Afghanistan and Liberia;
• Increased transparency of the Bank's country operations;
• Greater attention to debt sustainability in poor, debt vulnerable countries;
• Continued efforts to fight against corruption.
The U.S. and the MOBs are strengthening their commitment to the financial sector
in Africa, which is critically important for supporting sustainable economic growth.
President Bush recently announced the Africa Financial Sector Initiative to provide
financial and technical assistance 10 overcome barriers to capital markets
development in Africa. This will complement work of the MOBs to strengthen
Africa's financial markets.
The World Bank's new "Making Finance Work for Africa" initiative aims to increase
efficiency of financial intermediation, provide greater access to finance for
households and small business, and deepen financial markets. The IFC provides
financial and technical assistance to help African financial institutions lend profitabl{
to small and medium-sized enterprises. World BankllMF financial sector
assessments help African countries develop financial sector reform strategies.
The MOBs also playa key role in addressing the needs of fragile states, which
complements U.S. policy of helping to rebuild war-torn economies in countries like;
Afghanistan, Liberia, Haiti and Lebanon. Successfully addressing the special needl
of fragile states is critical for advancing global economic and pOlitical stability. We
are encouraging the MOBs to focus on the core issues of capacity and governance'
since shortcomings in these areas often make it difficult for fragile states to
effectively absorb aid. We also emphasize the need for the MOBs to achieve
measurable results.
The Administration wants to continue to work with Congress on this proactive
development agenda. In order for the United States to maintain its leadership in
these important efforts, we must address the past payments due to these valuable
institutions, as was requested in the President's FY 2008 budget.
Helping Small Businesses in Latin America
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In March, President Bush asked the Treasury and State Departments to develop an
initiative to "help U.S. and local banks improve their ability to extend good loans to
small businesses" in Latin America and the Caribbean. On June 12, Treasury
announced a three part program specifically designed to assist the estimated 90
percent of small businesses in the region that are often frozen out of the formal
financial sector. The initiative is aimed at helping more people share in the benefits
of economic freedom and growth that occur when small businesses thrive.
It is a three-part plan to catalyze market-based bank lending to small, profitable
businesses with growth potential in Latin America and the Caribbean, that would be
carried out in conjunction with in the Muftifaterallnvestment Fund (MIFJ of the InterAmerican Development Bank, the Overseas Private Investment Corporation (OPIC)
and the lOB Group's Inter-American Investment Corporation (IIC).
Household financial education is also vital to the success of this initiative. Many
entrepreneurs get their start using their own savings or personal loans. Treasurer
Anna Cabral will host a regional conference this fall to disclJSS ways we can
enhance access to financial services, including financial service aCCess of
entrepreneurs in the region.
Strengthening the International Framework against Illicit Finance
In 2004, Treasury became the first finance ministry in the world to develop in-house
intelligence and analytic expertise to use specific, current, and reliable intelligence
to evaluate potential national security threats. We use reliable financial intelligence
to build conduct-based cases, working to achieve a multilateral alignment of
interests. Multilateral support is critical to the success of targeted financial
measures; this support is also vital to bolstering the integrity of the international
financial system and to underpinning sustainable growth and development.
Treasury continues an intensive effort to track and disrupt terrorist financing that
has been effective on several levels. Perhaps the best example of a multilateral
program of targeted financial measures is evidenced when the target provides
support to al Qaida or the Taliban. In that case, a U.N. Security Council list requires
all member states to freeze the assets of designated actors.
We are applying targeted financial measures against narcotics trafficking. terrorism
threats and to counter the threat of proliferation, particularly the threats posed by
Iran and North Korea. We have used our authorities to financially isolate entities·
central to the financing of terrorism and proliferation, such as Iran's Bank Sepah
and Bank Saderat. We have worked to ensure that targeted financial measures are
a central part of multilateral efforts to combat WMD proliferators; these measures
are included in key UNSCRs related to North Korean and Iranian proliferation
activities.
One of the greatest challenges of this century will be to keep the most dangerous
weapons out of the hands of dangerous people. As I travel and meet with my
colleagues in finance ministries around the world, everyone acknowledges that we
must find effective ways to deal with these threats, short of military measures. Other
nations can move more quickly to accomplish our shared goals of protecting the
financial system and combating security threats by implementing the laws
necessary to give their finance ministries the authority to access and use
intelligence, and by integrating financial and security functions. This will enable
further cooperation and multilateral action, which is in the world's best interest. And.
these authorities must be available not only for use against terrorist financing and
money laundering, but also for the dangerous, emerging practice of proliferation
financing.
In conjunction with these targeted financial measures, Treasury has worked to
enhance transparency across the international financial system and creating a
dialogue with the international banking and financi~1 service industri~s. ~reas~ry is
working with FATF to reinforce anti-money laundennglcou~ter-t~rronst fin~nclng
framework to safeguard against threats such as WMD proliferation. FATF IS a
centerpiece of multilateral efforts, but cannot function effectively in isolation, the IFls
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are major partners. Countering illicit finance promotes international financial stability
and is therefore complementary to the missions of the IFls.
The U.S. has been working very closely with the IMF and MDBs on anti-money
laundering issues since 1999 and on terrorist financing issues since 2001. Our
efforts have been very successful in gaining their commitment and engagement to
combat terrorist financing and money laundering. A major step forward occurred in
March 2004, when IMF and World Bank Executive Boards agreed to make
countries' compliance with the FATF 40 + 9 recommendations, the anti-money
laundering and terrorist financing standard, a regular part of their financial sector
surveillance and diagnostic work, including in the Financial Sector Assessment
Program.
The IMF and World Bank continue to undertake country assessments and provide
technical assistance to help countries strengthen their AMLlCFT regimes. They
have performed 80 country assessments since 2002. The IMF has provided
technical assistance to 158 countries; conducted 57 training workshops/seminars at
national or regional level, involving 1,873 participants. And the World Bank has
undertaken 196 outreach activities and 314 technical assistance missions, training
approximately 2,200 officials in 140 countries.
Treasury Technical Assistance
Treasury seeks to advance the international economic agenda, and the specific
goals that I have discussed today, in many ways, primarily through bilateral policy
dialogue, through Treasury's participation in international organizations, and
through specialized groupings such as the G-7/G-8.
Another, less visible, way is Treasury's international technical assistance program.
It is a very small program that "punches above its weight" and merits your support.
Let me give you a few specific examples that illustrate how Treasury assistance is
supporting our efforts to combat illicit finance, to promote economic growth in
developing countries, and to promote open trade and investment:
• In Afghanistan, Treasury advisors have assisted the Afghan Central Bank in
a successful effort to license and regulate the vast network of informal
currency changers, also known as "hawaladars." This was a major step
forward in the effort to bring hawaladars into the formal financial system and
thereby reduce vulnerability to money laundering and terrorist financing.
• In Zambia, Treasury advisors are helping the Finance Ministry to create a
new Treasury Department that unifies and makes more transparent revenue
and expenditure collection, and introduces new cash management tools.
• In Mauritius, Treasury advisors have provided critical assistance in
advancing "aid for trade" initiatives. With Treasury's help, Mauritius has
introduced more advanced budget techniques that will help the authorities
plan for and mitigate the budgetary impact of steps to liberalize its trade
regime.
Conclusion
Taken together, policies to embrace openness, promote trade and assist
developing economies will enhance economic security and prosperity for people
around the world. These goals reflect what is best in the American people, and I
look forward to working with you to achieve them. Thank you and I welcome your
questions.
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June 21, 2007
HP-470
Testimony of
Treasury Assistant Secretary for Financial Institutions
David G. Nason
Before the U.S. House Committee on Financial Services
Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises
Washington· Thank you, Chairman Kanjorski, Ranking Member Pryce, and other
members of the Subcommittee for inviting me to appear before you today.
The market for terrorism risk insurance in the United States was significantly
changed by the terrorist attacks of September 11, 2001. Of course, prior to
September 11 , terrorism risk clearly existed in the United States. We experienced
the 1993 bombing of the World Trade Center, the 1995 Oklahoma City bombing,
the 1996 Centennial Olympic Park bombing, and the "Millennium Bomber's·
December 1999 attempted bombing of the Los Angeles International Airport.
Despite these events, most commercial property and casualty insurance companies
continued to provide coverage for terrorism risk in the insurance policies sold to
their commercial policyholders.
The terrorist attacks of September 11 resulted in insured losses of approximately
$32 billion, which at the time was the largest single insured loss event in U.S.
history. The recognition that terrorist attacks could cause losses of such scale
spread across multiple insurance products and concentrated in a relatively small
geographic a~ea, caused the insurance industry to undertake a broad reassessment
of the likelihood and potential losses associated with terrorism. Immediately
following September 11, commercial property and casualty insurers sought to
exclude coverage for terrorism risk in many poliCies. Reinsurance contracts also
began excluding coverage for terrorism.
In the months after September 11, there were increasing concerns about potential
economic disruptions caused by the unwillingness of many insurance companies to
provide terrorism insurance. In response, Congress passed and the President
signed the Terrorism Risk Insurance Act (TRIA) in late 2002. TRIA established a
temporary federal program of shared public and private compensation for privatelyinsured commercial property and casualty losses resulting from acts of terrorism.
