PAGENO="0001" aov. DøC TO ENABLE THE EXPORT-IMPORT WI OF THE UNITED STATES TO APPROVE EXTENSION OF CERTAIN LOANS, ~ARANTEESiND1NSURAN~j (D~?~c~c?s HEARINGS BEFORE THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES NINETIETH CONGRESS SECOND SESSION ON H.R. 16162 A BILL TO ENABLE THE EXPORT-IMPORT BANK OP TIlE IJNIPED STAT~JS TO APPROVE EXTENSION OF CERTAIN LOANS GUARANTEES AND INSURANCE MAY 13 AND 14 19~8 Printed for the use of the Committee on Bankth~ and Ctth~eney 11.8. GOVJ3~RNMENT PRINTING OFPICIfl 1~4-197 WASHINGTON 1968 PAGENO="0002" COMMITTEE ON BANKING AND CURRENCY WRIGHT PATMAN, Texas, Cha~rma~s WILLIAM A. BARRETT, Pennsylvania LEONOR K. SULLIVAN, Missouri HENRY S. REUSS, Wiscoasin THOMAS L. ASHLEY, Ohio WILLIAM S. MOORHEAD, Pennsylvania ROBERT G. STEPHEN'S, JR., Georgia FERNAND J. ST GERMAIN, Rhode Island HENRY B. GONZALEZ, Texas JOSEPH G. MINISH, New Jersey RICHARD T. HANNA, California TOM S. GETTYS, South Carolina FRANK ANNUNZIO, Illinois THOMAS M. REES, California JONATHAN B. BINGHAM, New York NICK GALIFIANAKI'S, North Carolina TOM BEVILL, Alabama LESTER L. WOLFF, New York CHARLES H. GRIFFIN, Mississippi WILLIAM B. WIDNALL, New Jersey PAUL A. FINO, New York FLORENCE P. DWYER, New Jersey SEYMOUR HALPERN, New York W. E. (BILL) BROCK, Tennessee DEL CLAWSON, California ALBERT W. JOHNSON, Pennsylvania J. WILLIAM STANTON, Ohio CHESTER L. MIZE, Kaasas SHERMAN P. LLOYD, Utah BENJAMIN B, BLACKBURN, Georgia GARRY BROWN, Michigan LAWRENCE G. WILLIAMS, Pennsylvania CHALMERS P. WYLIE, Ohio Pant NSLSON, Clerk and staff Director ALVIN Lias Moasia,~Co~tnsel CURTIS A. PRINS, Chief investigator BENWr D. GELLMAN, Counsel JAMES F. D0UERTY, Counsel ORMAN S. Fi~i~, Minority ~tc&ff Member (II) PAGENO="0003" Text of H.R. 16162 Statement of- Foy, Fred C., chairman of Koppers Co Linder, Harold F., President and Chairman, Export-Import Bank of the United States McNeil, Wilfred J., director, Fairchild-Hiller Corp McQuade, Lawrence C., Assistant Secretary of Commerce for Domes- tic and International Business; accompanied by Mark C. Feer, Deputy Assistant Secretary of Commerce for Financial Policy - - - Petty, John R., Acting Assistant Secretary of the Treasury for International Affairs Von Kiemperer, Alfred H., senior vice president, Morgan Guaranty Trust Co. of New York Additional information submitted for the record- Bankers' Association for Foreign Trade: Statement of principles and recommendations Feer, Mark C.: Information submitted on export financing systems.... Letter from- Bowe, Richard E., chairman of the board, Ellicott Machine Corp., to Hon. Wright Patman, recommending favorable consideration of H.R. 16162 Boylan, Francis X., president, Foreign Credit Insurance Associa- tion, to Hon. Wright Patman, in support of HR. 16162 Brandis, R. Buford, international trade director, American Textile Manufacturers Institute, to Hon. Wright Patman, urging early passage of H.R. 16162 Byrd, H. L., executive vice president, FMC Corp., to Hon. Wright Patman, supporting early action of H.R. 16162 Crockard, M. R., president, Bankers' Association for Foreign Trade, to Hon. Wright Patman Curtis, Elwood F., president, Deere & Co., to Hon. Wright Patman, expressing support of HR. 16162 Goldy, Daniel L., vice president, International Systems & Controls Corp., to Hon. Wright Patman, submitting views on H.R. 16162 Grazier, Joseph A., chairman, American Standard Corp., to Hon. Wright Patman, urging favorable action on F1.R. 16162.. Johnson, President Lyndon ~3., to the Speaker of the House of Representatives Juckett, J. Walter, president, Sandy Hill Corp., to Hon. Wright Patman, in favor of H.R. 16162 Lawson, W.D., III, president, American Cotton Shippers Associ- ation, to Hon. Wright Patman, supporting H.R. 16162 McDowell, Carl E., executive vice president, American Institute of Marine Underwriters, to Hon. Wright Patman, favoring early enactment of HR. 16162 Neuburger, Michael G., vice president, Beech Aircraft Corp., to Hon. Wright Patman, views expressed on II.R. 16162 Norris, Robert M., president, National Foreign Trade Council, to Hon. Wright Patman, favoring enactment of H.R. 16162~. O'Rourke, C. A., treasurer, Worthington Corp., to Hon. Wright Patman, strongly favoring enactment of HR. 16162 Wilson, T. A., president, the Boeing Co., to Hon. Wright Patman, in support of H.R. 16162 Response to questions of- Ashley, Hon. Thomas L Patman, Hon. Wright Wolff, Hon. Lester L (III) CONTENTS Page 2 12~ 3~ 124~ 7 10 122 158 28 153 161 155 162 158 157 1~l3 1~l2 139 154 161 155 154 157 156 153 83 15 98 PAGENO="0004" PAGENO="0005" TO ENABLE THE EXPORT-IMPORT BANK OF TILE UNITED STATES TO APPROVE EXTENSION OF CEIt- TAIN LOANS, GUARANTEES, AND INSURANCE MONDAY, MAY 13, 1968 HoJSE OF REPRESENTATIVES, CoMMrrmE ON BANKING AND CIJRRENCY, Wa.~hington, D.C. The committee met, pursuant to recess, at 10:15 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman (chair- man) presiding. Present: Representatives Patman, Barrett, Sullivan, Reuss, Ash- ley, Moorhead, Gettys, Annunizo, Rees, Galifianakis, Widnall, Brock, Clawson, Stanton, and Brown. Chairman PATMAN. The committee will please come to order. Today the committee begins hearings on H.R. 16162, a bill to enable the Export-Import Bank of the United States to approve extension of certain loans, guarantees, and insurance in connection with exports from the United States in order to improve the balance of payments and foster the long-term commercial interests of the United States. Members of the committee will recall that the President, in his January 1, 1968, Balance of Payments Message, said, and I quote: I shall * * * ask the Congress to earmark $~OO million of the Export-Import Bank authorization to: Provide better export Insurance. Expand guarantees f~r export financing. Broaden the scope of Government financing for exports. This legislation is part of the program which would implement the President's balance of payments message. In essence this legislation would implement the objectives sought in this instance by authorizing the Export-Import Bank to assist in promoting United States ex- ports through the utilization of the Export-Import Bank's credit, guarantees and insurance provisions in those instances which cur- rently do not meet the Export-Import Bank's statutory standard of "reasonable assurance of repayment." This legislation, if enacted, would authorize the Bank through its various programs to relax its "reasonable assura~ice of repayment" standards when, in the judgment of the Board, such leans prove to deserve the support of one or more of the Export-Import Bank's au- thorities. (The text of H.R. 16162 follows:) (1) PAGENO="0006" 2 [HR. 16162, 90th Cong., second sess.] A BILL To enable the Export-Import Bank of the United States to approve extension of certain loans, guarantees, and insurance in connection with exports from the United States in order to improve the balance of payments and foster the long-term commercial interests of the United States Be it enacted by the ~S'enate and House of Representatives of the United Btates of America in Congress assembled, SECTION 1. (a) It is the policy of the Congress that the Export-Import Bank of the United States should facilitate through loans, guarantees, and insurance (including coinsurance and reinsurance) those export transactions which, in the judgment of the Beard of Directors of the Bank, do not meet the test of reason- able assurance of repayment as provided in section 2(b) (1) of the Export-Import Bank Act of 1945, as amended, but which, in the judgment of the Board of Directors of the Bank, should nevertheless be financed, guaranteed, or insured in order to improve the balance of payments and foster the long-term commercial interests of the United States. (b) The Bank shall specially designate such loans, guarantees, and insurance on the hooks of the Bank. In connection with guarantees and insurance, not less than 25 per centum of the related contractual liability of the Bank shall be taken into account for the purpose of applying the limitation imposed by section 7 of the Export-Import Bank of 1945, as amended; but the full amount of the related contractual liability of such guarantees and insurance shall be taken into account for the purpose of applying the limitation in section 2(c) (1) of that Act, concerning the amount of guarantees and insurance the Bank may have outstanding at any one time thereunder. The aggregate amount of loans plus 25 per centum of the contractual liability of guarantees and insurance outstanding at any one time under this Act shall not exceed $500,000,000. Sue. 2. In the event of any losses, as determined by the Board of Directors of the Bank, incurred on 1oan~, guarantees, and insurance extended under this Act, such losses shall be borne by the Bank up to an aggregate amount not exceeding $100,000,000 and any losses in excess thereof shall be borne by the Secretary of the Treasury. Reimbtirsement of the Bank by the Secretary of the Treasury on defaulted loans and payments to discharge the Bank's liabIlities on guarantees and insurance in excess of the aforesaid $100,000,000 shall be from funds made available pursuant to section 3 of this Act, All guarantees and insurance issued by the Bank shall be considered contingent obligations backed by the full faith and credit of the Government of the United States of America. Sue. 3. There are hereby authorized to be appropriated to the Secretary of ~the Treasury without fiscal year limitation such amounts as m~y be required to cover any losses exceeding $100,000,000 incurred by the Bank as a result of loans, guarantees, and insurance extended under this Act. Sue. 4. Nothing in this Act shall be construed as a limitation on the powers of the Bank under the Export-Import Bank Act of 1945, as amended; and except as provided in this Act, all loans, guarantees, and insurance extended hereunder ~ba1l be subject to the provisions of said Export-Import Bank Act of 1945, as amended. Chairman PATMAN. We have as our witnesses this morning, as the members have been previously informed, Mr. Harold Linder, President and Chairman of the Board of the Export-Tmport Bank of the United States; Mr. John R. Petty, Acting Assistant Secretary of Treasury; and Mr. Lawrence MoQuade, Assistant Secretary of Commerce. Tomorrow the committee will hear from Mr. Fred Foy, chairman. of the board of Kc~ppers Co., Inc., and former Chairman of the Na- tional Ex~port Expansion Council; and Alfred H. Von Kiemperer, senior vice president of Morgan Guaranty Trust Co. and immediate past president of the Bankers' Association for Foreign Trade. In addi- tion, Admiral Wilfred McNeil, director of the F'airchild-HilIer Corp., will either a~ppear as a witness or present a `written statement to the committee. Mr. Linder, we are deUghted to have you, sir. You have a prepared. statement. You may proceed in your own way. PAGENO="0007" 3 STATEMENT OP HAROLD P. UNDER, PRESIDENT AND CHAIRMAN, EXPORT-IMPORT BANK OP THE UNITED STATES Mr. LINDEn. Thank you, Mr. Chairman and members of the coin- mititee. I appreciate the opportunity to appear before you this morning to discuss H.R. 16162, a bill designed to make a significant contribution to this country's balance of payments. It is now 2 months since President Johnson signed into law S. 1155. That act, as you know, gave Eximbank-now the Export-Import Bank of the United States-a new 5-year mandate and increased its lending authority to $13.5 billion. May I e~press my very sincere ap- preciation for the efforts of the members of this committee and its dedicated staff during the long and sometimes difficult monit;hs be- tween introduction of that legislation over a year ago and its final passage. Thanks to that act, the Bank now has both the time and com- mitment capability it needs to carry forward its existing financing programs which have contributed substantially to this Nation's trade balance over the years. The new legislation before you goes beyond the scope of the bill just enacted in that it seeks to break new ground in e~port financing by the Bank. It is a part of President Johnson~s progr'a:m designed to reduce very substantially and hopefully eliminate the deficit in our balance of payments. I do not think it is necessary for me to repeat what you said in your quotation from the President's January 1 bal- ance-of-payments message, but he did elaborate further in his letter to the Presidenjt of the Senate and the Speaker of the House trans- mitting the bill before you. The President said that the requested $500 million allocation will: Support the determined efforts of the entire business community to expand exports. Assist American firnas who now sell only within the United States to expand their markets and send their goods abroad. Make available to American firms export financing more competitive with that provided by other major trading nations and especially suited to developing new markets. The bill seeks to achieve these objectives by authorizing Eximbank to support export transactions which give promise of helping our balance of payments and promoting the long-term commercial interests of the United States, but which do not necessarily meet Eximbank's statutory standard of "reasonable assurance of repayment." Senator Bennett, in his speech following introduction of the companion bill, aptly summed up `the situation which the bill is, designed to meet when he said that- * * we may be losing opportunities now for worthwhile sales which require financing with a dis'tinct-but acceptable-degree of risk. To permit us to take advantage of those opportunities the bill pro- poses broader criteria for a limited volume of Eximbank guarantees, insurance, and `credits. But it should be clearly understood that the bill entails no increaSd in the current $13.5 billion lending authority of the Bank. Let me describe the principal features of the bill itself before I touch briefly on how we would plan to administer it and why it is needed today. PAGENO="0008" 4 The proposed new law would authorize the Bank to facilitate, through loans, guarantees, and insurance, certain export transactions which, in the judgment of the Board of Directors of the Bank, do not meet the test of reasonthle assurance of repayment as provided in sec- tion 2(b) (1) of the Export-Import Bank Act of 1945, as amended, but which in the jud~ment of the Board nevertheless deserve support for the reasons to which I have just referred. `the loans, guarantees, and in- surance authorized under this authority would be specially designated. on the books of the Bank. For purposes of calculating charges against our statutory lending authority, the full amount of loans, and 25 per- cent of Eximbank's contractual liability under guamntees and insur- `ance, would be taken into account, as is the case with our regular pro- grams. The total of such charges attributabTe to the new program may not exceed $500 million at any one time. Thus, if ~ll the authorizations under the new program were in the form of guarantees and insurance, the Bank theoretically could have outstanding as much as $2 billion in gross commitments of this type. However, since some portion of the $500 million will probably be used for loans, which are chargeable at 100 percent, I do not anticipate that we shall in fact approach the larger figure. The bill provides that, if loans should go into default or the Bank' should have to `reimburse `the holders of its guarantees or insurance, the resulting losses would be borne by the Bank-that is, charged off against its reserves-up `to an aggregate amount of $100 million. Losses which exceed that figure would be borne by the Treasury. The bill au- thorizes to be appropriated `to the Treasury, without fiscal year limita- tion, such `amounts as `may be required to cover losses in excess of the $100 million figure. Implicit in the bill is the understanding tha~t the day-to-day financing requirements of the program will be funded out of the bank's normal resources. In his letter transmitting the bill to Congress the President stated that, "to achieve the greatest benefit from this export financing plan, I will establish an Export Expansion Advisory Committee, chaired by the Secretary of Commerce, to provide guidance to the Board of Directors of the Export-Import Bank." The Board of the Bank has every intention of using the services of this committee to the fullest extent. We shall seek its advice not merely for policy guidance but for specific recommendations in individual cases where that seems appropriate. I would expect the Board to follow the recommendations of the committee except in rare instances. As for the mechanics of administering the new facility, all of the processing of applications would be done by Eximbank. I would ex- pect some of these to be applications to include some which are be- lieved to be appropriate for export credit support under our existing programs but which the Bank, absent the new authority, would feel obliged to deny because they do not meet our existing standards. Other applications will no doubt be submitted by exporters, commercial banks, and foreign borrowers with the new program specifically in mind. In either case, we would study the application with a view to determining whether it is the kind of transaction we would support under one of our regular direct loan, guarantee, or insurance pro- grams, applying the criteria now in force for those programs. It we PAGENO="0009" 5 find we can do the business under these traditional criteria we shall, of course, do so. If, however, in applying the Bank's established interpretation Qf "reasonable assurance of repayment," we find that the risks involved are greater than we believe we should undertake, the transaction will then be looked at in the light of this new authority. The essential considerations at this point will be: What reasonably near-term bene- fits to the balance of payments can we hope for from this sale? Even if such benefits are marginal, does the sale carry with it significant potential for follow-on orders, for market penetration, or for other long-term benefits to our ongoing commercial interests? And, ulti- mately, is the prospect of repayment adequate, even though it does not amount to "reasonable assurance," to justify Eximbank support? On this last point, I can assure you that Eximbank is well aware that it is only repayments of principal and interest on export credits, and not the credit sales as such, that will help our balance of payments. Consequently we shall certainly not approve every application which comes our way. Eximbank has never been a soft-loan `agency. Neither the administration nor the managment of the Bank intends that this facility should make it one. I am sure the committee will have gathered from what I have said that what is proposed is in no sense a form `of, or substitute for, foreign aid. Its purpose is to give further support `to our commercial export trade. The hallmarks of foreign aid are long terms and low interest rates. These will not be used in this export expansion program. Exim- bank's usual repayment terms and standard interest rate will apply. By "usual repayment terms" I mean the terms customary in interna- tional trade for the goods being sold, unless it is demonstrated that longer terms are necessary to match offers of Government-supported credit being extended by our foreign competitors for a particular piece of business. By "standard interest rate" I mean, today, 6 percer~t for a direct loan to a foreign borrower. In the case of loans guaranteed or insured by us, our standard fees and premiums will be paid. The interest rate on such loans will be de- termined by the private commercial bank which provides the funds, or by the exporter himself when he requires no financing. Generally speaking, we shall expect the normal cash payment and exporter participation in transactions for which these would be re- quired under our regular programs. Most of the autborization~, I would hope, will be for short- and medium-term transactions-that is, on terms providing for repayment over a period generally not exceeding ~ years, although for certain types of equipment normal interna- tional terms do extend to 7 years and even longer. And most transac- tions would be financed by U.S. commercial banks under Eximbank's guarantee, or by the exporter himself under an insurance policy pro- vided by the Foreign Credit Insurance Association in conjunction with Eximbank. Why do we stress adherence to our normal terms? The reason is two- fold. First, we have no desire to stretch out over time the balance-of- payments receipts under these sales. Second, we could expect to gain lit- tle advantage over our competitors if we were to do so. We can be sure they will lengthen their terms to match whatever terms we offer. PAGENO="0010" 6 The result could be an international credit war, in which the exporting countries offer increasingly attractive terms as an inducement to addi- tional commercial purchases by foreign countries. We do not intend to be the instigators of such a credit war. I have already suggested our reason for stressing short- and medium- term transactions. It is tied directly to the fundamental purpose of the program. The sooner the dollars come in, the more help they will be in resolving our immediate balance-of-payments crisis. But I do not; mean, of course, to rule out authorization of project-type loans where `that would clearly serve the commercial and balance-of-payments interests of `this Nation and therefore be in accord with the purpose of this legis- lation. Mr. Chairman, when I testified before the Senate Banking and Currency Committee on S. 3218, the companion bill to ELR. 16162, I stated unequivocally that this new facility will not be used to finance sales of defense articles and services, either `to developed or less de- veloped countries. I wish to repeat that assurance to this committee this morning. As I have already indicated, this program is designed to further commercial exports. `The administration has no desire' to `cloud the issue involved in this bill by using the program to finance' sales of military equipment. I would point out in this regard that when Eximbank has financed arms sales to governments other than those of certain of the developed countries we have insisted on a guarantee of the Department of De- fense. As you know, under present law the authority of the Defense Department to guarantee credit sales of military equipment expires on June 30 of this year. The administration has proposed legislation, entitled the Foreign Military Sales Act, which is now pending be- fore the Foreign Affairs Committee. `That bill would continue the De- partment of Defense guarantee authority beyond June 30, 1968, but would prohibit the issuance of such guarantees to other Government agencies such as Eximbank. Another provision in that bill specifically prohibits Eximbank from financing sales of defense articles and serv- ices to any economically less developed country after June 30, 1968. There could scarcely be a clearer expression than this of the adminis- tration's intention not to use the facility proposed in the bill before you-or any of Eximbank's facilities, for that matter-to finance arms sales to developing countries after June 30. As for financing arms sales to developed countries, there would, of course, be no n'eed to use this new facility since the Bank has authorized such credits, and ex- pects to continue to do so, without a guarantee under our regular programs. Mr. Chairman, I believe that the urgency of our international monetary problems warrants your early and favorable consideration of this bill, Over the past few years somewhat similar proposals have been made-by Senator Magnuson and Congressman Adams, and by the National Export Expansion Council-and it is no secret that Eximbank's management has not previously supported these pro- posals. But changing circumstances have caused us to alter our posi- tion-changes in the international competitive situation, in Exim- bank's portfolio, in the absorptive capacity of many foreign countries, and. most importantly, exigencies of our payments situation. We now have no doubts as to the benefit to our national interest that would result from the passage of the bill. U.S. manufacturers PAGENO="0011" 7 are now attempting to sell in areas of higher risk. The Bank is aware of an increasing volume of business which is marginal in terms of our normal criteria but which nevertheless may be in our national commercial interest. In certain countries which are relatively good credit risks, the Bank has increased its share of the foreign external debt to a point where it would be imprudent, under a "reasonable assurance of ie- payment" standard, to add substantially to its already large commit- ments. We believe that the Bank has been operating at the outer limits of its present statutory authority. We therefore have little room to- day for significantly liberalizing our credit judgments to accommo- date the marginal transactions which it might well be in the national interest for us to approve. But let me assure you again, Mr. Chair- man, that any transaction supported under the new program would be expected to be repaid, notwithstanding the fact that the risks would be somewhat greater than those inherent in transactions han- dled under the Bank's normal loan, guarantee, or insurance pro- grams. The Senate Banking and Currency Committee, in its report recommending enactment of the companion bill, S. 3218, recognized that there would be higher risks under this program but stated that "we believe these added risks must be taken if our export financing programs are to stimulate significant export growth." The establishment of this special facility, administered by Exim- bank but guided by an interagency group, will not in my judgme~nt impair the integrity of Eximbank and its reputation as a sound lend- ing institution operated on a businesslike basis. If I believed other- wise I would not be here today. I think it fair to say that not only the Board of Directors of Eximbank but a full spectrum of American industry shares the administration's conviction that the country's balance of payments and long-term commercial interests would be well served by the broadened credit support of our commercial export trade which will be made possible by the bill before you. I shall be pleased, Mr. Chairman, to endeavor to answer any ques- tions which you or members of your committee may wish to put to me. Thank you, sir. Chairman PATMAN. Thank you very much, Mr. Linder. I believe the other two gentlemen have statements, too. Mr. McQuade, Assistant Secretary of Commerce, are you ready to present your statement? You may proceed, sir. STATEMENT OP LAWRENCE C. McQUADE, ASSISTANT SECRETARY OP COMMERCE FOR DOMESTIC AND INTERNATIONAL BUSINESS; ACCOMPANIED BY MARK C. PEER, DEPUTY ASSISTANT SECRE- TARY OP COMMERCE FOR FINANCIAL POLICY Mr. MCQUADE. Mr. Chairman and members of the committee, I appreciate the committee's invitation to describe the relationship of }J.R. 16162 to the Commerce Department's export expansion proo~ram and the balance of payments which, as Assistant Secretary of Com- merce for Domestic and International Business, are among my prin- cipal concerns. Mark Feer, Deputy Assistant Secretary of Commerce for Financial Policy, who has worked intimately in the development of this concept, is here with me to help the committee if that seems appropriate. PAGENO="0012" 8 The members of this distinguished committee know full well the gravity of our present balance-of-payments position, and there is little I can add to what has already been said in this regard. In brief, our persistent deficits have given rise to doubts abroad as to our ability to restore a balance in our external accounts. One immediate aAd very serious conse~uence has been an increasing reluctance by foreigners to hold U.S. dollars, and a consequent and substantial drain on our gold reserves. The recent partial demonetization of gold in mid-March and the agreement by the world's major international bankers to move ahead with the special drawing rights system are important steps affecting the working of our international financial machinery. However, these measures in no way lessen the urgency of our taking the actions neces- sary to improve our trade balance and restore our international pay- ments equilibrium. This will not be an easy task: our trade account for March showed an excess of imports over exports. While there. are some nonrecurring factors reflected in the March figures-the dock strike, anticipatory steel buying, and inflated copper purchases abroad-our basic trade account remains far from healthy. The comprehensive balance of payments program announced by the President on January 1 was designed, in combination with appro- priate measures in the domestic economic field, to help turn around our balance-of-payments position. While certain restraints on the short-term outflow of dollars were imposed under the program, it also includes a number of long-term positive measures, several of which are designed to stimulate exports. As part of this long-term effort, the Commerce Department plans- subject to congressional appropria~ions-to initiate a new joint export association program intended to assist small and medium-size Ameri- can business firms to develop foreign markets. We also plan to expand and improve our present export promotional activities-trade missions, trade shows, trade fairs, and trade centers-all within the framework of a new 5-year export development program. A key element of the President's program is the proposal embodied in H.R. 16162. While we do not pretend that the proposed special ac- count will solve all of our problems, it will help to fill a gap in present export financing. Moreover, it promises to show balance-of-payments benefits in the near term. I might note that the United Kingdom and Canada have had analogous special financing facilities for some years; and exporters in other industrialized countries with which American firms must compete for markets also enjoy a variety of special arrange- ments to facilitate their exports. We envisage that the special account will increase commercial sales abroad by providing coverage for exports now being lost to foreign competitors, either for lack of financing by commercial banks or be- cause the transactions do not meet Eximbank's statutory test of "rca- sonable assurance of repayment." This is not to say that the speeial account would finance questionable export transactions. On the con- trary, for U.S. balance-of-payments and commercial interests to be served as reqthred by H.R. 16162, there would have to be a clear ex- pectation of payment for all exports financed by the account. The types of export transactions that are not now considered appro- priate for the Eximbank but might be eBgib]e for special account fi- PAGENO="0013" 9 n,ancing because of balance-of-payments and commercial considerations would include: Cases where the Eximbank, because of previous financial commit- ments, is not able to undertake new financial commitments even though the markets involved may be promising; Cases where a new buyer's financial strength is not yet' clearly ~s- tablisheci, yet the potential buyer looks like it could become an im- portant customer for U.S. exporters; Cases of newly emerging markets in cou~ntries where commercial transactions are of growing. importance but where risks are still pres- ent, perhaps because of debt-servicing obligations. We exipect that the special account would foster maximum use of private financing and commercial channels of export credit through wide use of guarantees an'd insurance of private cOmmercial export financing. Direct credits would, of course, also be made under the proposed special account. Transactions would originate with private exporters and commercial banks, so that the new facility would serve, first and foremost, our commercial objectives. Moreover, repayment terms, interest rates, downpaymen'ts, and supplier participation would generally be the same as in Eximbank's regular programs, which would also insure that noncommercial objectives did not intervene in the operation of the new account. In exceptional cases, where ~oreign com- petition or other commercial factors so warranted, variations in the terms provided would obviously be co~sidered. Even in those instances, however, terms would remain essentially commercial and would in no way resemble the terms and conditions associated with foreign aid. The `Commerce `Department urges favorable consideration for H,R. 16162 with the knowledge that we are dealing with an export expan- sion instrument which has been the subject of considerable careful thought `and examination over the past several years by a wide range of experts in the banking and business communities and in, Govern- ment. The Banker& Association for Foreign Trade, which represents virtually all banks active in foreign trade financing, endorsed the specific proposal now `before the committee at its meeting in April. The National Export Expansion Council, representing some 1,400 business leaders throughout the country, also supported the creation of such a fund at its February plenary meeting. A ~pecial fund to provide export financing under broader balance-of-payments consid- erations was a key recommendation of the Nationaj Ei~port Expansion Council's Action Committee'on Export Financing in 1966. A bill to create a facility very similar to the one proposed in H.R. 16162 was also introduced in the House as part of a proposed Export Expansion Act of 1965. As `far back as 1964, when I had the job Mr. Feer now holds, I headed an interdepartmental committee which reviewed this idea. In his message transmitting this bill, the President stated that he would "establish an Export Expansion Advisory Committee chaired by the Secretary of Commerce, to provide guidance to the Board of Directors of the Export-Import Bank." I might therefore make a few remarks on how we envisage that the Advisory Committee would work. In the majority of cases, we would expect that applications for guarantees, insurance, and dfrect credits would be e~amine'd `and proc- essed by Eximbank personnel, developed into formal proposals with PAGENO="0014" 10 all necessary background information, and considered by the Exim- bank Board in the same manner as applications are now handled. Applications that in the judgment of the Board of Directors do not meet Eximbank standards and policies as to "reasonable assurance of repayment" would then be referred to the Advisory Committee. In other cases, where a preliminary review indicated that regular Eximbank financing might be unavailable, such transactions should also be subject to review by the Export Expansion Advisory Com- mittee for possible financing under the new account. In all cases, the Committee would seek to assure that the use of the new account' would result in genuinely additional exports of benefit to the U.S. balance of payments and to our long-term commercial interest. We believe the Advisory Committee should also render guidance to the Eximbank on the use of the new facility in a somewhat broader perspective-for example, in connection with the general types and overall amounts of loans and guarantees in specified markets where, for commercial and balance~of-payments reasons, it might be desir- able to encourage added U.S. export efforts. Finally, I might add that, in order to assure consistency and policy coordination with the financial activities of other executive branch agencies, the guarantees, insurance, and credits extended from the earmarked account would be subject to review by the National Advis- ory Council on International Monetary and Financial Policies, which coordinates all of the GovernMent's overseas lending activities. Thank you for this opportunity to present the Commerce Depart- ment's views on the bill now before the committee. I shall be pleased to try to answer any questions that you might wish to ask. Chairman PAPMAN. Thank you, sir. Now, John R. Petty, Acting Assistant Secretary `of the Treasury for International Affairs. STAThMENT OP JOHN R. PETTY, ACTING ASSISTANT SECRETARY OP THE TREASURY FOR INTERNATIONAL AFFAIRS Mr. PETTY. Thank you, Mr. Chairman. I am happy to appear `before this committee in support of H.R. 16162. I would like to emphasize the importance of the proposed export expansion facility in the framework of our oompr~hensive pro~ gram to restore equilibrium in our balance-of-payments accounts. President Johnson said that the need for action to eliminate the balance-of-payments deficit is "a national and international responsi- bility of the highest priority." The reasons for this priority are abundantly clear. The strength of the dollar abroad depends on our payments position. The international monetary sys'tem which rests so largely on the dollar will be greatly strengthened by elimina- tion of the U.S. payments deficit. A stable international monetary system is essential to assure expanding world trade, and a prosperous international economy. On .January 1 of this year, the President proposed a comprehensive balance-of-payments program d'esigned 1o bring our balance-of-pay- ments position close `to equilibrium in the year ahead. The program is broad and comprehensive. It requires `additional savings in many phases of our activities `abroad. It affects Government expenditures over~e'as, foreign loans and investments, foreig~i travel and foreign trade. PAGENO="0015" 11 A large part of this program has already been put into operation. A program has been established to cut Government personnel and other expenditures overseas as well as to reduce the impact on our balance of payments of national security expenditures which cannot be further reduced. The Office of Foreign Direct Investment is now administering a program of temporary restraint on direct investment and the Federal Reserve has greatly strengthened its existing vol- untary restraints on lending abroad by banks and other financial institutions. The administration has made a number of proposals in the field of travel designed to decrease the amount of money spent abroad by U.S. travelers. These proposals are now under consideration by the Con- gress, and we are hopeful that they will be enacted. On the earnings side of the tourism picture, the Industry-Government Task Force on Travel, chaired by Ambassador MeKinney, has made comprehensive recommendations to promote the flow of foreign travelers to the United States. Many of the recomme~idations of the task force have already been implemented. Moreover, consultations, requested by the President, have been undertaken to improve our trade position. Our hope is that this im- provement will be in the framework of continuing expansion of world trade. In addition, long-range negotiations have been commenced at GATT on the subject of border tax adjustments. The President in his January 1 message also focused on the long- term measures which would assure a strong balance-of-payments posi- tion for the United States. He placed great emphasis upon the im- portance of enacting an anti-inflation tax, encouraging wage-price restraints, and reducing crippling work stoppages, in order to keep American products competitive. In addition, he cited three areas where further efforts are needed: (1) increases in exports, (2) reduction of nontariff barriers, and (3) increased foreign investment and travel in the United States. The most important way to earn foreign exchange is through in- creased exports. Unfortunately our trade surplus ha's decreased from $6.7 billion 4 years ago to less than $3.5 billion last year. Data for the first quarter of 1968 underscores the necessity of intensifying our ef- forts to expan.d exports. Increased exports are the cornerstone of our balance-of-payments position. In addition to measures to keep the do- mestic economy competitive and stable, and to keep world markets open to U.S. goods and services, we need to make our industry more export- minded through export expansion programs. To accomplish this objective, the President proposed: (1) A 5-year $200 million Commerce Department program to sup- port and stimulate the sale of American goods overseas through trade fairs and other means. (2) A joint export association program under the Commerce De- partment to provide direct financial support to American corporations joining together to sell abroad. (3) A more liberal rediscount system to be provided by Export- Import Bank to encourage banks to help firms `increase their exports, and ` (4) The export expansion facility. The export expansion facility legislation which is before you today can make a significant contribution to a larger U.S. trade surplus and PAGENO="0016" 12 thus to our balance-of-payments position. It can do this principally through helping in the development of new markets for U.S. goods and services and by assisting smallorcompanies in exporting. President Johnson in his letter of March 20, 1968, transmitting the export expansion ~facility draft bill and requesting approval of a $2.4 million supplemental appropriation to launch the ~-year Commerce program to promote American exports said: Both actioliffi ~ reeMnthe~iid thdây ~il1 help in&ease AmeriE~a'sè~poi4ts ~ ~ * a vital element in the balance of payments equation. The establiskbient of' this facility within the ~Export-Import Bank ivas specifically endorsed by the President's Cabinet Committee on the Balance of P~meñts. The Action Committee on Export Financing of the National Export Expansion Council In 1966 proposed the crea- tion of a somewhat similar national interest fund in the E~port- ~fmpórt Thtnl~ whi~h would permit E~pbrt-Thiport l3thtk to support U.S. cxpbr~ts On `the basis of less stringent ctedit jndg~n~nts than called for by existing bank standards. The proposal also finds its origins in the Export Expansion Act introduced in 1965 by senator Magnuson and Representative Adams. It is evident that considerable thought and study have gone into this proposal. I would like to emphasize that the legislation before you i~ designed to improve the `IJ.S. balance of payments by expanding