would provide about $4.8 billion, or nearly half the total, with Saudi Arabia the largest single participant at $2.5 billion.

This $10 billion would be used for a special facility in the IMF. It is a temporary facility-countries could apply within the next 2 to 3 years, and could draw down funds over a period of 2 to 3 years, though the total period of disbursements could not exceed 5 years. It would be available for use by members only in clearly defined circumstances. Specifically, a member drawing under the facility:

Must have a balance of payments financing need that is large in relation to its IMF quota and exceeds the amount available to it under the IMF's regular policies;

Requires a period of adjustment that is longer than provided for under regular IMF policies;

Must enter into a standby agreement with the IMF in which it undertakes to adopt corrective economic policy measures adequate to deal with its balance of payments problem.

The facility, in short, is designed to encourage those countries with particularly severe payments problems to adopt internationally responsible adjustment programs-and to avoid the unwelcome alternatives of resort to the controls, trade restrictions, and beggar-thy-neighbor policies which can be so harmful to world prosperity and so disruptive to our liberal trade and payments order. It is not a device for augmenting development assistance. The IMF provides only balance of payments support. The member drawing on the facility receives more financing than is otherwise available from the IMF: a longer period of adjustment (a 2 to 3 year program as compared with the 1 year normally applicable in the IMF); and a longer period of repayment (3 to 7 year maturity, as compared with the IMF's normal 3 to 5 year maturity). Since interest on the financing provided to the Fund is market-related, the borrowing country would also pay a somewhat higher charge.

Participation in the facility is also advantageous to the United States and others who are providing the financing. In addition to our interest in assuring a strong and smoothly functioning international monetary system, we receive in exchange for our participation a strong, liquid and interest-earning monetary asset. Technically, the United States (or other participant) agrees to provide currency to the IMF in exchange for an automatic drawing right on the IMF, which is counted as part of our international reserve assets and which can be drawn down at any time the United States can sell or transfer the asset to others if there is agreement to do so. The interest rate we receive is linked to U.S. Treasury issues of comparable maturity, so there is no net cost to the Treasury. As the drawings are repaid by the borrower, the IMF returns the dollars to the U.S., U.S. reserve assets are reduced, and the transaction is reversed.

The Witteveen facility will make a major contribution to strengthening the international monetary system against the problems the Subcommittee is addressing. First, it encourages countries to initiate needed adjustment measures before their debts become too large for them to handle or credit is no longer available, and it encourages them to adjust through sound and internationally responsible policies. Second, the fact that the facility is available will improve the creditworthiness of the international monetary system and confidence in the system. It is not constructed and will not be used to help any banks that may have lent excessively or unsoundly. It will help countries that are in need, not financial institutions. Nor will it be used to take over the private banks' regular lending activities. For one thing, the amounts involved are far, far below the levels of private lending-although the IMF may in the period ahead account for a share of total balance of payments financing larger than the 7 percent provided in 1974-76, it will remain small in comparison with the share channeled through the private market. For another, experience indicates that after the IMF enters into a standby agreement with a borrowing country, private lending tends to expand rather than contract. The banks will benefit from the Witteveen facility, but only indirectly-through an improved international environment and stronger monetary system that will benefit all parties, including American industry, workers and farmers.

The Subcommittee has asked whether consideration should be given to other new forms of cooperation between public and private institutions to improve assessments of creditworthiness. The Federal Reserve has shown considerable interest in this question and I know Governor Wallich will want to discuss it, so I will comment only briefly.

I think we must be receptive to new ideas along these lines, and be willing to explore the prospects for closer interaction. The IMF is at present examining its procedures, and considering whether the provision of more information about individual economies would be of value to both borrowers and lenders and thus facilitate the continued flow of private capital. Looking beyond the question of providing more information, the idea of cooperation between the IMF and private banks, through joint loans to country borrowers, or IMF guarantees of private loans, has been mentioned. There is great reluctance on the part of many IMF members to move in this direction-which they see as a fundamental shift in the character of the IMF-and it is not realistic to expect such moves in the foreseeable future. Nonetheless we must, as Secretary Blumenthal has said, be prepared to review old premises and consider innovations, to assure that our institutions grow and adapt, and are used with maximum effectiveness. A final question raised by the Subcommittee relates to formalizing procedures for debt reschedulings. Under Secretary Cooper will discuss this issue in greater detail. I merely want to say that it is not in the interest of either debtors or creditors to undermine the basic principle that reschedulings should be acI think the arrangements by cepted only in absolutely unavoidable cases. creditor clubs have worked well, although there is room for some improvement. Presently the IMF role, in actual creditor club negotiations, is limited to that of a technical observer and supplier of statistical information. I have an open mind as to whether a greater IMF role in rescheduling than presently exists would be helpful, but in general I think there is some advantage in keeping these cases ad hoc and informal.

CONCLUSION

The conclusions I would like to leave the Subcommittee with are as follows: 1. Debt is not necessarily bad. As shown by the experience of the United States in the nineteenth century, and Canada and others at present, borrowed money, if productively invested, provides the capacity to service the underlying debt, and need not represent a serious burden.

2. The large growth in international debt is a natural consequence of the pattern of world payments of recent years, and of the recognized need to finance the imbalances resulting from the oil price increases, while we put in place energy policies needed to reduce the imbalances.

3. There is no evidence that the international monetary system is presently in danger either from general overborrowing by uncreditworthy countries or general overextension of the banking system. Several countries have made encouraging progress in their adjustment efforts.

4. Several oil producing countries will continue to run substantial payments surpluses with some resultant strain on the world payments system, for some years to come.