The TRIA legislation stated that the purposes of the legislation were to address
market disruptions, to ensure the continued widespread availability and affordability
of commercial property and casualty insurance for terrorism risk, and to allow for a
transition period for the private markets to stabilize and build capacity while
preserving State insurance regulation and consumer protections. While TRIA was
largely successful in achieving its original purposes, given some remaining
uncertainty surrounding the development in the market for terrorism risk insurance,
TRIA was temporarily extended in 2005 for an additional two years by the Terrorism
Risk Insurance Extension Act of 2005 (the "Extension Act").
Today, I would like to provide an overview of the key features of TRIA and the
Extension Act, the key findings of the President's Working Group on Financial
Markets' (PWG) 2006 report to Congress on terrorism risk insurance, and some
principles for the federal government's role in the market for terrorism risk insurance
going-forward. Our view of TRIA is shaped by the belief that the most efficient,
lowest cost, and most innovative methOds of providing terrorism risk insurance will
come from the private sector. The Administration believes that three elements are
critical if TRIA is to be reauthorized for a second time: the program remains
temporary and short-term; private sector retentions are increased; and there is no
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expansion of the program. Treasury cannot support efforts that move the program
in a direction that is inconsistent with these key elements.
The Terrorism Risk Insurance Act and the Extension Act
TRI~ ~ssentially ~sta?lished a government reinsurance program. Much like typical
provIsions found
In
reinsurance, the TRIA program requires that insurers first retain
~ portion of terrorism risk exposure themselves (referred to as "deductible") with the
Insurer and government then sharing in the losses above the initial retention
(referred to as "co-share" or "co-pay"). Unlike a typical reinsurance policy,
how~ver, there is no up-fr?nt premium charged for the reinsurance coverage
provided under TRIA; but Instead, any federal expenditure can be collected, or
rec.ouped, after a loss through surcharges applied to premiums paid by commercial
policyholders regardless of whether their insurers had received TRIA payments.
Some key features of TRIA and the Extension Act include the following:
Private Sector Retentions
An insurer's "retention" under TRIA generally refers to the amount of terrorism risk
exposure that an insurer retains. An insurer's retention is comprised of its insurer
deductible, its co-share of the insured losses above its deductible, or all of its losses
if an attack results in industry-wide losses below an event size threshold, called the
"Program Trigger." An insurer's retention under TRIA is a key provision that
governs the amount of terrorism risk exposure held by the private sector. The
general structure of TRIA and the Extension Act requires increases in private sector
retentions over time to encourage development of private market capacity to
provide terrorism risk insurance over time.
An insurer's deductible is company specific and is calculated based on the size of
the insurer's prior year's premium revenue from the types of insurance covered by
TRIA. Insurer deductibles have increased throughout the TRIA program - from its
2003 level of 7 percent of an insurer's prior year's direct earned premiums, to 10
percent in 2004, and 15 percent in 2005. The Extension Act further increased
insurer deductibles to 17.5 percent in 2006 and 20 percent in 2007. In the event of
a certified terrorist act, each insurer will cover 100 percent of the insured losses up
to its deductible before being eligible for federal payments under TRIA. Tying an
insurer's deductible to its revenue helps ensure that the amount of insured losses
the company itself is responsible for is commensurate with its size and assets.
Some of the largest insurers that partiCipate in the program have deductibles in the
billions of dollars.
Once an insurer pays insured losses up to its deductible, insured losses above its
deductible amount would then be shared between the insurer and the federal
government. The federal share of insured losses above the insurer's deductible
had been 90 percent through the first four years of the TRIA program, and was
reduced to 85 percent in 2007 - thus increasing the private sector's share from 10
percent to 15 percent. This provision of TRIA encourages proper claims adjustment
as insurers will have "skin in the game" in deciding and settling insurance claims,
much the same as provisions included in private sector reinsurance contracts.
In addition to the deductible and co-share, an insurer retains all of its losses if
industry-wide aggregate losses are below the minimum event size eligible for
payments under TRIA, or what has come to be known as the "Program Trigger."
Under TRIA, in order for an event to be certified as an act of terrorism, the losses
suffered by the insurance industry as a whole must exceed at least $5 million in the
aggregate. As originally structured, certified acts of terrorism resulting in losses
above $5 million would have been eligible for federal payments under TRIA,
essentially making the certification and the event's eligibility for federal payments
under TRIA equivalent. The minimum event size qualifying an event for federal
payments under TRIA was raised beginning in 2006 by the Extension Act, which
specifically added the concept of a Program Trigger to TRIA. Under the Program
Trigger concept, the Treasury Secretary is directed not to compensate insurers
under TRIA unless the aggregate industry insured losses exceed certain "trigger"
amounts: $50 million in 2006 and $100 million in 2007. Once the threshold is met,
program payments can then be made to an insurer once it has paid claims and met
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its company-specific deductible.
lines of Coverage
Insurance coverage under TRIA is limited to commercial property and casualty
insurance, which was the primary area of concem in terms of dislocations
associated with the September 11 terrorist attacks. TRIA does not apply to
personal insurance, such as homeowners, automobile, or life insurance. While
TRIA did not specifically define commercial property and casualty insurance, it did
specifically include excess insurance, workers' compensation insurance, and during
the first three years of the TRIA program, surely insurance. In addition, TRIA
specifically excluded certain types of insurance:
· Federal or private crop insurance;
· Private mortgage insurance, or title insurance;
· Financial guaranty insurance offered by a monoline financial guaranty insurance
corporation;
· Insurance for medical malpractice;
· Health or life insurance, including group life insurance;
· Federal Hood insurance; and,
· Reinsurance or retrocessional reinsurance.
In implementing the definition of commercial property and casualty insurance,
Treasury relied on the lines of business ("lines") under which insurers report their
premiums in annual statement filings pursuant to forms and rules adopted by the
National Association of Insurance Commissioners (NAIC). The specific lines that
ware included in the program were established by Treasury through regulation, in
consultation with the NAIC. With respect to implementing the program, policies
whose premiums are reported to the NAIC on deSignated commercial lines qualify
for TRIA coverage.
The Extension Act scaled back the scope of the program so that TRIA no longer
covers:
· Commercial automobile insurance;
· Burglary and theft insurance;
· Surety insurance;
· ProfeSsional liability insurance (but not directors' and officers' liability insurance);
and,
· Farmowners' multiple peril insurance.
Terrorism risk insurance for these lines of insurance, which was covered only
during the first three years of the program, was successfully transitioned back to the
private market without any signs of market disruption.
Certified TRIA Events
The TRIA program covers losses from certified acts of terrorism. In order to qualify
as an act of terrorism, an event must be certified by the Secretary of the Treasury
with the concurrence of the Secretary of State and Attorney General of the United
States as being:
· a violent act, or an act dangerous to life, property or infrastructure;
· resulting in damage within the U.S., or to a U.S. air carrier or U.S. flag vessel, or
on the premises of a U.S. miSSion; and,
· committed by an individual or individuals acting on behalf of any foreign person or
foreign interest, as part of an effort to coerce the civilian population of the .U.S. or to
influence the policy or affect the conduct of the U.S. government by coerCIon.
Terrorism coverage is often described as 'certified acts' covera~e (based on the
TRIA definition) and "non-certified acts' coverage (acts of terronsm that are not
certified under TR IA because they do not meet one or several of the certification
requirements). "Certified ~cts" are synonymous with foreign acts of terrorism due to
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the requirement that the act be "committed by an individual or individuals acting on
behalf of any foreign person or foreign interest."
Under TRIA, an act committed by a "home-grown" terrorist could currently be
certified as an act of terrorism and covered by TRIA so long as the terrorist was
acting on behalf of any foreign person or foreign interest, and the other
requirements are met. However, purely domestic terrorism, such as eco-terrorist
attacks or an attack like Oklahoma City, would not be covered by TRIA. Such noncertified risks generally continue to be insured oy the private market.
Recoupment
Unlike a private sector reinsurance company, the TRIA program does not require
insurers to pay up-front premiums and does not build up surplus to pay future
claims. Instead, the program is funded on a post-loss basis. TRIA provides
authority for Treasury to recoup its federal payments through annual surcharges on
commercial policyholders of up to three percent of a policy's premium. Certain
recoupment is mandatory, while in other circumstances TRIA authorizes
discretionary recoupment.
Mandatory recoupment is based on the concept of an "insurance marketplace
aggregate retention" amount, which specifies the amount of losses the private
sector as a whole must absorb in any given year. If the insured losses that the
insurers collectively retain (individual company deductibles plus the co-pay portions
paid above deductibles) are lower than the marketplace aggregate retention,
Treasury must recoup the difference. In addition, Treasury has the discretion to
seek recoupment of up to the full amount paid out based on consideration of
specific factors described in TRIA. The "insurance marketplace aggregate
retention" amounts have increased each year of the program, going from $10 billion
in the first year to $27.5 billion in 2007.
Key Outcomes of the Extension Act
The TRIA program was originally designed as a three-year program set to expire on
December 31, 2005. The temporary program structure allowed the federal
government to re-evaluate the program in the context of current market conditions.
As the debate surrounding the extension of TRIA took place in 2005, the
Administration focused on encouraging the private insurance market to develop
innovative solutions and build capacity. This serves to reduce potential exposure to
taxpayers. The core changes ultimately adopted as part of the Extension Act increasing deductibles and co-share amounts, elevating program trigger levels, and
eliminating coverage for certain lines of insurance - all focused on encouraging
greater private market participation over time. The impact of these changes and an
overall evaluation of the market for terrorism risk insurance formed the basis for
much of the President's Working Group on Financial Market's (PWG) 2006 report
on terrorism risk insurance.