tT.S. exports on a commercial basis. Mr. Limier has already emphasized `that the new facility is designed to give further support to our commercial export trade. We in the Treasury are keenly aware t~iat an e~pOrt loan is only helpful to our balance of payments to the extent down payments and installments are received. Therefore, we support H.fl. 16162 because we are convinced that the export expansion fathhity will en~ourage acc~eptance of our exports in difficult markets, it will permit our products to become estab1i~hed in new markets where the potential for follow-up sales is high. In markets where competition is aggressive it will facilitate the maintenance and expth~isioh of exist- ing export markets. Mr. Chairman, these are the reasons for Treasury suppo~rt for the proposed legislation before this committee. We believe the proposed export expansion facility will assist U.S. exporters `to expan4 their sales abroad and will contribute to elimination of our ba1ance-o~f-pay- ments deficit. Thank you, sir. Chairman PATMAN. Thank you very much, sir. Mr. Linder, you indicated in your testimony that in loan terms, including both interest and maturities, under }T.R. 16162, if enacted, would be the same as under the current Export-Import Bank operations. There is nothing in this legislation which requires the Bank to do this, Would you object to an amendment that would require the samç lending terms under this proposed program as is now the case for your conventional lending programs? Mr. LINDEn. We have already made legislative history in the Sen- ate on this subject, Mr. Chairman, and the Senate committee report indicates that our interest rates, repayment terms, fees, and so on, for PAGENO="0017" 13 transactions under this facility would be generally in line with those under the Bank's regular program. If you will permit me, I would like to quote from the Senate com- mittee's report. Chairman PATMAi~. I assume yoti approve of the report? Mr. LThTDER. The report is certainly approved by us. [Reads:] Both the maturities and the intere~t rates charged would be generally in line with ~ximbdnk's standard terms for the items being sold, and comparable to conuetitts~e export financing offereçl by other industrIal countries. Thus, terms longer than normal for the exports involved and concessionary interest rates will not be provided under this program. Mr. Ohairman~ I am inclined to oppose the introduction of a special amendment with that aim for several reasons. The principal one I have already previously alluded to~ namely that we have made clear legislative history before the Senate Bankiftg and Currency Commit- tee and now before your committee on that subject. Chairman PATMAN. That will be fine. You can expand on your testimony when you look over your transcript, if you desire. Mr. LINDER. I would like, if I, may, just to add that we have oper- ated responsibly for 84 years under a charter which does not tie our hands. We have modified our terms as changing conditions require. We found it desirab'e and even neceesary to charge more than our standard rate on certain occasions and less on other occasions. We ~feel that flexihility is needed, and we fe~l that a statutory re- striction on the Bank's operations under the new program could conceivably invite statutory restrictions on oi~r regular program. Ther~fo~re, it ~vbu~d ~ee~n that my statement p~is the report of this com- mittee, would suffice to insure that we will generacfly use the same rates and terms ~ithoutthe iiecessity for an amendment. Mr. BARRETT. Would the gentleman yield? @iairni~n PA~A~N. Yes. Mr~ BARRETT. Mr. ~ind~r~ would it p9t put you ~n a more f~ru~. foundation if you aco~p~eel this amendmetit and ~prevent the con- trovers~ when we go on the floor to enact this bifl'? You have both Houses approving what is good for the Exirn1~ank and, of course, the export expan~ion faoili~ties. I think your takitig the damguage, as you haye indicated here, does not give you the sta'b~i]~ty that you could g~t if you were to agree to ana~meiidm~ut. Mr. UNDER. I would like to say this, Mr. Barrett. If the House in its wisdom adopted such .ai~ api~ndment, and if the Senate adopts thi bill which its Banking and .Qurrency Cop~imittee Jaas already re- ported out unanimously, a conference might be necessary and thete cotild be some further delay. Iwoiild have thought that the legislative history~tltat ~e ~have made ~s sufficiently firm and ~peoific to ac~om- pii~h anything that the amendment would accomp1i~h. There; has beeit n~ evi i~e in the Sei~iate ~that ~they would like to have such an amendment added; and, as I~ indicated,: the report ~n- dicates categorically what our ground rules will be. Chairman PATMAN. We would certainly give consideration to that, in view of what Mr. Barrett brought up in connection with it. 94-197-68-----2 PAGENO="0018" 14 As you say, if we were to adopt this language not consistent with the Senate, we could at least iron it out in confere~ice. Now, I will read these questions and ask you gentlemen to answer them when you look over your transcript. Could you give us an illustration, Mr. Linder, or two, of actual cases where the Eximbank has turned down proposed loans because they did not meet the bank's test of reasonable assurance of repaynient and where another country having a lending institution similar to the Eximbank actually made the loan and it is `being repaid on schedule? What I am asking for is what reasonable assurance you have that this program will be successful not only in terms of assisting in our balance-of-payments objectives but also assuring repayment of loans. You may answer that when you examine your transcript. Mr. LINDER. I can give you some general examples now, but I can- not give you a particular transaction which, although we turned it down because of questionable repayment, someone else went ahead with it and is now being repaid. Chairman PATMAN. That is all right. Mr. LINDER. I can tell you generally for example, that Indonesia is in that category. The Japanese are selling in Indonesia today whereas we are not financing, insuring, or guaranteeing sales in Indonesia. Other people are willing and eager to do some business that has been proposed to us but we are not yet willing to resume doing business there. The Dominican Republic is another example. Chairman PATMAN. Under the terms of this bill, if enacted, you would be able to do that? Mr. LINDER. We would if our Advisory Committee agreed it was the desirable thing to do. Chairman PATMAN. What estimates can you provide the committee that would indicate the positive effect of this program on our balance- of-payments situation over the next several years? Mr. UNDER. I cannot give you any specific `estimates, but I would point out that our budget for fiscal year 1969 contemplates that we probably would make up to $100 million of loans and possibly au- thorize as much as $400 million of short and medium term guarantees and insurance under this program. That would result in the absorp- tion of approximately $200 million of th~ $500 million that we are now suggesting be allocated for this purpose. Chairman PATMAN. Assuming this proposal were in effect now, at what rate would you be lending funds under this program, and for what maturity? Mr. UNDER. The interest rate would be 6 peréent. The maturities would depend on what good international practice calls for. We would meet the competition. However, in general all of the export insurers in the world, whether they be French, German, British, or Japanese, adhere to certain standards. PAGENO="0019" 15 For example, we would not give more than, let us say, 5 years on Theavy trucks. We would not give more than, let us say, 3 years on automobiles and so on. There are standard accepted criteria in inter- national trade. As you know, a very large percentage of such trade is done on 90- to 180-day terms, much of it under insurance suj~plied by us. Chairman PATMAN. Mr. Linder, under the Foreign Credit Insurance Association program whereby Eximbank will assist in effect as a reinsurer, 60 private insurance companies are offering both com- mercial credit and political risk insurance, Eximbank has consistently lost money. Is there any consideration given to increasing the premium rate on this insurance so that Eximbank at least breaks even? Mr. LINDEn. As a matter of fact, Mr. Chairman, we are not certain that we have lost money, and if we have, it is negligible in relation to the total amount of our net income. The reason I cannot be more precise is that until the final losses are determined for guarantee contracts and insurance policies issued in past years which are still outstanding, one does not know what the amount of the loss will be. Now, the insurance companies, according to good insurance account- ing practice, set up certain reserves and those reserves are held until the whole of the policy year is liquidated. So we think that we have an equitable interest in some of those reserves. I would guess that we have not lost money, when all things are con- sidered, although we have not made a great deal. This is as it should be since it is obviously not the purpose of this operation to make a great deal of money. The loss record will never be completely unraveled unless you liqui- date. But we will begin to get recoveries from some of these reserves within the next couple of years which should more than offset any apparent loss that we have. Chairman PATMAN. Now, I have two other questions which I will read and I ask you, Mr. Linder, and one for Mr. McQuade, and you can answer them in the record because my time is up and I want to yield to the other members. (Two questions read by Chairman Patman and submitted in writing to the witness follow:) Chairman PATMAN. Mr. McQuade, can you provide for the record our U.S. cx- import trade figures over the past decade by quarters? What has been the trend recently. Is it not true that we have consistently bind a surplus in our triade over the years, but in recent years the surplus has been diminishing? Answer. It is true that 13.5. trade ha's been in surplus for many years, although there have in the past been occasional months (such as March 1968) when imports exceeded exports in value. The `average `annual surplus in the first half of the decade (using official Bureau of the Census `data, as shown `in the attached table of U.S. trade by qu'arters) was $5.4 billion. Our trade surplus in 1966 diminished to $3.8 billion, then strengthened a little to $4.1 billion last year. In the first quarter `of this year it declined sharply to $731 million at a seasonally adjusted annual rate. PAGENO="0020" Period Exports I Imports Grops e,~pprt surplus2 1958-I ~ 4,130 3,126 l,0l~4 II ----- "-~--~-~-~ 4,080 3,154 926 Ill 4;080 3,152 928 IV~~ 4,O~9~ ~, 3,386 7O~ ~ 3,896 3,587 II 3850 133 4,358 3,928 430 IV ` 4,~t97 3828 369 1960-I - ~ 3890 74O~ II 4,915 3,907 1,008 III ~- ~---- 5,032 3,723 1;3o9~ IV 4,989 3,5Q1 1,488 1961--i 5,08~ 3,472 1,613 II 4~836 3,500 1,336 Ill 5,061 3,868 1,193 IV - -5,248 3,929 1,319 1962-i 5,150 3,984 1,166 II 5,446 14,118 1,328 Ill ~ - 5,357 4,]~7 IV i--- 5,070 4,116 954- 1963-L.. - -5,884 4084 1,000 II 5,663 ~4,253 1,410 III 6,715 4,408 1,307 IV 5,948 4,406 1,542 1964-L 6,196 4,401 1,795 II 6,238 4,584 1,654 III 6,451 4,720 1,731 IV 6,727 4,893 1,834 1965-I - 5,589 4~666 923 `Ii 6,940 5,456 1,484- Ill 6,920 5,425 j~495 IV 7,090 5,736 1,354 1966I 7,104 6;o21 1,173; II -. - 7,257 .6,334 921 7,439 6,592 847 IV..... 7,500 6,661 839 1967-I 7, 771 6,688 1, 087 II 7,777 6,593 1,184 Ill 7775 6,542 ~1,233 IV 7,688 7,102 1968--I - - 8,013 7,830 -193; I Export values exclude military grant-aid and include commercially ` financed sl~ipments and those financed under AID and Public Law 480 programs. 2 Sorpliis rbpresbnts exports, freealongside ship, less imports, valued, generally at the foreign market price, a~ re- ported by the Bureau of the Census. Note:liranium and ~elated mterials, not available by month, are excluded from expórts pdor'to 1961 and from import's. Ørior to 1980. T-he8e annual values Were as fbllovas In millions of dollars: Exportà-1958, 46; 1959, $11; and 1960, $8. Imports-1958, $427; and 1959, $422. Chkirrnan PktMAN. The l3xport4mport Bas~k h-as. its own guarantee program. as I understand it whereby Eximbank guarantees cotumercial bank loans made to exporters. These guarantees are against both political risks and commercial credit risks. ~hy has tb1~ progratn ~ li~ terms- ofthe costs Inv~rlved to~the ~cpth~t-Import ~ank, whnr~a1s the~'CIA ~rogrrith lhas, I -belie've, cstmsist- eñtly oI~& at a -lts~ to ~hdmba-nk? - - - Mr. LINDmc. As I polntdd oUt aldfvn, It is 1di~cnlt~to-d~t~tñine `exactly what tim lOss recorcT lids been trf~d~r FCI'A. `~t~Iie same is true for our ~guarantee' pro- ~rarn. ~[t doe~ â~pear to tiate th~t the program has- O~erdt-e~d at. a profit but it is difficult to detei~±niiie `this *it-h certaiñty. The program i~ relatively new a-n'd the guarantees authOrl~ed cover trUnsa-otions Of several years duration. Thus a goodly percentage of the guarantees - authorized under the program are still current dnd the Bank has an outstanding liability. A aecend importatit point is that it is misleading to compare the operation~ of FOIA with Eximbank's bank guarantee program. The great majority of policies written by FCIA cover short-term transactions where the loss record has been higher than on medium-term transactions, perhaps partly because the losses become quickly apparent due to the short-term nature of the transactions. 16 QUARTERLY TRENDS IN U.S. FOREIGN TRADE, ,1958-JANUARY-MARCFI 1968 [In millions of dollars, seasonally adjustedj PAGENO="0021" 17 ~Tbe guarantee program deals entirely with goods sold on medium-term credit, under which our loss record has been better to date but as I said there are still outstanding installments which may or may not be met. Chairman PAT1~EAN. Mr. Widnall, would you like to ask questions? Mr. WIDNALL. Thank you, Mr. Chairman. Mr. Linder, it is again a pleasure to welcome you before this committee, and certainly also your associate~s and colleagues, Mr. McQuade and Mr. Petty. You have an excellent statement in support of this legislation con- cerned with the new risk lending authority sought by Eximbank. I just have a couple of questions. First, while the Eximbank bill was on the floor of the House earlier this year-can you explain to me now why the Johnson administration, the Defense Department, the Eximbank, and the Democratic leader- ship so vigorously fought against my amendment to bar Eximbank credits for sales of arms to underdeveloped nations after June 30, 1968, when, according to page 9 of your own testimony, this has now become the administration's own recommendation in the proposed Foreign Military Sales Act? Mr. LINDEn. Let me say that I was not a party to the discussions between the Defense Department and other agencies in the adminis- tration concerning the introduction of the legislation to which 1 re- ferred on page 9 of my statement. My recollection is that the position taken in that legislation had not yet been arrived at by the time of the debate on the floor. Possibly your arguments on the floor were very persuasive, Mr. Widnall. Mr. WIDNALL. I am pleased to see that some people have gotten religion. Also, that I am no longer Peck's bad boy, as I was at that time. Mr. LINDEn. You never were with me. Mr. WIDNALL. I am particularly pleased that you are under no illu- sion about this new risl~ lending operation and that you will have no part of Eximbank becoming an adjunct to foreign aid through soft- term lending. That is the last thing in the world I would ever want to see happen to the Eximbank, As I have repeatedly observed, Ezimbank has a fine reputation with the Congress as a sound lending organization. I want to see us keep itthatway. It seen~s to me that wh~n we take this bill to the floor it would be helpful to have in the proposed law itself language assuring that Eximbank is not going soft on lending terms. Speeiflc~lly I would propose an amendment to section 4 of the bill striking the period at the end thereof, inserting a comma and the following clause: and to the policies of the bank with respect to terms of repayment, interest rates, fees and premium applIcable to loans, guarantees and insurance extended under the said port-~Impo~t Bank 4~ç~t of W45, as amended. I think such language would be veryheipful in floor debate on the bill as something we could point to making clear that Eximbank has not become an aid organization. At the same time I think the proposal is in language gen~ral enough in scope to not interfere with your making prudent decisions on the use of this new authority. I would lik~ to have your reaction to the proposal. PAGENO="0022" 18 Mr. LINDER. I don't think, Mr. Widnall, that I, at least, have very much to add beyond my previous comments. I would merely say that I cannot assert that the Bank is going to go out of business, or that anything very tragic will happen, if such an amendment were added. But I think we have made it clear, both here and in the Senate, that it is our full intention to follow the policy you suggest. I assume that this committee report will include it. I must rest on the fact that I really hate to see anything introdu~ced into our governing statutes which is not necessary and which would impose limitations on the flexibility of the Bank's operations. I much prefer to hope that the Congress will entrust us to continue to conduct ourselves in a manner which on the whole, I think, they have approved of, especially since we have stated categorically that we do intend to do precisely what your amendment suggests that we do. We fear that the introduction of such an amendment might lead the way at some future time to the introduction of a more specific amendment which might include specified interest rates or guarantee or insurance fees. We accept the fact that, on the whole, we ought to try to operate at a profit and we have been able to do that. But that is about as far as I would like to see it go. I think a banking institution needs a considerable amount of flexibility. We made a loan only a few months ago-I am not going to men- tion the country-for $25 million and charged 67/s percent because it was a peculiar transaction which we felt did not come under the normal rules. On the other hand, it is conceivable that we might charge somewhat less than 6 percent on a particular transaction for similar reasons. . In my opinion that kind of flexibility ought to be permitted the management and Board of Directors of the Bank as long as we are conducting ourselves in an acceptable manner. Mr. WIDNALL. As I understand your answer, Mr. Linder, you prefer not to have it go into the bill. You would expect that some language would be written into the committee report affecting it and at the same time you do not see any serious objection to it ~ Mr. LINDER. I would agree completely except for your very last phrase indicating that I do not see any serious objection to it. I do see some objection to it merely on the grounds that it would set a prece- dent for a limitation on the flexibility with which the Bank has been able to operate successfully until now. Mr. MCQUADE. Mr. Widnall, I guess it is bad form for me to ask questions from here. My concern is, as you know, to advance the commercial front, and there are times when we want to meet foreign competition and more often it turns out a question of the length of the loan rather than the rate. It was unclear to me from your language, maybe because I did not hear it fast enough, whether it would still be possible for Eximbank,~ under your language, to step out to meet competition, where, say, we find that the British or French are providing financing terms beyond what Eximbank is now prepared to do in a given market on a given transaction. That is my concern. PAGENO="0023" 19 Mr. WIDNALL. I understand the amendment that I would propose to make would not be a complete limitation in that respect. Mr. MCQUADE. So that, if it were the position of the Bank that they step out to meet competition, it would be perfectly consistent with your language to do so under the bill as you would have it amended. Mr. WIDNALL. I might go this far though and say that if the amend- ment is used to forestall a 3 percent loan, that would be my intent. I do not think it should as far as that- Mr. MCQTJADE. Okay. Mr. LINDER. Mr. Chairman, maybe I will alter my last comment by saying I might be willing to accept such an amendment if it were the consensus of this committee that we can proceed rapidly with con- sideration of the new program and that the only problem is the ac- ceptance of such language. As a matter of fact, I `think Mr. Widnall's amendment has been very carefully and very well drawn for the purposes which he has in mind, and, therefore, I would like to leave it precisely as is if it is the consensus of the committee that it is necessary for it to go into the bill. I would still hope that the legislative history we are making now and which will be made by the report will suffice. Mr. WIDNALL. But you are now moderating your original objection. Mr. LINDER. I am moderating my objection. Chairman PATMAN. Mr. Barrett. Mr. BARRETT. Two short questions. Mr. Linder, I know your per- cen'tage of loss has been very small. But what percentage of losses have you had the last 5 years? Mr. LINDER. This is a question that comes up not infrequently. Losses actually written off because we believe there is no reasonable expecta- tion of recovery, if I may paraphrase that language that was used in our bill, have been so small as to be inconsequential-amounting to several million dollars. On the other hand, there are situations which may turn into serious losses. As of today, and for the last 7 or 8 years it has been perfectly clear that $36 million which we have in Cuba is not going to be repaid by the present regime. But who knows whether Mr. Castro will be there forever. Any successor government would recognize, I think, this kind of an obligation. Mr. BARRETT. I think we should exclude Cuba because that is a unique situation. It may change for the `better. In general, what would you say? Mr. LINDEn. The total amount of losses that the Bank has written off in its whole history has been $8 million. The actual for the last 5 years has been something under $4 million. `Now, going from Ct~ba, we have defaults in Egypt at the present time. We believe these are going to be corrected at some point. The Bank is not conducting any business with the Egyptians at the mo- ment and I do not think we would be doing very much in Egypt, even under this new program. We also have a kind of standstill agreement in Indonesia. If you look at our annual report you will see that we include in a note to our balance sheet a category of potential losses in Indonesia, PAGENO="0024" 20 Cuba, the U.A.R. and the tail end of a loan to the Republic of China for goods which are now in Mainland China. The delinquent princi4pal and' interest installments on that loan amount to about $32 million of which principal is $17.5 million. The original loan was for $200 million. I indicated to you what the total' amount is in Cuba. Indonesia has past due installments of $22,900,000 as of June 30 last year and will have a larger amount at the end of this year. Egypt has past due installments of $2,700,000, and there were mis- cellaneous past due installments of $7 million. We expect to recpver substantially all of the $7 million. Those figures con~parewi'th an earned reserve of about $1,100,000,000 after paying dividends over `the years of more than $550 million to `the Treasury. Mr. BARRETT. Mr. Linder, would it he unfair to ask you how the Eximbank `co'n~pares with the World Bank and the Inter-American Bank in the losses sustained over the lastS years? Mr. LINDER. I think they `all have an excellent record in terms of losses sustained. `Mr. BARRETT. Would you say con~parabieto yours? Mr. L~NDER. A~t least as good. Mr. BARRETT. One very academic question, Mr. Linder. You say you would cover loans on heavy~'duty trucks for 5 years, but you would not cover passenger vehiclesfor 3 sears. How do you estimate the life expectancy of a heavy-duty truck in undeveJc~ped countries? Mr. UNDER. It does not `make any difference from our point of view whether it is developed or an undevelc~ped country. We `are doing a commercial transaction and `therefore we will `not give longer terms to an underdeveloped country than we give to a developed one. If we sell an aiiiplane in Brazil and 7 years is the term for an air- plane, it is 7 years to Brazil or Belgium. You and I know, Mr. Barrett, that trucks, if they are well main- tained, will `last a lot longer than 5 years. But the life expectancy of the article is only one of the criteria used. There is a general understanding in international trade among the insurers and granters of credit that ~ years is a reasonable time. I am using five years arbitrarily; it may be 4. The term is equal to a reason- able time within which to expect a buyer to pay for his truck. In addition to t'hat, there is a general understanding that the buyer must pay something in cash, and that the `exporter must retain some risk in the transaction. We adhere to both of those principle's as well as to the terms which are appropriate. Under this program we would not extend the term, nor reduce the cash payment, nor change the exporter's participation, except tc the extent that we had to because we had clear evidence that the French or Japanese or some other country was doing it. We always meet com- petition, if we possibly can. Mr. BARBETT. What I wa's trying to determine is whether or not you can project a sustained loss over the next 5 years under your new expansion facility? Mr. LINDER. I think that the Bank's experience in the past is clearly not a criterion for what we might expect under the new program. PAGENO="0025" 21 The bill states that we will risk up to $100 million. With respect to losses beyond that amount we thought that Congress ought to appro- priate funds to the Treasury to reimburse us. I do not really anticipate our loss is going to be of such magnitude, but I do want to keep a clear line of demarcation between the Bank's regular operations and this operation. Mr. BARRETr. Thank you. Chairman PAT1~tAN. Mr. Brock. Mr. BROOK. Thank you, Mr. Chairman. Mr. Linder, welcome aga.in. Mr. UNDER. Good morning. Mr. BROOK. You were mentioning earlier the terms. I would like to ask a couple of questions. You mention the fact the Japanese are selling to Indonesia and we are not. On what terms are the Japanese selling to Indonesia? Mr. LINDER. I imagine all kinds of terms. That is, I am sure they are selling a certain amount of consumer goods on 90- to 180-day terms, although as a matter of fact I have heard that the Indonesians are trying to avoid buying anything on short terms doing their best in order to get their own house in order so that they can meet their obligations to us and other creditors. But we did not feel, in light of the fact they are in default to us, that we wanted to extend new credits to them on any terms and increase our risk. I suspect if the Indonesians want some basic equipment, not spare parts or normal consumption goods, that they will get longer terms and probably get the terms that are customary in international trade. Mr. BROOK. What concerns me, when we talk about a nation like Indonesia, which is very much in critical balance anyway- Mr. UNDER. That is correct, sir. Mr. BROOK. I am not so sure that we ought to worry about our balance of payments when, when we are talking about Indonesia, any more than when we worry about theirs. They are not going to be able to pay us unless they maintain some sort of a balance, and I would be a little reluctant to see us supporting a mass amount of consumer goods in Indonesia as opposed to something that will yield an invest- ment to them. Mr. UNDER. I do not think there would be a massive amount. I think there is a very disciplined and sensible government in there now. But I do think it is important that our manufacturers should not lose their markets completely so they can keep their presence in Indonesia and so that the Indonesians do not get into the habit of buying Japanese goods exclusively. Moreover, I am not suggesting that Japanese is the only country competing with us there. Mr. BROOK. I do not want to pick on that one. We hope that nation can maintain its current record of progress. We very deeply feel that way. When you are talking about a high-risk loan, Mr. Linder, most com- mercial institutions will make a high-risk loan upon request. Mr. LINDER. I am sorry, what kind of loan? Mr. BROOK. High-risk loan. Mr. LINDER. Yes, sir. Mr. BROOIC Most banks will accept high-risk loans within certain well defined limits, which you have here, but they charge a little more. PAGENO="0026" 22 Mr. LINDER. Yes. Mr. BROOK. I got the impression that-may be I misunderstood- that you intended to charge the existing rate of interest. Mr. UNDER. That is correct. Mr. BROOK. Why? Mr. LINDEn, We accept a lot of high-risk loans now. Fortunately they have worked out pretty well. Mr. BROOK. You have been pretty cautious about it? Mr. LINDER. Yes, sir; we have been. But as I said in my statement we have operated on the outer limits. Of what we regard to be reason- able assurance of repayment. The reason we do not, as a general rule charge different rates of interest, is that we have lived a long time and have learned that as a government institution it is impossible, with- out running into all kinds of political problems, to try to differeiitiate in terms of interest rate between two relatively underdeveloped coun- tries, let us say, or between two developed countries. And, generally speaking, the banks do not have as much fluidity in that as you would assume. The prime rate does constitute the rate for all prime risks. Now, within that prime risk category there is a big difference be- tween lending to General Motors and lending to some fellow who has a net worth of a few hundred thousand dollars, but he still may be prime. Mr. BROOK. You would not equate a loan to export machine tools to Italy with a loan for machine tools to Indonesia? Mr. UNDER. We would not what? Mr. BROOK. Equate the credit risk of those two? Mr. UNDER. No; I would not equate the credit risk. But I would keep the same rate because my experience tells me that on the one hand if I make a concessionary rate to Indonesia some other country will come along and say you ought to make a greater concessionary rate to us because we are less developed than Indonesia. On the other hand we lend at a premium rate to Indonesia we run into the difficulty that that country is anxious to foster its trade, to be friendly with our coun- try, and it looks as though we are discriminating against them. Now, I will not lend at a rate which on balance and over all repre- sents a loss to the Bank, but I will try to maintain a rate which I think is consistent and which is reasonable under all the circumstances. There are people in the world who are managing to maintain what is apparently a lower rate than we are at the present time. I say it is apparent because the lower rate is more apparent than real. The rate may be somewhat lower, but there are other charges that go into the net cost of the loan. But I assure you, Mr. Brock, that we have played with this idea a great deal, of both charging more for the higher risk, or putting it the other way, charging Tess for the prime risk. At a time when money was obtainable at much lower rates, I did some experimenting with it and I found that it was a mistake. Mr. BROOK. One of the suggestions in our riot insurance bill that is under consideration by this committee is to charge an add-on pre- mium for given Federal guaranteed insurance into riot areas which is apparently high-risk insurance, and the people that are paying for that are the insurance companies- PAGENO="0027" 23 Mr. LINDER. This we do. Let me explain to you. This may seem to be inconsistent with what I just said, but it is not because we were talking about loans previously. Under our guarantee and insurance programs, we do have four categories of countries, divided according to the risks inherent in the markets, and our insurance premiums and our guaranteed fees vary substantially between the four categories of countries. As I said in my statement, most of the authorizations under the new program would, I hope, come under the category of guaran- tees and insurance. When the U.S. Government or one of its agencies lends money on a businesslike basis, but nevertheless, as an arm of the Government, we do not believe the loans can be at different interest rates for differ- ent borrowers. Those reasons do not apply to loans that are made by commercial banks and which we guarantee. As I said, we charge different rates for guaranteeing riskier loans. We are not directly in * that, you see. Mr. BROOK. Thank you very much. Chairman PATMAN. Mr. Reuss. Mr. REuss. Thank you, Mr. Chairman. You say always the same interest rate, but I see in your report that you were lending to Aus- tralia at 6-percent-plus for peacetime articles and 41/2 percent for sophisticated war planes. How does that sit with your egalitarian interest rat~? Mr. LINDER. They are egalitarian in respect of all our commercial business. But we think that financing defense articles is a peculiar kind of Government transaction, and I would point out that in setting those lower rates-and I believe that such credits for Australia were at both 43% percent and 51/2 percent-we were concerned with the sale of that defense equipment to a very friendly country. And as long as we were able to do it at a rate which would not result in a loss as of the date the rate was agreed to, since it was a highly specialized kind of transac- tion, we did make those concessions. Mr. RETJSS. Is not that same friendly country equally friendly when it comes to selling them peacetime goods? I just think you have put yourself in an impossible position by the differential interest rates. Mr. LINDER. I would only say, Mr. Reuss, that we are actively dis- cussing with the Defense Department the tail end of these DOD guar- anteed loans to developing countries, some of which the President has before him for consideration. With respect to these, and to any new commitments to developed countries for defense articles as well, we are charging a 6-percent rate. Mr. REUSS. You say in your testimony that this new bill, if enacted, will not be used for military sales. However, there is not a word in the ;text of the bill to prevent such use, is there? Mr. UNDER. As you know, there are limitations in our basic bill. Mr. RETJSS. Is there a word in H.R. 16162? Mr. UNDER. No. Mr. RETJSS. Would you prepare language making it very clear that this would be prohibited under the bill, so I may insert itas an amend- ment? Mr. UNDER. Do not all the limitations of the basic bill follow? PAGENO="0028" 24 Mr. RETISS. By the "basic bill," are you talking about the bill before the Committee on Foreign Affairs? I do not think that is going to be passed. Mr. UNDER. I am talking about our own Export-Import Bank Act, which amendment was signed 2 months ago and contains certain spe- cific limitations. Mr. R&TSS. On the Eximbank regular operations. But this bill before us would- Mr. MCQUADE. It already has these limitations. It is in the last sen- tence of the bill. Mr. RElrss. As Mr. WidnaJl just said, the administration successfully resisted his effort to exclude arms sales to developing countries from the basic Export-Import Bank bill which was enaoted a few months ago. You in your testimony here this morning said that under H.R. 16162 arms sales would be entirely prohibited. Now, our basic bill does not entirely prohibit arms sales. It simply sets up criteria for them and I, therefore, say that if this bill does what you say it will do, then it had better provide in plain English that that is what Congress is enacting. Therefore, would you have your counsel furnish me with language which can make that clear, because your per- sonal views, while persuasive, of course, would not prevail if they other-how many on your Board-five? Mr. LINDER There `are five, although today there is one vacancy. Mr. REuss. If the other four outvoted you. So if we are going to~ have a meaningful bill we will have to put that in. On the overall bill, I listened to the testimony carefully this morn- ing and I cannot really determine why you need it. Your present law permits you to make, as you say, high-risk loans,, with the requirement that there be reasonable assurance of repayment.. Now, this bill, }I.R. 16162, would substitute for the reasonable assur- ance of repayment criteria the criteria that it improves the U.S. bal- ance of payments. Well, I cannot see this new authority improving the balance of pay- ments if we are now to make loans with no reasonable assurance of repayment. That does not help us at all, Mr. UNDER. I would agree to that proposition. Mr. REUSS. Why do you not go out and continue to exercise your expert judgment, undiluted, because we want to know who makes these loans, and if you find there is some reasonable assurance of repay- ment, make the loan as you do now, even if it is high risk. What do you need all this language for? Mr. LINDER. Let me explain. The Eximbank has an image and it has operated in accordance with that image-of being a relatively sound banking institution. We may have been wrong about certain of our criteria. However, when we have an exposure representing 25 or 30 percent of the external debt of a foreign country, we would, as pru- dent bankers, say we have got enough there, because the only thing with which we have to pay our losses is represented by our capital and reserve. At the present time the bank has gross commitments of over $9 bil- lion. We have some $2 billion of capital and reserves. You have au- thorized us to have commitments up to $13.5 billion. When we reach PAGENO="0029" 25 that ceiling we still will probably only have $2 billion, plus a couple of hundred million dollars more of capital and reserves. Mr. REUSS. If you exceed your capital and reserves, God forbid, you will then obviously do the only thing you can do, go to the Treasury and ask that you be bailed out. Why do you need a bill to do that? Mr. LINDEn. If you will permit me to finish my thought, it is that, as relatively prudent bankers, we believe that we must keep some sort of balance between the amount of money that we have now-not what the Congress might conceivably give us to bail us out-and what our commitments are; and, therefore, we have in the past, not infrequently, right or wrong, refused to do a particular piece of business. * Let me be specific about it. Assume we have a $500 million exposure in a given country and that equals 25 or 30 percent of that country's external debt. One of our competitors, the Germans, we will say, has $60 or $70 million in the same country. Now, Germany is more than one-tenth as large as we are. They ex- port more than one tenth as much as we do. Germany is very anxious tO do business in that Country. They will take the risks of up to, let us say, another $100 million there. Nevertheless, we-that is, the Board of the Bank-would feel it would be imprudent for us to go further. This happens all the time in commercial baliking. The Chase Man- hattan Bank may be full in Japan, but Japan may be able to walk around the corner and find another bank that is not quite that full. The fact that Chase will not lend any more money does not mean that Japan will not pay. It does mean that Chase is up to its eyes as far as Japan is concerned. By the same token Eximbank may be up to as much as we can prudently risk in that particular country. This bill will enable us to go beyond that amount and take on that added exposure. Over the years we have developed some fairly broad criteria. We make exceptions to them, it is true, but generally speaking, our interpretation of reasonable assurance of repayment is pretty well understood. And one of the factors that goes into reasonable assur- ance of repayment is the Bank's exposure in a particular country. For example, it could well be that it could be we owned all the external debt of a given country and had all of our resources com- mitted to that country. We still could find a reasonable assurance of repayment for any one transaction there. But I do not think that is what is really meant by our legislation and I do not think that is the way to conduct an institution of this kind. We are going to the Congress to make it perfectly clear to Congress first, that we are not starting an aid organization; and second, that we are going to take additional risk, either by doing additional business in a country in which we are currently relatively heavily exposed or by financing buyers who do not meet our current criteria of Credit worthiness. Let me give you an example of the latter. There is a large American motor car manufacturer who has a customer who has re- cently begun assembling automobiles in a foreign country. We have a lot of money in that country in relation to its size, It is an Asian country. It is far away. You cannot get the figures you would normally expect to get in order to extend credit. We have guaranteed a line of a couple of million dollars-a revolving credit, in effect-for the sale of parts to that foreign assembling plant. The exporter's needs now require $5 or $6 million. PAGENO="0030" 26 I do not think prudently I could go to $5 or $6 million for that buyer under the present statute. It is true that I would probably not be hauled up before the court for having broken the law if we did extend such additional credit but I do not think that would be a prudent thing for us to do. Mr. REUSS. I do not see any change here in the bill, other than semantics, in substituting for "reasonable assurance of repayment" the phrase "in order to improve the balance of payments and foster the long term commercial interests of the United States." Furthermore, it seems to me an exercise in buck passing. First of all, you ask Congress to give you a