[House Document 106-82]
[From the U.S. Government Publishing Office]
106th Congress, 1st Session- - - - - - - - - - - - House Document 106-82
EXCHANGE STABILIZATION FUND FINANCING
__________
MESSAGE
from
THE PRESIDENT OF THE UNITED STATES
TRANSMITTING
HIS NOTIFICATION THAT UNIQUE OR EMERGENCY CIRCUMSTANCES REQUIRE THE ESF
FINANCING TO BE AVAILABLE FOR MORE THAN 6 MONTHS TO THE BANCO CENTRAL
DO BRASIL, PURSUANT TO 31 U.S.C. 5302(b)
June 15, 1999.--Message and accompanying papers referred to the
Committee on Banking and Financial Services and ordered to be printed
__________
U.S. GOVERNMENT PRINTING OFFICE
69-011 WASHINGTON : 1999
To the Congress of the United States:
On November 9, 1998, I approved the use of the Exchange
Stabilization Fund (ESF) to provide up to $5 billion for the
U.S. part of a multilateral guarantee of a credit facility for
up to $13.28 billion from the Bank for International
Settlements (BIS) to the Banco Central do Brasil (Banco
Central). Eighteen other central banks and monetary authorities
are guaranteeing portions of the BIS credit facility. In
addition, through the Bank of Japan, the Government of Japan is
providing a swap facility of up to $1.25 billion to Brazil
under terms consistent with the terms of the BIS credit
facility. Pursuant to the requirements of 31 U.S.C. 5302(b), I
am hereby notifying the Congress that I have determined that
unique or emergency circumstances require the ESF financing to
be available for more than 6 months.
The BIS credit facility is part of a multilateral effort to
support an International Monetary Fund (IMF) stand-by
arrangement with Brazil that itself totals approximately $18.1
billion, which is designed to help restore financial market
confidence in Brazil and its currency, and to reestablish
conditions for long-term sustainable growth. The IMF is
providing this package through normal credit tranches and the
Supplemental Reserve Facility (SRF), which provides short-term
financing at significantly higher interest rates than those for
credit tranche financing. Also, the World Bank and the Inter-
American Development Bank are providing up to $9 billion in
support of the international financial package for Brazil.
Since December 1998, international assistance from the IMF,
the BIS credit facility, and the Bank of Japan's swap facility
has provided key support for Brazil's efforts to reform its
economy and resolve its financial crisis. From the IMF
arrangement, Brazil has purchased approximately $4.6 billion in
December 1998 and approximately $4.9 billion in April 1999. On
December 18, 1998, the Banco Central made a first drawing of
$4.15 billion from the BIS credit facility and also drew $390
million from the Bank of Japan's swap facility. The Banco
Central made a second drawing of $4.5 billion from the BIS
credit facility and $423.5 million from the Bank of Japan's
swap facility on April 9, 1999. The ESF's ``guarantee'' share
of each of these BIS credit facility drawings is approximately
38 percent.
Each drawing from the BIS credit facility or the Bank of
Japan's swap facility matures in 6 months, with an option for
additional 6-month renewals. The Banco Central must therefore
repay its first drawing from the BIS and Bank of Japan
facilities by June 18, 1999, unless the parties agree to a
rollover. The Banco Central has informed the BIS and the Bank
of Japan that it plans to request, in early June, a roll-over
of 70 percent of the first drawing from each facility.
The BIS's agreement with the Banco Central contains
conditions that minimize risks to the ESF. For example, the
participating central banks or the BIS may accelerate repayment
if the Banco Central has failed to meet any condition of the
agreement or Brazil has failed to meet any material obligation
to the IMF. The Banco Central must repay the BIS no slower
than, and at least in proportion to Brazil's repayments to the
IMF's SRF and to the Bank of Japan's swap facility. The
Government of Brazil is guaranteeing the performance of the
Banco Central's obligations under its agreement with the BIS,
and, pursuant to the agreement, Brazil must maintain its gross
international reserves at a level no less than the sum of the
principal amount outstanding under the BIS facility, the
principal amount outstanding under Japan's swap facility, and a
suitable margin. Also, the participating central banks and the
BIS must approve any Banco Central request for a drawing or
roll-over from the BIS credit facility.