The Findings of the President's Working Group on Financial Markets
The Extension Act required the PWG to perform an analysis regarding the longterm availability and affordability of insurance for terrorism risk, including group life
coverage; and coverage for chemical, nuclear, biological, and radiological events.
In conducting this analysis, the PWG was assisted by staff of the member agencies
who reviewed academic and industry studies on terrorism risk insurance, sought
additional information and consultation through a Request for Comment published
in the Federal Register, and also met with insurance regulators, policyholder
groups, insurers, reinsurers, modelers, and other government agencies. The PWG
suomitted its report to Congress last September. Key findings of the report are
summarized oelow.
Long-Term Overall Availability and Affordability of Terrorism Risk Insurance
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One of the key findings of the PWG report was that overall the availability and
affordablllty of terrorism risk Insurance has improved since the terrorist attacks of
September 11, 2001. The general trend observed in the market has been that as
insurer retentions have increased under TRIA and policyholder surpluses have
risen, prices for terrorism risk have fallen, and take-up rates have increased.
Much of the improvement in the terrorism risk insurance market is due to several
important factors, including better risk measurement and management, improved
modeling of terrorism risk, greater reinsurance capacity, and a recovery in the
financial health of property and casualty insurers.
. Since September 11, insurers have made greater use of sophisticated models that
allow them to identify and manage concentrations of risk in order to avoid
accumulating too much risk in any given location. This improvement in risk
accumulation management has allowed insurers to better diversify and control their
terrorism risk exposures, which has enhanced their ability to undelWrite terrorism
risk. In addition, a significant effort has been made by the insurance industry in
modeling the potential frequency and severity of terrorist attacks; however, given
the uncertainty of terrorism in general and, in particular, the uncertainty associated
with these modeling efforts, insurers appear to have limited confidence to date in
these models for evaluating their risk exposures .
. In terms of market capacity, the PWG found that the quantity of terrorism risk
reinsurance capacity has increased since the period following September 11. In
addition, the financial health of insurers has recovered since September 11. As a
result, insurers have more available capacity to allocate to terrorism risk as
demonstrated by the increased provision of terrorism risk insurance coverage over
the past few years.
Despite these overall improvements, the PWG report found that a significant
number of policyholders are still not purchasing terrorism coverage - approximately
40 percent of all policyholders do not purchase coverage. Even in major cities, a
high proportion of policyholders are not purchasing terrorism risk insurance. For
example. in 2004, 46 percent of policyholders in New York City had not purchased
terrorism insurance; in Los Angeles, 61 percent had not purchased terrorism
insurance; in Chicago, 42 percent; and in Washington, D.C., 40 percent. Recently
reported data for 2006 suggests this has improved for some cities; for example,
approximately one-quarter of policyholders in the New York metropolitan area are
uninsured, as compared to 46 percent in 2004. The PWG's report, Treasury's own
2005 study, and others have found that the primary reasons for non-purchase were
price, perceptions of low risk, and perhaps to some degree an expectation that
federal disaster aid might be available if a significant attack were to occur.
The PWG report concluded that further improvements in insurers' ability to model
and manage terrorism risk will likely contribute to the long-term development of the
terrorism risk insurance market. However, the high level of uncertainty currently
associated with predicting the frequency of terrorist attacks, along with what
appears to be a general unwillingness of some insur:ance policyholders to purchase
insurance coverage, makes any prediction of the potential degree of long-term
development of the terrorism risk insurance market somewhat difficult.
Group Life Insurance
As passed by Congress in 2002, TRIA did not include group life insurance in the
program. Treasury was required to evaluate market conditions and determine
whether to include it in the program if both insurance and reinsurance were not
available, or not likely to be available in the future. In 2003, Treasury found that
group life insurance coverage was readily available for consumers. Thus, group life
was not added to the program. In 2005, when TRIA was extended tly Congress,
group life was not added to the program.
The PWG report found that group life insurance is still widely ~vailable in the pr~vate
market even though it is not part of the TR.IA progr~~. In partlc~la~. the group life
market is highly competitive and is very pnce senSitIVe. Group lIfe Insurers concede
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that competitive pressures have caused them to make coverage available, even in
the absence of TRIA protection. In contrast to property and casualty insurers,
group life insurers have decided to forgo purchasing reinsurance and to focus less
on managing risk accumulations.
Chemical, Nuclear, Biological, or Radiological (CNBR) Coverage under TRIA
CNBR is currently covered under TRIA. However, TRIA does not require insurers
to make CNBR terrorism coverage available to policyholders if CNBR coverage for
non-terrorism events is similarly not provided. Although not required by TRIA, if
CNBR terrorism coverage is provided by the insurance policy, such as with workers'
compensation insurance, TRIA covers insured losses from a certified terrorist event
involving CNBR.
The PWG report found that historically CNBR risks (caused by a terrorist or by any
other event) were typically not covered by insurance (except when mandated by
state law, such as with workers' compensation). The factors determining the
availability and affordability of CNBR coverage have more to do with the nature,
scale, and uncertainty of the damage and losses from CNBR events - however
caused - and less to do with terrorism specifically. In addition, policyholder
expectations regarding their own potential terrorism risk exposure are probably
lower and their expectations about the likelihood of post-disaster federal aid are
probably higher for CNBR attacks than for relatively smaller-scale conventional
terrorist attacks.
The Federal Government's Role in the Market for Terrorism Risk Insurance
As a basic principle, the federal government's role in any market, including the
market for terrorism risk insurance, should be limited to those areas where private
markets cannot function and hence broader costs are imposed on our Nation's
overall economy. In playing such a role at a time when it was needed, TRIA
appears to have been successful. TRIA provided time for insurers and others to
adjust to the risks made clear by the September 11 terrorist attacks. Subsequently,
there have been positive market responses by insurers and reinsurers to the
reductions in the federal role over the five years that TRIA has been in place, most
notably by assuming additional terrorism risk exposure in each year of the
program. And as insurers have increased their terrorism risk exposure as TRIA
was scaled back, prices for terrorism risk coverage have declined or remained
stable. In some sense, we have conducted a market experiment under TRIA that
has illustrated that the private sector is capable of taking on increasing amounts of
terrorism risk as the federal government's role recedes. TRIA has generally been
effective in encouraging the greater provision of terrorism risk insurance, while at
the same time encouraging and supporting private market development. However,
by providing a terrorism risk reinsurance without any up-front premiums, it may also
have displaced some private sector alternatives.
As has been clear from the outset, TRIA was designed as a temporary program. A
permanent or long-term federal subsidy of free federal reinsurance was never
intended. We firmly believe that temporary programs should be just that temporary. Given the success achieved under TRIA to date, the obvious question
is should the federal government maintain a limited role in the provision of terrorism
risk insurance? It is clear that some challenges remain in the market for terrorism
risk insurance almost five years after the passage of TRIA and nearly six years after
September 11. Insurers have made great strides in modeling loss exposure and
managing their concentration of risk; however, the ability of the insurance industry
to model the frequency of terrorism attacks is uncertain, and market partiCipants are
skeptical of their current reliability. As a result, insurers are cautious in allocating
more capacity to terrorism risk, although it appears that gradual increases have
been occurring over time. If TRIA were to expire, our general view is that the
market for terrorism risk insurance in much of the country would largely be
unaffected, but that there could be some dislocations in certain markets and
industries.
Based on where the market for terrorism risk insurance is today, our view is that
TRIA should be phased out in order to increase private sector participation. The
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following three elements are critical if TRIA is to b~ reauthorized for ~ second time:
the program remains temporary and short-term; private sector retentions are
increased; and there is no expansion of the program. Unfortunately. H.R. 2761
does not meet these critical elements.
It is important that the program remain temporary and short-term. When the
President signed TRIA in 2002 he said that it should be temporary, and the
Administration maintains this position. Given the positive market developments
during the last five years under a TRIA program where the federal role has been
scaled-back further and further each year. we clearly do not believe the federal
government's role in terrorism risk insurance should be made permanent. Similarly.
if the program were extended for a long period of time there would be less urgency
surrounding the development of private sector solutions, which would lead to
market complacency. In considering the length of any extension we must maintain
incentives for industry participants to continue to improve their systems (e.g.,
modeling) and develop private market capacity and innovative solutions. We
believe the ten year extension in H.R. 2761 is nat consistent with the critical
element of keeping the program temporary and short-term.
It is also important to continue the trend of increasing the private sector's
participation and reducing the role of the Federal Government. Private sector
retentions provide financial incentives for insurers to encourage their policyholders
to mitigate risk through such measures as improved physical security and
evacuation and business continuation planning. Private sector retentions can be
increased through deductibles. co-shares. or program triggers. Any extension of
TRIA should not backtrack from current levels, but rather should reflect some real
amount of increased private sector participation. As has been demonstrated by the
increased willingness of insurance companies to take on terrorism risk exposure
during the life of TRIA, there is ampJe opportunity to continue increasing private
sector retentions. In addition. recent increases in the capacity of property and
casualty insurers. as evidenced by growing surplus and profit levels as well as
increased reinsurance availability, should allow for greater private sector
retentions. Unfortunately, a number of provisions in H.R. 2761 move away from
requiring increased private sector participation, such as leaving insurer deductibles
and co-payment amounts flat and unchanged. lowering the program trigger level,
and lowering retentions for subsequent events through a reset mechanism.