vague directive, then you set up one more governmental committee, Exporters Expansion Advisory Committee. They have to consider it, and then the National Advisory Council on Financial and Monetary Policy- Mr. LINDER. Which always does consider our loans. Mr. REUSS. Which it always does. They keep signing the name of Dean Rusk and other august parties to their papers, who never see them. I will have to hear a lot more convincing evidence that this bill is needed, That is all, Mr. Chairman. Mr. BARRETT (presiding). Mrs. Sullivan, do you desire to questiom the witness? Mrs. SULLIVAN. Not at this time, Mr. Chairman. Mr. BARRETT. Mr. Clawson. Mr. CLAWSON. Mr. Linder, I join my colleague in again welcoming you and your associates before the committee. I think you have made- a statement that will certainly assist us in evaluating the legislation before us. I would like to observe, before asking a question, that it is re- freshing to find someone who believes that a Government contract is a good asset, and that the Congress will honor it. I refer to the fact that, in the proposed legislation, the Eximbank is willing to rely on authorized future appropriations to restore any losses Eximbank might experience in excess of $100 million on this new risk-lending program. The reason I made this observation at this time is because the great private enterprise insurance industry apparently is unwilling to rely upon the quality of a Government contract as a good asset. Instead o~ relying upon the appropriations process to provide funds that might be needed under reinsurance contracts with the Government, they are insisting that the only acceptable method is wide open, backdoor,, Treasury borrowing authority financing. The insurance industry insisted on backdoor funding of the proposed flood insurance program arid it got stymied. The insurance industry is insisting Oil backdoor funding for the new proposed riot reinsurance program, and it is my opinion that it will run into trouble on the House floor should it be reported out in this form by our full committee. Again, let me sincerely congratulate you on recognizing that the appropriations process can work in a program involving potential liability on the Goverimient. I just wish the private insurance industry could be as realistic as you are, as I think the proposed riot insurance program, properly PAGENO="0031" 27 funded, is a good proposal, and I `think they could use that method, if they want to proceed in that order. So I appreciate your testimony. Mr. LINDER. Thank you. Mr. CLAWSON. Mr. McQuade, on page three of your testimony, at the top of the page, you speak of `the exporters in other industrialized countries wi'th which American firms must compete for markets also enjoy a variety of special arrangements to facilities their exports. I am curious abou.t the `special arrangements `that some of them are using in order to facilitate these exports. Would you elaborate or give an example or two of what these ar- rangem'ents are? Mr. MCQnADE. I think these arrangements are like the United King- dom "National Interest Fund"-the Canadians `have a similar one too- where they reach out beyond their normal terms and standards. Mr. Feer has done a lot of work with the Japanese facility. Mr. FEER. Just two `examples with which we are familiar are the Japanese and French central banks. They provide special discount facilities which give a preferential, lower rate to export paper than to other categories of commercial paper and, therefore, give a special incentive for banks and business to go into `the export financing area an'd to push exports overseas. Al'so, in the `ca'se of Japan, certain kinds of governmental export financing are extended `to their trading partners overseas which help them in pushing their exports. Mr. CLAWSON. How low do `they get in the discount procedure? Do you happen to know what the figures might be? Mr. FEER. I would rather provide details on other countries' export financing incentives for the record. Mr. CLAWSON. Will the information you provide for the record be accurate? Mr. FEER. Yes, sir. Mr. CLAWSON. What about the rates? Mr. FEER. The rates, as I recall, might be 2 or 3 percent below the rates on equivalent maturity commercial paper. Mr. PETTY. I might add the rate itself is not the sole indicator. In many cases the commercial banks-I am thinking particularly of Eng- land and France-are required to maintain a percentage of their reserves in certain types of assets, government bonds, and what have you. They permit guaranteed export paper to qualify under this reserve liquidity requirement. So the rate should be compared to that on short- term government bonds or to the lack of interest earnings on cash reserve deposits, for example. Mr. CLAWSON. You are telling us then that this paper does qualify for this reserve requirement? Mr. PETTY. Yes, sir. And I am saying that the rate the paper gets is not itself the sole determinant as to how attractive it is to the com- mercial bank to participate. There are other considerations. Mr. CLAWSON. When you provide the information for the record would you give us both the rate and the term? Mr. FEER. We will be happy to, Congressman. (The information requested follows:) PAGENO="0032" 28 SELEm~n ExronT FINANCING SYSTEMS Annexed are descriptions of the export financing systems of the United States, Oanada, France, Germany, Italy, Japan, `and the United Kingdom, drawn from a comprehensive `technical study prepared `by the United Nations.' Each country description is divided into `three sections, "Institutional Framework," "Financing Procedures," and "Export Oredit Insurance." The first section cover's the insti- tution's which finance and refinance meclium4erm and long-term suppliers' credits and grant buyers' credits. The second section sets out the application procedure an'd the terms and conditions on w'hich thesle credits are granted or financed and refinanced, while the third section describe's the export credit `insurance process and provides quantitative information on th'e insurance of all export credit trans- `actions including `short-term export credits. The country descriptions may be considered as represertting the situation in mid-1960, except where note'd (espe- cially for statistic's). In response to `the interest an'd inquiries `of `th'e Committee, information on two types of `special governmental export financing facilities is presented below, sup- plememte'd with additional data where `available to `the Department of Commerce. These special export financing facilities `are: (a) Programs to guarantee or insure the repayment of export credit which is in the "national interOst" an'd which otherwise would not meet the normal criteria for the i~~u~ance of export credit guarantees or insurance; (b) Special central bank or other facilities for the discount or refinancing of export paper, sometimes at preferential rates. It should be noted that the responsiveness of various export credit systems to their exporters' needs depends partly on the formal programs th'at are offered and partly on the flexibility of their administration.2 The effectiveness with which these systems are administered is not evaluated. NATIONAL INTEREST FUNDS United Kingdom.-The Export Credit Guarantee Dopartment (ECGD) of the Boar'd of Trade insures credit terms extended `by British exporters and guaran- tees financing extended `by British prtvate b'anks, In much the `s~ame way as the United States' Foreign Credit Iii~urance As~dciatloh and the Exiinbank's guar- antee program operate. The EOGD's s'tatutory authority `is in the Export Guar- antee Act. `Section I of this Act `deals with `strictly eomm~rcial `tr'anshctions ~nd applies normal creditworthiness `criteria respecting repayment. By far the largest portion of ECGD's business is conducted under Section I, amounting to a maxi- mum liability o'f $4 `billion on March 31, 1967. Section II of the Act provides separate statutory authority for a "national interest fund": "For the purpose [of encouraging trade with places outside the United Kingdom], or for `the purposq `of rendering economic assistance to `countries outside the United Kingdom, the Board o'f Trade may with the consent of the Treasury `make arrangements for giving such guarantees to, or for the benefit of, persons darrying `on `business in the United Kingdom as appears to the Board to `be expedient in the national intere'st." As sta'ted in the ECGD's publication, EUGD $ervices; The cover is substantially the same as that given under Section I, the essential difference being that the Advisory Council do not consider that the proposition is insurable on a commercial basis; similar peemium rates also apply. In general terms this cover falls broadly into two categories: (a) cover on exports to markets where the Advisory Council considers the prospects too uncertain for Section I cover to be given, and (b) cover involving com- plex underwriting techniques, experimental forms of cover and cases where the overall selection of risks appears to be heavily weighted against the Department. 1 United Nations. Department of Economic and Social Affairs. Es,port credits and ddveloping financing. Part II: National erport credit systems: New York, 1967. ~ For example, Individual programs may be mdre or less (a) competitive in meeting foreign credit terms; (b) aggressive in seeking out and developing certain markets; (c) prompt in service, based upon extensive back-up facilities such as credit files on foreign importers, field offices, etc.; (d) capable of accommodating special conditions of individual transactions; (e) capable under law ~f in practice of going beyond credit- worthiness considerations to promote desirable export transttctlons. PAGENO="0033" 29 The outstanding liability outstanding under this section amounted to $1.4 billion on March 31, 1967. Cana&~.-TJie Export Credit Insurance Corporation (EiCIC) operates under authority of the Export Credits Insurance Act of 1944. Section 14 of this Act provides the authority for insuring exports on a strictly commercial basis. From 1959 through 1966, actual exports underwritten by ECIC amounted to Can$790 million, or an average of about Can$100 annually, The Act provides separate authority for national interest exports: Section 21. (1) Where the Minister (of Trade and Commerce) reports to the Governor in Council that (a) The Board, having regard to the limitations imposed by section 14, is of opinion that a proposed contract of Insurance or a proposed contract of insurance and a guarantee issued to a bank in connection therewith will impose upon the Corporation a liability for a term or in an amount in ex- cess of that which the Corporation would normally undertake in relation to any one contract, exporter, commodity or country, and (b) in the opinion of the Minister it is In the national interest that the proposed contract be entered into or the proposed contract be entered into and the guarantee be issued in connection therewith, the Governor in Council may approve of and authorize the Corporation to enter Into the proposed contract of insurance or enter into the proposed contract of in- surance and issue the proposed guarantee in connection therewith Under this Section, Can$4336 million in actual exports have been under- written from 1959 through 1966, or about Can$8Q million annually. Additional Comment-In Canada, national interest insurance accounts for a much larger share of total government-supported export credit insurance than does the similar fund in the UK. Op the other hand, the percentage of total exports which is insured is much higher in the U.}~. than in Canada; more than 25 percent for the U.K. as compared to around 2 percent for Canac~a. Whereas there is considerable similarity between the Canadian and, British national interest funds in terms of structure, they differ in the ways ip which the funds have been utilized. In the U.K., the major function of the national interest facility has been to provl~Ee supi~ort for major 1onger-ter~p p~oject~. In Canada the bulk of recent transactions have been to Eastern Europe.. REFINANCING F~CILITIE5 ~ummar~.-The refinancing facilities in various countries appear to favor export financing over the financing of other type of transactions. In Frahce and fapan, for example, a lower central bank dlscottht rate for expOrt paper than applies to other types of dlscQunt transactions suggestS that private banks have a profit incentive to lend for exports. In the United Kingdom and Italy, on the other band, the refinancing mechanism appears designed to assure that the exporter benefits form a lower cost of financing that would ordinarily be applicable. In Germany, a special discount line from the central bank provides liquidity to the export financing system. A brief description of the U.S. discount system for export paper is provided for comparative purposes. United ,~tates.-Although certain types of export paper are eligible for dis- count (or advances) at the Federal Reserve Banks, the general practice of com- mercial banks is to borrow against Treasury securities as collateral and to discount very little, if any, export paper. On May 15, 1968, the Federal Reserve's disconnt rate was 5.5 percent. The maximum original maturity of export paper eligible for discount Is 90 days.8 In September 1966, the Export-Import Batik established a discount program under which Eximbank extends loans to commercial banks based on their hOld- ings of export paper. Under the April 1, 1968, revision of this program, two types of loans are offered: (a) Current Export Loans, which are made against eligible export paper acquired on or after March 1, 1966; and (b) Net Increase Loans, which are made against a coi~imercia1 bank's increase in ownership of eligible export paper over calendar year 1967, or other agreed base period. Eligible export paper consists of export paper based on an export credit trans- action with an original itiaturity of 12 months or more. The interest rate on Current Export Loans is the lesser of Eximbank's project loan rate-6 percent as of May 15, 1968-or the cost of mone~V to Eximbänk in the private market; 8Except for certain bankers acceptances and agricultural paper. 94-497-68-3 PAGENO="0034" 30 except that under specified circumstances export paper arising out of an expoft transaction in which Eximbank has participated may carry a higher interest rate. The Interest rate on Net Increase Loans, as of May 15, 1968, varied from 51/s to 5% percent, depending upon the maturity of the underlying export `trans- action. Half the value of the export plaper offered by Commercial banks may be discounted under the Current Export Loans, whereas the full value' of the ex- port paper may be discounted under Net Increase Loans. As of May 14, 1968, Eximbank has disbursed $127.3 million in both types of discount loans to U.S. commercial banks. Fra.nce.-Phe Banque de France offers a 3 percent discount r~ate on export paper, as compared to a 3.5 percent rate for domestic paper. In addition to export paper, the Banque de France also offers to discount, at 3.5 percent~ paper financing (a) the production costs of major export transaCtion's prior `to ship- ment; and (b) a French exporter's working capital' needs in connection ~with a sustained volume of exports to a single foreign customer. Moreover, export paper is exempted from the commercial banks' discount ceilings which impose limits to the volume of other paper that the Banque de France is willing to dis- count for each bank. The maximum term of export phper eligible for dis- counting is five years. For export transactions with a credit `maturity in excess of five years, the Credit National will refinance the commercial `bank and in turn discount `the export paper with the :Banque' de France. Alternatively, longer-term translactiotis may be refinanced through a standing consortium of French banks (GICEX). Refinancing rates for the long-term transactions exceed the Banque de France's 3 percent discount rate. Germany-Short-term expo'rt paper of up to 90 `days' maturity is discdunted at the Bundes'bank on the same basis and rate as other types of comihercial paper. AKA, a consortium of German b~tnks, participates in financing export trans- actions originated through a Germafl commercial bank and be'~tring credit maturities of between one and eight, years. Undei~ AKA's program "B", the' Bunde~bank ,refinances AKA loans up to an aggregate of $625 million, at `a cost to the German bank of 4.5 percent, or 0.5 percent above the Bundesbank's dis- count rate. Italy.-Export transactions with a credit maturity of one year or more are eligible to be refinanced by Mediocredito Centrale, a government rediscount institution.. Mediocredito may finance 78 percent of the credit at 3,5 percent; or alternatively may finance 26 percent at 3.5 percent and pay a 3 percent inter- est rate subsidy to the originating bank on the remaining portiop. Since the originating ban1~ would normally charge 8.25 percent to the exporter, the effect of the interest rate subsidy and/or discount i~ to reduce the cQst to the Italian exporter to 5.9 percent. , ` Japan.-The Bank of Japan discounts three types of e~port-relatcd paper with a maximum maturity of up to 180 days: (a) export paper, at 4Q15 percent;. (b) paper to finance production prior to shipment, at 4.38 percent;, arid (c) paper. to finance the period between ,sh.ipment of goods and payment by the importer, at 3.65 percent. These rates compare favorably~. with tb~e l3ank of. Japan'S "standard" 6.205 rate on commercial bills, applicable as of May 15, 1968. In addition, export paper is exempt from the discount ceilings of the com- mercial banks with the Bank of Japan. Discounting is a major source of funds fOr Japanese commercial banks, and control of access to the Bank of Japan's discount window is a key instrument of Japanese monetary policy. United Kingdom-The Bank of England stands ready to refinance insured export credit of two years or more. The amount refinanceable is either 30 percent of the `export loan outstanding or repayments due to be made by the buyer in the next 18 months, whichever is greater. The Bank of England also stands ready to refinance the outstanding balance of an insured export credit five years or more after its origin. In actual practice, banks have found it advantageous not to discount their, eligible export paper, and prefer instead to count such interest-bearing paper toward their liquidity ratio, as is permitted by the Bank of England. The discount rate for eligible export paper is 5.5 percent, or 1.5 percent under the Bank of England's standard discount rate on May 15, 1968. The private banks have agreed to pass this rate on to exporters. PAGENO="0035" 31 UNITED STATES or AMERICA INSTITUTIONAL EnAMEWOEK 403. In the United States, suppliers of capital goods finance their medium-term export credits (credits of between one and five years) with the commercial banks, and to a limited extent by a number of commercial financing companies and factoring firms. The commercial banks generally carry out their export financing activities through separate international departments or, in a few cases, through subsidiaries set up under the Edge Act of 24 1)ecember 1919 to perform investment or banking functions abroad which the parent banks are prohibited by law from performing, or do not choose to perform. If they are un- able to obtain financing from the commercial banks or other private sources, suppliers may, in exceptional cases, finance their medium-term export credits with the Export-Import Bank of Washington (Eximbank). Since September 196(3, Eximbank has introduced a "discounting programme" under which it stands ready to grant commercial banks (a) "one-year ~urrent export loans" up to one-half of their outstanding medium-term export loans and (b) "net in- crease loans" up to one-half of the increase in their total export credit financing, including short-term lending. 404. As regards long-term export credits, in some cases suppliers can obtain financing from the commercial banks for periods of up to twelve years, but in practice the bulk of long-term export translactions carried out on a credit basis is financed through the long-term project and equipment loans granted by the Export-Import Bank of Washington and the aid credits provided by the Agency for International Development (AID). 405. The Export-Import Bank of Washington is the moist important source of financing for United States eNports and the key institution in the United States export financing system. It is a government agency established by the Executive Order of 2 February 1934, under the authority of the National Indus- trial Recovery Act. The 1945 Export-Import Bank Act, as amended, stipulates that the: "objects `and purposes of the bank shall be to aid in financfng and to facilitate exports `and impo'rts and the exchange of commodities between the United States or any of its Territories or insular possessions and any foreign country or the agencies or nationals thereof". 406. Eximbank's present scope of actiVities and form of organization date from this latter Act, under which it became an independent federal government agen- cy, administered by a five-man Board of Dire'ctor~,, appointed by the President of the United States with the approval of the Senate. The Board of Directors appoints a nine-member Advisory Oommittee representing the maii~ sectors of the national economy, namely, production, commer~6, finance, agriculture and labour, which is required `to meet at least once a year to advise on the Bank's progi4tmme. The financial policies of Eximbank, like those of the Agency for International Development, are co~ordinated by the National Advi~ory Council on International Monetary and Financial Problems. 407. Eximbank hacs a capital of $1,000 million, entirely `subscribed by the United States Government. It obtains additional `resources by borrowing from the Treas- ury, within a current over-all borrowing ceiling of $6,000 million. Additional resources are available in the form of undisit~ributed income accumulated as a reserve available for contingencies. 408. Eximbank may free resourcesi for additional loans by selling (a) partici- pation certificates in individual credits, with recourse agaust the Bank, or (b.) participation certificates in portions of specific loans on a non-recourse basis. This programme of sales of portfolio loans was introduced during the 1961/62 fiscal year, with the object of encouraging participation by commercial banks in Eximbank loans. Participation certificates were offered to institutions active in Eximbank's export assistance' programme, and buyers were in turn permitted to offer suhparticipation to their correspondents. Sales of participation certifi- cates guaranteed by E~zimbank amounted to' $300 million during the 1961/62 fiscal year, $250 million during the 1962/03 fiscal year, $372.5 million during the 1963/64 fiscal year and $486.4 million during the 1964/65 fiscal year. Exim- bank was also able to sell, on a non-recourse basis, participation certificates in portions of specific loans to an amount of $39.8 million during the 1961/62 fiscal PAGENO="0036" 32 year, $112.7 million during the 1962/63 fiscal year, $98.1 million during the 1963/64 fiscal year and $128.3 million during the 1964/65 fiscal year. These sales were mostly made to foreign financial institutions. 409. Eximbank's authorized lending authority was relatively modest ($200 million) until September 1940, when it was raised to $700 million. Under the 1945 Export-Import Bank Act it was increased to $3,500 million. Subsequent in- creases occurred periodically up to 1968, when the lending authority was raised from $5,000 to $7,000 million. According to Public Law 88-101, which amended the 1945 Export-Import Bank Act and extended the life of the Bank for a further five years from 30 June, 1963 to 30 June, 1968, the loans, insurance and guarantees that the Bank may have outstanding at any time should not exceed $9,000 million; up to $2,000 million of guarantees and insurance may be charged against this lending authority at 25 percent of the contractual liability assumed. The unused len-ding authority at 30 June 1965 amounted to $3,298.5 million. 410. Four major forms of assistance are available from Eximbank: (a) Project and equipment credits, for financing the purchase of United States equiipmetnt, goods and related services for projects undertaken b~ foreign gov- ernments or public or private enterprises; abroad; (b) Emergency foreign trade credits, designed to help countries faced with temporary balance of payments difficulties to maintain their fkw of imports from the United States; (c) Short-term and medium-term export credit insurance, provided by Exim- bank on a partnership basis with the Foreign Credit Insurance Association (FOIA); (d) Guarantees to commercial banks or credit institutions on medium-term export credits, and in exceptional cases direct financing to exporters who are unable to secure financing from private sources. 411. From the beginning of its operations through 30 June 1965, the Bank's net total authorizations for loans, guarantees and Insurance totalled $14,900 million and disbursements $10,200 million. TABLE 70.-EXPORT-I MPORT BANK OF WASHI NGTON AUTHORIZATIONS rn millions of dollarsi Fiscal year (ending June 30) Item --- -- 1957 1958 1959 1960 1961 1962 1963 1964 1965 Project and equipment loans 438. 1 436. 8 494. 9 286. 0 706.4 555. 0 525. 0 570, 2 415. 2 Exporter credits 56.1 68.8 39.2 115.5 145.0 34.5 39.9 309 cqmmq~ity credits 743 187. 0 66, 4 70. 0 63. 5 3. 5 79. 8 177. 2 76. 3 Exportercredit insurance (FCIA) 330.7 569.~ 744.5 721.5 Guarantees of exporter and commodity credits 17. 2 153.3 423. 2 219. 1 216. 8 282,9 Emergency foreign trade credits 500.0 165. 5 289. 8 35. 0 327.2 500. 0 35. 0 340. 0 Consignment inturance 31.6 41. 8 29. 1 9. 3 18.9 14. 3 5. 8 2 9 3. 1 FEN~NOXNG PR0CEDUItE5 Medium-term suppiiers' credits 412. Most medlum4erm export credit financing is provided under exportcredit insurance and bank guarantee programmes; the remainder, which has repre- sented a steadily increasing proportion, is provided independently of these programmes. 413. United States suppliers in need of financing for medium-term export credit transactions are offered four possibilities. (a) They can obtain an export credit insurance policy from the Foreign Credit Insurance Association and then seek financing from commercial banks or pri- vain firms. The foreign buyer is usually required to make an initial cash payment of 20 per cent to the exporter on or before delivery, the remaining balance of the contract value, known as the "IlnaiTced portion", being payable in monthly, quar- terly or semi-annual instalments. The dash payment may' be reduced to 10 per cent, depending on the credit rating of the buyer's country. The credit institution will normally provide financing without recourse up to the percentage covered by the insurance policy, that is, generally 90 per cent of the financed portion, the exporter assuming responsibility for the remainder. However, the credit institu- tion may decline to finance without recourse and will, in that case, ask the ex- porter to sign a side agreement or to secure an additional guarantee, for example PAGENO="0037" 33 the guarantee of the government of the buyer's country or a reliable bank in the buyer's country. In the case of transactions involving foreign governments or public enterprises, a guarantee from `the central bank of the country concerned may be requested. The promissory notes signed by the buyer or the drafts drawn on him must be in 1~Jnglis~h, expressed in United States dollars, and be payable at a bank in the United States. (b) United States suppliers can seek financing from commercial banks or private financial firms, `which will be given guarantees by I~ximbank. Under the Elxirnbank guarantee programme, the credit institution is obliged to provide non- recourse financing and to assume the commercial credit risks for the early maturi- ties. The buyer is required to make an initial cash payment of at least 10 to 20 per cent to the exporter on or before delivery. The credit iit~titi~tion provides the financing, usually by purchasing a 90 per cent interest in the financed portion of the sale, the exporter assuming responsibility for the remaining 10 per cent. These credits are often granted on an advanced commitment basis: a firm commitment of assistance from his bank may be sought by the exporter while he is negotiating with a foreign customer, or when he is obliged to specify the credit terms in his bid to a foreign customer for a sales contract. (c) United States suppliers may in certain cases obtain financing, with or without recourse, from commercial banks or private financial firms, without being obliged to procure a FOIA insurance policy or an E~ximbank gtiarantee. Such cred- its can only be obtained by exporters with high credit ratings for transactions destined to countries where currency and political risks are considered to be negligible. Condl'tionsL~_~such as the dowh payment by the buyer, the contingent liability to be assumed by the exporter, guarantees by foreign banks or ~tcceptable third parties etc.-are agreed upon by the exporter and the credit institution on a ease-by-case basis. (d) When two credit institutions have refused to finance an ~xport transac- tion under the Eximbank guarantee programme, or have declined to finance it even with FOJA insurance, Eximbank may be willing to finance the export transaction on the sslme terms `and conditions as those used under the ordinary guarantee and insurance programmes. However, very few applications for direct assistance are now submitted to Eximbank. Long-term suppliers' credits 414. When a supplier can prove that he is facing competition from a foreign supplier as regards the length of the credits to be offered, commercial banks tuay offer him credits with maturities of up to twelve years, which will be guaranteed under the "matching principle" by E~imb'atik within the framework of its bank guarantee programme. EXPORT CREDIT INSURANCE hUlA ecrport credit insurance 4US. The United States credit insurance scheme is operated by the Foreign Credit Insurance Association, in collaboration with Eximbank. The FCIA is an unincorporated association of approximately sixty-five stock and mutual insur- ance companies; it started functioning in February 1962. The FCIA insures commerical risks for its own account and non-commercial `risks for account c~ the Government through lDximbank, which also provides reinsurance for liabilities above certain limits in respect of commercial risks. Under arrangements intro- duced in 1904, Eximbank gave the FCIA discretionary authority to expedite the insurance of export credit transactions involving invoice values of up to $300,000 in selective markets. Beneficiaries of export credit Insurance policies may be; (a) Oorporations organized and operating under United States law; (b) Individuals or partnerships resident in the United States (except partner- ships consisting of one or more foreign-controlled corporations), or (c) Foreign corporations which are doing business in the United States. 416. Short-term insurance policies stipulate that exports must be "produced or manufactured in the United States to the extent that at least one half of the value, exclusive of price mark-up, has been added by labour or material exclu- sively of United States origin". Medium-term insurance policies are p~imarily designed to cover heavy durables, machinery, pl~tnt equipment, etc., produced oi~ manufactured in the United States, and certain types of livestock and surplus agricultural preduets originating in the United States. Insurance Is granted for the value of the United States content on products with a minor percentage of foreign content. PAGENO="0038" 34 417. Insurance is also available for goods on consignment and sales from consignment stocks held abroad; cover for risks on trade fairs, technical services and leased equipment is obtainable only as a direct guarantee from Eximbank. Eligible exports must be payable in United States dollars and shipped from a United States port. Applications for insurance are submitted by the exporter either through his insurance agent or broker or direct to the FCIA. Financing institutions can also act as intermediaries. Policies are not assignable, except with the written approval of the FCIA. Any amounts payable under the policies may be assigned on written notice of such assignment to the FOIA, which also reserves the right to approve such assignments. Assignment of the policy proceeds does not mean that the credit institution is under an obligation to finance without recourse. Also, when agreeing to non-recourse financing the credit institution will provide it to the extent that the risks are covered by the insurance policy and will exclude those risks not assumed by the FCIA. 418. Four types of policy are issued by the FCIA: Comprehensive short-term policies, covering commercial and political risks combined on sales involving payment terms up to 180 days; Short-term political-risk-only policies, covering loss from political risks only on sales involving payment terms up to 180 days; Comprehensive medium-term policies, covering commercial and political risks combined on sales involving payment terms generally from 181 days to five years (seven years for some types of aircraft) Medium-term political-risk-only policies, covering loss from political risks only on sales involving payment terms generally from 180 days to five years (seven years for some types of aircraft). While medium-term coverage is obtainable for individual transactions or for repetitive sales to one buyer, the short-term insurance programme requires that the exporter insure all or much of his export business. However, the "whole- turnover requirement" has to a large extent been replaced by the requirement of "reasonable spread of risks". The FOIA may permit exclusion of certain buyers (such as subsidiaries), certain countries, or shipments covered by ir- revocable confirmed or unconfirmed letters of credit, or allow the exporter to cover only certain product lines if it is satisfied that the insured business provides a reasonable volume of spread of market risks. The insurance of re- petitive medium-term export transactions is primarily intended for the exporter who has a distributorship agreement with the purchaser. 419. The standard insurance policies become effective With the shipment of the goods to the buyer. However, a pre-sbipment coverage endorsement may be attached as an added coverage for the period between the contract sale and the shipment of the goods. 420. Commercial risks include: Insolvency of the buyer; Protracted default, that is, failure of the buyer to pay within six months after due date of payment the amount due, in whole or in part, for products delivered to and accepted by him; Non-acceptance of the goods by the buyer when not due to the fault of the exporter. 421. Political risks include: Transfer risk resulting from the buyer's inability to convert into dollars payment funds deposited with a bank or appropirate agency In his own country; Cancellation or non-renewal of an export licence or imposition of re- strictions on the export of products not subject to licence or restriction prior to the date of shipment, under circumstances not dfie to the fault of the buyer; Cancellation under circumstances not due to the fault of the buyer of previously issued and valid authority to import such shipment; Imposition of any law, or of any order, decree or regulation having the force of law, which under circumstances not due to the fault of the buyer prevents the import of such shipment into the buyer's country; War, hostilities, civil `war, rebellion, revolution, insurrOction, civil corn- `motion or other like disturbance; Requisition, expropriation or confiscation of or intervention in the busi- fieSs of the buyer or guarantor by a governmental authority; Praiisport or insurance charges occasioned after shipment by interruption or diversion of voyage outside the United States due to political causes, nnd which charges are impracticable to recover from the buyer. PAGENO="0039" 35 422. FCIA policies do not cover: Losses arising out of the exchange fluctuations or devaluation of the cur- rency of the buyer's country, unless they occur after the due date or the date of the buyer's local currency deposit; Losses due to the fault of the insured exporter or his agent; Transactions providing for payment in any currency other than United States dollars; Losses with respect to which a dispute exists between the exporter and the buyer, until such loss shall have been finally determined to be a valid and legally enforceable indebtedness of the buyer, or otherwise settled to the satisfaction of the Insurers; Losses insurable undOr the American Institute of Marine Underwriters' War and Strike, Riot and Civil Commotion clauses current on the date of shipment; Losses for which written claim is not made prior to the expiration of eight months from due date of indebtedness. 423. For short-term transactions under comprehensive coverage, commercial risks are insured up to 90 per cent of the invoice value and political risks up to P5 per cent; the short-term political-risk-only policy provides coverage up to 90 per cent. For medium-term transactions, as noted in the section above on Fi- nancing procedures, the buyer is ordinarily required to make a down payment of 20 per cent of the invoice value on or before delivery, so that the financed portion is normally 80 per cent of the contract price; the maximum coverage in the case of a comprehensive policy is 90 per cent of the financed portion for losses due to either commercial or political risks; the medium-term political-risk-only policy provides coverage up to 90 per cent of the financed portion. 424. Premium rates vary according to the length of the credit period and the market category of the buyer's country (markets are classified into four cate- gories, A, B, C and D). The average premium rate for short-term comprehensive policies is about 48 cents per $100 of the gross invoice value; for short-term poli- tical-risk-only policies, it is reduced by approximately 25 per cent. For medium- term policies, the premium rates are charged on the "financed portion" or the unpaid balance of the invoice value after deducting the buyer's initial cash pay- ment. They increase progressively according to the market category of the buyer's country, and by half-yearly intervals, from the minimum credit period of 181 days to one year to the maximum period of five years. The range of premium rates for medium-term policies can be illustrated by the fact that the rate for a one-year credit might be approximately 0.5 per cent for a transaction with a buyer in an "A" country, against 1.2 per cent for a buyer in a "Ci' country. For a five-year credit the rates would be 1.7 and 4.4 respeëtlvely; and additional premium is charged for contracts covering the pre-shipment period, which is limit,ed to a maximum of one year. Premium rates during the consignment period are 50 per cent of the applicable medium-term rates for comprehensive cover, 425. Claims arising from commercial credit losses under both comprehensive short-term and medium-term policies are payable promptly upon submission of proof of the buyer's insolvency, or of his failure to pay (for reasons other than in- solvency) within six months after the due date. Claims arising from losses due to political events are payable within three months after submission of the best evidence reasonably available to the insured of a loss due to the political event named. 426. After the payment of claims, any sums recovered from the buyer `or any other source are shared, after reimbusement of the expenses of recovery, between the insurers and the insured in the proportion in which they shared the original loss. Ertmbctnk guarantees 427. As an alternative to the FCIA insurance policy, the exporter can arrai~~ge ior financing of his medium-term export sales on a non-recourse basis with his bank, whiCh will obtain guarantees from Eximbank for the political risks in respect of all maturities and the commercial risks in respect of the "later" maturities. "Early" maturities are defined as the first half of the instalments of a one, two or three-year credit, or the first eighteen months of the instalments of a longer credit, exclusive of the exporter's 10 per cent retention.. Th~ "later" maturities consist of the remaining instalments exclusive of the exi~orter's 10 per cent retention. The difference in treatment of the early maturities is due to the commercial bank's desire not to assume risks for periods exceeding one to two years. The maximum maturity for such guarantees, is twelve years, Guar- PAGENO="0040" 36 antees become effective upon purchase by the banks from the exporter of the buyer's promissory notes. 428. To the banks which have signed the Master Guarantee Agreement covering the Exhnbank guarantee programme, Eximbank has given discretionary authori- ty with regard to applications for non-recourse ñnancing of transactions up to $500,000 under conditions similar to those under which the FCIA may exercise discretionary authority with regard to insurance. 429. Many features of the Eximbank guarantee programme are identical with the FCIA-Eximbank insurance programme. These features relate particularly to eligibility for guarantees, assignment of guarantees or guarantee proceeds, pre-shipment guarantees, guarantee rates and doeumentati~n required for appli- cation. However, there are some basic differences. Guarantees may be granted for periods of up to twelve years, while the five-year limit is still the rule at the FOIA. The beneficiary of FCJA insurance is always the exporter, while the bene- ficiary of an Eximbank guarantee is a commercial bank. Financing may be pro- vided with or without recourse in the case of insurance, while it is always pro- `sided on a non-recourse basis under the guarantee programme. 