[Congressional Record (Bound Edition), Volume 145 (1999), Part 9]
[Senate]
[Pages 12793-12794]
[From the U.S. Government Publishing Office, www.gpo.gov]



 REPORT RELATIVE TO THE EXCHANGE STABILIZATION FUND--MESSAGE FROM THE 
                            PRESIDENT--PM 38

  The PRESIDING OFFICER laid before the Senate the following message 
from the President of the United States, together with an accompanying 
report; referred jointly, pursuant to 31 United States Code 5302, to 
the Committee on Appropriations, to the Committee on Banking, Housing, 
and Urban Affairs, and to the Committee on Foreign Relations.

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 Brazil (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 the roll-over. 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, and will 
repay 30 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 conditions 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 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.

[[Page 12794]]

  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 continue to make 
ESF financing available as needed for more than 6 months to guarantee 
this BIS credit facility, including any other rollover or drawing that 
might be necessary in the future.
                                                  William J. Clinton.  
  The White House, June 15, 1999.

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