Treasury would oppose these provisions as they are inconsistent with phaSing out
TRIA and encouraging private provision of terrorism risk insurance - which is the
fundamental goal of TRIA.
The program should not be expanded to introduce new lines or types of coverage
willingly provided by the private market. For example, we do not see any evidence
of problems in the market for group life insurance or in coverage for domestic
terrorism. These markets continue to function despite not having access to the
TRIA program. Expanding the TRIA program to include additional coverage for well
functioning markets - as H.R. 2761 proposes - is inconsistent with the appropriate
role of the federal government in the terrorism risk insurance market. Treasury
would oppose any such efforts that move the program in the wrong direction.
Finally. there have been questions raised about the lack of coverage for CNBR
terrorism risks. As noted previously, outside of workers' compensation insurance.
coverage for CNBR risk has generally not been provided by Insurers. However,
TRIA does provide coverage for CNBR risk if insurers include such coverage in
their policies. If policyholders were to demand CNBR coverage and were willing to
pay appropriate prices, we would expect some additional capacity to emerge for
CNBR risks. At this time the lack of CNBR coverage does not appear to be leading
to any disruptions or imposing any broader costs on our Nation's overall economy.
We do not support H.R. 2761's expansion ofTRIA's "make available" provision that
would require insurers to offer coverage for CNBR risks or its proviSions that would
lower insurer retentions. Nevertheless, outside the debate surrounding TRIA, we
should continue to consider the potential economic implications associated with the
limited amount of CNBR terrorism risk insurance coverage that is currently being
provided.
Conclusion
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We appreciate the efforts of the Chairman and Members of the Subcommittee in
evaluating issues associated with terrorism risk insurance and TRIA. Unfortunately,
the risk of terrorism is likely to remain a part of our lives for some time to come, but
that is precisely why the federal government needs to encourage the development
of the most creative and cost effective means of covering terrorism risks. The most
efficient, lowest cost, and most innovative methods of providing terrorism risk
insurance will come from the private sector. TRIA should be phased out in order to
increase private sector participation.
The three critical elements that we have set forth surrounding an acceptable
extension of TRIA - (1) the program remain temporary and short-term; (2) private
sector retentions are increased; and (3) there is no expansion of the programreflect the positive experience under TRIA to date, and are grounded in the basic
principle of limited government involvement in private markets. Without these
critical elements, we would not be supportive of extending TRIA as, in our view, the
program would be moving in the wrong direction. H.R. 2761 does not meet our
objectives. In Treasury's view, from both a market and economic perspective, it
would be better to have no TRIA than a bad TRIA. We are willing to continue to
work with Congress toward finding an appropriately balanced solution and to
establish the appropriate increases in private sector participation.
We look forward to continuing to work with Congress on this important issue.
Thank you. I look forward to answering your questions.
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June 21, 2007
hp-471
Remarks by Acting Under Secretary for International Affairs Clay Lowery on
Sovereign Wealth Funds and the International Financial System
San Francisco--The financial crisis that struck East Asia ten years ago had many
causes - fixed but adjustable exchange rate regimes, balance sheet mismatches in
the financial and corporate sectors, and inadequate financial sector regulation and
supervision. among others. Ultimately these causes manifested themselves In
large-scale capital outflows and insuffiCient official foreign exchange reserves.
At the time, a number of working groups were established to address issues coming
out of that crisis. One group recommended that the international community largely led by the IMF - improve the coverage, frequency, and timeliness of data on
foreign exchange reserves. The idea was to improve financial stability by providing
darity on what had been shown to be misleading data regarding gross reserves.
Though much has been accomplished, further progress, particularty on coverage, is
needed.
East Asia today looks considerably different in many respects, but perhaps none
more so than foreign exchange reserve holdings. In East Asia, and around the
world, reserve accumulation has sharply accelerated. From 1997 to 2001, global
foreign exchange reserves including gold increased at 6 percent per year on
average. Since 2002, the annual average increase has been a phenomenal 20
percent. Global reserves currently stand at roughly $5.6 trillion. Many countries with
large reserves surpass, by several multiples, benchmarks of reserve adequacy
developed after the Asian Financial Crisis.
But reserves do not tell the whole story as they generally do not include Sovereign
Wealth Funds. Sovereign Wealth Funds are not new - they have existed for over
three decades, even if the term as such was only coined to my knowledge in 2005.
What is new is the number of Sovereign Wealth Funds and their sheer current and
projected sizes. Private analysts put current Sovereign Wealth Fund assets in a
range of $1.5 - 2.5 trillion, which would bring total foreign assets held by sovereigns
to roughly $7.6 trillion, or 15 percent of global GOP.
These trends raise broad, strategic issues for the international financial system.
What are the underlying policies driving the accumulation, and should they be
adjusted? What financial market and, over the medium-term, financial protectionism
challenges could arise from this tremendous increase in sovereign cross-border
asset holdings? How can countries in which these funds are invested best promote
openness and welcome foreign capital? The common objective should be an
international financial system where countries do not accumulate more foreign
assets than they want or need, and where cross-border investment remains healthy
and open.
At Treasury we are actively considering these issues, and potential steps that could
be taken multilaterally, bilaterally, and by national authorities. While we clearly do
not have all the answers, I would like to walk you through some of our initial
thinking. I believe that the IMF and World Bank could take a very constructive step
through the drafting of best practices for Sovereign Wealth Funds. Complementing
the work of the International Financial Institutions, I would expect that the issue of
sovereign foreign asset accumulation will increasi~gly arise in informal multilateral
discussions. National authorities will also have an Important role to play. Moreover,
the U.S. government itself has responsibilities.
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Definitions and Differences
First let us be clear on what we are talking about. There is no universal, agreed
~efinition of a ~overei~n ~ealth Fund. I will use the term to mean a government
Investment vehicle which IS funded by foreign exchange assets, and which
manages those assets separately from official reserves. Sovereign Wealth Funds
generally fall into two categories based on the source of the foreign exchange
assets.
• Commodity funds are established through commodity exports, either owned
or taxed by the government. They serve different purposes, including
stabilization of fiscal revenues, inter-generational savings, and balance of
payments sterilization. Given the recent eKtended sharp rise in commodity
prices, many funds initially established for fiscal stabilization or balance of
payments sterilization purposes have evolved into savings funds.
• Non-commodity funds are typically established through transfers of assets
from official foreign exchange reserves. Large balance of payments
surpluses have enabled non-commodity exporters to transfer "excess·
foreign exchange reserves to stand-alone investment funds to be managed
for higher returns.
There are three key differences between these two types of funds:
• First is their asset-liability structure. Commodity funds often derive from
foreign currency accruing directly to the government, so the foreign currency
is not convened to domestic currency, does not enter the domestic
economy, and does not need to be sterilized through the issuance of
domestic debt to avoid unwanted inflationary pressures. In contrast, noncommodity Sovereign Wealth Fund assets often derive from exchange rate
intervention, much of which is usually sterilized. These funds' net retum will
depend on the difference between the yield they earn on their investments
and the yield they pay on their sterilization debt. So they may be thought of
more as "borrowed funds" than traditional "wealth."
• A second difference involves how countries have allocated their foreign
assets to Sovereign Wealth Funds and reserves. Commodity exporters
have typically chosen Sovereign Wealth Funds, while Asian countries have
chosen reserves. There are exceptions - Singapore created its Government
Investment Corporation back in 1981 and Russia established its oil
stabilization fund only in 2003 - but the general trend has stood. Now,
though, Asian countries are increasingly establishing non-commodity
Sovereign Wealth Funds.
• A third difference concerns the future pace of asset accumulation. Oil
exporters in particular are essentially replacing a real asset in the ground
with a financial asset in an account. If oil prices remain high, these
governments are likely to accumulate foreign assets going forward even
after the implementation of sensible domestic fixed investment plans. In
contrast, the extent of asset accumulation in non-commodity funds will
depend heavily on how successful emerging markets are in shifting to
increased exchange rate flexibility.
Benefits and Risks
The creation and expansion of Sovereign Wealth Funds is understandable given
the significant increase in official reserves. To be considered reserves, foreign
currency must be invested in liquid and marketable instruments that are readily
available to the monetary authorities to meet a balance of payments need. The idea
of a Sovereign Wealth Fund is to diversify foreign exchange assets and earn a
higher return by investing in a broad range of asset classes, Including longer-term
government bonds, agency and asset-backe~ se~urities, corporate bo~ds, ~uities,
commodities, real estate, derivatives, alternative Investments, and foreign direct
investment.
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Some back-of-the envelope math demonstrates why this trend toward higher riskreturn management of official assets is to some extent inescapable, or what has
been perceptively called "forced diversification." In 2006, official foreign exchange
reserves grew by 20% or $843 billion. If we assume for simplicity a similar percent
increase in Sovereign Wealth Fund assets, we add $336 billion. Setting aside
valuation changes, this brings total 2006 official flows to nearly $1.2 trillion.
In comparison, 2006 net issuance of the most traditional reserve assets - U.S.
Treasuries, U.S. Agencies, eura area government securities, and UK Treasuriestotaled $461 billion. So even if reserve and Sovereign Wealth Fund managers had
purchased all 2006 net issuance of these traditional reserve assets, they would still
have had some $720 billion left over. Of course this remainder can be invested in
the existing stock of these securities, but part is also likely to find its way to other
assets and asset classes.