430. Claims on early maturities (cover of political risks only) are settled in the same way as similar claims under an insurance policy. Claims relating to later maturities are payable immediately after notice of default. During the 1964/65 fiscal year, losses ~f $735,000 from guarantee and insurance claims, less recoveries, were, paid. During the previous fiscal year, net claims paid had amounted to $286,000. TABLE 71-UNITED STATES: GEOGRAPHICAL DISTRIBUTION OF SHORT-TERM INSURANCE, CUMULATIVE AS OF J~JNE 30, 1965 [In thousands of dollarsj Area Issued Outstanding Africa 56, 586. 6 7,679. 9 *Asia - 114,948.3 ` 17,996.4 Canada 15,571.9 2177.2 Europe 543, 145. 8 60, 828,9 Latin America 592, 821. 2 84, 143 1 Oceania 49, 869.6 7, 672 4 Total 1,372,943.4 180,497.9 TABLE 72-UNITED STATES: GEOGRAPHICAL DISTRIBUTION OF MEDIUM-TERM INSURANCE, CUMULATIVE AS OF JUNE 30, 1965 [In thousands of dollarsj Area Authorized Canceled Tob~ istuéd Ithued Outstanding AfrEca 8,587.8 3,794.8 2,9,02.8 1, ~90. 2 1, `486.3 P~sia 22, 7P4. 4 6,707. 5 7, 305.6 8, 761. 3 4,410.9 Canada `51.7 18.6 ~. , 3Q.8 ,Europe, 7, 2~7. 4 2, 109.6 1,613.0 3,534.8 2,434.2 Latth Afflè~ica 106,274.3 35, 507.7 23 306.5 47,460.1 33, 003.6 OceanIa - 953.9 53.9 253.0 647.0' 234.3 Total 145,899. 5 48, 192. 1 35,380. 9 62,326. 5 41,600.1 TABLE 73.-UNITED STATES, FCIA: CLAIMS EXPERIENCE Type of claim Claims paid Recoveries Political: Short term $1,244, 291 $1, 049,783 Medium term 3,240 3,240 Total 1, 247', 531 1,051,023 Commercial: Short term - 1,753,424 243,244 Medium term 264, 593 100,000 TotaL. - - 2,018,017 343,244 Grand total 3,2~5,548 l,396,~7 PAGENO="0041" 37 TABLE 74.-UNITED STATES: GEOGRAPHICAL DISTRIBUTION OF BANK GUARANTEES, CUMULATIVE AS OF JUNE 30, 1965 tIn thousands of dollarsj Area Authorized Canceled To be issued Issued Outstanding Africa 51, 806. 0 15 361. 1 9, 358. 6 27, 086. 3 18, 323 8 Asia 621 307.3 60 471.2 114,921.4 445,914.7 169,4~9.9 Canada 688:9 30.6 213.7 444.6 1973 Europe 157,424.7 34,306.1 57,810.3 65,308.3 27,643.6 Latin America 259,665. 7 114,710, 7 51, ~15. 2 93, 839. 8 54, 082.2 Oceania 16, 241.6 5,716.9 5, 819. 5 4,705. 2 2, 149. 0 Total 1, 107, 134.4 230, 598.~6 239, 238.7637,298,9 271, 8&~. 8 CANADA INSTITUTIONAL FRAMEWOR}( 48. In Canada, suppliers of capital goods finance their medium-term export credits (credits of between one and five years) with the commercial banks (chartered banks) which may refinance them with the Export Finance Cor- poration of Canada, Ltd. (EFC). However~ at present practically all export credit transactions involving capital goods are carried out on a long-term basis through buyers' credits provided by the Export Credits Insurance Corporation (ECIC), 49. The chartered banks, which are organized under federal charter in accord- ance with the provisions of the Bank Act, are the Ittoyal Bank of Canada, the Canadian Imperial Bank of Commerce, the Bank of Montreal, the Bank of Nova Scotia, the Toronto Dominion Bank, the Banque canadienne nationale, the Pro- vincial Bank of Canada and the Mercantile Bank of Canada. In addition to about 5,600 branches in Canada, these banks have more than 200 branches or agencies in about thirty foreign countries. lIJa,port Finance Corporation 50. The Export Finance Corporation of Canada, Ltd., which was incorporated by a special Act of Parliament in 1959, is wholly owned by the chartered banks and started operations in April 1961. Its primary purpose Is to refinance medium- term supp1ier~' credits and "to ensure that the coSt of financing medium~term paper compares favourably with costs in other countries".' The EFC is in fact a medium-term export credit rediscounting agency for the chartered banks. 51. The EFC is administered by a sixteen-member Board of Directors, com- posed of two representatives from each of the eight chartered banks. The Presi- dent and Vice-President of the Board are elected by its members from among themselves. The EFC's day-to-day operations are handled by a General Manager, assisted by a Deputy General Manager and a Secretary-Treasurer, all of whom are appointed by the Board of Directors from outside the Board. The manage- ment, which was Initially authorized by the Board of Directors to rediscount at any time from any chartered bank an amount up to the equivalent of ten times that bank's participation in the EFC~s capital, is now authorh~ed to disCount a larger amount, provided that it reports periodically to the Board for its official approval. 52. The EFC's authorized capital stock consists of 10 million shares of the par value of Can $5 each, of which 2 million have been issued and fully paid. The chartered banks' subscription to the EFC's capital stock is prç~p~rtionate to the percentage of deposits in Canadian dollars held by each chartered bank in relation to the total deposits in Canadian dollars held by the eight chartered banks as a whole at the time of the EFC's establishment. The btilk of the EFC's `refinancing resources are derived largely from borrowing on the -short-term money market in Canada and tbd United Sl?ates~ which is less expei~sive than the medium-term money market. Since the EFC'~ refinancing opetat~ms are carried out on a medium-term basis, it is continually selling its own notes to investment dealers and financial institutions, including its own shareholders, the chartered banks. The security for the EFC's notes consists of its capital re- `Expo~t Finance Corporation of Canada Ltd., Annual Report, Year ended SOt/s April 1962 (Toronto), section entitled President's report, May 81, 1962. PAGENO="0042" 38 sources and the rediscounted export bills. There is no limit to the EFC's borrow- ing capacity, and as of 30 April 1966 its outstanding debts totalled Can $168 million. 53. From the beginning of its operations to 30 April 1966, the EFC had re- discounted bills amounting to Can $327 million. Somewhat less than half of that sum was devoted to transactions involving capital goods and services, the balance having been used to refinance grain exports to eastern European socialist coun- tries, which were carried out not Qfl the traditional cash or short-term credit basis but on a medium-term credit basis, backed by export credit insurance granted under section 21 of the Export Credits Insurance Act (see section below on Export credit insurance). The following table shows the EFC's outstanding debts at the end of the fiscal years 1962 to 1966: MiUion~ of Canadian As at 30 April: dollars 1962 57 1963 85 1964 128 1965 209 1966 168 TABLE 13.-CANADA: EXPORT FINANCE CORPORATION REFINANCING [Millions of Canadian dollarsj Fiscal year, May 1 to Apr. 30 New refinancing Cumulative refinancing, end of lisc~I year Outstaiiding at end of fiscal year 1961-62 74 74 65 1962-63 1963-64 45 72 119 196 93 138 1964-65 1965-66 130 1 326 327 218 178 Ewport Credits Insurance Corporation 54. TJnder section 21A, which was added to the Export Credits Insurance Act in 1959, the Export Credits Insurance Corporation2 may, when authorized by the Governor-in-Council, provide long-term export credits for sales of capital goods and related engineering and technical services. The purpose of section 21A is "to give encouragement and assistance to enterprising Canadian. exporters of capital equipment who develop business possibilities abroad. Through these facilities ex- porters who can meet international competition in terms of price, quality and de- liveries, are afforded the opportunity of competing in terms of credit as well. Section 21A financing is a useful forni of capital assistance for economic develop- ment in recipient countries, but is not intended as an instrument of Canadian foreign aid. Accordingly, while the terms of Section 21A credits match interna- tional financing terms for viable projects, they are nqt intended to match aid- type financing facilities".2 55. The ECIC obtains funds for disbursement under section 21A from the Con- solidated Revenue Fund, that is, the Canadian Treasury, up to a global ceiling established by Parliament which was increased from an original Can $200 million to Can $300 million in 1962 and Can $400 million in 1964. From the inception of the programme until December 19f5 the ECIC concluded thirty-two financing agreements, all covering contracts for export sales to developing countries, in- volving an aggregate of Can $272.3 million in authorized credits, and total dis- bursements of Can $1&~8 mjllion. 2 For more details on ECIC, see section below on Export credit insurance. Export Credits Insurance Corporation, What it is avid how it operates (Ottawa, October 1965), pp. 15-16. PAGENO="0043" 39 TABLE 14-CANADA: CUMULATIVE AUTHORIZATIONS AND DISBURSEMENTS UNDER LONG-TERM EXPORT FINANCING AGREEMENTS UP TO DEC. 31, 1965 lAmounts are in millions of Canadian dollarsi Country Number of financing Disburse- Authorizations ments agreements Argentina Brazil 3 3 $15. 3 $15. 1 11.0 10.7 Ceylon Chile 1 2 10. 8 3. 7 22. 7 22. 0 China (Taiwan) India 1 8 5. 0 70.7 23.3 Israel Liberia 1 1 23 2.2 1.6 1.5 Mexico 6 73.0 69.0 Pakistan 4 42.3 7.8 Philippines United Arab Republic Total 1 1 13. 5 10. 5 4.1 -- 32 272. 3 165. & 56. The credits to India and Pakistan were granted within the framework of the international consortia organized by the International Bank for Recon- struction and Development. The 1968 agreement with Chile was likewise con- cluded within the framework of co-operation with an international development finance agency; it involved joint financing by the ECIC and the Inter-American Development Bank (1DB) and led to a decision to establish a working basis for further joint financing. 57. Under an arrangement entered into between the ECIC and the 1DB in June 1965, the former agreed to earmark an initial sum of Can $15 million for Latin America, in addition to its normal ti~ade promotion credits, to finance on a long-term basis exports of Canadian goods and related services for use in economic development projects in Latin American countries in co-operation with the 1DB. Projects to be financed will be selected under the following main procedures: Parallel financing by the 1DB and the E'CIO under separate loan contracts, usually with similar credit terms, for projects proposed by the IDE or by the ECIC; Independent financing by the ECIC of projects proposed by the 1DB under the ECIC's normal criteria. 58. Generally, the ECIC is ready to enter into co-operative arrangements with any national or international agency, "should advantageous opportunities arise for joint financing".4 The ECIC was recently authorized to lend funds to de- velopment banks or corporations in developing countries for relending to man- ufacturers for the purchase of Canadian goods or services. 59. Financing agreements of the ECIC have enabled developing countries to -acquire a wide range of machinery and equipment: for example, locomotives (Argentina, Brazil, India and Mexico); road-graders (Argentina); hydro- electric plant (Ceylon and India) ; pulp and paper mill (Chile) ; paper mill equipment (Pakistan) ; telecommunications equipment (Israel, Liberia aml United Arab Republic) ; nuclear reactors (India and Pakistan). FINANCING PROCEOURE~ Medium-term suppliers' credits 60. The exporter's first step when seeking financing for such credits is to ascertain whether the contemplated transaction is eligible for ECIC insurance. The issuance of an ECIC policy is in fact a condition precedent to the decision "ECIC offers long-term export financing", by J. A. Strang, Information Department, ECIC, Foreign Trade (Ottawa), 5 February 1966. PAGENO="0044" 40 ~of the exporter's bank as to whether to discount the time drafts drawn on the buyer or the promissory notes signed by the latter or make the exporter an advance against the export bills pledged as collateral. The financing provided is unlikely to exceed 90 per cent of the credit, which is the maximum covered under ECIC insurance policies. 61. The chartered banks may refinance their medium-term export bills with the Export Finance Corporation of Canada, Ltd., but the volume of refinancing sought has tended to fluctuate according to the conditions prevailing on the Canadian money market. More specifically, when the money market is tight, the relatively high cost at which the EFC would obtain the refinancing funds would make the refinancing too expensive for the banks. Conversely, when money market conditions are favourable, the banks turn to the EFC and may even refinance bills of less than one year. Medium-term export bills may be expressed in either Canadian or United States dollars and the interest rate will depend on the conditions prevailing in the money market in the country whose cur- rency is employed. Ip mid-1966 the interest rate for bills expressed in either currency is 6 per cent. Buyers' credits 62. Commitments of long-term export financing are given by the ECIC only on the basis of an application submitted by the Canadian exporter on behalf of the buyer and accompanied by complete details of the project, including engineering studies and supporting economic `and financial data. Procedures for commitments within `th'e framework of the above-mentioned international arrangements differ from the usual long-term export financing procedures, in that funds are ear- marked before the developing country concerned submits specific projects for the LOIC's `consideration. Once the projects have been selected by the recipient country and approved `by `the ECIC, the foreign b'uyer undertakes commercial negotiation's wi'th the Canadian suppliers who apply fo'r the individual credits on the `buyer's behalf. No in'surance is requi'red for credits granted by the ECIC. 63. On `the basis of the detailed information concerning the transaction sub- mitted by the exporter, t'he E'CIC prepare's a dossier for consideration by the Export Finance Committee, which is composed of a representative of the EOIC acting as chairman, a representative of `the Bank of Canada (the central b'a'nk) and `a representative of each of the following ministerial departments: Finance, T'rade and Commerce, Industry, External Affairs, A unanimous decision by the Committee is usually required for approval. Once `an application has been approved, an Order-in-Council is required to `authorize the financing o'f the trans- action. A contract between the exporter `and the buyer must be signed prior `to the conclusion `of the financing agreement, which is `negdtiated directly by the DOIC with the foreign `buyer. The E~'IC disburses `the finals to `the Canadian exporter `on beh'alf of the foreign buyer, who sign's promissory notes expressed in Canadian or United States `dollars to the `ord'er of the ECIC. Disbursement's are usually made on the `basis of `shipping documents and acceptance of `the goods by th'e buye'r. T'h'e E'C'IC will, `h'owever, `agree `to disburse on `a progessiv'e pay- ment basis if `this is laid down in the commercial contract. 64. Only transactions involving investment goods constituting part of a plant, or fixed assets `and related services, are eligible for long4term export financing. Such financing may also be made available `to `a Canadian firm that i's awarded a con'tract `to `supply goods and/or services ~or p'art of a project financed primarily by `a supplier or contractor in `another `country. T'o qualify for long~term export financing a `transaction must involve an order of at least Can $1 million, although transactions `involving smaller `sums may qualify in certain circumstance's, fo'r example, when long-term financing is needed to enable a Canadian supplier to participate on equal `term~s in foreign `development projects. 65. In ord'er `to `be eligible for long-term financing, the export `transaction must involve goods and services which are at least of SO per cent Canadian origin; the remaining 20 per cent must `consist of goods and services which are not `available in Canada. The E'C'IC must be satisfied `that the fo'r'eign b'uyer will be able to meet 1~j'a repayment pbligatiops and `that the importing coun'try will be able to meet its foreign exchange `commitments. When the buye'r is not the government of the importing country, a satisfactory guarantee of repayment is usually required (for example, guarantee `of the government, central `b'ank, a development bank o'r a reliable private bank). Where `ap~ro'priate, a foreign exchange guarantee is also required. PAGENO="0045" 41 66. The maturities of credits granted by the ECIC have, on the whole, tended to range from seven to twenty years, including when necessary grace periods on principal repayments, which are designed to allow the project to begin yielding a revenue. In the absence of a grace period, repayments of principal usually begin six months after the projects come into operation and must be made on a semi-annual or quarterly basis. There is no grace period on the repayment of interest, which begins six months after the signing of the financing agreement. Since the inception of the programme a fiat interest rate of 6 per cent has been charged. EXPORT CREDIT INSURANCE 67. Although, as has been seen, the ECIC grants long-term export financing which is not available from commercial sources, its main purpose is to operate the export credit insurance scheme. It is a proprietary Crown corporation (i.e., wholly Government-owned), established under the 1944 Export Credits Insurance Act, which has been amended several times. The ECIC is administered by an eight-member Board of Directors appointed by the Governor-in-Council, As of the end of 1965 the Board consisted of the Deputy Minister of Trade and Com- merce, the Deputy Minister of Finance, the Chairman of the Tariff Board, the Deputy Under-Secretary of State for External Affairs, an Assistant Deputy Minister of Trade and Commerce, an official of the Department of Finance, and the President and Vice-President of the ECIC. The Board of Directors is assisted by an Advisory Council, also appointed by the Governor-in-Council, whose members represent different sectors of the economy, namely, agriculture, finance, fisheries, forest industries, light and heavy manufactures and engineering and construction services. The ECIC's day-to-day operations are handled by the staff of the ECIC, which currently numbers sixty-five. 68. The ECIC has an authorized and subscribed capital of Can $15 million, of which Can $5 million is fully paid up. In addition, Can $5 million capital surplus has been paid in. The shares of the capital stock are not transferable and are held in trust for the Canadian Government. The ECIC covers both commercial and non-commercial risks on short-term and medium-term transactions for its own account; under section 14 of the Export Credits Insurance Act, the out- standing liability thereby assumed may not at any time exceed a total of ten times the aggregate of the subscribed capital and the capital surplus of the corporation: this means that at the present time the ECIC's maximum liability for its own account is Can $200 million. 69. Under section 21 of the Export Credits Insurance Act, the ECIC insures commercial and noncommercial risks for account of the Government, on instruc- tions from the Governor-in-Council. Such operations are carried out when the ECIC Board of Directors considers that the contemplated insurance transaction will impose upon the Corporation a liability for a term or an amount in excess of that which it normally undertakes in relation to any one contract, exporter, commodity or country, and when the Minister of Trade and Commerce considers that it is in the national interest that the proposed contract be entered into. Claims against policies issued for account of the Government are paid by the Treasury out of the Consolidated Revenue Fund. The maximum outstanding liability under section 21 may not at any time exceed Can $600 million, so that total outstanding liabilities on insurance policies assumed by the ECIC for its own account and that of the Government may not exceed Can $800 million. PAGENO="0046" 42 0, v) C,, C.) E B *~d E~ B B B B B E BE B B - - - C.~ ~ 0~ 0. B PAGENO="0047" 43 70. The ECIC offers insurance to all persons or corporations in Canada export- ing goods or proriding engineeering, construction, technical and similar services to clients in foreign countries on a deferred-payment basis. Insurance is also available for consumer good's and miscellaneous general commodities shipped on consignment for sale or for e~bibition purposes. The goods must be exported from Canada and be wholly or `substantially of Canadian origin. 71. The risks insured include: Insolvency of the foreign buyer; Failure of the buyer to pay for goods delivered to an'd accepted by him within six months after the due date of payment; Non~acceptance of the goo'd's by the buyer, where thi's does not result from a breach of contract by the exporter and where proceedings against the buyer would serve no useful purpose; Blockage of funds or transfer `difficulties; War or revolution; Cancellation or non-renewal of an export permit; Imposition of restrictions on the export of goods not previously subject to restrictions; Any other cause outside the control of both the exporter and the buyer arising from events occurring outside Canada and the United States. 72. The ECIC does not cover trade disputes and will not arbitrate between Canadian exporters and foreign buyers in a dispute about the quantity or quality of goods delivered. Furthermore, it does not cover risks which can be and normally are in'sured by commercial insurers. The main commercial insurer is American Credit Indemnity, a company with headquarters in `the United States and offices in Can'ada, which insures commercial risks `on short-term Canadian sales to the United States and short-term United States sales to Canada. 73. The insurance policies of the ECIC vary according to whether they cover consumer goods *and general commodities normally sold on credits of up to six months, capital goods sold on credits of up to five years, or services: (a) Consumer goods `and general `commodities. Two `types `of policy `are issued, both covering an exporter's entire `sales for one year: A contracts policy, which protedts the exporter from the reception of the order to the payment of the bills. This type of policy i's designed for exporters who manufacture goods to particular specifications `or goods which are So marked or stamped as `to be of no value except to `the original buyer; A shipments policy, which protects the exporter from the date of shipment. (b) Capital goods. Two types of policy `are issued for capital goods: CC (Spec 0) `policies, which cover sales to foreign governments or public entities; CC (Spec) policies, which cover sales to nongovernmental buyers. (c) Service Policies as issued to cover engineering, construction, technical or similar service contracts between Canadian firms and foreign buyers. 74. The maximum indemnity that can be paid In respect of both commercial and non-commercial risks under all types of policy is 00 per cent of the loss. Any recoveries after payment are shared between the exporter and the 1~JCI'C in the same proportions in Which `the lo'ss was shared. Premium rates are confidential, beitig k~iown only to the exporter and the ECIC. 75. Losses are usually paid according to the following schedule: Insolvency: immediately after submissiOn of proof of insolvency; Default: six months after due date of payment; Non-acceptance: one month after the amount of the loss has been estab- lished; Transfer difilctrlties: four months after due date of payment; All other risks: four months after the occurrence of the events which caused the loss. 76. In October 196~ the ECIO extended its insurance facilities by undertaking to provide unconditional guarantees to banks, thus enabling exporters to obtain non-recourse financing for sales of capital equipment sold on medium-term credit. Under this new bank guarantee facility, normal ECIC insurance prin- ciples relating to sales of capital goods on medium-term credit continue to apply. The insurance policy provides cover to the exporter during the production period of the goods but, once the buyer has accepted the goods, the unconditional guarantee to the bank goes into effect enabling the bank to waive recourse to the exporter. This new arrangement provides the lending bank with ECIC's 100 PAGENO="0048" 44 per cent g ~r~ntee ~f the deferred-payment portion. TThder the plan the EOJO will pc~y tb~ bank three u~onths after due date in ~be event o~ non~payment by the foreign buyer, The ECIC will retain the 1~igbt of recot~rse ngt~inst the exporter for the recovery of a~'y moneys it pays to the bank which are not payable under the Ordinary in~urance policy. For tili~ bank guarantee the 1~iCIC charges a nominal additional fee. TABLE 16.-CANADA: VOLUME bF E)(1nORTS INSURED 1 (SHORT TERM AND MEDIUM TERM) ilVilIlions of Canadian dollarsj Year Exports under Exportd under Vdctloh 14 sectioh 21 Total 1955 48. 4 6. 3 1956 54.8 45.9 1957 * 45.7 107.5 1958 42.0 7.9 1959 47.5 90.7 1960 63.5 38.2 1961. - 65.6 65.6 1962 96.4 49.4 1963 100.1 46.0 1964 - .~_... 131.2 214.9 1965 - ~ 133.8 ~18.5 54. 7 100.7 153.2 49.5 138.Z 101.7 131.2 145.8 146.1 346.1 212.3 I Insured ~xport transactions haVe repretented between 2 and 4 percent of all Canadian exports. TABLE 17.-~dANAbA: CLAIMS EXPERIEI'ICE UP TO DEC. 31, 1965 [Millions of Canadian doilarsj Type of risk Claims paid Recoveries Wirtten off ~ Net outstanding lnsolVency~. -____~ 0. 5 0. 1 0. 2 Default ~ 1.3 .6 .4 ~Fransfer 9~6 9.5 .1 .1 .1 .0 0. 2 .3 .0 .0 Total 11.5 10.3 .5 FRANcIS IN~SPtTt~TIO~AL 7RAMEwOISIC 149. In France suppliers'~ credits for the aeqi~isition of capital goods in that country are financed by tile ba~qae,s ~le dt~pOt (deposit banks) aud tile &a~quea 4'affaires (investment banks) either alone or in consortium; these banks in co- operation with the Banqi~e fran~aise du ~onuneree extérieur (BFCE) al~o grant for the `same purpose buyers' credit with a minimum maturity Qf ~lght years and involving a minimum sum of F fr 25million. 150. Medium-term suppliers' credits (credits o~ between two and five years) are refinlanced by the Credit national, which in turn refinance;s theiu with the Banque de France. Long~term suppliers' credits (credits ~f hutweei~ ~ve and generally ten years) are refinanced by the Créc~it national or the Gr'p~pcment interhancaire pour le commerce extérieur (GIOEX); the Credit national will? in turn, refinance with the Banque de France the portions of the* oeedits with maturities of five years ~nd less, ke~piug in its portfolio the `blils with maturities exceeding five years. In the case o~ countries which have signed with France an accord de cooperation (co-operation agree~ent) the portio~ of the credits ~ho~e maturities exceed five years are refinanced with the Oaisse centrale do cooperation éconemique (000E.). 1~i. In the case of buyers' credits, the banks grant theportion's whose maturi- ties do not exceed five years and finance them with the Banque de France; the portions whose maturities exceed five years are grante~ by the Bianque `franqaise du commerce extdrieur which keeps the corresponding export bills in its port- folio. In this connexion, it should be noted that while the term's "buyers' credits" and "financial credits" are used interchangeably in other countries, they are used PAGENO="0049" 45 to define two different types of credit in France where "financial credits" refers to long-term credits granted `by French credit institutions to the foreign `bene- ficiaries of French export ere~1it~s to `endble them to finance the down payments involved in export contracts with French suppliers and local expenditures in- curred in coimexion with the installation of the equipmen't purchased, such as the execution of civil ~nglneering works by local contractors or the purchase of supplementary material or equipment produced by local firms. Although the "financial credits" are guaranteed by the Compagnie française d'assurance pour le commerce extérieur (COFACE), no refinancing facilities are available. 152. The rrench Government grants loans i~or purposes similar to those of the privnte financial `credits. Such loans are granted on behalf of the Government by the Oaisse ceutrale de cooperation dconomique for the countries which have signed an acoord de cooperation with France and by the Credit national for other foreign countries. TABLE 28.-FINANCIAL PI~OTOCOLS ASSOCIATING LONG-TERM SUPPLIER~ CREDITS ANI7 GOVERNMENTAL LOANS SIGNED BY FRANCE WITH DEVELOPING COUNTRIES AS OF SEPT. 3~ 1966 [Amounts in millions of French francsl Country Date of G protocol overflmental loans Suppliers' credits Mexico' - June 21, 1963 150.0 MoroccO July 23, 1963 40. 0 Tunisia Aug. 9,1963 35.0 Spain Nov. 25, 1963 150.0 Turkey Feb. 13, 1964 41.0 Cambodia July 4,1964 SQ. 0 Ethiopia do 15.0 Greece Aug. 20, 1964 41.0 Turkey~ . Oct. 13,1964 16.6 Morocco - Oct. 17,1964 60.0 Morocco July 10, 1965 65.0 Chile Feb. 8,1966 ` 53.0 Bolivia July 8,1966 5.0 600.0' 100. 0 100. 0 600.0 82.0 90.0 40.0 82.0' 3~l.4 120.0 130.0 246.0 9.3 I The protocol with Mexito also included a private financial credit. 153. As noted, the French export credit system Involves thO banques de depot, the banques d'affaires, the Eanque française du commerce extérieur, the Credit national, the Banque de France, the Groupement interbancaire pour le com~ merce exterieur and the Caisse centrale de cooperation Oconlomique The deposit banks 154. There are approximately 300 deposit ban1~s in France, but the three na- tionalized deposit banks, namely, the Credit lyonnais, the Société générale, and the ]3anque nationale de Fans, account for about two-thirds of total banking business. The deposit banks bear most of the responsibility for the financing oC short-term export credits, although they may, If necessary, have recotirse to the refinancing facilities made available by the Banque do France. 155~ In the case of medium~term and long-term export credits, the deposit banks rely upon the refinancing facilities provided by the Credit national and the Groupement interbancaire pour le Commerce exténienr. Given `the nature of the bulk of their resources (funds received from the public repayable either on demand or on a time hasis~ whichs according to law cannot exceed two years), the deposit banks ate obliged to maintain a certain liquidity coefficient (at least 30 percent `of cash, treasury bilts and othOr account receivable) and cannot im- mobilize large amouats for long periods of time. In the medium-term and long- term export credit financing fields, the deposit banks thus act largely as inter- mediaries, but their role is far from negligible, since they are responsible for sereenifig loan applications, assessing the credit~worthiness of potential sufl- pliers and buyers and grouping and disceunting export bills from numerous in- di'vidtial exportort~ thus tO a certain extent simplifying the work of the Credit national and the Groupernent interbancaire pour he commerce extérleur. The `banque's d'affai~'ès `.` 156. ~here are approximately forty French bançjuee d'affaires, which take the form of limited liability companies or partnerships. According to the Act of 17 May 1946, the banques d'affaires are defined as institutions whose principal activity is the acquisition and administration of shares in ventures which al- 94-197-68-4 PAGENO="0050" 46 ready exist or are in the process of formation. No time limit is imposed on the credits they grant to the enterprises in whose capitalization they participate. ~They are allowed to invest only funds derived from their own resources or from time deposits of at least two years. They can open deposit accounts only for members of their staff, for enterprises to which they have opened credit lines or in whose capitalization they participate, for Individuals or legal entities whose main professional activity is that of a trader, or for shareholders of com- panies in whose capitalization they participate, on condition that these share- holders have deposited their securities with them. In fact, their business includes both investment banking and commercial banking and certain ba~?,ques d'affaires have been very active in both fields in developing countries. 157. As regards investment banking, the banq~es d'affaires not only perform the normal services of an investment banker but also act as investors or entre- preneurs in their own right. Through their interests in financial institutions in developing countries, these banks have developed a network of banking Institu- tions which facilitate their export credit financing activities. For example, the Banque de Paris et des Pays-Bas, which is the largest private financial institu- tion in France, created the Banque de Madagascar et des Oomores, which is active on many levels of the economy both in Madagascar and in the Comoros. The Banque de Paris et des Pays-Bas is a large stockholder in the Banque franqaise et italienne pour l'Am~rique du Sud, which has branches and subsid- iaries in Argentina, Brazil, Chile, Colombia, Uruguay and Venezuela. It is associated with the largest commercial bank in Mexico, the Branco Nacional de Mexico S.A. and its subsidiary, Crédito Bursatil. It has significant inter- ests in the Banque ottomane whose activities include operatons in Turkey and the Near East as well as in Kenya. 158. The Banque de l'Indochine, another large private financial institution, is a shareholder in the following banking concerns in developing countries: in Africa: the Banque industri~lle de l'Afrique du Nord, the Société générale de hanque in the Ivory Coast, the Société générale de banque in Senegal, the Société générale de banque in the Congo (Brazzaville) and the Socidté gén- érale de banque in Caineroon; in the Middle East: the Batique Etebarate Iran and the Sabbag Bank; in the Far East: the Banque franqaise de FAsie and the Banque franco-chinoise pour le commerce et l'industrie; in Latin America: the Banque française et italienne pour l'Amérique du Sud, the Credit foncier du Brésil et de l'Amérique du Sud, the Caisse générale de participation foncière et industrielle and the Financiera Peruana. 159. The Banque de l'Union patrisienne is a stockholder in the following bank- ing concerns in developing countries: the Banque commerciale africaine, the Banque industrielle do l'Afrique du nord, the Banque hypothécaire franco- argentine, the Société immobilière et financière africaine, the Société générale dc banque in Cameroon, the Societe générale de banque in the Congo (Brazzav~ille), the Société générale de banque in the Ivory Coast and the Société génCrale de banque in Senegal. 160. As regards export financing proper, the banqs4~es d'affaires are very active particularly in connexion with transaction.s involving the purchase of indus- trial machinery and equipment or the construction and Installation of complete plants abroad. They can provide direct export credit financing and may have recourse to refinancing fa~il'ities which are available at the Banque de France, the Credit national, or the Groupement interbancaire pour le commerce cx- térieur. Owing to the nature of their resOurces, they are in principle less re- stricted than the deposit banks in the financing of medium-term and long-term export credits and rely less heavily upon refinancing. The banqoes d'affeitres play an active part in the formation of consortia for providing export credits for large-scale projects. Through their foreign affiliates and subsidiaries they also assist foreign buyers and French suppliers In negotiating export contracts and related settlement arrangements. 161. The following may be cited as examples of export cretlit financing activi- ties undertaken by the bancjues d'affaires: the Banque de Paris et des Pays-Bas financed by means of export credits the installation of the large Paz del Rio steel manufacturing complex in Colombia and the establishment of the Chimbote steel works in Peru. This bank was also instrumental in bringing about the signa- ture of contracts for the delivery of hydraulic turbines and a cellulose aceate factory to India and for the setting up of a cement factory in Pakistan. In Latin America, it contributed to the implementation of agreements between the French PAGENO="0051" 47 and Mexican Governments for the development of the petro-chemical and sugar industries and has also aided French oil drilling companies in Brazil and Argentina. The banque franccai8e du commerce e~vtërteur 162. The Banque franQaise du commerce extérieur was established by a decree of 1 June 1940, pursuant to the Act of 2 December 1945, as a joint-stock com- pany with semi-public status. Its charter has been amended on several occasions and according to the latest version, approved by a decree of 10 March 1904, the BFCE's object is to facilitate the financing of export and import transactions by means of endorsements, acceptances, rediscottnting or any other form of short- term and medium-term credit. The Bank grants~ the portions of buyers' credits whose maturities exceed five years. It is also a member of the Groupement inter- bancaire pour 1st commerce extérieur. The BFC1~I assists the Ministry of Finance and Economic Affairs and the Centre national du commerce extdrieur in the organization and management of a foreign trade information centre. In addi- tion, it assists the Banque de France in carrying out a centralized classifica- tioll of risks incurred by French banks in foreign countires. 163. The BFCID's capital has been increased from an initial F fr 5 million to F fr 28 million at the present time. According to the BFCE's charter, the only institutions which may subscribe to its capital are the Banque de France, the Caisse des depOts et consignations, the Credit national, the Caisse nationale de credit agricole, the Credit lyonnais, the Société générale, the Banque nationale de Paris and the Caisse centrale de cooperation economique. In order to increase its resources, the BFCE is authorized to contract loans in either French franCs or foreign currencies. It is administered by a board of fifteen members appointed for five years by decree issued upon the recommendation of the Minister of Fi- nance and Economic Affairs and chosen in equal numbers from among (a) per- Sons possessing wide foreign trade experience and representing the main pro- fessional associations, (b) representatives of the main trade unions and (c) persons possessing wide banking experience. TABLE 29.-FRANCE, BFCE: DISTRIBUTION OF EXPORT CREDIT OPERATIONS, BY TYPE OF GOODS 1963 Type of goods Millions of Percentage French of total 1964 Millions of Percentage French of total Millionso French 1965 fP ercentage of total francs francs francs Transport equipment 2, 140. 5 41. 5 2, 051. 0 35. 2 2, 096. 3 32. 0 Mechanical industry equipment 973. 3 18. 9 985. 9 17. 0 1,450. 4 22. 1 Electrical industry equipment 363. 4 7. 1 424. 5 7. 3 623. 3 9. 5 Public works 348. 9 6. 8 554. 9 9. 5 462. 1 7. 0 Metallurgical industry equipment 254. 0 4. 9 403. 5 7. 0 276. 0 5. 8 Textiles industry equipment 181. 0 3. 5 228. 1 3. 9 223. 2 3. 4 Chemical industry equipment 179. 5 3. 5 225. 6 3. 9 234. 8 3. 6 Grains 145.5 2.8 244.3 42 256.1 4.0 Ores and metals 85.2 1.7 30.3 .5 27.5 .4 Winesand spirits 59.8 1.2 82.8 1,4 65.4 1.0 Precision engineering 48. 4 . 9 116, 1 ~. 0 119. 0 1. 8 Seeds and fertilizers 44.7 .9 35.0 .6 28.2 .5 Petr~L~qm products 33.8 . 6 81. 8 1. 4 72.7 1. 1 Miscellaneous 301. 0 5. 7 368. 0 6. 1 511. 8 7. 8 Total 6,459. 0 100. 0 5,831. 8 100. 0 6, 546. 8 100.0 TABLE 30.-FRANCE, BFCE: DISTRIBUTION OF EXPORT CREDIT OPERATIONS, BY TYPE OF CREDIT 1963 1964 1965 Type of credit Millions Percent- Millions Percent- Millions Percent- of French age of of French age of of French age of francs total francs total francs total Avals (endorsements) 3, 960. 1 76.8 4,351. 5 74. 6 4, 776. 7 73. 0 Discounts and advances 582. 9 11.3 771. 5 13.2 910. 2 14.0 Overdrafts 453. 5 8. 8 485. 0 8. 3 607. 3 9. 2 Cautions (guarantees) 162. 5 3. 1 223. 8 3. 9 252. 6 3.8 Total 6,459. 0 100.0 5, 831. 8 100. 0 6,546. 8 100. 0 PAGENO="0052" 48 The Credit nationaZ 164. The establishment of the Credit national dates back to 1919. As indicated by its original name, the Credit national pour faciliter la reparation des dom- mages cauwés par la guerre, its object was to finance the reconstruction of war damage. It also granted mortgage loans to industrial and commercial enter- prises for reconstruction and ~noderrtization purposes. Subsequent amendments to Its charter now permit it to refinance medium-term and long-term export ci~ed- its. Its resources consist of itsown capital and reserves, plus funds raised on the capital market. 165. The Credit national is ~. key Institution in the French export credit system, since it is the refinancing agency for most medium-term and long-term export credits, Medium-term and long4erni export refinancing provided by the Credit national is summarized in tables 31 and 32. TABLE 31-FRANbE, CRtDIT NATIONAL: REFINANCING OF MEDIUM-TERM EXPORT CREDITS [In millions Of French francsj New Outstanding Year commit- commitments, tuents; as of ~ec.31 1959 - 471 946 1960 783 1,38a 196L. 810 1,746 1962 - 1,294 2,410) 1963 1,490 2,866 1964 1,639 3,342 1965 - 1,521 3,704 TABLE 32.-FRANCE, CREDIT NATIONAL: REFINANCING O~ LONG-TERM EXPORT CREDITS [In millions of French francsj Credits Year Commit- Credits outstanding) ments disbursed as of Dec. 31 1961 1.9 fL4 0.4 1962 40.9 24.0; 24.0) 1963 - 71.0 450. 