(including claims of branches of U.S. banks in Hong Kong, Singapore, Panama, Bahamas, and the Cayman Islands). Note: The G-10 countries are: Belgium-Luxembourg, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, United Kingdom, and United States. We do not have the information on individual banks requested. (a) "Eastern bloc?" (b) Cuba? Question 6. Is Castro's Cuba included within the so-called "Eastern bloc?" Question 7. Identify which, if any, U.S. banks that have made loans to Panama have also made loans to Castro's Cuba and what is the total amount loaned by each to Cuba? Answer. As of June 30, 1977, U.S. bank claims on East European countries and the Union of Soviet Socialist Republic amounted to $5.6 billion. U.S. banks report no outstanding loans to Cuba. Question 8. Sum up briefly any OPEC pressure over the last two years on Western powers, especially the U.S., to postpone payment of the debt of LDCs, and the reactions to date to such proposals. Question 9. Did the Republic of Panama figure specifically by name in any such OPEC proposal? Answer. There has been no "pressure" from the OPEC as a group for an LDC debt moratorium, nor have there been an increasing or significant number of developing countries which have sought debt reschedulings. Panama has paid its debts on time. Although the developing-country bloc in the U.N. (which includes the OPEC countries) has advocated a number of debt relief proposals in recent years, Panama has not figured specifically in any of these proposals, and the U.S. and many of the other developed countries have steadfastly opposed all proposals for generalized debt relief. Question 10. Would you agree with Rowen that the "poorer countries' massive debt looms as a bomb that can go off at any time"? Answer. The Treasury does not concur with Mr. Rowen's assessment that "the poorer countries' massive debt looms as a bomb that can go off at any time." While the external indebtedness of the developing countries is large in absolute terms, it is the Treasury's belief that these countries as a group possess the capacity to meet their repayment obligations. Indeed, the repayment record of the developing countries is excellent, and only in a few isolated instances have developing countries sought to reschedule their foreign debts. For a more detailed discussion of the international debt situation, please refer to the statement of Under Secretary of Treasury Solomon attached to Question 12 in this section. It should also be noted that the economic situation of the developing countries has improved considerably since Mr. Rowen wrote his article in December, 1976. In particular, the aggregate current-account deficit of the developing countries declined in 1977, while holdings of international reserves increased. Question 11. In its conclusion, the Church Report spoke of the fear that some debtor nation would default and this would start a domino effect that would "set the multinational banking system teetering". What precisely would be the likely chain of events and effect on that system if Panama defaulted on (a) its present debt? (b) any subsequent debt even if present debt were rolled over and/or additional private loans were to be forthcoming? Answer. (a) There is no reason to believe that Panama will default on its foreign debt obligations to either public or private obligors. Despite a relatively heavy debt burden, the Panamanian Government has made its debt-service payments on time, and it is expected to continue to do so in the future. Furthermore, even if Panama were to experience difficulty in meeting its debt service payments we would expect that it would be more likely to seek a rescheduling of its foreign debts than to default. However, in the unlikely event that Panama did default on its present debt, this would be expected to have very minimal effects on the international banking system. Panama's debt to the commercial banks, some $650 million, represents a very small fraction of the banks' total exposure in developing countries and only one-tenth of G-10 bank claims on foreigners. According to information supplied by the Federal Reserve Board and the Comptroller of the Currency to Senator Proxmire, no bank is more heavily exposed in total claims with maturities over one year in Panama than it is authorized to be exposed to a single domestic corporate borrower. Only two banks, both State banks, had claims on capital equal to more than 10 percent of capital. (b) Given current trends, it is not expected that any additional debt incurred by Panama will change the outcome suggested in 11(a). Question 12. What would be the effects on : (a) U.S. private banks (b) The U.S. economy in a situation in which (i) Non-industrial, developing countries like Panama all were to default on their debt to those banks? (ii) In addition to such default, the Communist dominated socialist bloc countries also defaulted? (iii) Beyond (ii), the OPEC nations also withdrew all their short-term deposits from those banks? (According to the Church Report "of the $18.2 billion in OPEC deposits at the 21 largest U.S. banks here and at their overseas branches, nearly half had a maturity of 30 days or less.") (iv) What steps would be available in each of the above situations (a) for the banks to take? (b) for the government to take? Answer. The Treasury Department does not believe that the scenario