These trends can bring benefits to countries in which these funds are invested.
From the U.S. perspective, we unequivocally support international investment in
this country - both portfolio and direct investment- and are committed to ensuring
that the United States continues to be the most attractive place in the world to
invest. Most market estimates, though highly dependent upon underlying
assumptions, expect future official flows to have a material though moderate impact
in bidding up prices and lowering risk premia of riskier, less liquid assets, while at
the same time resulting in continued strong demand for traditional reserve assets.
This may contribute to continued benign financing conditions.
There are also risks, however, The first concerns these funds' potential impact on
financial market stability. To be sure, there is much that is reassuring. Sovereign
Wealth Funds are, in principle, long-term investors that can be expected to stick
with a strategic asset allocation despite short-term losses. They are not highly
leveraged. They cannot be forced by capital requirements or investor withdrawals to
liquidate positions rapidly. They have access to, and frequently make use of, wellregarded private fund managers, consultants, administrators, and custodians.
Yet it is hard to dismiss entirely the possibility of unseen, imprudent risk
management with broader consequences. Sovereign Wealth Funds are already
large and projected to get much larger. Little is known about their investment
policies, so that minor comments or rumors will increasingly cause volatility as
market partiCipants react to what they perceive Sovereign Wealth Funds to be
doing. Sovereign Wealth Funds are typically not directly regulated by their domestic
financial authorities, and the extent of indirect regulation may also be limited.
Investor discipline will depend on what their citizens know and how active they are
in monitoring fund activities, rather than the market discipline of sawy institutional
investors. Further, the funds' counterparties and any creditors may simply assume
a sovereign guarantee and fail to exercise market discipline.
The second risk is that, over the medium term, the size, investment policies, and/or
operating methods of these funds fuel financial protectionism. It is no secret that
globalization, despite its benefits, is raising sensitivities around the world. This is
not just a U.S., European, or even industrialized country issue. Emerging markets
have also at times expressed sensitivity to certain investments by other emerging
markets. There will likely be much public attention to whether Sovereign Wealth
Funds exercise the voting rights of their equity shares, and if so, how. If Sovereign
Wealth Funds obtain operational control of the companies in which they invest, the
fact that they are government entities may invite additional scrutiny. Finally, these
sensitivities and pressures to block sovereign investment would worsen if
Sovereign Wealth Fund investment decisions were made for non-economic
reasons.
I think I can identify two other risks, which are largely domestic but could potentially
be international. One is that with so much money invested across a wider range of
asset classes, Sovereign Wealth Funds will need to have strong fiduciary controls
and good checks and balances to prevent corruption. Another is that, while
Sovereign Wealth Funds should be managed as professionally and independently
as possible, my experience in government suggests that once a bureaucracy is
created, shutting it down becomes difficult. Therefore, a fund created to handle
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what could be a temporary phenomenon should not impede thorough examination
of underlying policies and avoid becoming self-perpetuating.
The Work Ahead of Us
We want of course to maximize the benefits of these funds while reducing the risks.
A sound global financial system and the maintenance of open markets are in the
common interests of all. Sovereign Wealth Funds raise issues of the appropriate
institutional arrangements, governance, operational and risk management,
accountability, and - critically - transparency of the funds' rules, operations, and
asset management guidelines and performance.
So what to do?
First, I believe that the IMF and World Bank could take a very useful step by
developing best practices for Sovereign Wealth Funds, perhaps through a joint task
force. The lMF has the requisite expertise on wider systemic and macroeconomic
subjects, such as the link to fiscal policy. The World Bank is knowledgeable about
country govemance and accounting and fiduciary issues, including the fiduciary
duty these funds have to their citizens as investors. The IMF and World Bank also
have the broad membership of 185 member countries, including countries that have
these funds, countries in which they invest, and countries that simply have a stake
in a healthy overall international financial system.
One caveat is that I do not think that the International Financial Institutions should
be in the business of competing with the private sector to manage reserves or
Sovereign Wealth Fund assets on behalf of countries. This is clearly beyond their
mandates. Proposals along these lines have been justified by the concern that an
individual reserve manager may be reluctant to invest excess reserves more
aggressively for fear of disapproval (or worse) if returns are negative in a given
year. This issue is best addressed by building support domestically, including
through the establishment of a stand-alone domestic institution if appropriate. A
country naturally also retains the right to fire asset managers that underperform
their designated benchmarks. Finally, it is critical that the International Financial
Institutions avoid feeding a misperception that more reserves are necessarily better,
both for the countries themselves and the broader system.
Second, the subject of sovereign foreign asset accumulation will increasingly arise
in informal multilateral discussions, which can complement and provide impetus to
the work of the International Financial Institutions. At last April's meeting of G-7
Finance Ministers and Central Bank Governors, the Treasury Department hosted a
special outreach dinner with Russia, Saudi Arabia, and the United Arab Emirates to
discuss investment flows from oil exporters, including in the form of Sovereign
Wealth Funds. In May, Treasury and the Federal Reserve co-hosted with the South
African Treasury and Reserve Bank a meeting of G-20 Finance Ministry and
Central Bank officials on Commodity Cycles and Financial Stability, where we
discussed, among other topics, Sovereign Wealth Funds.
Third, national authorities will have an important role to play, and certainly at
Treasury we will continue to explore ways to address the challenges and
opportunities provided by Sovereign Wealth Funds. Finance Ministries and Central
Banks are in increasing contact with these funds to promote common
understanding. National securities regulators should treat these funds as they
would any large institutional investor. National governments also maintain
mechanisms to review foreign direct investment in a manner that preserves national
security without creating unnecessary and counterproductive barriers.
Long-established and well-run Sovereign Wealth Funds may wonder why they
should adjust their practices, particularly on transparency. I hope they will find that
transparency is good for the funds as well as the international financial system.
Lack of transparency puts heavy demands on the quality of fund administration.
Even where fund administration is solid, greater transparency would enhance the
likelihood that the fund serves its intended purposes and reduce the likelihood of
future governance problems. The experience of large corporations in the
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Page 5 of 5
industrialized world demonstrates that potential for error and abuse exists even in
apparently highly-rated and well-managed organizations. From a systemic
perspective. transparency will facilitate the maintenance of openness to investment.
What may have been tenable in a world where Sovereign Wealth Funds manage
only several hundred billion dollars may not be tenable in a world where Sovereign
Wealth Funds manage several trillion dollars.
Finally, the U.S. government also has a direct responsibility - which is making our
investment regime as open and consistent as possible for welcoming Sovereign
Wealth Fund investment. We are doing that by working with Congress to get a
sound CFIUS bill and we are doing that by reaching out around the world to explain
the U.S. investment climate. Just this week for instance Deputy Secretary Kimmitt
has been traveling in Beijing and Moscow meeting with government officials and
business leaders to promote open investment policies and to gain clarity on their
new investment laws and to beUer understand the nature and investment priorities
of their soon to be established sovereign wealth funds. The message delivered
clearly to the Deputy Secretary from officials in both countries is that the funds
would focus primarily on portfolio investments such as corporate bonds and
equities. When asked about the possibility of foreign direct investment acquisitions,
officials in both countries indicated that is not in their current planning but if such an
opportunity arose in the future. it would be in non-sensitive sectors.
Never Forget the Underlying Issues
In considering Sovereign Wealth Funds, we should not lose sight of the underlying
issues - the need for increased exchange rate flexibility in many emerging markets
and the need for oil exporters to formulate and implement fixed investment plans
even if further foreign asset accumulation can reasonably be expected. Otherwise
the official sector would be doing the equivalent of treating the symptoms rather
than the condition.
However, Sovereign Wealth Funds are not going away, and it will be increasingly
necessary to work to integrate these funds as smoothly as possible into the
international financial system.
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June 21, 2007
HP-472
Remarks by Anna Escobedo Cabral
U.S. Treasurer
U.S. Department of the Treasury
Before the New Mexico Mortgage Lenders Association
Albuquerque, NM- Good afternoon. Thank you, Ryan, for that introduction. I want
to thank Dan and the New Mexico Mortgage Lenders Association for your warm
welcome. I applaud the important work you're doing here in New Mexico to
promote and maintain sound mortgage lending practices. I'm pleased to join you
here today with our federal partners and so many others dedicated to fostering the
American Dream of homeownership.
For many Americans, owning a home is a giant step on the ladder of economic
mobility. It's a symbol of hard work, a source of pride, and a foundation for
security.
I know President Bush is deeply committed to helping all Americans fulfill the dream
of owning a home. Today, more and more individuals and families are achieving
this dream. Nearly 70 percent of Americans own homes, and the rate of minority
homeownership has risen above 50 percent since the President took office.
The Departments of Housing and Urban Development and Agriculture do a
tremendous amount of work to ensure this success and extend the opportunity of
homeownership to more and more Americans.
At Treasury, we're equally committed to fostering an ownership society. One of the
ways we do this is by empowering individuals to make wise and informed decisions
about their finances.
In today's increasingly complex mortgage market, often the greatest challenge to
consumers is having enough information to navigate through the variety of products
available and choose the one that best fits their needs.
A 2001 study revealed that homeownership counseling can reduce gO-day
mortgage delinquencies by an average of 19 percent. Of course, know/edge is also
our best protection against predatory lenders and fraud.