69.0 1964 1040 116.0 184.0 1965 167.fl 176.0 360.0) The Groupemeat interbancaire ponr Le commerce exrtërieur 166. The Groupe2x~ent interbancaire pour le Commerce exterienr was eatablished in 1962 to lighten the burden on the Credit national and encourage the banking system to refinance long-term export credits. The GIOEX, which is not a legal en- tity, is an association of the following banking lhstitutions: Banque française du commerce extérieur, Baiique fran~aise ct italienne pour l'Amérique du Sud, Banque de l'Indochine, Bhnque nationale de Paris, Banque de Paris cit des Pays- Bas, Banque de l'IJnioii parisienne, Compagnje algérienne et de son groupe, Credit commercial de FranCe, Credit industriel et commercial ct son groupe~ Credit ly}onnais, Credit du nord, Bauque Louis Dreyfus, Société générale et SGAB, Societe marseilla;ise de credit, Union europeenne industrielle et finan- ciCre and Worrnseit Cije. 167. Each participant has agreed to provide refinancing for transactions ap- proved by the association, up to) a g'obal ceiling represented by one per cent of its private deposits or 5 per cent of its own funds. In principle each member in turn acts as the GICEX's secretariat on an annual rotating basis. The Cai.sse centrale 4e cooperation dconomique 168. Since its reorganization in 1958, the Caisse centrale de cooperation écono- mique has assumed increasing responsibilities in the financing of development in the developing countries. It currently performs two basic functions: as an administrative instrument of the Government, it is responsible for the execution of the French bilateral aid programme; as an autonomous financial agency, PAGENO="0053" 49 it undertaJ~es jnvestmel4t financing for it~ own aecour~t. ii~ the export fiaanc~n~ field, the CC~B co-operates with tile Oohipagnle fran~aise U'assilrane~ pour le commerce extérleur, by providing research and advisory ser~~ices in coflnevion with insurance applications relating ~o transactions Involving' sales of capital goods to countries which have sighed an accOrd de coopë~ation (co-operation agreement) with France. The OOC~ also refinances thOse port1~ns of hing-term suppliers' credits granted to buyers ih tb~se countrie$ whose maturities exceed five years and, on behalf of the French Government, handles requests for the governmental loan's granted those countries in a~sociathui with the export credits. rINANCINU PI~OCEDURES Medioor-term sup pliers' credits 169. Credits of this type have been available since 19~0, when a special financ- ing procedure was darwn up and agreed upon by the French t~lovethment, the l3anque de Fran~ce, the Credit national, in co-operation `with the Banque fran~aise du commerce extérieur and the French commercial banks represented by- their professional association. 170. Before making final arrangements with his customer, the supplier files an insurance application with the Compagnie française d'assurance pour le commerce ext~rieur and requests from his bunk' an agreement in principle to discount the export bills. The supplier's bank, having first made certain that the Banque traiiçaise du commerce extdrleur will grant its unconditional endorse- mient, requests a refinancing commitment front the Credit national. For contracts with foreign private buyers, a guarantee from a reliable bank in the buyer's country is usually requested. 171. The buyer is expected to make a down payment of 20 per cent of the in- voice value and the supplier is expected to finapee at lea~t 10 per cent of tile credit out of his own funds or through parallel financing. Once the contract has been concluded and insured by the Compagnie frapçaise d'assurance pour hi commerce extérienr, the supplier makes ou't renewable export bills and dis- counts them with his bank. The credit granted by the `bank does not usually exceed the percentage of the invoice value covered by the insurance policy. After being endorsed by the Banque française du commerce extérieur, the discounted export bills are submitted ~or redliscounting to the Credit national, which, in turn, rediscounts them with the Banque de France. Long-term suppliers' credits 172. The financing procedure for long-term suppliers' credits was drawn up following the adoption of the Loi de finances rectificative pour 1960 of 13 August 1960 which authorizes the Minister of Finance and Economic Affairs to grant loans to the Credit national In order to enable that institution to refinance long- term suppliers' credits. When the Cr~dit national obtain~ funds for that purpose by borrowing on the capital market, this Act authorizes the Minister to cover the difference between the interest rate paid by th'e Credit national on its borrowing operations and the preferential interest rate cl~arged for Its refinancing opera- tions. Credits are granted only- after the Cempagnie fran~aise d'assurance pour le commerce exteriour has committed itself to insure them; this commitment 4e- pends on previous clearance by the Minister àf 1~inánee and Economic Affairs. The application and mobilization procedures for long-term suppliers' credits resemble those employed for mediunt-term suppliers' credits. 173. In the case of long-term snppliers' credits to be refinanced by the GIO~X, the supplier's bank submits a refinancing application to the GICEX secretariat, which forwards details of the application to all GICEX participants. The ap- plication must be approved by two-thirds of the participants, representing two- thirds of the funds committed to GICEX, When approval has been obtained, the supplier's bank, which has discounted the primary export bills, ~leposits them with the Banque franqaise du commerce e~t~rieur. The latter determines the amount of refhrancin(g to he provided by ea~~h participant `on the basis of its com- mitment to the GICEIX's potential resources and informs each participant accordingly. Buyers' credits 174. The financing procedure for buyérs~ credits was drawn up following the adoption of the Loi de finances reotificative pour 1965 of 30 December 1965 which authorizes the Minister of Finance to grant to the Banque française du commerce extérleur loans and guarantees similar to those granted to the Credit PAGENO="0054" 50 national under the Loi do finances rectiticative pour 1960, thus enabling the Banque frau~aise du commerce ex'tèrieur to grant portions of buyers' credits ex- ceeding five years. 175. In principle buyers' credits are granted only for sums of at least F fr 25 million and must involve transactions carried out within the framework of a single commercial contract or a group of contracts concluded by a single foreign buyer with 1~'rench firms for the execution of a specific programme. The credit maturities involved must be of eight years' and more. Buyers' credits are granted preferably for transactions with developing countries. However, franc area countries are in principle not eligible for such credits, since they are accorded long-term financing facilities by the Caisse centrale de coop~ration éconoimique and the Fonda d'aide et do coop~ration: in view of the special situation of Algeria, Morocco and Tunisia, requests from these countries may be given special consideration. 176. The credit contract is concluded by the foreign buyer with the BFCPJ and one or more French banks acting on their own behalf or on behalf of a banking consortium. The opening of the credit involves two simultaneous opera- tions: a loan from the commercial banks with a maximum maturity of five years, and a loan from the BFOE for the portion of the credit exceeding five years. Both the BFCE and the banksi can insure the loans they grant with the COFACE. The loan granted by the commercial banks may be refinanced by the Credit national which will, in turn, refinance it with the Banque de France. The interest rate for buyers' credits is approximately 5,7 per cent. EXPORT CREDIT INSTJRANCR 177. The French export credit insfirance scheme is operated by the Com- pagnie franqaise d'assurance pour le commerce extérleur, a joint-stock com- pany established at the same time as the Banque franç~aise du commerce extérieur by the decree of 1 June 1946, which began operations on 1 May 1948. The purpose of COFACE is to administer the government export credit insurance scheme on behalf of the State and to guarantee export and import transactions and in general all transactions relating to foreign trade. The COFACE has in fact a dual nature: as a private company, it insures commercial risks incurred in respect of short-term export credit transactions, and as a par- astatal company, it administers a public service under government supervision,. guaranteeing for account of the Government non-commerical risks for all export credit transactions and commercial risks for medium-term and long-term export credit transactions. 178. Its present capital of F fr 2.5 million is owned by a number of Goverxr- nient-owned or Government-controlled corporations-the Credit national, the Caisse des dépôts et consignations, the Banque française du commerce extérieur, the three main nationalized banques de depOt and twenty-one nationalized in- surance companies-and a private company, the SociOté franqaise d'assurance pour favoriser le credit. According to the decree of 1 June 1946, the latter com- pany may not hold more than 30 per cent of the COFACE's capital. 179. The CQFACE is adWini8tered by a Board of Directors consisting of fifteen members, five of whom are chosen from among persons having wide foreign trade experiecne, five from among, persons possessing wide banking and insur- ance experience and five `being chosen at the suggestion of the most representative trade unions. There are also two comnUssaires du Gouvernement (government commissioners), who may veto any decision taken by the Board of Directors. The latter is responsible only for the internal administration of the company and the activities it carries out for its own account, which represent approxi-~ mately one-fifth of its total activities. 180. Insurance transactions carried out oi~ behalf of the Government must be approved by the Commission des garanties et du credit an eommerce extérieur, a fifteen-member interministerial committee, presided over by the Director of Foreign Bconomic Relations of the Ministry of Finance and Economic Affairs, whose members include representatives of the Department of Foreign Economic Relations of the Ministry of Finance and Economic Affairs, the Trésor, the Bancjue de France, the Credit national, the Ministry of Foreign Affairs and the technical ministries. However, before being examined by the Commission des garantke~ et (du credit au commerce exterieur, long-term export credit tran- PAGENO="0055" 51 sactions must have been cleared by the Minister of Finance, whose decisions are- based on the recommendation of the "Long-term Committee". 181. The COFAOE insures short-term and medium-term suppliers' and long- term export credits (suppliers' credits and bñ~ers' credits); it also insures credits financiers (financial credits) as defined in the section above on Institu- `tional framework. In addition, it insures equipment used in the execution of works abroad against political risks, provided that the equipment is exported to the foreign country on a temporary basis' and is to be returned upon comple- tion of the work. 182. The following export transactions are eligible for `insurance by the COFACE: Sales of goods; Provision of services: preparation of studies, technical assistance, sales of patents, lease of equipment, constitution of stocks abroad, participation ill trade fairs, and the exploration of foreign markets, including advertising; Execution of public works abroad. 183. In the ease of short-term transactions, `the COFACE issues global policies covering all of an exporthr's sales to one foreign country or group of countries. These policies always cover the commercial risks, while non-commercial risks- may be covered at the exporter's request. Special global policies may be issued for transactions with a duration of up to three years involving exports of capital goods. For medium-term and long-term export transactions, the COFACE issues specific policies for individual transactions providing coverage against com- mercial ancljor non-commercial risks. Special policies are issued for participation in individual trade fairs, for increases in domestic prices as compared to world prices and for market prospecting in one or more countries. 184. The risks covered-which include both pre-delivery and post-delivery risks-are as follows: (a) Commercial risks: defined as the policy holder's inability to collect all or- part of the credit owing to a definitive and duly verified inability on the part of the buyer to pay all or part of his debt. This inability is considered to exist upon termination of legal proceedings in the debtor's country which may be assimilated `to a jugement dëclaratif de faiWte (judicial declaration of bank- ruptcy due to misfortune) or to a judgment according the debtor the right to effect a judicial settlement according to French law, or to any friendly arrange- ment involving all creditors. For all types of credit, the basic cause of losses arising from commercial risks is held to be the buyer's de jure insolvency, but for reasons related to credit mobilization, the strict application `of this principle is tempered in the case of medium-term and long-term credits by `the introduction of the concept o'f default (careiwe) which is to a `certain extent substituted for that of insolvency; (b) Political risks: defined as those resulting from war, revolution and riots in the debtor's country, a moratori'~m decreed by the authorities of that country or an act or decision by the government of the country to which the export is destined, and a `decision by the French Government prohibiting the production or export of the goods; (c) Catastrophe risks: defined as `those resulting from. hurricanes, floods, tidal waves, earthquakes or volcanic eruptions in the country in which the debtor resides; (d) Transfer risks: defined as those caused by political events, economic difficulties `or legislation in the country in which `the debtor resi'des which prevent or delay the transfer of funds already deposited by the latter with his bank; (e) E*change risks: such risks may be insured only if they cannot be élimi- nated or covered by other meand (~ucb a~ forward exchange sales') and on con- ditioil that the expo'rt bills are expressed in certain specific foreign currencies..' Three kinds of exchange risks are eligible for coverage: exchange loss in the case of non-payment for all types of transactions; exchange loss on repatriation of export proceeds; exchange loss on bank guarantees; (1) Economic riskS: price increase risk (co'vered to the extent to which the increase in French prices exceeds the increase in world prices) ; risks arising from `the explotrtion of foreign markets (non-amortization of expenditures Incurred in connezion with market exploration, advertising and participation in trade fairs). PAGENO="0056" 52 185. The percentages covered, which vary aceor~ing to the nature of the risks, are shown in the following table: Risks coverei Risk cover Commercial: Insolvency; delaye~l payment -__~. 80-85 percent. Political and catastrophe - 80-90 percent. E~cbange (i~f export contract isex- pressed in foreign currency,) 100 percent. Economic: Price increase 100 percent ~f loss due to the French prices rising faster than world prices. Exploration of foreign markets 50-60 percent world prices. 18(3. Premium rates are determined according to the countty of destination, the nature of the goods, the length of the credit, the standing of the importer and the exporter and the type of policy. They vary from 4 to 15 per mu for policies covering the risk of default by public buyers and from 8.5 to 17 per mU' for policies eov~ring the risk of insolvency in respect of medium-term and long-term transactions; for policies eov~ring cothmercial risks in reSpect of short-term transactions, they range from 3 to 15 percent. TABLE 33.-FRANCE, COFACE: EXPORT CREDITS INSURED 1 [In millions of French francsj Short-ter - Year Commercial m credits -- Medium-term crçdits, non- Non- risks commercial commercial risks risks 1959 - 1960 - - 1961 1962 1963 1964 1965 1,400 1,800 2,100 2,500 2,800 3,250 3,750 700 900 1,200 1,450 1,750 2,320 Z,740 1,500 1,800 2,700 3,350 3,500 4,200 6,500 1 Insured short-term export transactions represent approximately 7 to 8 percent of all French exports while insured medium-term export transactions represent approximately 10 to 11 percent. FEDERAL REPUBLIC or GERMANY INSTITUTIONAL 1?BAMRWORIC 128. In the Federal Republic of Germany the ~nain sources of financing for export credits for the acquisition of capital goods in that country are the Ausfuhrkr~dit Aktiengesellschaft (AKA) (for credits of betw'een one and five years), the Kreditanstalt fur Wiederaufbau (KFW) (for credits in excess of five years) and, to a very limited extent, the Rheinische Girozentrale und Pro- vincialbank (for both medium-term and long-term credits). 129. The Ausfuhrkredit Aktiengesellscbaft is a private corporation established in 1952 by the "Big Three" private commercitd banks (the Deut~ebe Bank, the Dresdner Bank and the Cominerzbank), nine other private banks and eleven regional, state and local government banks for the purpose of f1na~cing ~rnedlum- term suppliers' credits. It has a capital of DM 20 millIon, of which only 50 per cent is paid in, but its main financial resources are derived from tw~ credit lines, "A" and "B". Credit line "A", which originally totalled PM 270 million and has been increased to PM 700 milllou, is made available to the AKA by the me~nber banks, whose individual commitments range from 0.49 per cent to 32.0 per cent of the total. Credit line "B" Is a rediscount ceiling granted to the AKA by the Deutsche Bundesbank, the German central bank This ceiling was orig~nally~fixed at PM 600 million, but as the commercial banks have shown an increasing interest in providing medium-term export credit financing and have increased their com- mitments under credit line "A", the Deutsche Bundesbank's role has diminished and the ceiling has now been lowered to DM 300 million. The minimum maturity of loans granted by the AKA Is twelve months: the maximum maturity under PAGENO="0057" 53 l~redit line "A" is eight years, tacludhig three yearS for production of the goods, while the maximum maturfty thider credit line "B" is four years, Ifieltiding the production period. 130. The AKA is administered b3~ a two-member Board of Management chosen by the Supervisory Board, which is in turn elected by the member banks. The Supervisory Board also appoints a special Cre~tit Committee, to which credit applications are submitted for examination and approval. The Credit Committee also decides which credit line will be used to ~1nance a given loan; its decision in this respect is motivated mainly by the balance remaining in each credit line, but credits granted under credit line ~`E" must in principle be used to finance transactions with developing cotmtries and muSt also be approved by the Deutsche Bundesbank when their m~tturities e~ce~d twenty-four months and when the value of the transaction exceeds DM1 million. TABLE 23.-FEDEOAL REPUBLiC OF GERMANY: AKA EXPORT CREDITS lie millions of Deutsche marks, except as indicated( Year Number of trans- Credit line A Credit line B Total line AH-li ne B Total credits Total value of Number of trans- Total credits Total value of Number of trans. Credits Value Of orders actions orders actions orders actions 1955 25 50.9 101.8 310 351.1 762.9 335 402.0 864.7 1956 75 133.1 288.9 542 356.6 965.9 617 489.7 1,254.8 1957 44 90.5 197.9 289 306,1 985.0 333 396.6 1,182.9 1958 30 83. 9 174. 1 196 206.9 468. 5 226 290. 8 642. 6 1959 33 43.4 98.0 131 255.8 714.9 164 299.2 812.9 1960 67 200.5 420.8 110 177.1 442.4 177 377.6 863.2 1961 109 313.7 648.3 104 91.8 225.2 213 405.5 873.5 1962 103 269.3 478.4 80 93.7 246.5 183 363.0 724.9 1963 93 313. 6 553. 9 80 100. 4 273. 2 173 414. 0 827. 1 1964 125 241.7 440.6 112 139.1 310.2 237 380.8 750.8: TABLE 24.-FEDERAL REPUBLIC OF GERMANY: GEOGRAPHICAL DISTRIBUTION OF AKA EXPORT CREDITS (Percentage of totall Area 1958 1959 1960 1961 1962 1963 1964 Europe 36. 86 40. 36 37. 65 40. 54 34. 00 20. 56 22. 80 Africa 9.78 13.69 23.56 15.58 9.65 11.17 16.91 Asia 30.06 28.35 25.83 18.71 17.82 20.37 18.94 North America 2. 76 1. 78 2. 40 3. 81 3. 88 4. 60 6. 10 Central America . 15 . 02 . 04 . 02 . 12 . 12 South America 20. 39 15. 80 10. 56 21. 25 34. 12 42. 77 34. 90 Australia . 07 . 51 . 41 . 23. Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 131. The Kreditanstalt fir Wiederaufbau was established by an Act of 5 November 1948 to finance post-war reconstruction, but as reconstruction financing needs diminished its activities broadened in scope to cover not only domestic investment but also a wide range of foreign transactions. In 1950 it was entrusted with the task of promoting Federal Republic exports by providing financing or medium-term suppliers' credits; this task was transferred to the AKA when that institution was established in 1952, but the KfW continued to participate in the export financing process bY providing "parallel financing", that is, com- plementary financing covering the difference between the percentage of the transaction covered under the government insurance policy and the percentage of financing provided by the AKA (see the section below on Financing pro- cedures). In recent years, owing to the fact that its funds can be lent on a long-term basis, the KfW's main activity in the export financing field has been the financing of long-term suppliers' credits and the granting of buyers' credits: it finances credit maturities exceeding the ceiling imposed by AKA regulations for up to ten years after delivery, and in the case of large projects in developing countries (minimum DM 5 million) grants direct long-term credits to the foreign buyer. 132. In 1961, the KfW'~ experience in foreign transactions led the Federal Government to designate the institution as the official executive agency for PAGENO="0058" 54 the German foreign development aid programme. In this capacity the KfW acts on behalf of the Federal Government, conducts negotiations with developing countries regarding aid loans, signs the loan agreements as the German con- tracting party, disburses the funds and supervises the agreed use of the capital supplied. 133. The KfW administers the Government's aid programme under the guid- ance of the Interministerial Committee on Development Policy, which deals with basic policy issues and lecides on projects of special importance to the bilateral ~ticl programmes. 134. Transactions carried out on behalf of the Government within the frame- work of the German aid programme are financed out of public funds, which the KfW administers on a trust basis. For transactions carried out on its own behalf, that is, export credit financing and the provision of untied loans to foreigners on conventional terms to' supplement official development aid, the KfW uses its own capital and funds borrowed on the capital market or from other sources. Its capital, 15 per cent of which is paid up, amounts to DM 1,000 million, DM 800 million being subscribed by the Federal Republic and DM 200 million by the Laender (state governments). The KfW's administrative organs are the Board of Management and the Board of Supervisors; the former, which is appointed by the latter, conducts the corporation's business. TABLE 25.-FEDERAL REPUBLIC OF GERMANY: KFW FOREIGN CREDITS [Millions of Deutsche marksj Type of credit 1961 1962 1963 1964 tapital aid 888.6 1,264.7 1,858.4 923.5 Exportfinancing 182.5 637.4 411.6 670.0 Loans granted to foreign parchasers 78. 3 224. 7 284. 1 335. 9 Loans granted to German exporters 104.2 412.7 127.5 334. 1 Nontied financial loans - 627.6 69.2 269.8 52.0 Loans for nstablishments and participations abroad 8.6 12. 0 6.7 9.9 To~all 1,707.3 1,983.3 2,566.5 1,655.4 1 The corresponding totals for FfW's domestic financing operations were as follows: 1961, 789.0; 1962, 576.5; 1963 :911.6; 1964, 930.3. PAGENO="0059" `tABLE 26.-FEDERAL REPUBLIC OF GERMANY: GEOGRAPHICAL DISTRIBUTION OF KFW CREDITS IMillions of Deutsche marksl 1963 Type of credit commitment -______________________________________________________ Europe Asia Africa America Total 1964 Europe Asia Africa America Total Capitalaid loans 314.8 1,210.1 333.5 1,858.4 119.0 440.3 319.7 44.5 923.5 Project loans 291.9 943.6 333.5 1,569.0 77.0 363.3 319.7 44.5 804.5 Non~projectIoans..._ 22.9 266.5 289.4 42.0 77.0 119.0 Exportfinancing 132.9 116.7 65.8 96.2 411.6 233.8 143.9 210.6 81.7 670.0 c.n J..oans to foreign purchasers 105.2 114. 8 43. 1 21. 0 284. 1 55. 8 93. 0 1425 44.6 335. 9 -Loans t6German exporters - 27.7 1.9 22.7 75.2 127.5 178.0 50.9 68,1 37.1 334.1 - Non-tied financialioans 50.0 178.0 61.8 289.8 51.0 1.0 52.0 Loans for establishments and participations abroad - 3.2 2.1 1.4 -6.7 2.6 2.7 2.8 1.8 9.9 Total 500.9 1,328.9 578.7 158.0 2,566.5 406.4 587.9 533.1 128.0 1,655.4 - Leaps to developing countries 382.7 1,328.9 470. 7 138. 9 2, 321. 2 154.6 587. 9 533. 1 119. 8 1, 395. 4 * Loans to nondeveloping countries 118.2 108.0 19. 1 245. 3 251.8 8.2 260.0 PAGENO="0060" 56 135. Another institution which has recently entered the export credit financing field is the Rheinische Girozeutrale und Provincialbank, one of the twelve Girozentralen in the Federal Republic of Germany. It is owned by the state of North Rhine Westphalia, the Landschafts-Verband Rheinland and the Sparkas- sen-Verband Association of savings banks of the Rhineland. It functions main- ly-as the name indicates-as a clearing office for the savings banks in the Rhineland as well as a state bank, granting credits to the municipalites and floating bond issues on their behalf. Owing to the availabilitiy of long-term private savings funds deposited with it, this institution has recently begun granting long-term loans to domestic borrowers and providing some medium- term and long-term export credit financing. FINANCING PtOCEDURES Medium-term suppliers' credits 136. An insurance policy is a prerequisite for obtaining credits with maturities of twenty-four months and more (see the section below on Export credit insur- ance). Exporters are expected to send their credit applications to the AKA through their commercial banks. When financing is granted under AKA credit line "A", the foreign buyer is expected to make a down payment of 20 percent of the contract value and the exporter is expected to provide financing for 20 percent of the remaining 80 percent (that is 16 percent of the contract value). The AKA is unlikely to provide financing for more than 64 percent of the contract value under credit line "A". The interest rate (in 1965 6.5 percent) is determined by the member banks of the AI~A and is in principle based on the discount rate of the Deutsche Bundesbank. 137. When financing is granted under credit line "B", the foreign buyer is expected to make a down payment of 20 percent of the contract value and the exporter is expected to finance at least 40 percent of the contract value, so that the financing provided by the AKA is unlikely to exceed 40 percent of the contract value. The interest rates for credits granted under credit line "B" are strictly bound to the discount rate of the Deutsche Bundesbank, being 1.5 percent above that rate. 138. The Rheinische Girozentrale und Provincialbank has no uniform rules regarding the percentage of the transaction to be financed. Long-term suppliers' credits 139. These are financed Ia two parts: cover for the first five years after delivery (four years in the case of credit line "B") is secured through medium-term financing from the AKA (see above) ; in addition the exporter after securing insurance coverage contacts his commercial bank, which submits an application to the KfW for financing to cover the rem~dning maturities. The financing of the later maturities may be provided for up to the percentage of the credit covered under the insurance policy, with the exporter providing 20 percent of the financing. Buyers' credits 140. These credits are made available to developing countries for large-scale projects costing at least Di~1 5 million. Disbursements to the suppfl'~r are made by the KfW one year (considered as a warranty period) after the completion of the project in the developing country, and the credit is reimbursed to the KfW by the buyer in eighteen semi-annual instalments. The financing provided by the KfW is unlikely to exceed 76.5 per cent of the cost of the project, since the exporter must make a down payment of 10 per cent and the export credit insurance insti- tution will guarantee 85 per cent of the remaining 90 per cent. The exporter must sign a commitment with the KfW assuming responsibility for 20 per cent of the financed portion of the project. The cost of the KfW credit for the buyer usually ranges between 5.75 and 6.0 per cent, plus a commitment charge of 0.25 per cent. Financing to cover the production and warranty period may be provided by the German commercial banks or the Girozentrale, which are completely reimbursed by the KfW at the end of the warranty. EXPORT CREDIT INSURANCE 141. Export credit Insurance Is provided jointly by the Hermes-Kreditversi- cherungs AG and the Deutsche Rerislons-und-Treuhand AG (Treuarbeit). The two companies act as agents of the Federal Government and funds are allocated annually in the federal budget to cover their administrative costs and possible PAGENO="0061" 57 indemnity claims. Export credit insurance against commercial risks is also pro- vided to a very limited extent by two other private insurance companies, the Gerling Konzern Speziale Kreditversicherungs AG and the Deutsche Kreditversicherungs AG. 142. Since 1960, the statutory ceiling for government backing of the insurance cover has been stipulated annually in the federal budget; the growth of the Insur- ance programme can be judged by the sharp rise of this ceiling since the Act on which the present export credit insurance system is based was adopted in 1949: FJcoport credit insurance cci jing MilUons of Deutsche Year: marks 1949 120 1950 600 ~951 1,200 1952 2,400 1953 - 4,000 1954 5,000 1955 7,500 1957 9,500 1960 12,000 1962 14,000 1964 - E6,000 143. All insurance applications must be forwarded directly to the ITermes, which together with the Treuarbeit examines them and ensures that the rcquire4 documentation is complete. The applb~ations are then submitted to the Inter- ministerial Committee for Export Guarantees, which holds the power of deci- sion. This Committee includes representatives of the Federal Ministry of Economic Affairs, the Federal Ministry of Finance and the Federal Ministry. of Foreign Affairs; it is assisted by representatives of the banks, the export merchants and the manufacturing industries. The Committee's decisipns are based not only on commercial considerations but also on the economic Interests of the Federal Republic. For contracts whose value exceeds DM 1 milliou, the Committee's decision must be endorsed by the Ministries of Economic A~airs ~nd Finance. Once the Committee has approved an insurance applicatlofl~ the exporter is given a promise that the transaction in question is In princip~e eli- gible for insurance; the policy is issued when the exporter has concluded t1~ eon- tract according to the couditions and terms approved by the Committee. Guaran- tees are accorded for the export of goods of Federal Republic origin or having a high content of Federal Republic labour. Guarantees may also be accorded for construction work abroad, consignment contracts, the processing of goods and the building up of stocks abroad; guarantee~ are not provided for the prospeetion of markets abroad. 144. Three main types of policies are issued: Single transaction (Einzclguarantie) policies; Policies covering all transactions with a given foreign buyer (Revatvier- ende Dec1ous~g); Policies covering all transactions with several `buyers in one or several countries (Mante~garantie) 145. Guarantees cover the risk of insolvency and political risks such as inter- diction of payments, conversion and transfer delays and governmental measures likely to cause losses during the execution of an export contract. The exchange risk is not covered, except when the exporter has been compelled to accept a cur- rency other than that stipulated in the contract or when he has obtained the Federal Government's authorization to accept a currency other than that stipu- lated in the contract. 146. The maximum indemnity that can be paid is 80 per cent of the loss In respect of commercial risks (insolvency, or, for public buyers only, protracted default), 85 per cent in respect of conversion and transfer risks and 90 per cent as regards `other political risks, It is 85 per `cent `of the production cost for pre- delivery risks. The actual ciover limits depend on the ~ireumstances of tb~ case and iii certain conditions cover for commercial risks may be limited to 60 per cent. While this is a greater limitation than in many other systems, the Govern- ment may provide guarantees under more favourable conditions for export transactions "In which the Federal Republic of Germany has a public interest". PAGENO="0062" 58 147. Export sales to private firms are normally insured at a rate of 0.75 per cent for "cash against documents" sales, while the rate on credit sales is 1.5 per cent for a period up to six months, 0.1 per cent on the outstanding balance for each additional month. For contracts with public bodies, the premium rates are graduated: one per cent for the first 1DM 3 million; 0.75 per cent for the next DM 2 million, and 0.5 per cent for sums in excess of 1DM 5 million, plus a monthly charge of 0.05 per cent on the outstanding balance for periods up to two years or 0.04 per cent per month for payment periods exceeding two years. 148. The maximum duration of export credit insurance is normally five years but insurance is available for long-term export credits-mainly buyers' credits- for the execution of projects of major importance involving the purchase of German capital equipment with a minimum vale of DM 5 million, which normally needs to be amertized over a period exceeding five years. The "financial guar- `antee" covers not only the principal hut also the interest accruing during the amortization period. The guarantee covers all risks according to the following' percentages of the credit: (a) Contracts with private buyers: 80 per cent for commercial risks; 85 per cent for conversion, transfey and moratorium risks; (b) Contract with public buyers: 80 per cent for non-fulfillment or contractual payments; 85 per cent for political risks. Premiums are calculated on the same basis as for ordinary export credit Insurance. TABLE 27.-Federal Republic of Germany: Annual value of guarantee issued' Thousands of millions of Deutsche Year: marks 1955 32~ 1956 2.6 1957 4.5 1958 3. 5 1959 4.3: 1960 4.5 1961 4.9 1962 4, 1 1963 ITALY INSTITUTIONAL FRAMEWOhIC 204. E~po~rt credits are financed within the institfitional framework of the' Italian general credit system, based on the 1936 Banking Act, which draws a clear distinction between short-term credits, the granting of which is entrusted to commercial banks, and medium-term and long-term credits, for which special medium-term and long-term credit institutions are responsible. While `the com- mercial banks finance short-term suppliers' credits (credits of up to one year),~ the medium-term and long-term credit institutions finance medium-term sup- pliers' credits (credits of between one and five years) and long-term suppliers' credits (credits of between five and `ten years) and grant financial credits. These last, which do not in principle exceed ten years, are granted not only to foreign governments, public entities and private firms for the purchase of Italian goods and services (buyers' credits) but `also to foreign governments and central banks for "economic rehabilitation" (Act No. 635 of 5 July 1961, chapter-lU, articles 20~ and 21), which need not necessarily involve the purchase of Italian goods and services. Most of `the "economic rehabilitation" credits have so far been grantedi for repayment of Italian suppliers' credits extended to deve'lopitsgceuntries. PAGENO="0063" 59 TABLE 34.-ITALY: VOLUME OF EXPORT CREDIT FINANCING (SUPPLIERS' CREDITS AND FINANCIAL CREDITS PROVIDED BY MEDIUM-TERM AND LONG-TERM CREDIT INSTITUTIONS, 1965 Industry ~ Export credit financing (millions of lire) Percentage of total export credit financing Fuel Metallurgy Engineering: shipping yards, vehicles, motors and miscellaneous Chemical Textils - Miscellaneous 4,386 11,689 184,150 6,129 3, 108 645 2 5 83 3: 1 Public works Total 12,72~ 5 222,888 100.0. 205. The medium-term and long-term credit institutions refinance medium~term and long-term export credits with the Mediocredito Centrale (Mediocredilto), a government medium-term and long-term refinancing agency,, which also finances the financial credits granted ~y those institutions. The medium-term and long- term credit institutions empowered to obtain refinancing from the Mediocredito are the Istituto MoMliare Itali'ano (IMI), `the Ente Finanziario Interbanicari'o (~fiban~a), the Banica di Oredito Finanzia'rio (Medi!obanca), the Istituto di Cred- Ito per le Imprese di Piiiblica Utuità, the Banlca Oentraie di Credito Popolare (OentrObanea), the Banon per Finauziamenti a Medi'o Termine (Interban~a) and the regional medium-term credit institutions for the regions of Lombardy, Pied- mont and Vane d'Ao'sta, Tirentino~Alto Acliige, Friuli, Venetia, Liguria, Emilla and Romagna, Tuscany, Umbria, the Marches and Latium. The first three and to a less extent the fourth are the most active in the medium-term and long-terni export credit financing field. The Istituto Mobiliare Italiano 206. The Istituto Mobiliare Italiano is a joint-stock corporation established in 1931 to contribute to the development of the Italian economy by providing invest- ment credits and effecting general financial transactions. It is the largest of the institutions specializing in the granting of medium-term and long-term credits and is responsible for mOre than one-third of the total credits granted by all the medium-term and lorig4erm credit 4nstitution~. 207. Its present share capital, of which 30 percent is paid up, amounts to LitlOO,000 million, the most important shareholders being government institutions such as the Oassa Depoisiti e Prestite (Loan and Deposit Fund), the Istitut~ Nazionale della Previdenza Sociale (N~ttiona1 Social Security Institute) and the Istituto Nazioniale delict Assicurazi'oni (National ir~surance Institute). Shares in the IMI are also held by private companies, including security and insurance in~titutions, savings banks, commercial bank's and holding companies. The IMI raises the hulk `of the funds needed for its lending activities through the fioatati'on of ~~nd issues on the Italian capital market and to a ~crery limited extent on foreign markets and `by refinancing with the Mediocredito. As `the IMI has pointed out, "even through Italian industrial ~orporatio'ns have direct access to the financial market, long-term bank loans constitute a highly important source of financing for new expansion programs. This i's due to the fak~t that, fo'r a number of reasons, the special credit institutions can fio~at bond issues at more favora)31c terms than industrial corporations can. The latter, therefore, often find it more economical to turn to the special credit institution's, which perform between investors and industri~s the `sam'e function which commercial banks ~tarry out between savings and commercial loans".1 208. The IMI is administrated ~y a Board of Directors composed of twenty-one members including the Chairman of the Board. Some Board members are ap- pointed by the Minister of the Treasury and some are elected by the shareholders' 1 Institute Mobilistre Italiano, For the Progress of the Italian Economy (Rome, 1965), p. 9. PAGENO="0064" 60 meeting. The Chairman of the Board is appointed by Decree of the President of the Repnblic on the recommendation of the Minister of the Treasury, upon the advice of the Council of Ministers. The Executive Committee, composed of the Chairman of the Board and four Board members appeinted by the Board, is entrusted with the management of the institutiOn. Day-to~day bueiness is handled ~y the General Manager, who is appointed by the Board, though not necessarily from among Its members, and who attends the meetings of the Board and of the Executive Committee. 209, The IMI's activities fall into two main categories: (a) Ordinary operations, that is, medium-term and long-term credit trans- actions, ir~cluding export credit financing transactions, which are financed out of the institution's own funds: in addition to its export credit financing activities, the IMI also engages, to a limited extent, in other foreign financing activities: thus, is has established one sij4bsidiary company in Swit~eriand and another in the United States; is has invested in foreign securities and, jointly with Italian and foreign banks and/or international finai~cial Institutions, has acquired stocks in foreign development banks and corporations; (b) Speciat operations involving the administration of various special funds on behalf of the Italian Governnient and other government agencies. TABLE~ 35.-ITALY, 1141: LOANS OUTSTANDING AS OF MAR. 31, 1966 Type o,f credit Amount (roil- PercentAge lions of lire) of total Domestic loans 1, 433, 700 88.9 Export credits 173,612, 10.7 Suppliers'c~edlts 133, 776k Financial credits - 39,836 Other 4,367 .4 Total 1,~611,679 TABLE 36-ITALY, IMI: ANNUAL VOLUME OF EXPORT CREDIT FINANCING IMillionsof lire] Credit applications Credit agreements Credit Outstanding as Of Itlat. 31 Fiscal year (Apr. 1-Mar. 31) -_- Suppliers' Finan~iaI Suppliers' Financial Supp~ers' Financial ciedits credits credits credits credits credits l962-63~~ 118,000 35,55a U,509 76,854 11,509 1963-64 29,483 41,605 41,145 46,371 1964-65 46,825 7,281 41,005 7,281 106,778 37, 171 1965-66 109,472 18,754 62,089 18,566 133,776 39,836 TABLE 37.-1TALY, EFIBANCA: LOANS OUTSTANDING AS OF DECEMBER 31 1965 Type of credit Amount Percentage (millions of lire) of total Domestic loans 69,831 51. 0 Export credits 66,394 49.0 Suppliers' credits (58, 144) Financial credits (8,250) Total 136, 226 100. 0 TABLE 38.-ITALY, EFIBANCA: ANNUAL VOLUME O~ EXPORT CREDIT FINANCING [In millions of lire] Year Suppliers' credits Financial credits Total 1962 1963 1964 24,659 5, 417 27,112 6,325 28,976 30, 076 33,437 28,976 PAGENO="0065" 61 The EflAtO Fi~ianriAario In~terbaneark 210. The Bate Flnanziario Interbancario is a joint-stock corporation which was established in 1939 under ~he ua~ue of Eute Finariziamenti Industriali and reorganized under its present form and name in 1949. It has a capital of Lit 10,000 million contributed by a number ott Italian public and private credit institutions, Italian finance and insurance companies and foreign financial houses. The latter, which hold about 10 percent of the shares, are S. G. Warburg & Co., Ud. and Baring Brothers & Co., Ltd. (London), LNP North American Holdings, Ltd. and Transoceanic Development Corporation, Ltd. (Toronto) and B'ayeriscbe Vereinsbank (Munich). The largest single shareholder is the Banca Nazionale del Lavora. The Efibanca is authorized to issue bonds to finance its lending operations but the bulk of its resources is derived from time deposits and from refinancing with the Mediocrethto. 