ROLE OF U.S. GOVERNMENT GUARANTEE AND TRADE FINANCE PROGRAMS IN RESPONDING TO INTERNATIONAL DEBT ISSUES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85-01156R000200290005-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 21, 2016
• Document Release Date: August 25, 2008
• Sequence Number: 5
• Publication Date: July 29, 1983
• Content Type: REPORT

 IV. Eximbank
A. Methodology
The focus of this analysis
is
to determine the adequacy of
Eximbank's budget authority for
FY
83 and the Administration's
requests for FY 84, if the Bank
is
called upon to provide extra-
ordinary financing in response
to
the international debt problem.
The analysis will first describe Eximbank programs and its
response thus far to the debt problem. Secondly, the paper will
estimate demand for "normal" Eximbank financing through the end
of FY 84, i.e., the level of Eximbank direct credits required to
neutralize foreign export credit subsidies and the level of
guarantees and insurance required to cover standard commercial
and political risk not directly associated with the debt crisis.
The core of the paper is the estimate of demand for extra-
ordinary Eximbank financing to meet contingencies arising from
debt problems through the end of FY 84. Two scenarios will be
evaluated: (1) estimated demand for extraordinary Eximbank
support if one major debtor country and 2-3 medium-sized debtor
countries experience severe liquidity problems; and (2) estimated
demand for extraordinary Eximbank financing if two major debtor
countries and 4-6 medium-sized debtor countries experience severe
debt problems. Finally, the paper will evaluate the non-fdnancial,
non-budgetrary capabilities and constraints on Eximbank.
B. Eximbank Charter Authority
The primary purpose of Eximbank under its charter is to
aid in financing and to facilitate U.S. exports. The charter
emphasizes that Eximbank should provide financing for U.S.
exports competitive with financing offered by other governments.
The charter is sufficiently broad to allow Eximbank to be
used for contingencies which could arise from LDC debt problems.
The charter would not prohibit the Bank from (1) drawing on
existing programs, (2) tailoring existing programs to respond to
debt problems or even (3) establishing new programs, if necessary,
provided that the financing supports U.S. exports and offers
"reasonable assurance of repayment." To the extent that special
programs or large amounts of extraordinary financing would be
required to meet the debt problem, it would be essential for the
Administration to consult with key members of Congress before
implementing any special actions.
 C. Existing Eximbank Programs
Eximbank's buyer credit or project financing window provides
long-term financing in the form of either direct loans at fixed
interest rates and 5-10 year repayment terms, as well as financial
guarantees of private source loans for heavy capital equipment
and capital intensive projects:
-- Direct credits are "targeted" to where the need is
greatest to nuetralize foreign, officially-supported,
subsidized export credits.
-- The minimum terms (interest rates, repayment term, cover)
of officially-supported export credits are governed by the
OECD Arrangement on Export Credits. At the present time,
Eximbank's interest rates and repayment terms precisely match
the terms of the Arrangement. The current terms of the
Arrangement, however, may change, since a new round of
negotiations is scheduled for October, 1983.
-- The convergence of commercial interest and the minimum
interest rates under the Arrangement has presented an oppor-
tunity for Eximbank to make increasing use of its guarantee
and insurance programs in the provision of competitive
financing.
Eximbank's supplier credit window offers financial support
through medium-term commercial bank guarantees, medium-term
credits, and short- and medium-term export credit insurance.
-- Eximbank's support for short-term (up to 180 days)
export sales has rested exclusively with the export credit
insurance program which it has previously operated jointly
with the Foreign Credit Insurance Association (FCIA), a
group of fifty private U.S. underwriters. Typically, short-
term insurance is used for such exports as commodities, raw
materials, chemicals and spare parts.
- The program offers insurance covering commercial and
political risks on financing that U.S. exporters and
banks extend to their foreign buyers.
- FCIA has covered commercial risk (at 90 percent of
principal, interest to maturity date at Chase-Manhattan
prime rate on date of shipment). As of September, 1983,
however, FCIA will no longer participate in Eximbank
insurance programs. Commercial coverage will be for
Eximbank's sole risk.