When we talk about effective homeownership counseling, we need to think beyond
the specific states of pre-purchase, post-purchase, and foreclosure. After all. the
goal should be to ensure individuals and families are equipped not just to buy their
homes. but also to remain in their homes. Buying a home is often the biggest
purchase most of us will make in our lifetime, and information is critical to ensuring
that we make this purchase wisely.
Homeownership counseling and training provides an ideal opportunity to educate
consumers on general personal finance issues such as credit and money
management that are critical to helping them manage their new mortgage and avoid
foreclosure. Therefore, good homeownership counseling programs take a more
holistic approach to address a range of finance topics.
Without question, homeownership fuels the economy and enhances Quality of life in
our communities. It's in the best interest of financial institutions to help their
customers continue on a successful and secure economic path once they purchase
their homes.
hnp:llwww.tre:ls.gov/presslreleas~SnlfAn.htl11
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In talking with communities throughout the country, we've found the most effective
way to deliver this important financial education message is by working together.
Grassroots organizations can be extremely successful in reaching their local
community members to deliver homeownership counseling.
We also know that HUD regional offices across the country as well as programs like
NeighborWorks America are advancing homeownership education through
innovative outreach, aggressive public awareness campaigns, and intensive
counseling. Just this week the Federal Reserve Board announced a new online
Mortgage Comparison Calculator that consumers can use to compare what their
monthly mortgage payments will be and how much equity they will build up in the
future. This is a user-friendly and accessible financial education tool that will help
consumers make informed decisions about mortgage options.
These are just some of the financial education programs and resources out there.
By working together, federal, state, and local governments, financial institutions and
community organizations have the potential to empower all Americans with the
information they need to achieve their dream of buying a home.
Finally, I want to mention another important Treasury-led effort. As some of you
may know, in 2003 Congress established the Financial Literacy and Education
Commission under the Fair and Accurate Credit Transactions Act. The
Commission brings together 20 different federal agencies - including HUD and
USDA - with the single goal of improving financial education.
Since that time, the Commission has released The National Strategy for Financial
Literacy, and launched a financial education web site and tOil-free hotline,
MyMoney.govand 1-888-MyMoney in English and Spanish. The Strategy - which
can be downloaded from the website looks at a variety of important finance topics
including homeownership.
In fact, the section of the Strategy on homeownership has been nationally
recognized as a valuable source of information.
The MyMoney website also offers helpful links such as the Federal Reserve
Board's mortgage calculator I mentioned earlier. I encourage those of you who
haven't seen the Strategy to go on line and take a look. I think you'll find it offers
some trUly valuable resources.
Over the last year, Treasury and HUD have co-hosted meetings with financial
institutions, lenders, policy makers, community organizations, and counseling
agencies to discuss the issues surrounding homeownership and build new
partnerships to advance this important goal. Treasury continues to work with HUD
and our Commission partners to engage in similar discussions throughout the
country.
We're making great progress in offering homeownership opportunities to more
Americans and building a more prosperous future for our communities. But much
work remains. I'm confident that working together we will continue to boost
homeownership - especially among the nation's most underserved consumers and create a more financially informed public. I thank you for your continued
partnership, hard work and commitment to this important endeavor.
Thank you.
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June 22, 2007
hp-473
IMF Concludes Article IV Consultation with the United States
Washington, DC·· The Treasury Department is releasing today the concluding
statement by the staff of the International Monetary Fund following this year's
Article IV Consultation with the United States. This statement represents IMF staffs
independent judgment and assessment of U.S. economic performance and policies.
Release of this statement is consistent with the United States' longstanding, strong
support for enhanced transparency of the IMF. The United States also plans to
release the IMF staff report and Public Information Notice on the U.S. Article IV
review following the Executive Board's discussion of the mission later this summer.
-30REPORTS
•
Concluding Statement of the IMF Mission
a~:I/www.treas.gov/press/releast!s/hp473.htm
7/5/2007
INTERNATIONAL MONETARY FUND
2007 Article IV Consultation with the United States of America
Concluding Statement of the IMF Mission
(June 22, 2007)
BACKDROP
u.s.
1.
Fortunately for the global economy, the recent cooling of
activity from the
robust pace of recent years has coincided with a pick up in growth elsewhere. The U.S.
slowdown has mainly reflected a drag from residential investment due to the ongoing
housing market correction. Consumption, by contrast, has remained strong, supported by
solid employment and wage growth. This resilience reflects the benefits of flexible markets
backed by stable monetary policies and an improving fiscal position. Benign U.S. financial
conditions have minimized spillovers elsewhere and, with global activity supported by faster
growth in the Euro area and Asia, the U.S. current account deficit has stabilized, albeit at
high levels.
2.
Against this background, we see four main macroeconomic challenges:
•
Facilitating a soft landing for the economy;
•
Maintaining a sound and innovative financial sector;
•
Raising domestic savings and lowering the current account deficit, while resisting
protectionism; and
•
Tackling the key longer-term fiscal challenge of rising entitlement spending.
FACILITATING A SOFT LANDING
3.
We share the U.S. authorities' view that the most likely scenario is a soft landing as
growth recovers and inflation falls, although both are subject to risks:
•
Activity should pick up as the drag from housing dissipates, business investment
recovers, and higher foreign growth supports net exports. This yields a baseline of
2 percent annual GOP growth in 2007, rising to 2% percent in 2008. Slack and the
abatement of temporary price pressures brings core inflation below 2 percent.
•
However, growth is uncomfortably close to the 2 percent "stall speed" associated with
past recessions, even if other accompanying factors-rising unemployment and high real
interest rates-are not evident. Consumption could weaken, given the ongoing housing
market slowdown, while benign financial market conditions could tighten.
•
At a time of low unemployment, cost pressures, including from rising oil and commodity
prices, could feed through to prices despite the cushion provided by wide profit margins.
This would be a particular concern if slowing productivity has a larger structural element
than generally assumed, suggesting a need for vigilance on the price front.
4.
Current monetary policy settings are consistent with a soft landing and can be
adjusted flexibly in response to emerging macroeconomic developments. The Federal
Reserve stopped its most recent tightening cycle a year ago on signs that growth was
06-22-07 IMF Article 4 report. DOC June 22,2007 (12:09 PM)
2
weakening and the federal funds rate of 514 percent appears consistent with a soft landing-a
view supported by market expectations. However, given that labor market conditions remain
tight and that there is still some risk that inflation will fail to moderate as expected, the
Federal Open Market Committee has rightly emphasized maintaining weB-anchored inflation
expectations. At the same time, policymakers will need to be alert to the speed with which
employment and activity can weaken in a downturn.
ENSURING A ROBUST FINANCIAL SYSTEM
5.
Financial innovation and stability have underpinned U.S. economic success and
funding of the current account deficit. The system has been highly resilient, including to
recent difficulties in the subprime mortgage market, spreads and market volatility are near
historical lows, and profits and capital adequacy are strong. Innovation has helped disperse
risk, as the core players of the system-the large commercial and investment banks-have
embraced an "originate to distribute" model in which they bundle loans into securities with
varying risk characteristics for sale to investors; derivative markets too have increased the
liquidity of securitization. Overall, innovation has been instrumental in attracting capital
inflows, with foreigners increasingly buying U.S. private debt instruments.
6.
However, rapid innovation has also created new regulatory challenges. We agree
that prudential oversight should focus on core commercial and investment banks, while
relying on market discipline to limit risk elsewhere. However, even as new instruments have
made it more difficult to asses vulnerabilities, benign market conditions have encouraged
risk-taking, which can lower lending standards, as occurred with subprime mortgages:
•
We are concerned that the same could be happening in other market segments, such as
leveraged loans, and that tightening financial conditions could expose unanticipated risk
concentrations and links across markets.
•
This places a higher premium on supervisory systems geared to careful risk management,
particularly for exposures ofthe core to hedge funds and other private pools of capital.
•
Problems with subprime mortgages also raise the challenge of ensuring consistent
consumer protection through federal rules without unduly constraining innovation.
7.
With several federal and many more state regulators overseeing this evolving
system, we welcome the current emphasis on improving regulatory effectiveness. Shared
responsibility can encourage informed debate, but it can also slow responses to pressing
issues (e.g., to issuing guidance on hybrid subprime loans). Therefore, we support:
•
Increasing the use ofgeneral principles as a guide to rule making. Such principles can
ease interagency coordination and shorten reaction times to developments. The scope for
rationalizing the regulatory structure could also be explored, including by building on the
options discussed by the report of the Government Accountability Office.
•
Other measures to improve regulatory effectiveness. Taking forward several proposals
would help, notably instituting a national insurance charter (to reduce compliance costs
with state-by-state norms); reforming oversight of government-sponsored housing
enterprises (to limit risks from their portfolios); and modifying the industrial loan
company charter (to avoid deposit-taking without consolidated supervision).
3
8.
Competition from foreign financial markets has helped spur other initiatives to
lower the costs of regulation. We welcome new guidance reducing the compliance burden of
parts of the Sarbanes-Oxley Act and rules making it easier for foreign companies to delist
from U.S. markets. We also support moves by the Securities and Exchange Commission to
consider recognizing International Financial Reporting Standards for foreign companies and
to allow for mutual recognition of comparable regulatory regimes.