211. The Efibanca is administered by a twenty-one-member Board of Directors elected by the shareholders, the Chairman being elected by the Board from among its members. There is an Executive Committee composed of Board members, and. the General Manager and Secretary are chosen by the Board, either from among its members or from outside. 212. The Efibanca's principal activities are the granting of domestic loans and the financing of export credits, but it also invests in securities and sets up under- writing syndicates for the placement of industrial shares and bonds. In addition, it is authorized to provide endorsements and guarantees for financlial transac- tions with maturities of at least twelve months, and to acquire a minority interest in Italian and foreign corporations. The Bctnco di Uredito Fi~a,onriario 213. The Banco di Credito Finanziario is a joint-stock corporation established in 1946. Its initial capital was subscribed by three important commer~ial banks (Banco di Roma, Banca Commerciale Italiana and Credito Italiano) which still possess a controlling interest in the institution (53 percent of the shares). The other shareholders include Italian individual investors (20 percent), various Italian eorporations-banks, financial corporations, insurance companies etc. (12 percent) and foreign banks and financial housea-Lazard Brothers ~f London, Lehman Brothers of New York, Lazare Frères of Paris, the Berliner Handels Gesellschaft (13 percent). The present capital amounts to Lit 14,000 million. The Mediobanca is authorized to issue bonds but at present derive'~ its resources mainly from time deposits and from refinancing from the Mediocredito. 214. The Mediobanca is administered by a fifteen-member Board of Directors elected by the shareholders and a five-member committee chosen from among the Directors. The Managing Director is a member of both the Board and the Executive Committee. 215. Total credits disbursed by Medlobanca from the beginning of its activity up to 30 June 1965 amounted to Lit 695,500 million of which financing of export credits (suppliers' credits and financial credits) accounted for Lit 110,997 million (16 percent). 216. The 1\tfediobanca also invests in overseas trading companies, chjefiy through its 87 percent-owned subsidiary, Società Mercantile Interpazionale S.A. Milan (Intersomer) which has a capital of Lit 700 million. Intersomer has set up affiliated companies in a number of African countries: Liberia, Mozambique, Nigeria, Southern Rhodesia and Zambia. Mediobanca considers Intersomer as "an efficient instrument for the promotion of trade relations with countries which offer favourable opportunities for Italian products." TABLE 39-ITALY, MEDIOBANCA: VOLUME OF E)~PORT CREDIT FINAI'ICING(SIJPPIJERS' ~REDlTS AND FINANCIAL CREDITS) AS OF JUNE 10, 1965 Item Millions of lire Credits outstanding 59, 830. 8 Repayments 51, 166. 0 Total credits disbursed 110,996.8 Credits granted but not disbursed 41,996.7 Total (net of canceled credits) - - 152,963, 5 94-l97-68-~ PAGENO="0066" 62 TABLE 40~-lTALY, MEDIOBANCA: GEOGRAPHICAL DISTRIBUTION OF EXPORT CREDIT FINANCING (SUPPLIERS' CREDITS AND FINANCIAL CREDITS) EThousands of millions of lirel U.S.S.R Argentina Turkey India Panarna~~ Hungary Indonesia.~ Poland Rumania United Arab Republic Spain France Republic of Korea Greece Brazil Yugnslavia Uruguay Mexico Liberia Eastern Germany Colombia Chile Sweden Czechoslovakia Morocco Iran Ethiopia Norway United Kingdom Thailand Libya Portugal Switzerland Peru Angola Philippines Germany (Federal Republic) Finland Total 30, 000. 0 4, 629. 1 25, 370. 9 20, 671. 9 6, 407. 9 10, 295. 1 3, 968. 9 13, 894. 9 8, 562. 3 2, 528. 2 2, 804. 4 10, 568. 9 1, 967. 4 6, 999. 2 1, 602. 3 9,888.9 9,888.9 8, 919. 2 3, 247. 2 2, 299. 7 3, 372. 3 7, 520. 4 1, 145. 3 5, 246. 8 1, 128. 3 7, 144. 3 4, 802. 3 1, 836. 5 505. 5 6, 689. 6 3, 342. 1 3, 347. 5 4,888.7 1,219.4 3,669.3 - - 3, 620. 0 2, 942. 0 678. 0 2, 852. 4 2, 625. 8 226. 6 2, 619.0 311.3 2,307.7 2, 328. 7 2, 159, 6 162, 3 6. 8 2,129.4 1,697.5 431.9 1, 925. 2 983. 9 833. 8 107. 5 1, 880. 7 442. 7 1, 288. 5 149. 5 1,8~7.3 1,084.9 741.0 51.4 1,857.7 1,576.7 281.0 1, 760. 0 685. 4 1, 038. 6 36. 0 1,359.0 570.7 788.3 1, 053.7 981.0 72.7 884,0 884.0 828. 7 204. 4 69. 1 555. 2 778.3 258.7 519.6 774.1 774.1 755.6 228.2 527.4 735. 2 466. 5 268. 7 552.3 286.2 266.1 540.6 414.0 126.6 529.7 488.6 41.1 388.7 343.8 44.9 279.7 62.1 217.6 171.7 159.5 12.2 125.2 125.2 103.1 9.2 93.8 34.7 17.4 17.3 32.1 32.1 152,963.5 51,166.0 59,830.8 41,966.7 The Mediocredito Centrale 217. Mediocredito Centrale is a government institution established by Act No. 949 of 25 July 1962 to serve as a rediscounting agency for medium-t~rm credit institutions. Subsequent amendments to its statutes have expanded the scope of its activities. Its resources consist of an endowment fund provided by the Government, which now amounts to Lit 176,519 million, and of credits as- signed to it by the Ministry of the Treasury. 218. Mediocredito's general policies are laid down by a fifteen-member General Council, appointed by the Ministry of the Treasury, which also appoints the President and Vice-President of the Council. The Institution's day-to-day business is administered by a nine-member Board of Directors consisting of four members of the General Council, two representatives of the Ministry of the Treasury, one representative of the Ministry of Foreign Trade, one representative of the Minis.- try of Industry, and the President of the General Council who acts as Chairman of the Board. 219. As regards export financing, Mediocredito finances advances made by the medium-term and long-term credit institutions and rediscounts export bills dis- counted by these institutions. Mediocredito refinances up to 75 percent of the portion of the credit financed by the financing institutions (a bill now before the Italian Parliament proposes to increase this percentage to 85) ; if lack of funds prevents it from refinancing the full 75 percent, it refinances a small percentage and reimburses to the financing institutions the difference between the special interest rate of 5.90 percent they charged to exporters and the cost Credits granted from beginning of Country Mediobanca `s operations Status of credits as of June 30, 1965 Repaid Outstanding Not disbursed until June 30, 1965 PAGENO="0067" 63 for the institution `of borrowing the supplementary funds on the market. In the case of ordinary suppliers' credits, the interest subsidy resources are derived from Mediocredito's net profits and in the case of financial credits or specially authorized long-terfn suppliers' credits from a fund contributed by the Govern- ment. Mediocredito's intervention in the export financing process, whether through direct refinancing or indirect refinancing in the form of interest sub- sidies, enables the medium-term and long-term credit institutions to finance export credits at a more favourable rate than that charged for comparable domestic loans, thus making it possible to reduce the cost of the export credit to the foreign buyer. TABLE 41.-ITALY, MEDIOCREDITO: VOLUME OF REFINANCING FOR EXPORT CREDITS,' 1955-65 [In thousands of millions of lire] Type of refinancing 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 Refinancing of export credits (sup- pliers' and financial credits) 3. 2 4. 4 14. 8 28. 4 53, 7 62. 7 76. 9 87. 2 114. 9 130. 8 141. 7 Direct refinancing 3. 2 4. 4 14. 8 27. 8 28. 8 37. 1 41. 1 55. 4 65. 7 71, 0 93. 1 Indirect financing through pay- ment of interest subsidies - 6 24. 9 25. 6 35. 8 31. 8 49. 2 59. 8 55. 6 1 This ha~ in recent years exceeded the volume of Mediocredito's domestic credit refinancing (which amounted in 1965 to Lit 122,500000,000). TABLE 42.-ITALY, MEDIOCREDITO: GEOGRAPHICAL DISTRI BUTION OF EXPORT CREDIT REFINANCING, 1961-65 (Percentage of total] Country 1961 1962 1963 1964 1965 Argentina 9.7 19.5 15.9 14.2 10.9 Brazil 12.4 11.2 12.7 11.3 5.0 Bulgaria . 1 . 1 . 7 Chile .7 4.0 5.1 4.7 31 France 3.3 1.7 .1 .1 10 Ghana 3.0 3. 4 2. 4 1. 5 . 4 1, 0 Hungary .5 1.4 .2 1.3 2.9 India 8.0 4.3 3.0 .8 1.2 Indonesia 1.4 1.6 1.6 5,1 Israel .2 .1 1.9 2.2 Japan 1.0 6 Mexico 1.2 2.9 3.4 5.0 4.5 Panama . 1 . 1 . 1 . 1 7, 4 Poland 3.3 2.0 3.2 3.1 3,3 Romania .7 1.6 .6 .4 2,7 Spain .9 .6 1.4 1.7 Sudan .2 2.9 3.4 2.2 Tunisia 44 3.7 3.0 Turkey - 7.2 4.7 3.6 2.7 1.4 U.S.S.R 2.4 4.9 4.4 7.2 5,0 United Arab Republic . ` . 4 6. 9 8. 2 5. 3 Uruguay .1 .2 .1 .5 .5 Venezuela 14.2 2.9 Yugoslavia 26.6 28.9 25.4 22.4 20.6 Others ~ 4.9 ~ 4.5 ~ Total 100. 0 100. 0 100.0 100. 0100,0 FINANCING PROCEDURES Medium-term and long-term suppliers' credits 220. All suppliers' credits in excess of one year' (five years in the case of trans- actions with buyers in the countries of the European Economic Community) must be approved by the Ministry of Foreign Trade. The buyer is usually required to make a down payment averaging 20. per cent of the value of the contract. The credits are financed by the medium-term and long-term credit institutions. A guarantee from a reliable bank in the buyer's country and an insurance policy issued by the Instituto Nazionale delle Asisicurazioni (INA) and endorsed by the exporter in favour of the financing institution being prerequisites for such financing. The duration of the credits does not usually exceed five years for credits PAGENO="0068" 64 relating to exports of goods and services, four years for credits relatLng to the execution of works abroad and two years f~r credits granted in connexion with goods deposited abroad for eonsignmeut selling. These limits are exceeded only in special cases when the Ministry of the Treasury authorises the Istituto Nazionale delle Assicurazioni to guarantee suppliers' credits for longer periods. 221. The financing, which takes the form of advances against the export bills as collateral or the discounting of those bills, is not likely to exceed the percentage of the credit guaranteed by the Istituto Nazionale de1l~ Assicurazioni (85 per cent of the credit for exports of goods and services, 30 per cent of the value of the contract in the case of works executed abroad and 65 per cent ~C the value of Italian products stocked abroad for sale; the bill now before the Italian Parlia- ment proposes that the maximum cover for exports of goods and services should be increased to 90 per cent of the credit and that similar cover should be made available for the execution of works abroad). 222. The medium4errn and long-term credit institutions obtain advances from Mediocredito to refinance up to 75 per cent of the advances they have made to the exporter or rediscount with Mediocredito up to 75 per cent of the export bills they have discounted. Mediocredito charges a special interest rate of 3 per cent for such refinancing and as already noted will, if it lacks funds, grant the financing institutions an interest subsidy to make up the difference between the cost of borrowing on the market and the special interest rate of 5.90 per cent charged to the exporter. Since the medium-term and long-term credit institutions finance up to 85 per cent of the credit and Mediocredito refinances 75 per cent of this financing out of government funds, such funds are used to finance up to 64 per cent of medium-term and long-termsuppliers' credits. Long-term~ export credits (suppliers' credits and financial credits) granted under Act, No. 635 of 5 July, 1961, chnptcr III, articles 20 and 21 223. These articles deal with long-terra export credits granted by Italian sup- pliers or the Italian medium-term and long-term credit insti'tutions to foreign governments, public entities or private firms guaranteed by their governments for the purchase of Italian goods and services, and long-term credits (which need not necessarily be tied to the purchase of Italian goods and services) granted by these institutions to foreign governments or central banks for "economic rehabilitation". All these credits must be authorized by the Ministry of Foreign Trade in agreement with the Ministry of the Treasury and are financed as follows: (a) Under article 20(a), the Italian supplier receives from the foreign buyer promissory notes expressed in Italian lire or foreign currencies for the amount of the credit (usually 50 per cent of the invoice value). These notes are guaran- teed by the Istituto Nazionale delle Assicurazioni up to 85 per cent of their nomi- nal value and then financed by the medium-term and long-term credit institutions, which buy the notes or make advances against them, generally up to the insured percentage. The credits are refinanced by Mediocredito according to the procedure described above; (b) Under article 20(b), the foreign `buyer issues promissory notes to the order of the Italian exporter or, at the latter's request, to the order of the financing institutions. These notes are guaranteed by the Instituto Nazionale delle Assi- curazioni up to 85 per cent of their nominal value. The financing institution receives these instruments and in exchange gives the exporter special securittes called titoli rappresentativi, expressed in Italian lire or foreign currencies repre- senting possession of the promissory notes. The exporter may use the titoli rappresentatiivi to obtain advances from the financing Institution which issued them or from any other medium-term and long-term credit institution. The titoli rappresentativi may be refinanced with Mediocredito according to the procedure described above; (c) Under article 20(c), the medium-term and long~term credit institutions grant credits to the foreign buyer; `the latter issues promissory flotes to the order of the institution, which may be guaranteed by the Istituto Nazionale delle Assi- curazioni up to 100 per cent of their nominal value. The institution pays the exporter with bonds which, unlike the titoli rc&ppresentativi, are issued within the limitations set forth In article 2410 of the Italian Civil Code2 and represent 2 "A corporation may issue registered or bearer bonds for an amount not exceeding its paid-up capital stock shown in the last approved balance sheet". PAGENO="0069" 65 an irrevocable conunitment on the part of the institution. The bonds may be repur- chased by the financing institution which will refinance them with Medlocredito; (d) Under article 21, the medium-term and long-term credit institutions grant credits to foreign go~re~pmeflt5 or central bao~s for "economic rehabilitation", receiving in exchange promissory notes which may be guaranteed by the Istituto Nazionale delle Assicurazioni up to 100 per cent of `their nominal value and financed with Mediocredlto. 224. The Interest rate charged by the financing institutions for all credits granted under articles 20 and 21 is the same as that charged for medium-term suppliers' credits, that is, 5~90 per cent. ExPORT CREDIT INSURANCE 225. The Italian export credit insurance scheme is administered by the Institute Nazionale delle Assicurazioni, an autonomous government institution established in 1912 to engage in life insurance operations. The official scheme has not so far provided coverage for short-term suppliers' credits and covers only non-commer- cial risks in the case of medium-term and long-term suppliers' credits and financial credits. Short-term suppliers' credits may be insured against commercial risks with the Societa Italiana Assicurazione Crediti when granted to certain countries. 226. The global amount of guarantees which may be provided is laid clown an- nually in the law approving the expenditure budget of the Ministry of the Treasury. It should be noted however that this ceiling applies only to guarantees issued during the year in question; any balance remaining uncommitted at the end of the year is carried over and added to the official ceiling for the fo1Iowln~ year. The annual guarantee ceiling has gradually been increased from Lit 30,000 million for the financial year 1953/54 to Lit 150,000 million for 1960/61 and Lit 300,000 million for 1968/64. The official annual ceiling has remained at that level in subsequent years, but as a result of the carrying over of uncommitted balances the de facto ceiling was Lit 450,000 million for the calendar year 1965 and Lit 532,000 million for the calendar year 1966. 227. The INA is authorized to insure on behalf of the Government the capital and interest of credits granted by Italian enterprises in connexion with the export of goods and services, the execution of projects abroad (including planning and projecting) and the sale of Italian products stocked a:broad. Pransactions carried out by the INA on behalf of the Government are sul~ervIsed by a com- mittee composed of a representative of the Ministry of Foreign Affairs, a repre- sentative of the Ministry of the Budget, two representatives of the Ministry of the Treasury (one from the Raglonerla Generale dello Stato (General AccoWit- ing Office) and the other from the Directorate General of the Treasury), two representatives of the Ministry of Industry and Commerce (one from the Direc- torate General of Industrial Production and the other from the Inspectorate of Private Insurance Enterprises), three representatives of the Ministry of 1l'oreign `rrade (one from the Directorate General for Commercial Ageements, one from the Directorate General for Foreign Exchange and the third from the Directorate Genei~al of Trade Development), a representative of the Ministry of Agriculture a~d Forests, a representative of the Ministry of Labour and Social Tnsnrance, a representative of the Corte dci Conti (Oourt of Accounts), a representative of the Italian Foreign Exchange Office, a representative of the National Institute for Foreign Prade, a representative of the Italian Union of Chambers of Coinmer~e, Industry and Agriculture, a representative of the private insurance companies and a representative of the IN&. 228. The members of the Committee, including the Chairman and the Vice- Chairman, are appointed by decrees of the Minister of Foreign ~L~rade in agree- ment with the Minister of the Treasury and the Minister of Industry and Com- merce. Secretariat services for the Committee are carried out by the National Institute for ForeignTrade. The Committee Is entrusted with the task of determin- ing the insurance terms, approving the risks to be insured and verifying the validity of claims. Committee decisions are taken by a simple majority of mem- ber~, frovidOd that this majority in~iudes the Chairmanì or Vies-Chairman, a representative of the Ministry of lrorelgn Aftali~, a rej~resentatlve of the Ministry of the Treasury, a rep~esentative of the Ministry of Industry and Commerce and a representative of the Ministry of Poreign Trade. The Committee's decisions are transmitted to the Ministry of the Treasury and become executory twelve days after their date if the Ministry has not rejected them. PAGENO="0070" 66 229. Only specific policies are i~sued Covering risks to which Italian firms are ei~posecl by reason of: War (whether declared or not), revolution, rebellionmid riots; Catastrophe (earthquake, tidal wave, volcanic eruption, flood, hurricane etc.) General moratorium decreed by the government of the buyer's country; Suspension or cancellation of the order, `prior to delivery, resulting from any of the above-mentioned causes or from regulations introduced by the government of the buyer's country or by the Italian Government; Delay of at least six months in transferring to the Italian supplier sums already deposited by the foreign buyer with his bank; Increases in production cost prior to delivery caused by circumstances of a general nature not imputable `to the supplier, when the sale contract does not provide for price adjustments or an escalation clause in those cases. 230. Ordinary commercial risks are not covered; however, the risk of default is covered when it is that of a foreign government or a foreign public agency which has guaranteed the purchase or the payments. 231. In general, the insurance coverage does not exceed 85 per cent of the credit. In the case of financial credits the maximum cover may be increased to 100 per cent. In the case of stocks of Italian products held abroad for sale, the insurance coverage does not exceed 65 per cent of their value in connexion with the execution of projects abroad by Italian contractors, the costs incurred in connexion with studies and planning, equipment and machinery assembled at the site and the actual execution of the first stage of `the project may be insured up to 30 per cent of the total amount of the contract; a similar limitation applies to insurance covering the complete execution of such projects. However, when the project is to be executed for a foreign government or government agency, the insurance coverage may be increased to 65 per cent of the amount of the contract. As regards the risk of increased production costs, the insurance is limited to price changes in excess of 5 per cent of the value of the order up to a maximum of 10 per cent. 232. The duration of insurance is usually limited to five years from the time of dispatch or delivery of the goods or performance of the services, four years from the beginning of work on the project and two years from the dispatch or sale of products stocked abroad. These limits may be exceeded in special cases upon authorization of the Ministry of the Treasury. With regard to the risk of increased production costs, the duration of insurance cannot exceed the period elapsing between the date on which execution of the order began and the date upon which production was completed. Insurance in excess of five years is made available for long-term suppliers' credits granted under the matching principle and for long-term suppliers' credits and financial credits granted with government approval by Italian enterprises under article 20 of Act No. 635 of 5 fuly 1961 and under article 21 for "financial loans intended for economic rehabilitation" granted with government approval by the specialized credit institutions to foreign governments or central banks. 233. Premium rates are determined within maximum and minimum limits established each year by decree of the Minister of the Treasury in agreement with the Minister of the Budget, the Minister of Industry and Commerce and the Minister of Foreign Trade. At the end ~f September 1966 these upper and lower limits were 1.25 per cent and 0.10 per cent, respectively. In the case of financial credits premium rates are lower. 234. The statutory delay after which loss is recognized varies according to the risk involved. In the case of losses due `to war, revolution, rebellion, catas- trophe and moratorium, the delay is six months reckoned from the maturity of the credit. For losses due to suspension or cancellation of orders, the delay is six months reckoned from the date of suspension or cancellation. As regards foreign exchange transfer difficulties, the delay is six months reckoned from the date on which the buyer deposited the sum with his bank. When the loss results from non-payment by a foreign government, a foreign public entity or a foreign private entity guaranteed by its government or by a public entity the delay is six months reckoned from the maturity of the credit. In the case of production cost variations, the loss is recognized upon the completion and delivery of the goods. In the case of financial credits, Indemnities are payable within thirty days of the recognition of the loss. PAGENO="0071" 67 235. As of 31 March 1966 outstanding guarantees for suppliers' credits (medium-term and long-term) issued by the INA totalled Lit 592,000 mIllion forsuppliers' credits (medium-term and long-term) and Lit 218,000 million for ilnancial credits. 236. The Societa Italiana Assicurazione Crediti insures transactions of up to twelve months at premium rates fluctuating between 0,3 and 1.5 per cent. Claims are payable within two months in the case of insolvency and six months in the case of protracted default. JAPAN INSTITUTIONAL FRAMEWORK 237. In Japan, export credits for the acquisition of capital goods are financed through "concerted financing" by the commercial banks and the Export-Import Bank of Japan. 238. These are about one hundred commercial banks, including fifteen banks which are branches of foreign banks. The Japanese banks are classified in two categories, the large "City Banks" and the locally oriented "Country Banks". The most important role is played by the thirteen "City Banks" (Bank of Tokyo, Mitsui, Elokkaido Takushoku, Mitsubishi, Sumitomo, Fuji, Sanwa, Dai-Ichi, Daiwa, Kobe, Tokai, Nippon Kangyo and Industrial Bank of Japan). Pursuant to the Foreign Exchange and Foreign Trade Act, only the commercial banks authorized by the Minister of Finance and known as "Authorized Foreign Exchange Banks" can carry out foreign exchange transactions. There are about seventy authorized banks, which are divided into two classes, A and B. Class A banks, which include most of the "City Banks" and the branches of foreign banks, are permitted to conclude correspondent arrangements with non-resident banks and can finance foreign trade. Class B banks are permitted only to act as agents: they may purchase and hold foreign exchange as agents for their clients, but may not sell it to other than class A banks. TABLE 43.-Japan: Oittstanding e~vport credit financing provided by 12 "A. Group" and 16 "B Group" ecrchange banks as part of joint financing with the Ecoport- Import Bank of Japan As of- Millions of yen Oct. 31, 1961 90,400 Dec. 31, 1965 93, 100 Mar. 31, 1966 97,100 239. The main burden of medium-term and long-term export credit financing is carried by the Export-Import Bank of Japan. This bank was established as the Export Bank of Japan in December 1950 but assumed its present name on 1 April 1952 when the scope of its activity was expanded to cover import financ- ing. The Bank is a public corporation whose capital, now Y 175,800 million, is entirely owned by the Government. According to the Act under which it was established, the Bank's purpose is "to supplement or encourage the financing of exports, imports and overseas investments by ordinary financial institutions, with the view of facilitating, through financial aid, trade and other economic interchange between Japan and foreign countries". 240. The Bank is administered by a President, a Vice-President and six Directors, and is inspected by two Auditors. The President, the Vice-President and the Auditors are appointed by the Prime Minister, and the Directors are appointed by the President of the Bank. The Bank is under the general super- vision of the Ministry of Finance and its annual budget and accounts must be submitted to the Parliament for approval. 241. The Bank can obtain ad~litional resources only by borrowing from the 4lovernment of Japan or by borrowing foreign currencies from foreign banks and other financial institutions. At the end of the fiscal year 1964/65, outstanding borrowing from the Government totalled V 291,400 million. The Bank's maximum liability limit is three times the total of its capital and reserve fund. The maxi- mum amount of loans and guarantees that it may have out~tanding at any time PAGENO="0072" 68 must not exceed the total of ltm capital and reserve fund plus its niaximtfln liability limit. 242. The Bank grants most of its loans iii the form of financing for export credits granted by Japanese firms. However, it is also authorized to make Invest- ment loans to Japanese firms desiring to: Purchase equipment for esthbllshillg OVerseas ventures; Make capital cOtttributiOnu to~ acquire shares of, or lease equipment to foreign corporations; Invest in Japanese corporatiOns Ostablished for the purpose of imple- menting investment projects abroad; Lend funds to foreign partners for the purpose of contributing to joint Japanese-foreign ventures. 243. Lastly, in addition to making some import loans to Japanese firms, the Bank is authorized to make loans to foreign governments and jmblic agencies: To promote imports from Japan which individual foreign firms would be unable to handle; To enable them to contribute capital to, or acquire stocks in, joint ventures with Japanese firms; To enable them to finance the installation or expansion of plants needed for their economic development. 244. According to the Export-Import Bank of Japan Act, the Bank should not "compete with commercial banks and other financial institutions in financing exports, imports and foreign investments". Consequently, it does not, as a rule, lend funds for less than six months or for transactions for which private financ- ing is available, and generally provides financing in co-operation with private financial institutions. FINANCING PROCEDURES 245. As noted in the foregoing section, export credits for the acquisition of Japanese capital goods are financed jointly by the commercial banks and the Export-Import Bank of Japan. The latter finances up to 70 per cent of the value of the contract minus down payment and profits if the credit is Of between six months and one year, and 80 per cent if the credit exceeds one year. TABLE 44.-EXPORT~IMPORT BANK OF JAPAN: DISTRIBUTION OF CREDITS, BY TYPE OF TRANSACTION [Millions of yenj Transaction 1959-60 1960-61 1961-62 1962-63 1963-64 Exports 75,300 91,100 98,600 139,500 184,300 Vessels 39,500 42,200 50,400 78,400 115,600 Vehicles and rolling stock 5, 70Q 9, 200 15,800 6,600 7,800 Electrical machinery 5,000 7,600 6,700 3,000 7,600 Telecommunication machinery 600 300 2,500 1,400 400 Textile machinery 4,800 6,400 5, 000 9, 000 10, 500 Steel products 2, 700 3,900 2, 300 4, 000 4,000 Other industrial machinery 15,900 21,500 15,600 19,600 21,500 Consumer durables 300 1, 600 800 Yen loans' - - (9,700) (6,000) (6,300) 16,000 16,200 Technical services 100 1,000 Imports - 400 1,300 1,400 900 200 Investments 8,100 11,200 8,600 7,800 12,500 Total 84,500 103,600 108,600 148,400 197,900 Credits outstanding at the end of year 140,400 198,600 261, 000 342, 600 443, 500 I Yen loans to foreign countries to finance imports from Japan. Sums in parentheses for 1959-60-1961-62 are already included in other subitems. - 246. The exporter discu~se5 with his commeri~ial bank the terms and con- ditions he intends to offer to the buyer, in order to ensure that they will be acceptable to thO ~3lxport-Tmp0rt ]3ank and the Export Insurance Section of the Ministry of International Trade and Industry (MITI). The buyer is asked to make a down payment of about 20 per cent of the value of the contract attd to obtain a repaymeht guarantee for the remainder from a reliable bank in his Own country. The commercial bank forwards to the Export-Import Bank the draft fittancial cOntraCt between the exporter and his customer, requesting PAGENO="0073" 69 a promise of financing. The eEporter will simultaneously seek an insurance corn' mitment from MITI. When preliminary approval has been obtained from both the Export-Import Bank and MITI (a process which usually takes about two weeks), the exporter will finalize his negotiations with his bank and the buyer. 247. Transactions which are eligible for financing by the Export-Impoi~t Bank include those involving equipment and parts and accessories thereof, other goods manufactured or produced in Japan and technical services supplied by Japan. Maximum maturities of credits for which financing is requested should not in principle exceed five years, but in recent years this limit has proved to be fairly flexible. The interest rate charged by the Export-Import Bank varies from 4 to 7 per cent, depending on the purpose and maturity of the credit and the collateral offered. Commercial banks usually charge rates of be- tween 8.5 and 9 per cent on the portion of the credit which they finance. EXPORT CREDIT INSURANCE 248. The Japanese export credit insurance scheme is operated by the Export Insurance Section of the Ministry o1~ Inter~iational Trade and Industry. The latter is advised on all important matters relating to export credit insurance by the Expoi~t Insurance Cop~c~l, which Is composed of the Minister of Inter- national Trade and Industry and eleven other members appointed by the Minis- ter from among the personnel o~ government agencies dealing with foreign trade, finance and insurance and from among experts in these fields. 249. All insurance premiums are credited to and all losses are debited from the Export Insurance Special Account e~tablished and financed by the Treas~ ury under the Export Insurance Special Account Act, which came into effect on 31 March 1950. This Act authorizes the Account to make temporary bor- rowings and to issue finance bills up to a ceiling specified by the Parliament, which also dEdermines annually the over-all insurance ceilings. PAGENO="0074" C,, 0 0 ~ G) -J -J 70 C,) 00000000 CC) 0000 0 0 CCJ 0 ~ CC) C,, PAGENO="0075" 71 250. As can be seen from table 45, there are eight types of export insurance: general export insurance, export proceeds insurance, export bill insurance, ex- port finance insurance, consignment sale insurance, overseas advertising insur- ance, overseas investment profits insurance and overseas investment principal insurance. 251. The type of insurance falling within the scope of this sthdy are the first six, and by far the most important of these is general export insurance, which usually accounts for between 60 and 75 per cent of all contracts insured. (a) General erport insvrance. This type of insurance, which can be obtained for exports of equipmei~t produced, process~d or purchased in Japan and exports of other goods designated by MITT, covers the following risks as from the date of the contract: (i) Restriction or prohibition of exchange transactions in the buyer's country; (ii) Restriction or prohibition of imports in the buyer's country; (iii) Suspension of exchange transactions owing to war, revolution or Civil war in the buyer's country; (iv) Prevention of delivery of the goods by war, revolution or civil war in the buyer's country; (v) Suspension of transportation to the destination, owing to cfrcum- stances occurring outside Japan; (vi) Any other circumstance occurring outside Japan which are beyond the control of the parties to the export contract; (vii) Restriction or prohibition of exports under the Japanese Foreign Exchange and Foreign Trade Act; (viii) Jn the case of contracts with foreign governments or public entities, cancellation of the export contract by the buyer or cancellation by the Japanese exporter for valid reasons not imputable to him; (ix) Bankruptcy of the buyer. This type of insurance may be obtained b~ individual exporters or by exporters' associations which exist in the different branches of industry. In the latter case, all expnrt contracts concluded by the members of the association concerned are covered. The exporters' associations now covered by such policies are those for cotton yarns and fabrics synthetic yarns and fabrics, wool products, textile manufactures, foot-wear, railway vehicles and parts, machine~y and plants. electric wire and vessels. In general, specific policies are issued, which are operative five days after the date of the insurance contract. However, a global insurance policy may be issued for specified types of goods. The maximum risk cover is 60 per cent in the case of commercial risks and 90 per cent in the case of non-commercial risks. The cost of the insurance ranges from 07 to 6.7 per cent, depending on the risks involved in the transaction, the reliab~ljty of the buyer and the guarantees provided by him. (b) E~oport proceeds insurance. This type of insurance, which is available for credit transactions involving equipment, vehicles, ships and other goods des- ignated by MITT and technical services, covers the following risks from the date of shipment or delivery of the goods or from the beginning of the services: (1) Restriction or prohibition of exchange transactions in the buyer's country: (ii) War, revolution or civil war in the buyer's country; (iii) Any other circumstances occurring outside Japan which are beyond the control of the parties to the contract; (iv) Bankruptcy of the buyer; (v) Default for six months on the part of the buyer (excluding default for reasons imputable to the exporter or supplier). For this type of insurance only specific policies are issued. The maximum risk cover is 90 per cent for all risks. (c) Ewport bill insurance. While the exporter or supplier is the beneficiary of general export insurance and export proceeds insurance, the beneficiary of export bill insurance is an authorized foreign exchange bank, which is insured against non-payment of documentary export bills drawn for the. collection of export proceeds that it has purchased. The policy is a global one; the foreign exchange bank concludes in advance an insurance contract with the Govern- ment for each fiscal or half fiscal year. Within five days of the actual financing or negotiation of a bill, the bank notifies the Government that the insurance contract is to be applied to that particular operation. The maximum risk cover is 80 per cent. The authorized foreign exchange bank which has been indemnified PAGENO="0076" 72 is expected `to make every effort to exercise Its rights in respect of the bills and the goo~~ concerned and to transfer to MITI any proceeds it may recover up to the amount of the indemnity received. (d) j~wp~rt ftnaswe fnsurance. The beneficiary of this type of insurance is a bank (excluding the Bank of Japan but including the Central Bank for ~gri- eul~ture and l~restry and the Central Bank for Commercial and Industrial Co- operative~). The bank can obtain insurance for 1oan~ macTo against bills or notes relating to exports or for export bills o~ notes it has discounted covering losses arising from the exporter's or producer's Inability to export the whole or part of `the goods intended for export or his inability to collect the whole or part of the export proce~cjs. The maximum risk cover is 80 per cent. The policy is a global one: the bank concludes in advance an insurance contract with the Gov- ernment for each fIscal year or half fiscal year. Within five days of the actual financing or negotiation of the bill or note the bank notifies the Government that an insurance contract is to be applied to that particular operation. (e) Consignment sale insurance. This type of insurance covers losses arising from the exporter's failure to collect proceeds of sales effected within the frame- work of consignmept sale contracts. The maximum risk cover is 80 per cent. (f) Overseas advertisement insurance. This type of insurance covers the exporter against losses resulting from non-amortization of expenditure incurred in connexion with advertising abroad. The maximum risk cover is 80 per cent. TABLE 46.-JAPAN. MIII: EXPORT INSURANCE OPERATIONS (Millions of yeni Type of insurance 1960-61 1961-62 1982-63 1963-64 A. General export insurance: Guarantees issued 269,683 270, 293 465, 140 493,616 Premiums received 501 377 546 596 Claiips paid 37 88 77 63 Individual policies: Guarantees issued 7,668 11,053 13,595 14,144 Premiums received 28 42 52 54 Claims paid 23 U 12 15 Comprehensive policies: Cotton manufacturers association: Guarantees issued 44,093 42,976 43,252 41,429 Premiums received 40 33 30 29 Claims paid 5 10 10 12 Synthetic fibers manufacturers' association: Guarantees issued 33, 893 39, 003 43,707 52,364 Premiums received 30 29 29 36 claims paid 59 52 35 Wool manufacturers' association: Guarantees issued 8,001 12,973 11,777 18,920 Premiums received 7 10 10 13 Claims paid 1 8 3 4 Textile manufacturers' association: guarantees issued 28,952 55,851 Premiums received 19 38 Claims paid Foot-wear manufacturers' association: Guarantees issued 1,529 3,121 2,613 Premiums received 1 2 Claims paid Vehicle manufacturers! association: Guarantees issued 24,283 9,946 15, 336 21,835 Premiums received 43 13 15 11 Claims paid MachInery manufacturers' association: Guarantees issued 80, 591 58, 145 76,320 104, 157 Prejniums received 227 99 85 133 Claims paid Shipbuilders' association: Guarantees issued 71, 153 04,698 229, 079 196,959 Premiums received 126 iso 304 281 Claims paid B. Export proceeds insurance: Guarantees issued 90,273 115,026 91,943 597,373 Premiums received. 987 1, 089 586 727 Claims paid 76 92 521 400 PAGENO="0077" 73 TABLE 46.-JAPAN,MITI: EXPORT INSURANCE OPERATIONS-~--Continuecf [Millions of yeni Type of insurance 1960-Si 1961-62 1962-63 196s-64 C. Export bill insurance: Guarantees issued 42,623 50,854 ~2,782 88,787 Premiums received 129 400 514 776 Claims paid 501 1 020 1, 028 964 D. Export finance insurance: Guarantees issued 2,448 2,171 1,623 1,867 Premiums received 9 9 7 7 Claims paicL 1 48 31 E. Consignment insurance: Guarantees issued - 30 15 35 127 Premiums received 1 1 1 3 Claims paid_ 1 F. Advertisement insurance: Guarantees issued 8 10 1 1 Premiums received Claims paid 1 3 1 G. Investment principal insurance: Guarantees isSued 1,092 577 953 1,908 Premiums received 36 30 26 36 Claims paid H. Investment profits insurance: Guarantees issued 4 Premiums recGived Claims paid Total: Guarantees issued 415, 155 439,004 622,476 791,965 Premiums received~. 1,867 1,907 1,679 2,144 Claims paid 617 1,252 1,640 1,432 Tixinco KII~nIDOM OF GItEAT BRITAIN AND NORT2SIIItN IRELAND INSTITUTIONAL FRAMEWORK 378. in the United Kingdom the financing of export credits for the ae4ulsition of capital goods in that country is carried out as part of regular banking busi- ness. The dominant role is played by the London clearing banks, the five Scottish banks, the three Northern Ireland banks and the merchant banks. 