 - Eximbank has covered all political risk (100 percent of
principal, interest to maturity date at Chase-Manhattan
prime rate on date of shipment) and has reinsured FCIA
commercial coverage beyond specified country and
aggregate limits. As of September, 1983, FCIA will
no longer participate in new Eximbank insurance; all
commercial and political coverage for new insurance
will be for Eximbank's sole risk.
-- Medium-term insurance policies, previously operated
jointly with FCIA, cover exports of capital equipment and
other products generally sold on terms of 181 days to five
years, with.policies written on case-by-case, seller-to-buyer
basis. Such insurance covers capital goods and quasi-capital
goods such as power generating equipment, transport equipment,
and industrial machinery.
- Eximbank covers 100 percent of political risk and
interest up to Treasury bill plus one percent from time
of default.
- Eximbank will assume commercial risk coverage (90 percent
of principal, interest up to Treasury bill plus one
percent) on all new insurance, as of September, 1983.
-- The Bank Guarantee Program offers protection against
commercial and political risks on medium-term debt obligations
acquired by banks from U.S. exporters. The program dovers
capital and quasi-capital goods and insurance coverage is
the same as under the medium-term insurance program.
-- The Medium-term Credit Program offers fixed-rate medium-
term financing under a discount loan program with commercial
banks to neutralize foreign, officially-supported, subsidized
credits.
Generally, Eximbank's Direct Credit Program and Medium-term
Credit Program are designed to counter subsidized foreign
competition. The Bank's various insurance and guarantee programs,
on the other hand, are designed to improve access to commercial
export financing by covering the export credit against political
and commercial risks.
D. Eximbank's Response to the international Debt Problem
Generally, Eximbank has remained open for business in most
markets, even in the face of the international debt problem.
Eximbank has taken a country-by-country approach to the issue of
determining "reasonable assurance of repayment." The Bank imple-
ments specific country policies by specifying conditions for long-
 term lending under its buyer credit window and adjusting its
country limitation schedule for supplier credits.
Some examples of the variety of Eximbank approaches to meet
each particular country situation are given below:
-- In Chile, Venezuela, Brazil, and Colombia, Eximbank has
stayed open under all programs, but modified the country
limitation schedules. At this time, Eximbank's short-term
country limitation schedule requires an import certificate
from the central government to ensure that the transaction
is consistent with the government's efforts to control
imports. The Bank also reduced the discretion allowed to
U.S. exporters under the short-term and medium-term FCIA
insurance programs to $50,000.
-- In Peru, Eximbank has decelerated the consideration of
new long-term commitments until Paris Club Agreement is
negotiated and adopted the same country limitation schedule
as above.
-- In Argentina, Eximbank has adopted a very restrictive
approach in light of continuing public sector arrearages.
Nonetheless, Eximbank has continued to honor major outstanding
credits and commitments for major infrastructure projects,
including the hydroelectric project at Yacyreta and ~ large
order of locomotives.
-- In Ecuador, Eximbank has deferred consideration of new
business until a bilateral agreement is executed on basis
of Paris Club agreed minutes.
-- In Nigeria, Eximbank has deferred action on new requests
for long-term commitments, but has considered extension of
existing commitments on a case-by-case basis. Extensions
of commitments have been granted for those projects that
are revenue-generating, or essential infrastructure such
as water resources, power, transportation and communications.
Eximbank has continued to offer shortterm and medium-term
insurance, but has adjusted the country schedule to require
a 360-day waiting period before the holder of the policy
can file a claim for transfer risk.
-- In Egypt, Eximbank has followed a cautious policy in
which the Bank avoids the large infrastructure projects and
large capital equipment transactions more suitable for con-
cessional financing. In general, Eximbank offers support
for modest-size projects with potential to earn foreign
exchange to service debt. Eximbank requires a government
guarantee for transactions involving public sector entities,
 and the guarantee of a major commercial bank for private
sector undertakings.