SUPPORTING EXTERNAL ADJUSTMENT
The large current account deficit remains easily funded through debt markets. The
recent fall in the nonoil trade deficit is encouraging but, at present exchange rates, the current
account is projected to narrow only modestly to around 6 percent ofGDP, implying rapidly
rising net external debt. Nonetheless, financing has remained low cost, with long-term
interest rate differentials suggesting that markets are discounting the need for real dollar
depreciation to rebalance U.S. demand and reduce the current account deficit. While the
innovativeness and depth of U.S. fixed-income markets may help explain the continuing
attraction of foreign capital, the size of financing needs and the absence of a dollar risk
premium underline potential vulnerabilities.
9.
10.
A disorderly resolution ofglobal imbalances remains a low probability-but high
cost-risk. The rebalancing of U.S. demand from foreign to domestic goods, and associated
real depreciation of the dollar and reduction in the current account deficit, will likely occur
gradually. However, shocks could provoke a more abrupt adjustment. A flight from dollar
assets would risk disrupting U.S. financial markets, thus lowering domestic demand andgiven the evidence that U.s. financial market conditions are the main conduit for spillovers
abroad-foreign demand as well. This highlights the importance of:
•
Ensuring that U.S. financial markets remain sound and innovative; and
•
Raising U.S. saving in order to lower the current account deficit. In reducing its fiscal
deficit faster than anticipated, the United States is making commendable progress on
the policies agreed in the Fund's Multilateral Consultation as part of a shared
responsibility of key member countries to address global imbalances.
11.
We welcome the U.S. authorities' sustained commitment to free trade, despite
initiatives to erect trade barriers. A more ambitious agenda for liberalizing agriculture could
support a positive outcome to the Doha round of multilateral trade talks. In addition, it is
worth considering a greater cushion to those temporarily dislocated by rising imports, which
could also help resist pressure for higher tariffs to ameliorate the impact of trade on workers.
MEETING THE FISCAL CHALLENGES AHEAD
12.
We also welcome recent fiscal performance and the Administration's medium-term
goal of budget balance by FY 2012, which is garnering broad support. The FY 2007 deficit
will likely fall below 1~ percent ofGDP in FY 2007, again outperforming expectations on
the back of revenue buoyancy from robust profit growth and tight expenditure control.
Congress has also adopted this time frame for budget balance and passed supporting pay-asyou-go rules. However, achieving broad consensus on the means to achieve budgetary
balance remains a major challenge, especially given the uncertainties attached to war funding
and the cost of temporary fixes to the Alternative Minimum Tax.
4
13.
The Administration has rightly identified the key long-term fiscal challenge:
reforming unsustainable entitlement programs. Rising health costs and aging imply huge
spending increases in Medicare, Medicaid, and, to a lesser extent, Social Security:
•
The Administration has appropriately proposed to strengthen the link between premiums
and income so as to limit the growth in Medicare spending.
•
Regarding the relatively high cost of the U.S. health care system, current proposals such
as removing the tax bias for employer-sponsored health coverage may help. However, we
agree with the authorities that more fundamental reform is necessary. More work is
urgently needed on underlying medical cost drivers, so as to help crystallize the policy
debate on alternative policy options.
•
For Social Security, where the underlying costs and reform options are well understood,
the priority is developing a broad consensus on reforms to make the program sustainable.
We would agree that limiting the growth of benefits through progressive indexation
appears to be a promising approach to Social Security reform.
14.
A more stringent medium-term target, such as balancing the budget excluding the
Social Security surplus, would better prepare for these long-term spending pressures. By
placing government debt and associated interest costs on a clear downward trajectory, a more
ambitious medium-term deficit target would offer greater room for maneuver in addressing
future fiscal pressures on entitlement spending.
15.
The reform of entitlement spending should be complemented with tax reform.
Depending on the progress that can be made in controlling spending, revenue increases may
also be needed. An overhaul of the complex tax system is in any case overdue. With tax
expenditures a substantial portion of income tax revenues, the priorities lie in widening the
tax base so as to maintain low marginal tax rates and to reform the Alternative Minimum
Tax. Proposals contained in the President's Commission on Tax Reform to reduce and better
target write-offs while further shielding saving from income taxes are an excellent starting
point. This could be augmented by other options, such as in the area of energy taxes, which
would also support environmental objectives.
IN CONCLUSION
16.
The U.S. economy continues to show remarkable dynamism and resilience, but
important challenges lie ahead. This performance reflects important strengths, including
high levels of flexibility and innovation in markets for goods, labor, and financial assets, as
well as monetary stability and a strong recent fiscal performance. The commitment of
policymakers to embrace globalization has ensured that these benefits are shared with the rest
of the world. Even so, policymakers will need to come to grips with the need to maintain a
robust financial system, eliminate the fiscal deficit, reform the tax system and, most
importantly, make entitlement programs sustainable.
Page I 01' I
June 25, 2007
HP-474
Paulson to Swear in Assistant Secretary Nason
U.S. Treasury Secretary Henry M. Paulson, Jr. will swear in Assistant Secretary for
Financiallnstilutions David G. Nason Thursday, June 28 at the Treasury
Department. Under Secretary for Domestic Finance Robert K. Steel will also
deliver remarks at the ceremony The following event is open to credentialed media:
Who
U. S. Treasury Secretary Henry M. Paulson, Jr.
Under Secretary for Domestic Finance Robert K. Steel
Assistant Secretary for Financial Institutions David G. Nason
What
Swearing In Ceremony for David G. Nason
When
Thursday, June 28, 4 p.m (EDT)
Where
U.S. Treasury Department
Cash Room
1500 Pennsylvania Ave.
Washington, DC
NOTE:
Media without Treasury press credentials planning to attend must contact Frances
Anderson in Treasury's Office of Public Affairs at (202) 622-2960 or (202) 528-9086
with the following information: name, Social Security number and date of birth. This
information may also be emailed to francesanderson@dotreas.Cjov.
http://www.tr~as.gov/press/relcase3!hr474.htm
7/5/2007
Page 1 of 1
....... : ...... :." ......:.... .
. .
June 25, 2007
HP-475
Statement by Secretary Paulson on World Bank
President-Designate Robert Zoellick
Washington, DC- Treasury Secretary Henry M. Paulson, Jr. issued the following
statement today on the World Bank's Executive Board approval of Robert Zoellick
to be World Bank President;
"I welcome the board's action approving Bob ZoelUck to lead the World Bank. Bob
brings a wealth of experience, a paSSion for development and a proven track record
of working with colleagues around the world to get results.
"He has the trust, respect and support of governments in all regions of the wor1d
and I have no doubt his leadership will ensure continued support of World Bank
members. He will be an aggressive advocate for overcoming poverty, investing in
growth, and creating opportunity and hope."
hIlp1/www.treas.gov/press/rclcOSe5/hp475.htm
7/5/2007
Page I 01'5
June 25. 2007
2007-6-25-17-22-0-21024
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.s.
reserve assets totaled $65,532 million as of the end of that week, compared to $65,378 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
II
I
IA. Official reserve assets (in US millions unless otherwise specified)
IIJune 22, 2007
IIEuro
1(1) Foreign currency reserves (in convertible foreign currencies)
I(a) Securities
"II
11 12,850
lof which: issuer headquartered in reporting country but located abroad
I(b) total currency and deposits with:
1m other national central banks, 81S and IMF
I
IIYen
IITotal
I
I
1/
1[65,532
1
1\10,210
11 23.060
I
I
!
II
II
11 0
II
II
/12,918
15,046
11 17,964
Iii) banks headquartered in the reporting country
110
110
110
lof which: located abroad
I(ii ) banks headquartered outside the reporting country
10f which: located in the reporting country
110
1(2) IMF reserve position
11 4 ,476
[(3) SDRs
11 8 ,991
(4) gold (including gold deposits and, if appropriate, gold swapped)
11 11 ,041
I--volume in millions of fine troy ounces
11 261 .499
~5) other reserve assets (specify)
10
b-financial derivatives
Eloans to nonbank nonresidents
[other
I[ Other foreign currency assets (specify)
--securities not included in official reserve assets
--deposits not included in official reserve assets
I
JI
--financial derivatives not included 'in official reserve assets
II
II
--gold not included in official reserve assets
JI
-loans not included in official reserve assets
[-other
II. Predetermined short-term net drains on foreign currency assets (nominal value)
):llw ww.tre?s.guvlprc33/relea&:s.n0076251722021024.htm
I
II
"
715/2007
Page 2 of 5
[
II
II
II
II
I
Total
I
Ilprincipal
I
I--inflows (+)
Illnterest
I
Illnterest
I
More than 3
months and up to
1 year
More than 1 and
up to 3 months
Up to 1 month
11. Foreign currency loans, securities, and deposits
I--outflows (-)
I
II
II
II Maturity breakdown (residual maturity)
II
II
/I
Ilprincipal
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (including the forward leq of currency swaps)
(a) Short positions ( - )
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
II
--trade credit (+)
II
--other accounts payable (-)
II
--other accounts receivable (+)
II
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
I
II
applicable)
Total
I
11 Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1
year
I
II
II
II
IMaturity breakdown (residual maturity, where
II
More than 3
months and up to
1 year
More than 1 and
up to 3 months
Up to 1 month
II
II
I
\I
I(b) Other contingent liabilities
2. Foreign currency securities issued with embedded
options (puttable bonds)
/I
[3. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, 61S, IMF, and
other international organizations
I
--other national monetary authorities (+)
I
tt-
I
BIS (+)
IMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
I
I
p:!/ww w .tfr8s.gov/pres5/rclclt3esi2 0 076251722021024.htm
I
I
7!S/2007
Page 3 of 5
(c) with banks and other financial institutions
IIheadquartered outside the reporting country (+)
I
I
II
[Undrawn. unconditional credit lines provided to:
I
(a) other national monetary authorities. 81S. IMF. and
other international organizations
I--other national monetary authorities (-)
I
I
I
II
II
II
II
II
II
II
II
I--BIS (-)
I--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
I
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I
I(a) Short positions
[(i) Bought puts
I
I
II
I
I
I
I(ii) Written calls
I
I(b) Long positions
I(i)Boughtcalis
I
I(ii) Written puts
IPRO MEMORIA: In-the-money options 11
I
1(1) At current exchange rate
I(a) Short position
I(b) Long position
1(2) + 5 % (depreciation of 5%)
I(a) Short position
I(b) Long position
I
1(3) - 5 % (appreciation of 5%)
I
I(a) Short position
I(b) Long position
1(4) +10 % (depreciation of 10%)
"\I
II
II
II
I(a) Short position
I
/(b) Long position
1(5) -10 % (appreciation of 10%)
I(a) Short position
[(b) Long position
1(6) Other (specify)
I(a) Short position
I(b) Long position
I
II
II
II
IV. Memo items
I
I
(1) To be reported with standard periodicity and timeliness:
II
(a) short-term domestic currency debt indexed to the exchange rate
I
II
(b) financial instruments denominated in foreign currency and settled by other means (e.g .• in domestic
hnp;/lww w.treas.gov/press/relc213e3/2{)()76251722021024.htm
I
I
I
7/5/2007
Page 4 of 5
Icurrency)
II
I-nondeliverable forwards
II
I --short positions
II
II
II
II
II
II
I --long positions
I-other instruments
I(c) pledliled assets
I--included in reserve assets
I-included in other foreign currency assets
I
I
I(d) securities lent and on repo
E-Ient or repoed and included in Section I
I--Ient or repoed but not included in Section I
I--borrowed or acquired and included in Section I
I
I--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I--forwards
I-futures
I-swaps
I
I options
II
II
-aggregate short and long positions in forwards and futures in foreign currencies vis-ell-vis the domestic II
I-other
I
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
[year, which are subject to margin calls.
