[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.

                                  
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