-- In Turkey, Eximbank has approved a $200 million limit
for new business under its operating arrangement with the
Ministry of Finance for the coming year.
-- The Bank has also revised the country limitation schedule
for a number of countries in Africa and Central America by
reducing discretionary limits and requiring government
guarantees.
Eximbank also responded to Mexico's major liquidity crisis
by establishing two special $100 million insurance facilities
with major Mexican governement agencies (Nafinsa and BNCE), as
well as increasing the aggregate limit on its insurance facility
with Pemex from $125 million to $275 million, to cover new sales
with short term or medium term repayment according to tW-eusual
criteria relating to the character of the export. These facilities
had the following characteristics:
-- Eximbank required the full faith and credit guarantee of
the Government of Mexico for transactions financed under
these facilities. Eximbank insurance and guarantee programs
to sovereign public buyers cover 100 percent of principal
against political and commercial risk. This level of cover
makes insured trade finance U.S. risk for the commercial
banks engaging in them and effectively circumvented commer-
cial bank exposure limit problems. In addition, an umbrella
guarantee would allow Eximbank to show "reasonable assurance
of repayment"; governments remain current in servicing their
own debt, and Eximbank is likely to recover on any claims
arising under such a facility.
-- The BNCE and Nafinsa facilities primarily covered short-
term (180 day) exports, which theoretically enables the
insurance to be rolled over to cover additional transactions
during the year. About one-half of the Pemex facility supported
medium-term exports.
-- The facilities allowed maximum flexibility to the Mexican,
Government in responding to its liquidity problem. The Mexi-
cans could determine the priority products to be covered,
as well as which U.S. exporters and banks would have access
to the facilities.
Mexico had to promote the facility for it to be used.
This required identifying interested U.S. banks and concluding
loan agreements.
 -- Eximbank adjusted its insurance policies to give cover
equivalent to an Eximbank financial guarantee. Insurance
cover commenced from the time of bank commitment, and cover
of interest was extended to include period from date of
default to date of claim payment.
-- Eximbank required documentation at the time of each
export to trigger cover under its insurance programs.
Documentation ensured that the support was for U.S. exports
(legislatively required) and set terms of coverage (which
differ depending on type of product and amount of deal).
The Mexican insurance facilities are a good model of the
type of extraordinary financing support which Eximbank can provide
in response to severe liquidity problems. The major advantages
of these facilities are:
-- The line would draw on existing Eximbank guarantee and
insurance authority, consistent with the Administration's
budget policy to put more emphasis on guarantees and insurance.
-- The commodities, spare parts, and capital goods which
a debtor country in trouble needs are usually financed on a
short-term or medium-term basis through Eximbank's insurance
programs.
-- Eximbank can set up an insurance facility very quickly,
presuming it has the budget authority and gets the guarantee
of the debtor country government.
The key question has been the speed with which these lines
could be drawn for specific transactions. As of June 30, 1983,
goods totalling $ million have been shipped under the
Mexican facilities. The delays arose primarily from internal
Mexican allocation proceures. In addition, the negotiation of
loan agreements with individual commercial banks proved time-
consuming. (The Mexicans reportedly were trying to shave points.)
Nonetheless, it is expected that the insurance facilities will be
fully used.
E. Eximbank Budget Policy
The President submits the Administration request for Eximbank
budgetary authority and Congress sets limits on Eximbank's (1)
direct credit authority and (2) guarantee and insurance authority
for each fiscal year. The Bank is not permitted to shift direct
credit authority into guarantee/insurance authority (or vice versa)
without Congressional approval, but is permitted to shift authority
among its various guarantee and insurance programs. In terms of
the budget itself (as opposed to budget authority), only Eximbank's
 net direct loan activity (essentially gross loan disbursements
minus loan repayments) appears on the loan account of the budget;
Eximbank's guarantee and insurance programs are not included in
the budget.