envisioned in this question is likely to be realized. The Treasury's analysis of the international debt situation is provided in the attached statement of Under Secretary Solomon to the Senate Committee on Banking, Housing and Urban Affairs. It is always possible to postulate a "worst-case" scenario, such as the one posed in this question. However, this appears so remote that we find it analytically meaningless to speculate about its policy implications. The generally excellent repayment record of the developing countries, their improved economic performance in 1976-77, the desire of the middle- and upper-income developing countries to preserve their access to private capital markets, the self-interest of the OPEC countries in preserving the stability of the international financial system, and the lack of adequate alternative repositories for their funds, all suggest that the scenario posed by this question is not likely to be realized. STATEMENT OF THE HON. ANTHONY M. SOLOMON, UNDER SECRETARY FOR MONETARY AFFAIRS, U.S. DEPARTMENT OF THE TREASURY The Subcommittee is performing a valuable service by providing this opportunity for public discussion of the rapid growth of international debt in recent years, and the questions this may raise for world monetary stability. The structure of international debt in large measure reflects the structure of the international balance of payments. Thus, a description of the pattern of world payments sets the proper framework for considering the questions which the Subcommittee is addressing. The five-fold increase in oil prices in 1973-74 not only transformed profoundly the pattern of world payments, it also altered traditional attitudes toward payments deficits and surpluses. With OPEC countries suddenly accumulating export revenues far beyond their capacity to spend, it became obvious that the oil importing countries had to accrue large and unprecedented deficits as the counterpart. The industrial nations as a group had to accustom themselves to running payments deficits and borrowing capital, in contrast to their usual role of running surpluses and lending capital, while the developing nations had to adapt themselves to much larger deficits and much larger borrowing than they had previously experienced. In the initial phases of these wrenching changes in the world payments pattern, there were deep-rooted fears that the oil importing nations, trying individually to balance their own payments positions, would all harm each other by external restrictions and excessive domestic retrenchment, as they tried to eliminate deficits which as the counterpart of the OPEC surplus were collectively irreducible. Recognizing these dangers, the IMF membership agreed in January 1974 in the Rome Communique to forswear such self-defecting actions. Accordingly, in the early aftermath of the oil price increases, emphasis was placed and appropriately placed--on assuring the adequacy of resources for financing the balance of payments costs of higher oil prices. Nations were encouraged, at least temporarily, to "accept" the oil deficit and finance it, rather than to try individually to eliminate their deficits at the expense of other oil importing countries. To facilitate the financing, the IMF established a temporary "Oil Facility," which channeled nearly $8 billion to member nations, allocated largely in relation to the increase in oil import costs, and with much less than the usual emphasis on the IMF's traditional requirement that its financing be linked to carefully negotiated adjustment programs on the part of the borrowers. In the circumstances, nations therefore borrowed very heavily in the years 1974-76 to finance large payments deficits-deficits swollen not only by high oil costs but also by severe world inflation and recession, by inappropriate domestic policies in some cases, and by a variety of other factors. The borrowing took many forms. While official financing through the IMF during this period was far above historical levels, private markets provided about threequarters of total financing during the three year period. Conditions on the supply side of the market were also conducive to a rapid growth in private financing during that period. Huge OPEC surpluses, of course, brought large deposits and placements to the banks and other financial intermediaries, and greatly expanded the liquidity of those institutions. In addition, the period was one of rapid secular expansion of the international banking system. Many institutions were competing eagerly for new customers, as they sought to establish themselves in new activities and new geographic areas, and endeavored to broaden their scope of operations so as to spread risks and diversify portfolios at a time when domestic loan demand was less buyant than in immediately preceding years. Using such data as are available--unrealiable, inexact and incomplete-we can sketch out a pattern of world payments in the period 1974 through 1976 with roughly the following dimensions: The cumulative current account deficits financed equaled about $225 billion or so (after the receipt of grant aid), representing the counterpart of the lendable surpluses of OPEC plus those of certain industrial countries registering surpluses during the period. About $15 billion of these deficits or 7% of the total was financed through the IMF, the bulk of it through