5. A few countries are approaching or have reached the limits of prudence in borrowing and may experience considerable difficulties in financing their current account deficits. The countries experiencing such difficulties should pursue policies which will reduce their deficits and preserve their creditworthiness so that private lenders may, without undue risk, continue to provide the bulk of the needed financing.

6. Adequate conditional financing should be made available through the IMF to encourage the adoption of stabilization programs by countries which need to take such steps and to give such countries the financing needed to permit them to adjust at a politically tolerable pace by policies acceptable to the world community, and without an undue impact on world growth.

7. Bank supervisory agencies should continue to exercise surveillance over external lending, as they do with domestic lending, to preserve the soundness of banking systems.

8. And, finally, counntries should resist pressures for domestic protection and keep their markets open for international trade.

In sum, Mr. Chairman, the system has performed well under difficult circumstances. Yet it contains some weaknesses and we are moving on a number of fronts to strengthen it. Your Subcommittee will shortly be considering legislation to authorize U.S. participation in a central aspect of this effort-the supplemental IMF facility-and I hope you will give it your strong support.

VII

In 1976, Nicolas Arditto Barletta, Planification Minister, submitted a memorandum to Eng. Demetrio B. Lakas, Panama's President of the Republic, regarding the financial perspectives for 1977. In this memorandum, which was inserted by Senator Helms1 of North Carolina in the Congressional Record for February 22, 1977, (S2819ff), Mr. Barletta said the following:

"We feel it will be extremely difficult to syndicate loans with the commercial banks in the amounts previously mentioned, taking into account that during the present fiscal period we must contract for a total of B/823.6 million with those sources, who in turn have become more demanding each time that an accord has to be finalized. Besides, the relation between servicing the debt and current revenues of between 38.9 percent and 39 percent suggest a deteriorated capacity to service this debt and thus will increase the risk as realized by the lending institutions."

Question 1. Specify how the banks have become more demanding with Panama with each new transaction.

Answer. We have no information as to what Mr. Barletta may have been referring.

Question 2. What is the average relation between debt service and current revenues of all debtor countries outside the Soviet bloc?

Question 3. Name those countries whose debt service percentage is equal to or greater than Panama's 38.9% to 39%.

Answer. Due to the wide diversity among countries of governmental structures and budgetary reports, it is not meaningful to provide the international comparisons which have been requested.

One major problem is that the level of total central government receipts depends on the division of budgetary responsibility between the central and local governments for matters such as roads, education, health, and police. Also many governments own or operate railways, power plants, etc. which in other countries are in the private sector. Furthermore, budget accounts may be shown on either a gross or net basis, i.e., receipts before or after deductions of certain refunds and transfers.

Finally, when figures for different countries are compiled, interest paid on total public debt is not reported by all countries, and amortization payments are almost never reported.

Question 4. Detail how Panama's debt service percentage compares to that of New York City.

Answer. New York City's debt service for its 1978 fiscal year, which ends on June 30, 1978, is $1.6 billion for its general obligation bonds and $437 million for bonds issued by the Municipal Assistance Corporation. The City's total expense budget is $13.8 billion.

It is misleading, however, to compare New York City's debt service on its obligations (as a percentage of revenues) with other jurisdictions or with Panama for a variety of factors. One such factor is that debt service on City bonds, which is $1.6 billion in the current year as noted above and for certain short-term indebtedness, is paid out of an unlimited tax on real estate. If the City had no general obligation debt, it could not levy or use that portion of the real estate tax for operating purposes. Thus, the City is not using for debt service revenues which would otherwise be used for budgetary expenditures.

MAC debt service, however, which is $437 million, is paid out of general fund

revenues.

Question 5. If the present economy of Panama does not improve, can that country repay interest and principal coming due on loans of the commercial banks?

Answer. At year end 1976, Panama owed $650 million to commercial banks in disbursed external debt. Although the Panamanian economy has stagnated during the past three years, all debt service payments to the commercial banks are being made on time. In connection with an IMF stand-by, the Panamanian government has undertaken steps which will ensure prompt repayment, placed ceilings on the government deficit and borrowing for 1977, and postponed public investment in order to reduce expenditures. Even if the economic situation does not brighten immediately, we expect these measures will improve Panama's ability to service its debts.

At the same time, ratification of the Canal treaties would help to improve the economic outlook by significantly improving investor confidence.

1 See Appendix I, B (Exhibit 3).

Question 6. If Planification Minister Barletta has submitted a similar memorandum for 1978, please submit a copy for the record.

Answer. We are not aware of the existence of any such memo for 1978.
Question 7. Specify how Panama's loans have been secured.

Answer. Please see the response to Question 17 concerning the London Times article.

Question 8. Detail how the annuity and the method by which it is paid to Panama by the United States relates to payments by Panama on its indebtedness to U.S. banks.

Answer. In compliance with the provisions of Article XIV of the Convention of 1903, as amended by Article VII of the Treaty of 1936 and Article I of the Treaty of 1955, the U.S. pays Panama a yearly annuity of $2,328,200. In 1962, the Republic of Panama requested and irrevocably authorized the Government of the United States henceforth to pay from the annual annuity payments the sum of $500,000 to Chase Manhattan Bank, $1,000,000 and $828,200 to the First National City Bank of New York as Fiscal Agents for disposition as provided in the Fiscal Agency Contract between said banks and the Republic of Panama. Remittance of these checks makes possible annual payments on loans of the Republic of Panama to U.S. banks.

VIII

The New York Times on February 5, 1974, carried this story datelined Panama City by H. J. Maidenberg titled, "The Gnomes of Panama are Creating A Mushrooming 'Latindollar' Market".

The Gnomes of Panama Are Creating A Mushrooming 'Latindollar' Market