For FY 1983, the Administration requested $3.8 billion in
direct credit authority and $8.0 billion in guarantee and insurance
authority. Congress authorized $4.4 billion in direct credits
and $9.0 billion in guarantees and insurance. (For planning purposes,
however, 0MB instructed Eximbank to use $8.0 billion as its cap
on insurance and guarantees.)
For FY 1984, the Administration has requested budget authority
of $3.8 billion in direct credits and $10.0 billion in guarantees
and insurance. In addition, the Administration pledged that it
would request supplemental direct credit authority of up to $2.7
billion, if needed to meet inappropriate foreign subsidized
financing.
These requests reflect both the Administration's long-run
export credit policy and response to the international debt
situation. The level of requested direct authority reflects
expected economic trends, as well as an effort to increase use
of long-term guarantees. The $10 billion request for insurance
and guarantees represents a $2.0 billion increase over the FY 83
request and is $4.0 billion more than the Bank authorized in FY
82.
The FY 84 request for guarantee and insurance authority was
specifically designed to encourage the continued availability of
credit for U.S. exports in the face of the ongoing indebtedness
problems in developing countries.
F. Available Authority for FY 83 and FY 84
FY 83 Authority: Eximbank's projections as of June 28,
1983, indicate that it will have considerable program authority
available for extraordinary financing through the rest of FY 83.
Remaining direct credit authority will amount to at least $2.0
billion, while remaining guarantees and insurance authority
will amount to at least $1.0 billion (based on the OMB guideline
of $8.0 billion for FY 83, rather than the $9.0 authorized by
Congress). With two months remaining in FY 83, the $3.0 billion
in excess authority should be ample for any contingencies which
may arise.
FY 84 Authority: The Administration has requested $3.8
billion in direct credit authority and $10.0 billion in guarantee
and insurance authority. It is difficult to project exactly how
much room there will be for special programs in FY 84, but it is
 possible to construct rough estimates based on historical levels
and projections of U.S. exports (especially capital goods) and
the historic ratio of Eximbank activity. The demand for Eximbank
resources will be a function of (1) foreign competition, (2) the
interest rate environment in the United States, (3) the interest
rate matrix of the Export Credit Arrangement, (4) the level
of U.S. exports, especially to developing countries and (5) the
demand for project finance.
(1) Direct Credits. Eximbank direct credits will continue
to be targeted against foreign, officially-supported, subsidized
financing. Demand for Eximbank direct credits to support non-
aircraft exports to relatively rich countries will be small,
given the current level of commercial interest rates and Arrange-
ment rates for relatively rich countries. Eximbank will continue
to offer competitive financing for exports to intermediate and
relatively poor countries, as well as competitive aircraft,
unless U.S. interest rates drop or the new Arrangement eliminates
export credit subsidies for intermediate and poor countries.
The demand for Eximbank direct credits for FY 84 is roughly
estimated to be no more than $3.8 billion, the amount which the
Administration requested. This estimate is based on the following:
-- The demand for Eximbank support for non-aircraft, non-
nuclear capital is estimated at $2.4 billion for FY 84.
This estimate is based on the typical share of capital goods
exports supported by Eximbank and Chase and DRI projections
that capital goods exports will remain basically flat during
FY 83 and FY 84. This estimate is further substantiated by
demand estimates based on a forecast of major projects
likely to require Eximbank support in FY 84.
-- The demand for Eximbank support for nuclear projects is
likely to be only $250 million low in FY 84. The low level
of demand is due primarily to the low level of activity in
the nuclear sector.
-- The demand for Eximbank support for aircraft is estimated
at only $400 million, due to the sluggish recovery of the
world economy.
-- Demand for other programs (discount loan and medium-term
credit) is expected to rise to $600 million. The medium-
term area is expected to show a quicker recovery than the
long-term credits, because of the shorter project lead time.