379. The London clearing banks, often referred to as joint-stock banks, in- clude-in addition to the ~o-c~1led "Big 1l'lv&' (Barclays, Midland, L1c~tds, West- minster and National Provincial)-Wilfiains tiedeon's Bank, tiustrlct Bank, Glyn Mills and Company, Mnrtins Bctnk, Ooutts and Company and' N~ltlona1 Bank. The London clearing banks, together With the ftc~e Seott1~h banks (Etitish Linen Bank, National Commercial Bank of SeOtithIci, Clydesdale E~t~k, Ebyal Bank of Scot- land `and Bank of Scotland) and the three Northern Ireland ba~ik~ (Bél~ast Banking Oompany, tJlster Bank and Northern Bank), prdvide the bulk of me- diuin-term export credit financing as Well as mOst short-term ë~port credit ilnatining. 380. The merchant banks are either old-established partnerships or privait~ companies which have long been active in the field Øf acceptance financing and have, bec'ause of this, become known as "acceptance hotises." They are very ac- tive in organizing bank consortia (eompose4 of the clearing, banks mentioned above) to finan4~e exports for medium-scale and large~sca1e projects in develop- ing countries. Those merchant banks which are members of the accepting Houses Committee are: Baring Brothers and ~ompany, Limited. Brown, Shipley and Company, Limited. ~ntony Gibbs and Sons, Limited. i~rbuthnot Latham and Coixipany, Limited. Hill, ~`amuel `and Company, Limited~ Wm. Brandt's sons an4l Company, Limited. Samuel Montagu and Company, Limited. Guinness, Mahon and Company, Limited. Hambros Bank, Limited. PAGENO="0078" 74 Charterhouse Japhet, Limited. Morgan Grenfell and Company, Limited. Lazard Brothers and Company, Limited. Kleinwort, Benson, Limited. N. M. Rothschild and Sons. J. henry Schroder, Wagg and Company, Limited. S. G. Warburg and Company, Limited. 381. In the medium-term export financing field, a limited role is played by a number of organizations established in recent years to meet the needs of ex- porters who find it difficult to finance their credits with their banks. These or- ganizations, like the "confirming houses" in the short-term export financing ~field, give the credit to the foreign buyer. Among the largest are the Export Re- ~finance Corporation, the British Overseas Engineering and Credit Company, London Bridge Finance, all linked to merchant banks, United Dominions Trust's International Financial Services, and Barclay's Export Finance Company. 382. In 1963, the United Kingdom Government carried out an inquiry into the structure of trade credit extended to or received from other countriesL Ac- rording to the results of the inquiry, more than one-third of exports are sold on credit: most of these sales are on short-term credit of up to six months and involve maturities averaging three months. Export sales involving credits with maturities exceeding six months account for less than 10 per cent of all total exports. United Kingdom companies were not always able to indicate whether the credits extended to their branches or subsidiaries abroad were short-term or medium-term and long-term credits, but an analysis by length of credits has been made for outstanding credits granted to unrelated firms (see table 59). TABLE 59-UNITED KINGDOM: EXPORT CREDITS GRANTED TO UNRELATED FIRMS OUTSTANDING AT END OF 1963 (Millions of poundsj Item Total Short term Medium term and long term Other Credit extended by United Kingdom business 486 Bills discounted or assigned 130 307 162 17 37 93 Source: United Kingdom Board of Trade, "Structure of International Trade Credit," Board of Trade Journal (London), May 7, 1965, p. 994. 383. About 40 percent of the credits outstanding from unrelated firms had been granted on medium-term or long-term basis. The medium-term and long-term credits granted to eastern European countries and the USSR were several times as large as the short~term credits accorded to those countries. Latin America was the only other area where medium-term and long-term credits outstanding were greater than short-term credits. The amount of medium-term and long-term credit advanced to North America was relatively small. Leaving aside the eastern Euro- pean countries and the USSR, about 80 percent of the remaining medium-term and long-term credits went to developing countries. For long-term contracts in excess of £100,000, repayments were scheduled over a period extending from 1964 to 1973. Suppliers' credits up to two years 384. Under a scheme introduced In 1966 the London clearing banks and the Scottish and Northern Ireland banks have agreed to provide finance at Bank rate against eligible export instruments which have been unconditionally guaran- teed by the Export Credits Guarantee Department (ECGD). To be eligible, In- struments must be either trade bills drawn on a foreign buyer, or promissory notes issued by him, and must have a tenure of between thirty days and two years. The interest rate will be the current Bank rate, with a minimum `of 4.5 percent, but it will vary as Bank rate varies, and will not be fixed for the whole term for which finance is provided, as it is in the case of longer-term export finance. PAGENO="0079" CC - Co - C,) - 2 ~:; ~ ~ C) ~ 2 )D N4 ~ > OC) -4 - C I N) ~4N)CDC) ~ -4 > C) C) 2 -4 2 C) D 0 = C) 0_~ ~ m CD 0 = 2 > C) -4 C,) 2 )< C) C/) 0 C) C) C) 4(O C) C) C) C) N) .3~ 000 3 ~CD ~ ~CD ~ ~ -4 0 CCD ~` ~NPP~NNNO~$~n?o N) C) ~o n C"C.n -a' -~cn N) S-Co C,)C)CoC)C)N) oo~ ~-4 C) on N) -4 > C) 2 -4 C) 0 -4 o 0 0> *00 o = 2 0. -~ ~n C') CD 0 CD 0 CD ~ P1 0 2 C) V 0 -4 2 C?' E. 1K 20 0 223 2 (11 UCOCO0CO~4OO0C)~QDCOC)1~ ~J0)CJCD~C)Ooon - 4N)(000 CC~-' )~D-C)~N)~ NDC/) 0000 N)C)N))~O~ 00000 PAGENO="0080" suppliers' cmd 7n~4ye~4~ ~~dits di~~r two years 385. For contracts of t~o ~a~rs and upwards, the banks have agreed to pro- vide export finance at a fixed rate, at present 5.5 per cent, where the credit is covered either by ECGD bank guarantees or by ECGD financial guarantees. The latter are designed for major projects involving payment over more than five years and enable the EOGD to co~rer direct loans made by credit institutions to the foreign huyer, thus enabling the supplier to be paid on a cash basis. 38fi. The Bank of Engl*nd stands ready to refinance insured export credit of two years or more. Th~ amount refinänceable is either 30 per cent of the loan outstanding or repayments due to be made by the buyer in the next eighteen months, whichever is the greater. The commercial banks may count what is thus refinanceable as liquid when calculating their liquidity ratios, and for this reason have so far not needed to make use of the refinance facilit~ The Bank also stands ready nuder a separate scheme t~ refinance the whole of the out- standing balance of an insured export credit ~lve years or more after its origin, but the banks are not entitled to regard the additional amounts refinttnceable nnder this scheme as lhtpiid assets. EXPORT CREDIT INSURANCE 387. In the United Kingdom two institutions provide export credit insurance. B~ far the greatest part is provided by the Export Credits f4uarantee Depart- ment (ECGD), but a private firm, the Trade Indemnity Company, Limited, also provides coVer for commercial risks only. 388. The ECGD is a government department directly responsible to the Presi- dent of the Board of Trade. The Department's statutory authority was estab- lished by the seven Export Guarantees Acts (1949-1964), which enable the Department to issue guarantees and accept the resulting liabilities. Business up to a maximum liability of £1,500 million may be transacted under section 1 Of the main Act, whose purpose is to encourage overseas trade. Under this section, guarantees must have the consent of the Treasury and are oonslderod b~ the Advisory Council. This Council, which meets monthly, consists mainly of ex- perienced bankers and businessmen and its recommendations are followed by the ECGD. The ECGt~ plans to transact business under section 1 on a self- supporting basis over a period of years. 889. Under section 2 of the main Export Guarantees Act, cover up to a total of £1,300 million can be given with the consent of the ~reasnry when it is "in the national interest" to help trade or give economic aid. The Advisory Council need not be consulted with regard to these guarantees. 390. The majority of economic assistance loans given by the United Kingdom to Commonwealth and Other countries for the purchase of United Kingdom goods have been administered by the ECGD under sections 2 and 3 of the Export Guarantees Act. These loans and their administration have not, however, been a major part of the Department's activities. Towards the end of 1964 a new ministry, the ~Ministry of Overseas Development, was formed, having responsi- bility for the whole of the United Kiag~dOth's aid programme. The ECGD's re- sponsibility for admiiiistering United l~jngdom tie~l aid has now passed to that Ministry. 891. The two main types of insurance given are classified as "comprehensive" ami "specific". Comprehensive insurance 392. Under this type of cover the Department requires a large spread of risks and a high turnover, covering the relatively safe business as well as the less safe. Comprehensive policies were originally issued to cover consumer goods business on a short-term basis (credits of up to six months). Since 1959, how- ever, all business on repayment terms of up to five years can be insured Under the comprehensive policy provided it is of a recUrring nature and covers a wide range of buyers and markets. 393. The ECGD believes thalt this insistence on a wide range of business en- ables it to insure a wider range of risks, guarantee a higthr propbi~tib~n ot thO total business and in the long term to reduce premiums. The exporter either undertakes to insure all of his export business during the ne~t one ~w threo years, or his export business in specified tharkOts only, during the ne±t year. PAGENO="0081" 77 These specified markets must comply with the Department's stipulation of a spread of risks. The rates for this selected cover of markets are slightly higher than those for the full cover. 394. The risks covered fall into the following categories: (a) Commercial risks, such as insolvency of the buyer or his failure to pay; (b) The buyer's refusal to accept goOds which have been exported to him; (c) Political risks, which include import license restrictions, war, revolution and certain other risks; (d) Additional handling, transport or insurance charges arising from inter- ruption or diversion of the voyage; (e) Any other cause of loss occurring outside the United Kingdom and beyond the control of the exporter or buyer. 395. The percentage of loss covered varies according to the category of risk. Under the first category, the Department covers 90 per cent of the loss. Under the second, the exporter bears the initial 20 per cent of the total price and the Department 90 per cent of the next 80 per cent. This means that the Department has a maximum liability of 72 per cent of the contract value. Under the third, fourth and fifth categories, the Department's liability is 00 per cent if the cause arises before shipment and 95 per cent if after shipment. These figures repre- sent the new arrangements made available in May 1965. 396. In some cases where there are high economic or political risks, the ECGD has found it necessary to reduce the percentage cover, to 75 or 80 per cent of the total. 397. On the other hand, in recent years the Department has in some cases extended its cover during the later years of a contraCt to 100 per cent. This system was developed to help firms with accttmulated frozen assets to cover the uninsured parts of contracts. This Is a direct result of the financial insti- tutions' unwillingness to finance exports to ~ greater degree than is backed by the ECGD. The 100 per cent cover facility Was introduced in February 1962 for selected contracts which bad already run for two years after delivery and acceptance of the goods; In 1965 this period Was reduced to one year. The con- tract must Involve at least three years' credit to the buyer and some payment must have been made in the first year. The contract must of course be trouble- free, and be likely to remain so. The extra cover, when given, is supplied at no extra charge. Thin facility Is provided by ni~ endorsement to an e~tefided-terms approval issued in respect of a particular contract under the comprehensive policy, or by means of an endorsement to a specific policy. Specific insxranec 398. Under the specific policies the exporter insures individual export trans- actions in capital goods or large projects which are unsuitable for compre- hensive cover. These policies are available either from the date of the contract or the date of shipment~ The standard cover is 90 per cent; no cover is provided for the contingency of the buyer refusing to accept the goods. 399. The comprehensive and specific policies form the basis of the cover given by the ECGD. In addition, however, special facilities are available for larger projects. Where the terms of lending to an exporter by a bank extend up to five years or more, which is often the case with large projects, subsequent finunce may be difficult to obtain. In such cases the ECGD may provide a guarantee to the bank (at additional cost), undertaking unconditionally to pay the hunk should the buyer fail to repay the money due. Prior to January 1965, the Eocrn provided direct guarafitees to banks for large capital goods orders amounting to £100,000 or more and involving at least three years' credit. In the future any contract for exports of any manufactures for which two years' credit or longer is approved by the ECOD will be eligible for these guarantees. The guarantee comes into operation only after acceptance of the goods by the buyer and covers 100 per cent of the credit. 400. A direct guarantee is issued to supplement the cover given to the exporter, and the exporter's normal poliCy i~ amended tO exclude lOs8es dovered by the bank guarantee. A separate recourse arrangement Is made betWeeh the ECOD and the exporter, under which the ECGD retains a right of recourse against the exporter for any payments made to the bank, where it can be shown that the Department would not have been liable under the terms of the normal in- surance cover or where the amount covered under the normal policy was less 94-197-68-6 PAGENO="0082" 78 than the 100 per cent payable under the bank guarantee. The bank's recourse in a case of non-payment of promissory notes or bills of exchange is to the ECGD not to the exporter, who thus gets his finance from the bunk on a non- recourse basis. 401. Alternatively, the ECGD may give financial guarantees on loans made by commercial banks or other financial institutions direct to the foreign buyer. This facility, introduced in April lil6l, is a departure from the EOGD's normal busi- ness of guaranteeing suppliers' credits and is administered through its Financial Guarantee Division. Financial guarantees are available for projects such as power stations, steel mills, railway projects, etc., normally costing at least £2 million, excluding local expenditure, or £1 million in the case of ships. The nature of the assets created in all cases must be such that their useful life extends sub- stantially beyond the period of the loan. Normally the buyer is expected to pay from hi~ own resources direct to the supplier at least 20 per cent of the contract price; the remaining 80 per cent is paid to the supplier out of the loan made to the buyer, the loan being guaranteed 100 per cent (capital and interest) by the 1~OGD. In arranging a financial guarantee, the supplier initiates preliminary discussions with the ECGD and the bankers as soon as he starts negotiations with a buyer on a project for which a financial guarantee is required. In the United Kingdom, it is the supplier who makes the arrangemenits for the J~JCGD financial guarantee and pays the premium. No approach by the buyer will be entertained by the Department, and he must be introduced by the supplier to the financial institution arranging the financing. No mention should be made to the buyer of the proposed financial guarantee. 402. Financial guarantees are available only for especially worth-while busi- ness which satisfies certain conditions, among which are: (a) Phe existefice of good commercial grounds for gaining the contract, that is, that lit might eventually assist the United Kingdom balance of payments; or, maintain a position in an established market; or, stimulate an industry short o1~ orders; (b) The credit-worthiness of the buyer must be satisfactory to the ECGD and the economic and political risks in the overseas market must be at a level acceptable to the EOGD. TABLE 62.-UNITED KINGDOM: TOTAL BUSINESS DECLARED,' 1949-50 TO 1965-66 Commercial National Fiscal year . business (sec. 1) interest business (sec. 2) Total. 1949-50 259 1 260 1950-51 317 20 337 1951-52 441 37 478 1952-53 388 17 405 1953-54 380 17 397 1954-55 381 30 411 1955-56 395 31 426 1956-57 450 42 492 1957-58 483 27 510 1958-59 549 21 570 1959-60 671 23 694 1950-61 721 22 743 1961-62 806 39 845 1962-63 924 52 976 1963-64 1964-65 1965-66 1,093 1,243 1,412 ~68 271 69 1,161 1 314 1,481 `Including exports made under all guarantees, together with raw materials shipped for processing overseas, services rendered or work completed under services and constructional works guarantees and goods shipped from 1 country to another under external trade guarantees. Excluding advances made under economic assistance loans. 2 Including £32,000,000 advanced under financial guarantees. PAGENO="0083" 79 TABLE 63.-UNITED KINGDOM: REVENUE ACCOUNTS, COMMERCIAL AND NATIONAL INTEREST INSURANCE, 1961-62 TO 1965-66 tIn millions of poundsj Commercial insurance (sec. 1) National interest insurance (sec. 2) Item 1961-62 1962-63 1963-64 1964-65 1965-66 1961-62 1962-63 1963-64 1964-65 1965-66 Expenditure: Claim payments 4. 1 4. 6 5. 2 4. 0 7. 4 . 1 . 1 . 3 . 6 1. 2 Administration and services 1.6 1.7 1.9 2.3 2.5 .2 .2 .3 .3 .2 Total, expenditure~__ 5. 7 6. 3 7. 1 6. 3 9. 9 . 3 . 3 . 6 9 1. 4 Balanceforyear 7.9 4.9 6,0 8.2 5.8 1.8 1.7 2.3 5.9 2.0 Balance at beginning of year 27. 9 35. 8 40. 7 46.6 54. 8 4. 3 6. 1 7. 8 10. 2 16. 1 Balance at end of year_ 35. 8 40. 7 46. 7 54. 8 60. 6 6. 1 7. 8 10. 1 16. 1 18. 1 TABLE64.-UNITED KINGDOM: MAXIMUM LIABILITY UNDER COMMERCIAL AND NATIONAL INTEREST INSURANCE, 1950-66 (Millions of pounds) 1950 `~52.9 1951 225.7 1952 269.1 1953 250.1 1954 232. 0 1955 240.7 1956 244. 5 1957 263.4 1958 272.0 1959 310.9 1960 333.4 1961 388.5 1962 469.7 1963 542.5 1964 652.4 1965 773.9 1966 931.4 47.7 1.0 0.1 49.9 16.0 9.7 57.9 24.7 9.6 59.7 14.6 6.5 57.7 20.9 7.2 57.4 31.3 19.2 72.2 25.9 27.7 99.3 20.8 24.~ 180.8 18.2 22.2 178.1 26.2 23.4 208. 3 23. 1 23. 0 251.2 27.9 39.6 269.7 56.8 51.5 274.3 68.3 a 100.5 277.9 79.4 2113.8 289.2 72.1 2249.3 290.9 54.3 366. 8 Income: Premium 9.2 7.1 7.3 7.0 6.8 1.7 1.6 2.3 5.7 1.9 Recoveries 2. 1 1.9 3. 0 4. 7 5. 7 . I - . 5 . 7 Interest 2. 3 2. 2 2. 8 2. 8 3. 2 . 3 . 4 . 6 . 6 . 8 Total, income 13. 6 11. 2 13. 1 14. 5 15. 7 2. 1 2. 0 2. 9 6. 8 3, 4 ~ ~ .~ As at March 31 Commercial insurance National interest insurance (section 1) (section 2)1 Short-term Short-term Medium- and Medium- and term and extended- term extended- long-term term term Excluding liabilities under economic assistance loans. 2 Including financial guarantees. PAGENO="0084" 80 TABLE 65.-UNITED KINGDOM EXP~RTS: COVERAGE BY ECGD, 1949-50 TO 1965-66 [Millions of pounds, except as indicatedj Year Total exports Exports insured by ECGD ---------------------- Value 1 Percentage of total 1949-50 1950-Si 1951-52 1952-53 1953-54 1954-55 1955-56 - 1956-57 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1,901 2,335 2,866 2,575 2,733 2,847 2,067 3,377 3,445 3,317 3,595 3,701 3,835 4,018 4,315 4,452 5,051 218 11.5 288 12.3 400 13.9 355 13.8 12.6 367 12.9 388 12.7 465 13.8 482 14.0 530 16.0 660 18.3 703 * 19.0 805 21.0 924 23.0 1,081 251 1,202 27.0 1,365 26.8 1 Excluding busi~i~ss declared under externOl trade, processing, services, constructional works, aod bank guarantees, which does not represent direct exports from the United Kingdom Advances made under economic assistance loans are also excluded. 1949-50 1950-51 1951-52 1952-53 1953-54 1954-55 1955-56 1956-57 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 222 283 397 337 326 335 353 2 388 7 411 12 423 16 533 31 580 33 664 57 735 92 904 112 1,032 127 1,171 143 TABLE 66.-UNITED KINGDOM: BUSINESS DECLARED UNDER SEC. 1 (COMMERCIAL INSURANCE),' 1949/50-1965/66 [In millions of poundsj Year Medium-term (heavy en- Short-term Extended- gineering and terms (en- large-scale gineering) capital proj- ects) 37 34 44 51. 54 46 40 60 110 107 108 85 97 71 84 98 1 Including exports made under all guarantees, together with raw materials Shipped for processin~ overseas, service rendered or work completed under services and constructional works guarantees Sod goodS Sh~pped from one country to another under external trade guarantees. PAGENO="0085" 81 TABLE 67---UNITED KINODOM: BUSINESS DEDLARED UNDER SEIflION 2 (NATIONAL INTEREST INSURANCE)' 1949/~0496S/66 (In millions of poundsj Medium-term Year and long-term Extended- (heavy engi- Short-term term neering and (engineering large-scale products) capital projects) 1949-50 1950-51 1951-52 1952-53 1953-54 1954-55 1955-56 1956-57 1957-58 19~8-59 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1 10 10 20 17 12 5 12 5 24 6 22 (2) 9 14 (2) 28 18 (2~ 9 15 1 5 16 5 2 13 3 6 11 4 24 22 10 20 29 6 2 33 57 10 244 7 7 55 1 lnc[udlng exports made under all guarantees, together with raw materials shipped for processing Overseas, services rendered or work complet&t under services and constructional works guarantee and goods shipped from one country to another under external trade guarantees. Excluding advances made under economic assistance loans. 2 Including financial guarantees. TABLE 68.-UNITED KINGDOM: EXPERIENCE UNDER SEC. 1 (COMMERCIAL INSURANCE), 1949-50 TO 1965-66 (Millions of poundsj Year Premium income Claims paid Recoveries' Cumulative 2 1949-SO 1950-51 1.7 2. 4 0. 8 0. 4 2. 4 1. 1 7.8 8. 7 1951-52 3.1 .6 2.0 13,0 1952-53 2.8 14.4 .2 1.4 1953-54 2,5 11.4 4.8 -3.5 1954-55 1955-56 1956-57 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 2.9 3. 6 3. 7 5. 0 6.1 6. 6 7.4 9.2 7. 1 4.6 5.4 2. 3 4. 7 5.4 5. 4 4. 7 4. 8 7.0 3.5 5. 1 3. 7 4.0 4.0 4.1 2.1 4. 6 1. 9 -5 4. 8 8. 1 13. 0 15.5 20 5 27.9 3548 40. 7 196364 1964-65 1965-66 7.3 7.0 6.8 5.2 3.0 4.0 47 7.4 &2 46.7 S4.8 60.2 I May relate to claims payments made in previous years. 2 These figures take account of administrative expenses interest on recoveries and interest on cumulative balances and include a cumulative balance of £6.5 million brought forward at Apr. 1, 1949. PAGENO="0086" 82 TABLE 69-UNITED KINGDOM: EXPERIENCE UNE~ER SECTION 2 (NA~I1ONAL INTEREST INSURANCE), 1949/50-1965/66 [Millions of ~oundsJ Year Premium income Claims Reco paid veries 1 Cumulative balance 2 1949-50 1950-51 0.3 0.2 1951-52 . 5 . 6 1952-53 . 3 0. 1 . 8 1953-54 . 3 1. 1 -. 1 1954-55 .7 .3 .1 1955-56 8 . 1 .9 1956-57 .8 .4 1.2 1957-58 .5 .2 0.7 2.3 1958-59 .5 .5 .4 2.8 1959-60 .7 .4 .2 3.3 1960-61 1.1 2.9 2.6 4.6 1961-62 1.7 .1 .1 6.1 1962-63 1.6 .1 7.8 1963-64 2.3 .3 10.1 1964-65 5.7 .6 .5 16.1 1965-66 2.9 1.2 .7 19.1 1 May relate to claims payments made in previous years. 2 These figures take account of administrative expenses, interest on recoveries and interest on cumulative balances. Mr. OI4wsoN. Now, in connection with your statement that other f actors are involved, on page 4, down at the bottom o~ the page: In exceptional cases, where foreign competition or other commercial factors to warrant it, variations in ternis provided would obviously be considered. Even in those instances, however, terms would remain essentially commercial and would in no way resemble the terms and conditions associated with foreign aid. Are we going to then make some concessions? If we use these terms, which are flexible terms, will we allow some decrease in rates? Mr. MCQUADE. I am not enthusiastic about taking Indonesia as our basic example. I would take a country like Iran, which seems to' have moved out of the category where it is eligible for U.S. economic assistance, where there is a rising amount of effective commercial business to be done, and where the British, French, and Germans are very a~otive competitiors. If it turns out they are going to 7 and 9 or to 15 years for a given kind of transaction, it would be my hope-I guess it is naturally the ~a1esman's hope-that American exporters could get similar kinds of opportunities and credit support in competing for the business in Iran-which is, I think, turning out to be a reasonably good place to enter into commercial trade contracts--in terms of repayments, terms and interest rates. This, I take it, is what concerns you more. Mr. CLAWSON. The combination of the `two again. Mr. MCQTTADE. It is a combination of the two in order to be an effective competitor. I do not see going down, as Mr. Widnall suggests, into the 3 percent range. But I think 6 pereent, 5 1/2percent, some variation on either side of the basic rate can be' important in catching a piece of business. And we like the leeway to try to meet the terms. Mr. CLAWSON. When you say "essentially commercial" you are con- sidering perhaps a half a percentage point either way? Mr. MOQUADE. `That is the notion which I certainly had in mind. Mr. CLAWSON. Thank you very much. Mr. BAmlE~r. Mr. Ashley. PAGENO="0087" 83 Mr. ASHLEY. Mr. McQuade, in your statement, on page 3, you say: The types of export transactions that are not now considered appropriate for the Eximbank but might be eligible for special account financing because of balance of ~iayments and commercial considerations would include cases where the Eximbank, because of previous financial commitm~nts, is not able to under- take pew finan~ial commitments even though the markets involved may be promising. When Mr. Linder appeared before us some months ago, he indicated that the Bank would prtbahly use up the increase in authority from $9 to $13.5 billion even before the 5-year extension of authority elapsed for loans extended under the traditional lower risk criterion. What kind of pressure does this put on. the resources of the Exirn~ bank if this bill is adopted? I am referring specifically to the phrase you used, "because of pre- vious financial commitments." Mr. MCQcUADE. I believe I may have used this phrase inelegantly. What I have in mind is what I think Mr. Linder was explaining very clearly; that commitments in a given country might reach a level at which in the normal course the Exiinbank would not like to have greater exposure and would, therefore, be reluctant to add new com- mitments. Mr. ASHLEY. We do face the problem, of course, from Mr. Lrnder's previous tostimony, that under the present criterion, the additional input; namely, $4.5 billion, would be expended prior to the 5-year extension of authority. I am wondeiing then just what impact this will have, because my time is limited, let me simply say that I will await an answer on that. That is easy to supply for the record. (The answers to Mr. Ashley's question folio~s.) The $500 million requested for the new program, while not insubstantial, represents only one-ninth of the $4.5 billion of increased authority recently ap- proved by the Congress. Or, looked at from another viewpoint, the $500 million represents approximiately six months activity if the $4.5 billion is spread over the addition~ai five years of life authorized in the same bill. As I empbaMzed dur- ing your consideration of HR. 6649, the nature of the Bank's operations do not permit us to progra~n our loans nor to predict with great certainty the rate at which we will expend our lending authority. About all I can say is that setting aside $500 million for the new facility will probably require us to come baëk to Congress for additional authority somewhat sooner than would otherwise be the case. Mr. ASHLEY. I share Mr. Reuss' concern. When we look at the legis- lation that is proposed, it most certainly saddles on the Oongress the responsibility for changing the Bank's criterion. What the bill says is that th~ Bank shall be authorized to enter into credit transactions which do not meet the test of reasonable assurance of repayment, as provided in sectkn 2(b) (1) of the Export-Import Act. Thisis whatyon seek to fasten to u~s. I look at section 2(~b) (1) ~nd I read it, as follows: It is the policy of th~ COngress that the Bank in exercise of its function should supplement and encifira~ge and not compete with private capital, and that loans so far as possible be consistent with carry~pg out the purposes of stiI~section (a) shall genei~a1ly be for specific purposes and in the judgment of the Board of Directors offer reasonable assurance of repayments PAGENO="0088" 84 Now, on the basis of what has been said to us this morning, I am not entirely sure why we need this new graiiit of authority. There has been an effort to compare reasonable assurance of repay~ne~t with clear ex- pectation of repayment, which presumably would be the new guideline. I find it difficult to draw this distinction, particularly since there has been no effort on the part of the witnesses to tell us what comprises reasonaibie assurance of repayment, and what specifically is meant or what would be meant by clear expectation of repayment as opposed to reasonable assurance of repayment. So on the basis of the statute before us and on the basis of the criteria of the Bank, as I read it from the basic Eximbank authority granted by the Congress, I am frankly a little bemused why this legislation is necessary at all. Mr. Grirrrs. Would the gentleman yield for a question? Mr. ASHLEY. Yes. Mr. Grirrrs. Would you state where is the language, "clear expectation"? Mr. ASHLEY. That was used in the testimony. And I would like an answer to this. Tell me what would happen if this legislation does not pass. And I ask that as a friend of the Bank and also of the administration. There was a whole page of testimony, I might say, that quoted the President's urging of greater use of the Exim facilities to increase our trade account. I did not find a single phrase on page 2, or elsewhere, quoting the administration as urging a change in the Bank's criterion. So I would ask the question, What would happen if the bill before us does not pass? Can a case really and truly be made that this would hamper the operation of the Bank in the kinds of loans that it per- haps has not been making but it would seek to make? Are you really prepared to say that there is something so specific about reasonable assurance of repayment that, on the responsibility on the Board of the Bank policy could not be construed to include loans which had a clear expectation of repayment? Mr. LINDFYR. May I comment? Mr. Asw~r. Yes. Mr. LINDRR. Possibly the words "clear expectation" are unfortu- nate. Maybe we should drop the word clear. We would not make a loan under this new program where there was no expectation of repayment. That is clear. I would merely point out that we have some fairly simple guidelines. AID has a criterion for its loans of "reasonable prospect of repay- ment." We have a law under which we have been operating for years and under which we have been taking, I think, very, v~ry substantial risks, but, nevertheless, refusing to take certain other risks because of the "reasonable assurance of repayments" provision of our law. What we are suggesting here is that we want to keep the `standard of the Bank-the standard which the Bank has maintained over the years-but wish to loosen it in respect to $500 million. I will be glad to quote specific examples. I do nqt, think, for exam- ple, we can go very much further with the Republic of Ghana, where we have an exposure of $68 million. It is perfectly clear any one can pick me up by saying, "You cannot tell me that you have reasonable PAGENO="0089" 85 assurance of repayment for $68 million and you would not have reason- able assurance for $75 million." The fact of the matter is that, one has to set a limit. And if I were to take your time by telling you exactly what the safeguards are with respe~t to the $68 million due from Ghana-~on back-to-back contracts having to do with the manufacture and refining of aluminum, as well as assurances of trustees outside of the country-I believe I could demonstrate that we do not have as much risk as we appear to have. I do not think we ought to go any further with Liberia, where we have an exposure of $90 million at the present time. I do not think we ought to go very much further in Brazil, where we have more than $700 million at the present time. I think Bolivia, which was in default to us for years and years but has finally worked out a repayment schedule which provides for very small payments in the early years, is not ready, under our current legislation, for the amount of credit that they probably would want; and I certainly am not thinking of $25 or $50 million or any such figures. Our current exposure is $38 million in that country. I would put the Dominican Republic in the same category. We have $32 million there. Now, gentlemen, when you ask what is our specific requirement as to reasonable assurance of repayment, all I can say is that if you live with this problem long enough and look at the cases that come before you, you develop a `sense of where the borderline ought to be. We believe the Bank has a reputation for prudent management and we want to maintain that. We think it is very important. The Congress has given us very broad authority and I think I have an obligation to treat that broad authority very carefully. I would refer again to the example of the motor car manufacturer who wants us to extend $6 to $8 million on a revolving credit basis. Now, 2 or 3 years ago, when the situation was far less clear than it is today, we had an exposure in that country of $30 million. We built that up to $170 million and we probably will get to $200 million before the end of this fiscal year or during the next fiscal year. But the buyer there, while he has a good reputation, will simply not supply an ade- quate balance sheet. You cannot really determine that he is going to repay. He has debts which are secured by mortgaged property and any moneys that we lend will be junior to those debts. In those circum- stances it seems to me that the Bank ought to have an instruction from the Congress as proposed in this bill, that up to $500 million, with the advice of our friends from Commerce and Treasury and others, could be authori~ed for this type of case. I would also point to Turkey which wants to buy some planes on credit, and Turkey's economy i's not yet in a position which can be regarded as entirely viable. It will be getting aid for at least 2 or 3 years more. I do not want to see the Russians sell those planes to Turkey and yet I am not prepared to increase our commitments in Turke.y by the amount that will be required to finance those planes. I think it i~ like the old song from "Oklahoma"-"She's gonO about as far as `she can go." I think we have gone about a's far as we ~an go under our present criteria in Turkey. PAGENO="0090" 86 Mr. ASiTLEY. Mr. McQuade indicated in his testimony that other countries have a variety of similar programs for credit facilities which, of course, is entirely true. I am not convinced that these countries ad- vertise to the world through their legislative body that they are going to abandon reasonable assurance of repayment in lieu of the lesser~ standard. I do not think that they do this. Mr. LINoRE. Both Canada and the United Kingdom have separate statutory authority allowing them to write export guarantees or in- surance for transactions which are in the national interest but which the Export Credits Guarantee Department, in the case of Britain~ or the Export Credits Insurance Corporation, in the case of Canada, would not undertake under their regular programs. Mr. ASHLEY. I think the responsibility should be on the Board. You run the institution. Mr. UNDER. If I may finish my thought, Mr. Ashley, there is a separate category of risks that are taken by E'CGD upon the decision of the Board of Trade and not by ECGD itself. The same thing is true in Canada where the Cabinet decides, rather than ECGD making the decision. All we are saying here is that we will continue to make the decisions. We would like some advice from Congress so that we have the facilities comparable to section 2 of the EICGD Act in the United Kingdom and section 21 of the ECIC Act in `Canada. We do not believe we can maiiitain the reputation of this bank if we are required to lower our standards without specific statutory pro- visions for so doing. Take India for example, where we have an exposure of some $300 million. There are projects that are very important to do in India which they are not able to do because we insist on limiting our addi- tional exposure in India. We think that is appropriate under our cur- rent legislation. If we were not to insist on such limitations we would substitute our- selves for AID, which we do not intend to do. On the other hand, India has clear need for nine planes for its in- ternal transport system. They are either going to get it from us or, we think, from one of our competitors. You ask why do you not give it to them? I say we do not give it to them because if we are prepared to lend another $50 million to India- and I doubt we are prepared to do so, we are going to use that $50 million for things which we think are more important. Mr. ASHLEY. I am sorry, `but I do not quite see why this is not a matter of internal administration resting with the Board rather than *the Congress. Mr. BARRETT. Mr. Stanton. Mr. STANTON. Thank you, Mr. Chairman. Gentlemen, I think this has been a very enlightening hearing this morning. I certainly, for one, have learned a great deal and there does seem to be a question of whether or not this legislation is needed. But I think you are most honest in stating, and which I for one, es- pecially congratulate you, Mr. Linder, in your effort to run a tight ship. One purpose of this legislation might well be in a couple of years you can come back in and your loss figures are not so good then, and Con- gress itself is somewhat to blame if we pass this legislation. PAGENO="0091" 87 Mr. Petty, I had a couple of questions in regard to your general statement that you pointed out, which, 1 think, is general knowledge to all of us, that our balance of trade figures for last year, and espe- cially the first quarter of this year, are very poor. Do you not think that in light of this performance that the President's goal back in January of a $500 million target improvement in U.S. balance of trade over calendar 1967 is somewhat unrealistic? Mr. PETTY. In light of the events of the last 3 months~ I agree. Mr. STANTON. The second question is, do you not think it is also inconsistent that on the one hand we are encouraging U.S. industry to become more export minded, while at the same time we are pursuing a policy at the Treasury Department of controls over direct invest- ments of U.S. business abroad? Mr. PETTY. I think the position on the relationship of direct invest- ment to U.S. exports is less clear if the mandatory program serves- as the voluntary program has in the last 3 years---not to reduce the total amount of gross plant and equipment investments made by United States companies. In fact, such investment has increased from about $6 billion per annum from 1964 to about $10 billion per annum in 1967. Then the opportunity for components and follow on sales by U.S. corporations as a result of direct investment does in fact continue. What you have done is simply substitute a foreign source of this capital for what was once a dollar outflow. I think the issue the question poses is whether the mandatory program as compared to the voluntary pro- gram will be that much more rigid, that much more difficult, will make the demands for foreign capital that much greater, so that U.S. corporations will not in fact be able to maintain a high level of in- vestment expenditures through access to the capital market oppor- tunities available to them to borrow aibroad. I think we have had our cake and eaten it too. We have not killed the goose that laid the golden egg. We have continued to increase the base of investments for expansion of future earnings and the issue becomes one of determining whether the mandatory program will prove so much more rigid that we cannot continue that record. Mr. STANTON. One last question. I come from a large steel pro- clueing district and a couple of weeks ago we heard that in Japan where the government was more directly involved in their private industry than here in the United States, the plants have a certain quota. These plants were built on the idea that they would export such a percentage of their finished product, and if they did not reach that particular goal or quota they would be penalized by their gov- ernment. This, of course, has a direct effect upon the steel producing capacity in Japan, but at the same time for the Japanese sake is a tremendous gimmick. I wonder if we can compete if this is what the other countries are doing? Mr. PETTY. I personally would not use the relationship of the Japanese Government to Japanese industry as a model which I would like to have our country follow in the interrelaltions of the two in achieving their objectives. I do think, however, that we have had the tendency in this country, with exports representing only 3.8 per cent of GNP, for business to look on exports as an overflow, a spillover, a market to be satisfied PAGENO="0092" 88 when the domestic market was not at its peak. And by the same token, they have not traditionally-over the last 20 years-taken imports as seriously as they migtht have. What we do need is to instill in in~- dustry a greater sense of urgency and participation in international trade, and to provide Governmemt assistance to the extent appropriate. It is very simple for a country like the Low Countries in Western Europe, where their international trade is upward of half the total GNP, to be export minded. They must be, in order to live. Mr. STANTON. Mr. McQuade, one last question to you. Mr. Clawson spoke about the 7-, 8-, and 9-year terms that were quoted in regard to export and import agreements. Are you familiar at all with what we call the Berne Union with regard to t~he control of the time element of support and imports? Mr. McQuAt~E. I am. But Mr. Linder is about a's familiar with that as anybody could be. Mr. STANTON. Is this Berne Union involved in this? Mr. LINDIIR. Yes; it is. If you would like to know about the Berne Union, I could talk about it for a long time. Mr. STANTON. I thought they were limited to a 5 year- Mr. LINrn~. We have ~tn agreement but we- Mr. BARRETh Would the gentleman yield to me? Mr. STANTON. Sure. Mr. BARRETP. I wonder if Mr. Linder and Mr. McQuade would answer that in writing for you. Would that be agreeable? Mr. `STANTON. Very good. (The information requested follows:) The Borne Union is a voluntary association of 26 private and governmental insurers of international trade transactions. Its members represent some 20 countries, and include the industrialized countries of Western Europe and several countries in Africa and Asia. The Export-Import Bank and the Foreign Oredit Insurance Association (FOIA) are the U.S. member's of the Union. The original purpose of the Union when it w~s first organized in 1934 was' to provide a vehicle for the exchange of information `among the members regarding their respective practices and techniques in the field of export finanëing. ~n the Post World War II period the membership of the Union was expanded and its activi- ties broadened to include understandings regarding appropriate repayment terms for commodities sold on credit terms abroad. In their mutual interest of avoid- ing a credit war, the members exchange Information as to the prevailing terms on which various types of goods are normally sold in international trade. The members are not legally bound, however, to observe any fixed term since the understandings are purely informal and there are no sanctions provided to penalize members who for special reasons decide to exceed the generally accepted maximum term of 5 years. The only obligation members have is to let other members knoW whenever they insure o~ guarantee a credit transaction in which the repayment term exceeds 5 years, or such other period as may be applicable for certain items which have been specifically recognized to warrant other maximum terms. Mr. BARRETT. Mr. Moorhead. Mr. MOORHEAD. Mr. Linder, does the Eximbank hold more than 25 percent of the e~iternal debt of any country? Mr. LINDEn. Yes, sir. Mr. Moonrn~An. Maybe you could supply the names of the countries for the record. I do not think w~ need them right here. (The information requeste~[ follows:) PAGENO="0093" 89 Eiinbank medium- and long-term ecoposnre as percentage of total medium- anti long-term ez~ternal pnblic debt (over 1 year) of selected countries1 (as of Jan. 1, 1967; includes onts~anding and undisbursed amounts) Area and country Percent Africa: Liberia 52 Asia: Japan 26 Lebanon 54 Philippines 30 Europe: Italy Spain 72 Latin America: Guatemala 29 Haiti 258 Mexico 25 Venezuela 28 1 The table has been ma~e of those countries for which the percentage totals 25 percent or more. Source for figures on external public debt: IBRD, "External Medium- and Long- Term Public Debt Past and Projected Amounts Outstandtng, Transactions and raymelits; 1956-76," Dec. 4, 1967, table 3cL 2 Eximbanlt exposure as a percentage of total external debt, both public and private. Novu.