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
Rb~ long positions (+)
I-aggr~ate short and Ions positions of options in foreisn currencies vis-a-vis the domestic currency
I(a~ short positions
II
II
I(i) bouSht puts
I(ii) written calls
I(b) long positions
I
[(i) bought calls
II
IOi) written puts
II
1(2) To be disclosed less frequently:
I(a) currenc~ composition of reserves (by groups of currencies)
II
11 65.532
I--currencies in SDR basket
1165.532
[--currencies not in SDR basket
II
II
II
[--by individual currencies (optional)
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect markedto-market values, and deposits reflect carrying values.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month
hltp:llwww.treas.gov/plt:ss/relca~e:J/2t)076251722021024.htm
7/5/2007
Page 5 of 5
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
lltp:llwww.trec:ls.guv/press!rclcu56s/]0076251722021024.htm
7/5/2007
Page I of2
June 27, 2007
HP-476
Paulson Announces Next Steps to Bolster
U.S, Markets' Global Competitiveness
Washington- Treasury Secretary Henry M. Paulson, Jr. announced the next steps
of his capital markets competitiveness action plan today, focusing on maintaining
the global leadership of America's capital markets. The plan follows Treasury's first
set of capital markets initiatives announced in May to strengthen financial reporting
and seek a more sustainable and transparent auditing profession.
"To maintain our capital markets' leadership, we need a modern regulatory
structure complemented by market leaders embracing best practices," Secretary
Paulson said. "The steps we are announcing today will help to strengthen our
global competitiveness."
The second stage of the capital markets competitiveness plan seeks a rationalized
regulatory structure with improved oversight, increased efficiency, reduced overlap
and the ability to adapt to market participants' constantly-changing strategies and
tools. The plan will suggest improvements for all financial market participants,
including the Treasury Department itself.
Experts at Treasury's March Conference on U.S. Capital Markets Competitiveness
noted that the right regulatory balance would combine high standards of market
integrity, stability and investor protection with a strong foundation for innovation,
growth, and competitiveness.
The next steps of the plan will include:
•
•
•
•
•
Pursuing a Modernized Regulatory Structure. The Treasury Department
is examining the structure of the regulatory system for all financial services
providers and will release its blueprint for reforms by early next year.
Encourage Development and Adoption of Industry Best Practices for
Asset Managers and Investors in Hedge Funds. The President's Working
Group on Financial Markets will work with asset managers and investors to
help these two groups define separate sets of best practices that address
investor protection, enhance market discipline and mitigate systemic risk.
This effort, based on the PWG principles and guidelines released earlier this
year, will complement the ongoing reviews of counterparties' and creditors'
practices by supervisors globally.
Modernize Treasury's Cash Management and Debt Management. The
Department will strengthen the U.S. Government's cash and debt
management systems through a broad series of public initiatives in the
coming year, further improving the efficiency, integrity, transparency and
competitiveness of the U.S. Treasury market.
Complete Basel II Rulemaking. Treasury will work with U.S. regulators to
move the Basel II capital requirements forward. These new rules will reduce
uncertainly, relieve burdens for both domestic and foreign banks, and
enhance the United States' competitive position.
Empower All Investors through Financial Education. Any effort to
improve the oversight of the financial services industry to protect investors
must be coupled with empowering investors to better understand their
options and decisions. Treasury will lead the President's inter-agency public
initiative to help all Americans better understand money and personal
finance. By encouraging saving and better access to financial services,
Treasury can help broaden America's investor class.
http://www.treas.guv/pro3Irclea5~6/hp476.htl11
7/5/2007
Page 2 of2
• Encourage International Investment Opportunities with Recognition of
Comparable Regulatory Regimes. Mutual recognition between countries
with regulatory schemes comparable to the United States could increase
international investment opportunities and enhance risk diversification while
preserving investor protection. Treasury supports SEC consideration of
mutual recognition for foreign broker-dealers and foreign stock exchanges
offering services to U.S. investors.
hnp://www.trNl~.guv/prc~~/rcleIlS66/pp476.htm
7/5/2007
Page I of I
June 27,2007
HP-477
Steel Briefing on Capital Markets Competitiveness Plan
Under Secretary for Domestic Finance Robert K. Steel will hold an on-the-record
briefing today at the Treasury Department to discuss the second stage of
Treasury's capital markets competitiveness plan. The following event is open to
credentialed media:
Who
Under Secretary for Domestic Finance Robert K. Steel
What
On-the-Record Briefing
When
Wednesday, June 27, 3 p.m. (EDT)
Where
U.S. Treasury Department
Media Room (4121)
1500 Pennsylvania Ave.
Washington, DC
Note
Media without Treasury press credentials planning to attend must contact Frances
Anderson in Treasury's Office of Public Affairs at (202) 622-2960 or (202) 528-9086
with the following information: name, Social Security number and date of birth. This
information may also be emailed to freJrlcesanderson@clo.treas gOY.
http://www.trcas.gov/press/releases/lip477.htm
7/5/2007
Page I or I
.
.
_.
".:
_..
. . ";
~~~~~~~s:§~~~{tS~~\I·~;.·:~~-·
~>: ;::~.::,"c;~=~:::=::~~:,,:-:;,-·:,,-,.:~~
·.c:~-"'PiA~§'~c:!,90'M:·
June 2B, 2007
HP-478
Secretary Paulson Statement on IMF Managing Director de Rato
Washington, DC--Treasury Secretary Henry M. Paulson, Jr. today issued the
following statement on the departure announcement of International Monetary Fund
Managing Director Rodrigo de Rato:
"Rodrigo de Rato brought vision and dedication to his tenure as Managing Director
of the International Monetary Fund. He launched the Medium Term Strategy, a plan
that provides a foundation for important reforms to ensure the institution reflects
today's global economy. Rodrigo helped to strengthen the Fund by creating this
road map for reform, which will enable the Fund to remain a strong, relevant
institution and resource for the global financial system. His leadership was also
instrumental in the Fund's revision of its exchange rate surveillance framework,
which is a highly critical piece of the road map. I wish him continued success in his
future endeavors."
hnp://www.treas.gov/IJIt::~5./rclca~C3fhp478.htl11
7/5/2007
Page 1 of 1
June 29, 2007
HP-479
Statement by Treasury Secretary Henry M. Paulson, Jr.
on Trade Promotion Authority
Washington, DC--Treasury Secretary Henry M. Paulson, Jr. today issued the
following statement on the importance of Trade Promotion Authority to the U.S. and
global economies:
"America's openness has made our economy the most vibrant and dynamic in the
world. To keep our economy strong and competitive, we must continue to push
forward on the trade agenda. The 11 Oth Congress has an important opportunity to
demonstrate bipartisan leadership and help to strengthen our economy by
reauthorizing Trade Promotion Authority.
"Trade fosters the environment of innovation and research that leads to better
goods and services at lower prices, which in turn helps Americans provide for their
families.
"Members of Congress should move quickly to reauthorize Trade Promotion
Authority. Americans benefit from open markets here at home and open markets
abroad for our exports. Together with my colleagues in the Administration, we will
fight to keep markets open to the benefit of American manufacturers, farmers, and
service providers."
http://www.tr~as.gov/press/releases/ hp4 79 .htlll
7iS12()07
@FedFRASER