(2) Guarantees and Insurance: It is more difficult to
estimate demand for guarantees and insurance. Nonetheless, the
following table shows the traditional levels of Eximbank
 guarantees and insurance:
Guarantees and Insurance Authorizations
($ millions)
FY
Guarantees Insurance
Total
1978
589.4
3362.4
3951.8
1979
907.9
4108.4
5016.3
1980
2509.7
5521.7
8031.4
1981
1513.2
5910.0
7223.2
1982
716.3
6983.9
7700.2
1983
(estimated)
7000.0
The demand for Eximbank guarantees and insurance peaked in
FY 1980. During the past three years, the annual demand for
guarantees and insurance has settled at $7.0 to $7.5 billion.
If the world economic recovery is sluggish, normal FY 84 demand
for insurance and guarantees is likely to be the same as the
demand in FY 83 -- less than $7.0 billion. Most of the problem
debtor countries are in Latin America, which accounts for about
35 percent or $2.5 billion of the Bank's normal guarantee and
insurance authority.
It is likely that Eximbank will have about $3.0 billion
guarantee and insurance authority available for extraordinary
financing during FY 84, over and above the normal levels of
available financing.
G. Extraordinary Eximbank Support by End of FY 84
It is difficult to estimate of the demand for extraordinary
Eximbank financing to meet contingencies arising from the debt
problems through the end of 1984, particularly since it is not
possible to predict with certainty which countries will require
extraordinary financing and which countries will not. At best,
two scenarios can be evaluated: (1) estimated demand for extra-
ordinary Eximbank financing if one major debtor country and two
medium-sized debtor countries experience severe liquidity problems;
and (2) estimated demand for extraordinary Eximbank financing if
two major debtor countries and four medium-sized debtor countries
experience liquidity problems. Individual indicative countries
will be evaluated in order to get some sense of the order of
magnitude of the problem.
For purposes of analysis, indicative major debtor countries
include Brazil, Korea, Mexico, and Venezuela. Indicative medium-
sized countries include Argentina, Chile, Indonesia, Nigeria,
Peru, Philippines, and Yugoslavia. It must be emphasized that
 these lists are indicative lists based on size of the Eximbank
market; the appearance of any country on this list as well as
the analysis that follows does not necessarily mean that the
country is having severe liquidity problems which would require
extraordinary financing.
Trade Account Analysis: A rough method to estimate the
outer imits o country demand for extraordinary Exim financing
is to evaluate that country's trade account with the United
States. Table 2 summarizes the maximum estimate (i.e., total
disaster scenario) of extraordinary Eximbank support by country,
reflecting 1982 trade patterns and potential eligibility for (1)
short-term insurance and (2) medium-term insurance and guarantees,
as well as long-term Eximbank financing. (See annex for detailed
country break-down.) The amounts hypothesized are based on the
following assumptions:
-- Short-term insurance is for six months and is assumed to
be cycled twice per annum.
-- Hypothetical coverage for most categories is based on an
assumed use of Eximbank support for no more than 50 percent
of total U.S. export volume. The 50 percent figure is only
indicative, but nonetheless based on the view that (1) it
would be administratively impossible to mobilize trade
finance for all exports under a special facility and (2)
private sources of finance will continue to share the burden
in a major liquidity crisis as they have during 1983.
-- The estimates assume that Eximbank would not support
agricultural commodities because of the availability of
support from the Commodity Credit Corporation.
-- Extraordinary finance would only go for priority products.
Items such as passenger cars, TV sets, and consumer goods are
not included in the estimates.
The table reveals that Mexico would require the most Eximbank
support under the disaster scenario -- $3.1 billion, which is
about $1.8 billion more than 1982 Eximbank authorizations. The
maximum Eximbank support ranges from $ 1.0 to $1.5 billion in
Brazil, Venezuela and Korea, which is about $500-700 million
more than "normal" annual authorizations. For medium-sized
countries, maximum extraordinary financing ranges from $150
million to $500 million, on average $100 million more than normal
authorizations per country. -
These figures are clearly overestimates, perhaps by a large
margin:
 -- During Mexico's recent financial crisis, it clearly did
not require such huge levels of Eximbank support. Eximbank's
special insurance facilities amounted to $350 million in
suppport and have been drawn down slowly. Eximbank estimates
that total demands by the end of CY 83 will probably be no
more than $700 million.