the temporary "Oil Facility" and the "Compensatory Finance Facility," both of which provide financing largely on the basis of "need" with relatively little emphasis on "conditionality" or the adoption of corrective adjustment measures by the borrower. About $40 billion of the deficits or 18% of the total was financed through a variety of other official sources-development lending by industrial countries and OPEC by the IBRD and regional development banks and other sources. The remaining current account deficits some $170 billion plus about $40 billion of debt repayments were financed largely through market-oriented borrowing. Most of these funds were obtained through banks and securities markets. Some came from governments seeking investment outlets for their surpluses or as export financing. As these numbers suggest the accumulations of debt, especially debt owed to private lenders, have been large, by historical standards extremely large. While the above estimates extend only through 1976 the pattern has probably continued this year It is the purpose of these hearings to examine whether this rapid and unprecedented enlargement of lending activity and debt has reached a danger point for the monetary system-either in the sense that large numbers of countries have borrowed beyond their capacity to service debt or in the sense that our banks and other institutions are overextended My own assessment is that the system is not in any such position of danger, either as a result of excessive borrowing by large numbers of debtor nations though some have doubtlessly approached or reached the limits of financial prudence or as a result of our financial institutions being over-stretched. In formulating its judgments on the "burden" of these debts on borrowers, the Subcommittee should be aware of certain reasons why the burden may not be as severe as the numbers suggest. Let me mention several such reasons: First, economic growth and expanding trade tend to increase a nation's capacity to service debt. Some continuing increase in debt can thus be accommodated without added burden. Some of the debt increase is simply the increase in trade financing that accompanies the increase in the value of imports. For instance, the debt service ratio for developing countries as a group was no higher at the end of 1976 than it was in 1973. Second, inflation has substantially reduced the burden of previously incurred debt measured in real terms. Furthermore, in real terms interest rates which countries are paying on funds they borrow are substantially less than the nominal rates. Third, the borrowing is not being undertaken on balance by the poorer less developed group of nations. IMF studies show that as a group non-oil developing nations are borrowing little or no more at present-adjusted for inflation and real growth-than they borrowed in the years before the oil price increases of 1973-1974. The main structural change in world payments since that time is that the industrial nations, as a group, now borrow large sums from OPECsums which finance both the current account deficits of the industrial countries and their exports of capital to the developing nations. The developing countries now obtain some capital directly from OPEC while continuing to obtain the bulk of their credit from industrial nations. Fourth, statistics often exaggerate debt servicing needs, by listing as "shortterm" loans for which there are commitments or understandings to extend or roll-over. Also, the most commonly used aggregated data on foreign loans by banks involve a substantial amount of double counting because they include loans to other banks in major industrial countries. An accurate appraisal requires the elimination of most inter-bank loans. Fifth, many of the countries which have increased their debt have also increased their official reserves. On the question of whether the banks are getting over-extended, you will receive testimony from commercial bankers and from the Federal Reserve through Governor Wallich. I will offer only a few comments which might be relevant : Historical data on loan losses incurred through international lending by U.S. banks do not support the view that such loans jeopardize bank stability. Various studies indicate that the loan losses from foreign loans have been considerably less than for domestic loans in recent years. The statistics on the volume of bank credit overstate the extent of bank exposure since some of these credits are guaranteed either by a government agency or by a multinational corporation whose head office is in the lending country. Statistics on the maturity structure of international loans by banks also provide some encouragement. A high percentage of loans to foreigners represents selfliquidating trade credits with a maturity of less than one year. In his appearance April 5 before a House Committee the Acting Comptroller pointed out that the extensive examinations his agency performs on national banks engaged in international lending did not reflect cause for serious concern. He also said that the loan problems of major banks were concentrated in the real estate field and in various domestic industries. I am encouraged that as our international banking system grows and evolves, both the institutions themselves and the government regulators are developing more sophisticated procedures, and gathering