    [Public Papers of the Presidents of the United States: William J. Clinton (1999, Book I)]
    [June 15, 1999]
    [Pages 944-946]
    [From the U.S. Government Publishing Office www.gpo.gov]

    Message to the Congress Reporting on United States Participation in a
    Multilateral Guarantee of Credit for Brazil
    June 15, 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 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 condition of the agreement or Brazil has failed to

    [[Page 945]]

    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.

    [[Page 946]]

    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 roll-over or drawing that
    might be necessary in the future.

                                                          William J. Clinton

    The White House,

    June 15, 1999.