Before the financial crisis that hit Brazil last fall,
Brazil had made remarkable progress toward reforming its
economy, including reducing inflation from more than 2000
percent 5 years ago to less than 3 percent in 1998, and
successfully implementing an extensive privatization program.
Nonetheless, its large fiscal deficit left it vulnerable during
the recent period of global financial turbulence. Fiscal
adjustment to address that deficit therefore formed the core of
the stand-by arrangement that Brazil reached with the IMF last
December.
Despite Brazil's initial success in implementing the fiscal
reforms required by this stand-by arrangement, there were some
setbacks in passing key legislation, and doubts emerged about
the willingness of some key Brazilian states to adjust their
finances. Ultimately, the government secured passage of
virtually all the fiscal measures, or else took offsetting
actions. However, the initial setbacks and delays eroded market
confidence in December 1998 and January 1999, and pressure on
Brazil's foreign exchange reserves intensified. Rather than
further deplete its reserves, Brazil in mid-January first
devalued and then floated its currency, the real, causing a
steep decline of the real's value against the dollar. As a
consequence, Brazil needed to prevent a spiral of depreciation
and inflation that could have led to deep financial
instability.
After the decision to float the real, and in close
consultation with the IMF, Brazil developed a revised economic
program for 1999-2001, which included deeper fiscal adjustments
and a transparent and prudent monetary policy designed to
contain inflationary pressures. These adjustments will take
some time to restore confidence fully. In the meantime, the
strong support of the international community has been and will
continue to be helpful in reassuring the markets that Brazil
can restore sustainable financial stability.
Brazil's experience to date under its revised program with
the IMF has been very encouraging. The exchange rate has
strengthened from its lows of early March and has been
relatively stable in recent weeks; inflation is significantly
lower than expected and declining; inflows of private capital
are resuming; and most analysts now believe that the economic
downturn will be less severe than initially feared.
Brazil's success to date will make it possible for it to
repay a 30 percent portion of its first (December) drawing from
the BIS credit facility and the Bank of Japan swap facility.
With continued economic improvement, Brazil is likely to be in
a position to repay the remainder of its BIS and Bank of Japan
obligations relatively soon. However, Brazil has indicated that
it would be inadvisable to repay 100 percent of the first BIS
and Bank of Japan disbursements at this point, given the
persistence of risks and uncertainties in the global economy.
The timing of this repayment must take into account the risk
that using Brazilian reserves to repay both first drawings in
their entirety could harm market confidence in Brazil's
financial condition. This could undermine the purpose of our
support: protecting financial stability in Brazil and in other
emerging markets, which ultimately benefits U.S. exports and
jobs. Given that the BIS and Bank of Japan facilities charge a
substantial premium over the 6-month Eurodollar interest rate,
the Banco Central has an incentive to repay them as soon as is
prudent.
The IMF stand-by arrangement and the BIS and Bank of Japan
facilities constitute a vital international response to
Brazil's financial crisis, which threatens the economic welfare
of Brazil's 160-million people and of other countries in the
region and elsewhere in the world. Brazil's size and importance
as the largest economy in Latin America mean that its financial
and economic stability are matters of national interest to the
United States. Brazil's industrial output is the largest in
Latin America; it accounts for 45 percent of the region's gross
domestic product, and its work force numbers approximately 85
million people. A failure to help Brazil deal with its
financial crisis would increase the risk of financial
instability in other Latin American countries and other
emerging market economies. Such instability could damage U.S.
exports, with serious repercussions for our workforce and our
economy as a whole.
Therefore, the BIS credit facility is providing a crucial
supplement to Brazil's IMF-supported program of economic and
financial reform. I believe that strong and continued support
from the United States, other governments, and multilateral
institutions are crucial to enable Brazil to carry out its
economic reform program. In these unique and emergency
circumstances, it is both appropriate and necessary to make ESF
financing available as needed for more than 6 months to
guarantee this BIS credit facility, including any other roll-
over or drawing that might be necessary in the future.
William J. Clinton.
The White House, June 15, 1999.