more detailed information, to increase understanding and to protect depositors. A number of banks are devoting more care and more resources to analysis of individual borrowing countries. Both the Comptroller of the Currency and the Federal Reserve have introduced major new measures to obtain more timely and more useful information. These moves will improve and strengthen the system. But it is not good enough, clearly not good enough, simply to assure that debtor nations, as a group have not thus far overborrowed, or that our private credit institutions as a group are not at present overextended. Combining all borrowers in a group or all banks in a group can conceal major differences in individual cases. The poorer countries which have never had significant access to the private markets will, no doubt, continue to be dependent primarily on bilateral aid and loans from international development lending institutions. They will no doubt have to continue to limit their deficits basically to the amount of the new flow of funds which they can expect from these official sources. If the flow of aid increases steadily as now expected they should be able both to service their accumulated debt and run somewhat larger current account deficits. There are other countries-certainly not a large number but a significant number-that have reached or are approaching the limits of their ability to borrow. These are countries that are beset by economic distortion, that still face large payments deficits, where the need for corrective measures and adustment is compelling. We must assure ourselves that such countries, and others which may in future face similar difficulties, are encouraged, and permitted, to adjust their economies in ways that are compatible with our liberal trade and payments objectives, in ways that avoid discrimination against others and disruption of the world economy. We must assure ourselves that our monetary system will foster such adjustment, and that it will be able to cope with new stresses that may arise in the future. While our international monetary system is at present strong and functioning effectively, we do not have in place all the machinery needed to insure against such future risks. It is for that reason that the Administration is proposing that the United States and other strong industrial nations join with major OPEC creditors to establish within the IMF a new facility-the Witteveen facility to fill that critical need. We will shortly be proposing legislation to authorize United States participation in this facility, and I would like to describe its main features today. The rationale for the Witteveen facility-its formal name is the IMF Supplementary Financing Facility-rests on three main premises: First, that large payments imbalances will continue for the next several years. Certainly our expectation is that the OPEC surplus will diminish only gradually, in line with the growth of OPEC spending and with the implementation of effective energy conservation programs in the United States and elsewhere. Second, that there will be a need for greater emphasis on "adjustment" of imbalances, rather than simply "financing" imbalances, especially by those countries facing relatively large payments deficits. With the passage of time, the need for countries to adapt to higher energy costs and other economic developments has been increasingly recognized. At the Manila IMF meeting last fall, it was recognized that: adjustment should be symmetrical; deficit countries should shift resources to the external sector and bring current account positions into line with sustainable capital inflows; countries in strong payments positions should maintain adequate demand consistent with anti-inflationary policies: exchange rates should play their proper role in adjustment. Third, that the resources of the IMF must be adequate both to enable it to foster responsible adjustment policies by members facing severe payments difficulties, and also to provide confidence that it can cope with any potential problems that may arise. There is concern that without additional funds the IMF's resources may not be adequate to meet demands which may be placed on it over the next several years. With the relatively large amount of use in the past three years, the IMF's usable resources are at present extremely low at about $5 billion. These usable resources will be increased by about $6 or $7 billion with the coming into effect of the sixth quota review approved in 1976 and now being ratified, and about $3 billion remains available under certain conditions through the General Arrangements to Borrow. Even with those additions, and the repayments which may be expected, the IMF's resources look sparse in a world in which total imports are running at an annual level of nearly a trillion dollars, and in which OPEC surpluses are likely to decline only gradually from the current $40-45 billion level. In order to provide the added resources, at a meeting in Paris earlier this month, the United States agreed with six other industrial countries and seven OPEC countries on an arrangement which would assure the availability of about $10 billion to the IMF for the proposed Witteveen facility. The industrial countries would provide $5.2 billion, of which the U.S. share-subject to Congressional authorization-would be about $1.7 billion. The OPEC members |