-- The trade account analysis is inflated by including
mineral fuels (which are subject to existing commitments)
and crude materials (which may be difficult to finance under
a facility because of the diversity of suppliers).
-- it would be difficult for most of these countries to
administer and absorb Eximbank support under insurance
schemes for such large amounts.
Nonetheless, these figures indicate the following maximum
extraordinary financing requirements over and above normal Eximbank
authorization levels:
Scenario I: If one major country and two medium-sized
countries need extraordinary financing, the absolute maximum
additional demand on Eximbank resources would range from
$1.0 billion to $2.0 billion, depending on whether Mexico
was the country with in liquidity crisis.
J
Scenario II: If two major countries and four medium-sized
countries required extraordinary financing, the absolute
maximum additional demand on Eximbank resources would range
from $2.0 billion to $3.0 billion.
Since Eximbank will have $3.0 billion in excess budget
capacity for the remainder of FY 83 and is likely to have $3.0
billion in excess budget authority for FY 84, the Bank should
have enough budget authority to cover the need for extraordinary
financing through the end of 1984. The Administration will not
have to seek additional Eximbank authority for FY 84 in order to
cover the most likely contingencies.
H. Policy Framework for Special Eximbank Facilities
(1) Special Eximbank programs should be based on a reasonable
economic rationale, particularly to satisfy the Congress. For
example, the Administration should have projections which indicate
the magnitude of the gap in import financing available to a
country designated to receive the special assistance before
 determining how much special Exim support is needed. Alternative
gaps could be defined according to different assumptions as to
growth rates in that economy and likelihood of various sources of
financing. In the past such estimates have varied from later
reality, so that the special Exim programs may not be susceptible
to precise need projections. Based on reasonable ranges of
estimated need the special programs should be sufficiently large
and flexible as to (1) inject funds immediately and (2) help
instill medium term confidence in private sources of financing to
that country.
(2) Criteria should be established which can discriminate
among recipient countries. Once a program is announced for one
country, e.g. Mexico or Brazil, the U.S. can expect many countries
to argue why they also qualify. These criteria could include
conditionality measures such as satisfying IMF-IBRD programs, or
additional measures which the USG (and other cooperating governments)
might require.
(3) The special actions might be unilateral U.S. actions in
some cases, depending on the character, but for others coordination
with IMF and IBRD actions and other governments and private banks
will be required.
(4) Exim actions should be coordinated with those of other
agencies such as Agriculture, Treasury, AID, which can contribute
resources to an intergrated U.S. Government approach.
(5) The Exim special actions should be structured toward (1)
demonstrable benefits to U.S. exporters and (2) "bailing in" not
"bailing out" the banks.
(6) Actions to bring in the banks would call for maximum use
of Exim insurance and guarantees to cover bank commitments to
exporters.
(7) Exim will need to address the requirement for reasonable
assurance of repayment. This requirement presumably could be met
by the conditionality provisions and evidence of parallel actions
by other governments, international financial institutions and
private banks.
(8) Reschedulings - in the event of a multinational resche-
duling the issue arises as to how Eximbank's special support
efforts be treated. Short-term support efforts might, for example,
be rescheduled into a much longer repayment term than originally
intended.
 Country Maximum Eximbank Support Authorizations
Short-term Medium-term/ Total FY 82 FY 83
Long-term
Large Debtors
Brazil
500
500
1000
347
189
Korea
684
742
1426
Mexico
1377
1795
1426
1376
412
Venezuela
436
1088
1524
545
242
Medium-sized
Debtors
Argentina
134
311
445
659
22
Chile
69
143
212
Indonesia
179
453
632
Nigeria
63
233
296
153
44
Peru
75
225
300
198
101
Philippines
229
224
453
73
272
Yugoslavia
81
51
132
103
31