-Pigures are not generally avatl~bie oft total extei~nal debt, both public and private, of individual countries. The IIIRD study gives the external public or publicly guaranteed debt of lj year or over of selected~ countries as of ~Tan. 1, 1967, To break dawn Eximbank's exposure to show only publ~e debt would require many man~hours. Hewever~ this table comparing the rBRD public debt figures with E~imbank's, medium- and ibagiterm exposure in these `countries, as of the same date to all borrowers, public and private, gives an indication of the relative Importance of Eximbank iu the external debt positions of the countries listed. Mr. MooRm~AD. Mr. McQuade, I wonder if you could tell us `a little bit more about the proposed Export Expansion Advisory Committee. Will it have any function other than advice under this act? Mr. MCQtTADE. You will observe in the bill that the criteria which are to be used for lending, guaranteeing, or insuring, are to improve the balance of payments and foster the long-term commercial interests of the United States. Essentially, the Ad~visory Committee is to help make a judgment as to whether a particular transaction, which would not otherwise meet present Eximbank financing criteria-which we have discussed at considerable length this morning-would be eligible for financing under the bill's balance of payments and commercial benefits criteria. Mr. MOORIJEAD. Mr. MeQuade, does it have any other function than this? Mr. MOQUADE. No, sir. Mr. MOORHEAD. Then this is its sole function. What will be the membership? Will there be private members cor- poration or strictly Government officials? Mr. MOQUADE. StrictJy Government o1~lcials. Mr. MOORHEAD. What Governmetit officials? Mr. MCQUADE. When it is finally determined, I would expect the Secretary of the Treasury and' the Secretary of Commerce, and per- haps the President of the Eximbank, to be members. Mr. MOORH~IAD. Mr. Petty, it would seem to me that this council plus the bank are given the power to open the doors of the Preasury to the extent of $400 million. Do you not think that the Treasury should' have at least a veto power over this? PAGENO="0094" 90 Mr. PETTY. I think we would work pretty well on this basis, Mr. Moorhead, and I believe that the Treasury views would be well re- ceived and considered in those interagency deliberations. In addition, I think the problem is so distant that I do not believe that it will be posed in the way you suggest. Mr. MOORHEAD. You do not believe that the Advisory Council would recommend the approval of a transaction which the Treasury vig- orously opposed; is that correct? Mr. PETTY. I was saying, sir; that I did not think that the possible losses could be so great as to necessitate a Treasury veto on the Ad- visory Committee. The give and take in the interagency dialog is such that you win some and lose some, but our views are well received and considered, and I do not believe this would open the door to ex- cessive losses. Mr. MOORHEAD. Well, if there is a draw on the Treasury and you have to come before the Appropriations Committee, you have to in effect say we endorsed the legislation which permitted other agencies to open the door of the Treasury, even despite our disapproval. I hope you recognize this is the situation. Mr. PETTY. I can imagine that could be the case. I can imagine that in any particular case `the Treasury could vote for and be wrong, as' well. Mr. MOORHEAD. Now, Mr. Linder, I notice that, to follow up some of the questions of Mr. Reuss, that in the cases of Australia and the United Kingdom, and Zambia you varied from the standard' rate of about 6 percent, when there was a case of military equipment. Is that because these were loans guaranteed by the Defense Department? Mr. UNDER. No. I do not think there was such a case in Zambia. With regard to Australia and the UK, it was a very important piece' of business. Mr. MOORHEAD. Was that guaranteed by the Defense Department?' Mr. UNDER. No, it was not guaranteed by the Defense Department. Mr. MOORHEAD. So on your own, for reasons I am not clear about, you reduced the rate to 5½ percent in one case and. 4% in another? Mr. UNDER. Yes, sir. Mr. MOORHEAD. Zambia, the report says, military equipment and' services, 4~ percent to ~½ percent. Page 54 of the annual report. But this was an obligation guaranteed by the Department of Defense? Mr. LINDEn. Excuse me; sir, that is an entirely separate category. That has nothing to do with Zambia. Mr. M0ORIJEAD. This is "miscellaneous?" Mr. UNDER. That is correct. Mr. M001mEAD. This could be various countries? Mr. LINDEn. Those were ones that were guaranteed by the Depart- ment of Defense. Mr. MOORHEAD. These are not necessarily Zambia, they are any of" them? Mr. LINDEn. Those were loans to developing countries which were guaranteed by the Department of Defense. Mr. MOORHEAD. And was the reason that you reduced the interest rate on the Defense Department's guarantee? Mr. LINDER. That was one factor, surely, and a very important. factor. PAGENO="0095" 91 Mr. MOORHEAD. Between now and the end of this fiscal year you are still, as I understand it, permitted to enter into transactions guar- anteed by the Department of Defense? Mr. LINDER. That is correct, sir. Mr. MOORHEAD. How much are presently involved in dollars? Mr. LINDER. About $181 million in aggregate. The President has some of the proposed transactions before him now, he is required to make a determination in accordance with the amendment which Mr. Reuss introduced to our legislation. The transactions would be at 6 percent. Mr. MOORHEAD. And this would be to the underdeveloped countries? Mr. LINDER. That is correct. Mr. MOORHEAD. Since the publication of this annual report and to the present time, how many dollars of Defense Department guar- anteed loans has the Eximbank made? Mr. LINDEn. It has made about $13.5 million to date which was applicable to the Defense Department's fiscal 1967 credit sales program. Mr. MOORHEAD. And 181 are now pending? Mr. LINDEn. Certain proposed transactions within the $181 million figure are about to be presented to the President for a determination as to whether or not he thinks they are in the national interest, in accordance with the Eximbank Law. Mr. MOORHEAD. Let me see if I can sum up what I think the essence of this legislation is. In the situation where you feel that you have gone as far as you can go with a particular country- Mr. UNDER. Or a particular buyer. Mr. MOORHEAD. Well, I am thinking particularly of a country, you want protection that if its losses go over $100 million, like the Brazil situation, you have a pretty clear commitment from the Treasury that will build up, back up your reserves, so if a Castro type of government came along and all borrowing was repudiated, you would have a draw on the Treasury up' to the exttentr- Mr. LINDEn. Only with respect to the kind of transaction contem- plated by this bill, and to the extent that the Congress decided to appropriate money for that purpose. Mr. MOORHEAD. And the second thing is up to $100 million. In effect you would like the Congress to give its advance blessings so that when. you come up before us in future years with a worse loss record than you have had in `the past, we have given, sort of in advance, our blessings to those transactions in which you have gotten the blessing of the Commerce Department and the Treasury Department? Mr. LINDER. I would say, Mr. Moorhead, that the part of the bill relating to reimbursement for losses over $100 million from our point of view is secondary. What we are really doing is saying we are going to change our criteria for certain transactions and we want you to know this. We want a law which says this is something that Congress approves of because we are running the Bank under a general legis- lative mandate. You have given us authority to li~nd $13.5 billion, and really more because some of that $13.5 billion can be done on a 25 percent reserve basis. You have doubled the amount since I have had the honor of being the President of the Bank, and you have done PAGENO="0096" 92 it presumably because you thought we were reasonably careful and prudent people. Mr. M0ORHEAD. You want special blessings for changing the criteria in a limited number of cases? Mr. LINDEn. That is correct. Mr. BARRErP. Mr. Brown. Mr. BROWN. Thank you, Mr. Chairman. Thank you, Mr. Linder. If I may just attempt to summarize here a little bit at first, the $500 million we are taJking about falls within the Bank's present limitations on direct loans, guarantees, and insurance? Mr. UNDER. Yes, sir. Mr. BROWN. Then it seems to me the real important part of this bill is the reimbursement provision~; is it not? Mr. LINDEn. No, sir; I do not really think so. I do not expect the losses are going to be that great. I think the important part of the bill is the fadt that you gentlemen will recognize that there are going to be loans made under this authority which will foster the long-term commercial interest of the united States but which may not carry quite as strong or rigid requirements as the law presently provides. Mr. BROWN. Mr. Linder, under existing legislation, if you made loans, "more risky,~~ if I may term it as such, than you normally make, and if you suffered losses, those losses would have to be handled within the framework of your existing financial structure? Mr. LINDER. That is correct. Mr. BROWN. This legislation provides a means of reimbursement to you, otherwise- Mr. LINDER. Over $100 million. Mr. BROWN. Well, now, not just $400 million; it could be as much as $1,900 million? Mr. LINDER. Literally, yes, but really not in fact. In the first place, we will not do it all on guarantees. Mr. BROWN. You could. Mr. LINDER. Yes. Mr. BROWN. So, in effect, this legislation commits the Congress to appropriate as much as $1,900 million for the reimbursement of the Bank in case none of these loans are direct loans, but are guaranteed loans. I acknowledge this probably would not happen, but technic~fly it could. Mr. LINDER. As I understand it, sir, there is a difference between an authorization and an appropriation. I have known of many authoriza- tions which have not actually been appropriated. Mr. BRowN, Well, nevertheless, the Congress by this legislation, if it passed it, would be saying we agree, we authorize and agree to ap- propriate such sums as are necessary in excess of $100 million to cover all losses suffered by the Bank by virtue of this program. Mr. LINDER. I am sure you are a better interpreter than I am. Mr. BROWN. You have been around longer than I have. I would be happy to have you disagree with me. Do you think it is essential that you have this additional substantive authority from the standpoint of being able to make this different type of loan? Mr. LrNDER. I do, because., as I have tried to indieat8, I believe this proposal represents a substantial alteration in the traditional policy of PAGENO="0097" 93 the Bank. Certainly it represents a change in the policy under which we have operated for the past 7 years since I have been President of the Bank, and I am sure it is true of my predecessors. Mr. BROWN. The $100 million that the Bank would be required to bear, in case of loss, how would that be recouped by the Bank? Mr. LINDER. It would not. We have accumulated reserves over and above the dividends that we have paid to the Treasury of approxi- mately $1,100 million. We would just lose that $100 million and our reserves would be reduced by that amount. Mr. BROWN. On a little different subject, is the Eximbank prepared, or is the Department of Defense in the process of preparing more defense loans under the existing program, here making reference to the legislation which is presently pending before Foreign Affairs? Mr. LINDER. No. As my statement indicates, under the legislation pending before the Foreign Affairs Committee, Eximbank, as a Gov- ernment agency would be excluded from receiving any Department of Defenseguarantee after June 30, 1968. I did indicate in response to a question a moment ago that the President will shortly consider making a national interest determination, as required under our Eximbank law, on a portion of Eximbank's loans aggregating $180 million, which will be guaranteed by the Department o~ Defense, to developing coun- tries. These commitments would be made during this fiscal year, however. Mr. BROWN. What do you anticipate would be the amount of non- direct Eximbank defense lending to developing nations before June 30, and will it be substantial in terms of total lending? Mr. LINDEn. If the President makes the determination with res~eet to the pending $181 million, it will be that amount plus $13.5 million, which we authorized in the first week of July of last year prior to enactment of the amendments to our basic legislation, or a total of $194.5 million guaranteed by the Department of Defense in this fiscal year. This year, our loans, guarantees, and insurance will aggregate $3,600 million, give or take $100 million, but since guarantees and insurance are charged at 25 percent of the authorized amount, our net authoriza- tions will be about $2.6 billion. Therefore, if our current estimates hold through June 30, of the gross $3,600 million, just under $200 million would be represented by DOD-guaranteed loans. Does that answer your question? Mr. BROWN. Yes, I think it does. Thank you very much. Mr. BARRETT. Thank you, Mr. Brown. / Mrs. Sullivan, are you desirous of now taking your time? ~` Mrs. SEJLLIVAN. Instead of asking questions, Mr. Chairman, I would like to yield my time to Mr. Reuss and Mr. Ashley who both have further qpestions. Mr. REuss, Thank you. I am just concerned, Mr. Linder, among other things, about this Parkinson law proliferation of advisory com- mittees by dictating the responsibility which the Congress thought it had placed in the five Governors of the Eximbank. One is the Advisory Committee of nine members set up by section 3(d); is that right? Mr. LINDER. That is correct, sir. Mr. REuss. And they all get per diems and travel and everything? 94-197 O-68----7 PAGENO="0098" 94 Mr. LINDEn. They meet formally twice a year. Mr. Rnuss. For a review of the Bank's operations and prospects for the future as well as to advise on policies? Mr. LINona. That is correct.. Mr. REuss. Then you have got the National Advisory Council on Financial and Monetary Policies setup under the Bretton Woods Act? Mr. LINDER. That is correct. Mr. Rnuss. They also advise; is that right? Mr. LINDER. No, that is not quite so. They approve or disapprove of any loans our Board is prepared to do. Mr. REuss. Do you mean to say that the National Advisory Council does not advise? Mr. LINDEn. It does to the extent that it gives its consent or disap- proval to credits that we propose to authorize. I might say that I can- not think of a single case since I have been in the Bank in which the Advisory Council has not approved a specific loan. Mr. Rnuss. Now, you want to establish an Export Expansion Advi- sory Committee. That would be a third one. Mr. LINDER. It will, Mr. Reuss, but I do not anticipate that our advisors are actually going to be multiplied and proliferated, or Parkinsonized, if you will. Mr. Rnuss. What is your reason for saying so? Mr. UNDER. My reason is that I think that the Secretary of Com- merce is unlikely to appear personally at every meeting. I think that the Advisory Committee meetings may take at the most an hour or so a week for Mr. McQuade, or his successor, and Mr. Petty, or his succes- sor, possibly Mr. Sauer or one of our Bank directors, to sit down and consider, say, five cases which we do not believe the Bank can do under its regular program, but which could be considered under the new criteria. They would have to consider perhaps a two page memoran- dum on each of them, which would contain the salient facts. They would then give us their reactions and advice. Now, Mr. MoQuade might very likely tell us that in Iran if we do not sell those automobiles, Mercedes or somebody else is going to sell them, that he, therefore, thinks that we ought to take that risk even though we cannot get an adequate balance sheet. Mr. REuss. You said the Secretary of Commerce would not appear. Mr. LINDER. I would think his designee would sit on a regular basis rather than he. Mr. RETJSS. That, too, is my objection to all `these Parkinson-like committees. Here in the President's message it says there shall be "an export expansion advisory committee chaired by the Secretary of Commerce," and now you tell me he is not going to show up-which is undoubtedly what happens. Mr. LINDEn. Is it not normal that the Secretary of Commerce and the Secretary of Defense must delegate authority and responsibility? Mr. McQuade is a very able person. Mr. Rsuss. If you want a committee set up, tell us who is going to sit on it so we know who to go to. Mr. UNDER. I have tried to do that. Mr. REuss. But this business of putting in titular authorities, who obviously do not have the time to do the job is Parkinsonian. It PAGENO="0099" 95 seems to me `to dilttte the authority which we thought we were placing with you and your Board. Mr. LINDER. I think the Board reserves the right (a) not to pick up anything, or (b) to reject the advice of the Advisory Committee. But I would like the advice and I do not expect that if the Defense Department, for example, were on the Committee that Mr. Clark Clif- ford himself would sit on such a committee. I would expect that he would delegate that responsibility to one of his assistant secretaries, and possibly even to a deputy assistant secretary, and I would expect that the Secretary of Commerce, considering the demand on his time, would necessarily do a certain amount of delegating of responsibility for the operation of this Committee. Mr. REuss. I wonder why you suggested the Defense Secretary should sit on this Advisory Committee, when you have just test~ified there would be no military loans. Mr. LINDER. I assure you that was just an example. I have no knowl- edge whatsoever whether there will be anybody representing the Department of Defense on this Committee. I assume there would not. Mr. MOQUADE. Let me make a comment, if I might. Mr. REUSS. Thank you. Mr. LINDER. I think Mr. McQuade wanted to say something. Mr. MCQUADE. Just two points. The first point is that the respon- sibility of the Secretary of Commerce would be exercised in the Committee's deliberations; and, as these things go, I, of course, or whoever was in my place, would be consulting continuously with the Secretary. The second point is that the object of the game here is to bring to bear broader considerations on the decisions of the Bank. For example, I think that you might make a judgment that our export expansion strategy might put higher priority on entering a particular market or on a particular category of export goods; and that is the kind of a policy consideration which we would like the Bank to bear in mind in making some of the decisions. So I think that unlike the Business Ad- visory Committee, this Export Advisory Committee would try to bear on Mr. Linder and his associates `these broader issues, as we see them. Also we would be exercising the authority, and would be acting in a manner consistent with the responsibility of the Secretary of Com- merce and in consultation with him. - Mr. ASHLEY. Does the legislation before us set up a different cate- gory with respect to loans, insurance, and guarantees, Mr. Linder? Mr. LINDER. Yes, it does. Mr. ASHLEY. Going back to the basic act in 1945, as amended, as I read it, section 2(a) establishes the Bank; section 2(b), as I sug- gested earlier, states the policy of the Congress that the Bank in the exercise of its functions should supplement, encourage, and not com- pete with private capital, and that loans insofar as possible, and in the judgment of the Board of Directors, shall offer reasonable assurance of repayments. It is fairly general language, is it not, that loans insofar as possible and in the judgment of the Board of Directors shall offer reason- able assurance of repayment? PAGENO="0100" 96 Mr. LINDER. It is. But may I point out there has been a great deal of legislative committee history made on our existing statutory authority both before this committee and the Senate committee and also in `both Houses. I have come before this committee many times over a period of more than 7 years, and have made clear what our philosophy of lending is `and especially with respect to the degree of risk we feel prudent to take in particular co'un'tries. For example, if we are going to lend a total of $50 million to India, which we decided was the maximum exposure we could. properly afford and if we be- lieved that an aluminum plant, a satellite station, and a* fertilizer plant had very high priority for financing, but the Indians still wanted six planes, we could not cover `all these requests within our total ex- posure limit. Thus we would be faced with the choice of which to finance and possibly letting the Russians or the British take those planes. Mr. ASHLEY. That choice has not been imposed upon you by the Congress in `section 2(b) of the act, because wh'at the act says and what the Congress has said is that loans, so far as possible, and in the judgment `of the `board shall offer reasonable assurance of repayment. So if you want to complain abut the criteria of the Bank, it seems to me that you are pointing a finger at yourself. Mr. LINDER, I am not complaining, Mr. Ashley. I want to maintain that standard. I feel very strongly that if the Bank `is not to' be called another aid organization, as `so'me people have at times thought they could call it, which I do not `think i~ justified, it must maintain `that kind of standard. There must be a clear kind of demarcation. I recog- nize perfectly well that we could have gone right ahead and done all of these things. But if I had done all these things and if that judgment and exposure in India had gone beyond the line of reasonable assurance of repayment, I then would have had ei'ther a very, very bad con- science, or I would have been breaking the law. Mr. ASHLEY. On the contrary, you would not have been breaking the law because the law specifically says `as "so far as possible," consist- ent with carrying out the purpose of this subsection. Mr. LINDER. I am sure you would not su~'gest that we should get ourselves into a position where we have disproportionate amounts in various places. Should `we do so, then I would not think `we are carrying out the purposes of the `act as you have read it. It is perfectly true that at this time I am coming `before yo'u saying that I want to do an aluminum plant and certain other priority items because they are all very important, but that I cannot do the airplanes because I believe that we would be overextended un'der our present critei~i'a. Mr. ASHLEY. Mr. Lind'er, you have read a good `deal of statutory 1angua~e. When you are confronted wi'th langauge that says "insofar `as possible," would you not think that this suggests `that there may be situations that arise which give some substan'tive meaning to the phrase "insofar as possible?" Mr. LINDER. There are. I think we have gone to the limit allowed by that langauge in many cases. But if we approved all the high-risk requests we recieve, I am sure that we would not be fulfilling my statutory responsibility. PAGENO="0101" 97 Mr. ASHLEY. What I am saying is that if you adhere stringently on every occasion to a criterion, namely, the reasonable assurance of repayment, you are not giving any weight to the langauge "insofar as possible." Mr. UNDER. I have explained already, sir that I do go further under our mandate than I think I would, were I the president of the Chase Manhattan Bank. But I think I myself differentiate between an organization with the reputation and tradition of the Eximbank and what we think might be in the conirnerical interests of the United States. In India for example, the need for financing could be four or eight times greater `than we could provide even with `this new program. The same could apply to Iran. The Koreans, who have a $200 million shop- ping list, have done well enough so that they will receive little AID assistance, but we cannot and do not propose under this new program to go to $200 million in Korea because I think this would be wholly disproportionate within the $500 million. Mr. ASHLEY. When Congress says that the reasonable assurance of repayment shall be subject to the judgment of the board, and shall he further subject to the phrase "insofar as possible," it should be quite clear to you that the reasonable assurance of repayment is not de- manded by the Congress in every single situation. Mr. LINDEn. I agree, sir, and I have tried to indicate that there are a good many situations where we have made use of the phrase "insofar as possible." Mr. ASHLEY. If you are not going to utilize the criterion reasonable assurance of repayment, then why d~ you need the legislation before us? Mr. LINDEn. Because I believe, as I said in my statement, that we have gone to the outer limit of what our legislation allows and I have to take the two parts together. I cannot rely only on the phrase, "insofar as possible"; I must rely, it seems to me, more on the reasonable assurance of repayment criteria. At least this is the way I have conducted the institution. And if I may say so, if I had not, you would not have had a Bank very long. Mr. ASHLEY. I am not sure of that at all, because I `think what you are coming to us for is an authority which will allow you to do that which you now c]aim would be prejudicial to the existence of the institution. Mr. LINDER. That is precisely the reason and that is why I believe it desirable to set up a clear line of demarcation between `the regular operations of the Bank and the new facility. If for example, $65 million is the amount that is required to finance U.S. exports to India, and $50 million is all we feel should `fall under our regular program, then I would want the extra $15 million to be financed under the new program. Mr. ASHEY. Just' one final question. In the basic act there is no criteria whatever with respect to guarantees and insurance; is that not so? Mr. LINDEn. There is, sir. The act says, among other things, that the fees and premiums charged on our guarantees and insurance shall be commensurate with the risk. There is a good deal of legislative history PAGENO="0102" 98 which would indicate that guarantees and insurance are means to sub- stitute private capital for our lending the money; our guarantees merely enable the Chase Manhattan Bank to lend the money instead of the Eximbank. And as I told you before, we charge different premiums when we guarantee a Chase loan to country A as against country B; we do that with respect to insurance as well, and we lend in the worst places. We have to limit the amount tJiat we are prepared to do. Mr. BARREVr. Mr. Linder, I think Mrs. Sullivan's time has expired. Mr. LINDER. I am sorry to have taken so much `time. Mr. BAm~Err. Thank you, Mr. Ashley and Mr. Linder. All time has expir~d. (The answers to questions by Mr. Wolff follow.) Mr. WOLFF. Hasi the Export-Import Bank ever published any materials speci- fically tailored to the informational needs of the small businessman concerning its programs? If so, this Committee would like to have a listing of these materials. If, on the other hand, no such materials have been published, we should like to know the reasons therefor. Mr. LINDER. Eximbank has not published material specifically tailored to the informational needs of Small businessmen because we have had no evidence of need for them. However, one of the prime aims of the guarantee and insurance programs has been to increase the accessibility of small businessmen to export finance and insurance. Since the size of the exporter is not relevant to the type of coverage given-rather the type and term of export is' the governing factor- we have not designed information specifically for small business. I will send you separately copies of publications on the Bank's guarantee and insurance programs. Mr. WOLFF. How many loans, if any, has the Ebcport-Import Bank made in Fiscal 1967 to small business concerns? Mr. LINDER. Since the introduction of the guarantee and insurance programs in the early 1960's, the Bank has made virtually no loans, directly to U.S. ex- porters. We do, however, issue insurance policies directly to American firms of all sizes, and guarantees to their commercial banks. It is not possible for the Bank to determine to what extent the many companies benefiting from our programs qualify as small bu~iness firms. However, I can give you some indi- cation of the way in which our programs do benefit smaller U.S. firms. FOIA's short-term program Is of obvious benefit to smaller firms since a large proportion of commitments under this program are for revolving credit lines where the average size of transactions is small indeed. Under the medium- term FOIA insurance program and the bank guarantee program the small busi- ness community can and does utilize the facilities provided. Although neither the Bank nor FOIA is equipped to determine whether a policyholder fIts~ the definition of small business, a sample taken from 1966 authorizations of FCIA medium-term insurance polices showed that 46% of such policies, were for less than $25,000. It is even more difficult to determine the effect on various-s'ized U.S. firms of Eximbank's direct credits to overseas borrowers. The prime contractor is often one of the larger U.S. firms but much of the contract value of the export Is often supplied by subcontractors which include many Small businesses. For ex- ample, in the past two calendar years Eximbank has participated in the financ- ing of Boeing commercial jet aircraft valued at $832 million. During that same period, according to data provided by the Boeing Company, Boeing committed $2.5 billion to suppliers under its commercial programs, of which more than $500 million went to small business concerns, Although the Boeing and E~dmbank data are not strictly comparable they do provide convincing evidence of the large amount of small busines's participation in the production of goods exported under our direct credits. Mr. WOLFF. Wha,t control or influence, if any, does the Export-Import Bank exert upon the Foreign Credit Insurance Association (FCIA) in order to assure ready and facile access to FOIA's credit Insurance programs? PAGENO="0103" 99 Mr. LINDEn. The agreement which sets out the relationship between FOIA and E'xim.bank is written to insure that the Bank bass an important role to play in the determination and iniplementat'ion of the policies of FCIA. The agree- ment sets out criteria which insure equitable treatment of all U.S. exporters. In addition, all transactions beyond a certain size must be approved by the Bank as well as by FCIA and even in those markets where FCIA has discretionary authority to commit the Bank we keep close watch over the policies written to insure their compatibility with our standards. The Bank and FOIA are in constant and close coordination on the day-to-day operations of the insurance programs as well as on general policy questions. Both organizations continually endeavor to service the needs of U.S. exporters and the FCIA program as well as the bank guarantee program have been modi- fled a number of times to reflect changing conditions and the lessons of experience. Mr. WOLFF. It is my understanding that in its dealings with FOIA the Ex- port-Import Bank is imposing certain limitations or restrictions which result in small exporters' inability to obtain credit risk insurance beyond 180 days. If so, this Committee will appreciate a statement regarding the nature of these limitations or restrictions, the reasons therefor and, what steps, if any, the Export-Import Bank anticipates to alleviate the small businessman's plight resulting therefrom? Mr. LINDEx. We do not know of any limitations or restrictions being imposed on the ability of small exporters to obtain credit risk insurance. Mr. WOLFF. It is further my understanding that FOIA's standard insurance agreement form contains recourse provisions which are detrimental to the small businessman. If such recourse provisions do, in fact, exist, this' Committee will appreciate a detailed explanation thereof, the reasons therefor, and the extent to which they are impeding small business participation in export trade? Mr. LINDEn. There are no' recourse provisions in the insurance' agreement forms, and we do not know of any provisions in the policies which could be construed asi detrimental to the small `businessman. FCIA sometimes facilitates the assignment of policy proceeds by the insured to' his commercial bank by issuing the bank a so-called "hold harmless" agreement undertaking to pay the bank in case of default for any reason, including reasons excluded from coverage un'der the policy provisions. These agreements of course provide for recourse by FC'IA to the expo'rt'er in the case of payments based on defaults fo'r excluded causes. These agreements' are' not detrimental to small business. Mr. WOLFF. What criteria, if any, is a small businessman required to meet in ord'er to qualify for insured c'redit? Mr. LINDER. There are no' special criteria which an exporter must satisfy. He need o'nly `apply to his insurance broker or directly to F'CIA for insurance on his export sale. PAGENO="0104" 100 F OUNDED in 1934, the Export- Import Bank, more popularly known as Eximbank, is an inde- pendent corporate agency of the United States Government. Its function is to assist in financing the export trade of the United States. `The Bank serves this purpose by making loans directly to ~ overseas buyers of American goods and services; by guar- anteeing and insuring short and medium term export transactions; and by discount- ing export debt obligations held by corn- mercial banks. To enable Eximbank to conduct these operations, the Act of Con- gress which constitutes the charter of the Bank grants it broad banking powers, in- cluding authority to borrow and lend, and to buy, sell, or guarantee debt obligations. The direct lending operations of Exirn- bank are not unlike those of the several multi-national banks engaged in interna- tional lending, although Eximbank's activ- ities are designed to serve the interests of the United States, whereas the multi- national institutions serve the interests of all their member governments. In its insur- ance and guarantee operations, Exirnbank is the United States counterpart of those institutions of other industrial countries which provide guarantees and insurance to PAGENO="0105" 101 their exporters against the credit and polit- ical risks of overseas sales. The charter of Eximbank lays down threebasic principles: (1) Eximbank should supplement and encourage - not compete with - private capital; (2) Eximbank loans should generally be for specific purposes and should offer reasonable assurance of repayment; and (3) Eximbank fees and premiums charged for guarantees and in- surance should be commensurate with the risks covered. Eximbank derives its funds from capital stock, from borrowing either from the United States Treasury or the private capi- tal market, and from retained earnings. All of the Bank's $1 billion of capital stock is held by the Treasury and the Bank may borrow from the Treasury up to $6 billion. The Bank has raised funds in the private market through the sale of participations in its loan portfolio and the Attorney Gen- eral of the United States has ruled that Eximbank guarantee of such participations, as well as other undertakings of the Bank, constitute general obligations of the United States Government backed by its full faith and credit. The retained earnings of the Bank, which constitute a reserve for pos- sible losses, are slightly in excess of $1 bil- lion. This reserve has been, accumulated by the Bank after payment of all its operat- ing expenses, including interest on funds borrowed, and payment of dividends over PAGENO="0106" PAGENO="0107" 103 the years of some $500 million to the United States Treasury. The Congress places a ceiling on the total of loans, guarantees and insurance which Eximbank may have outstanding at any one time. In all categories of its activities, the Bank's net authorizations during its life have aggregated over $17 billion. The chief executive officer of the Bank is a President who also serves as Chairman of a bi-partisan Board of Directors which is the policy making body of the Batik. The President and Chairman, and the other four members of the Board, are appointed by the President of the United States with the advice and consent of the Senate. Exim- bank's policies are coordinated with those of the Government as a whole through the National Advisory Council on Interna- tional Monetary and Financial Policies, an inter-agency group composed of the Secre- taries of State, Treasury, and Commerce, the Chairman of the Board of Governors of the Federal Reserve System, and the Chairman of Eximbank. An Advisory Com- mittee of nine members, broadly represent- ative of production, commerce, finance, agriculture, and labor, meets several times a year to advise with the Bank on its policies. If a buyer abroad contemplates procuring equipment from United States suppliers for an industrial or other project and these purchases are of sufficient magnitude, direct contact with and a direct credit from Eximbank will usually be the most appropriate Eximbank assistance. Such credits may be extended to foreign cor- porations, partnerships, and individuals; foreign governments and their agencies and subdivisions; and United States enterprises operating abroad. Generally speaking, the credit will be made avail- able only to assist in financing capital goods and PAGENO="0108" 104 related services of United States origin. Under a direct loan, Eximbank negotiates a credit agreement with the foreign purchaser who issues his notes or promises to pay to Eximbank which, upon shipment of the equipment, remits dollars to the United States supplier. Here the exporter's role is secondary and he participates in the financing only when asked to take some part of the financed portion of the sale. Repayment terms for direct credits vary with the project and the type of equipment, running normally from five to fifteen years. An initial waiting period prior to the first repayment of principal may be granted for installation and to permit cash throw-off to develop. The cost of money and other pertinent considerations govern the rate of interest charged by Eximbank on its direct loans. Eximbank must satisfy itself that the country in which the loan is to be made can supply, in all probability, the dollar exchange to service not only the Eximbank loan but the country's total dollar debt as well. If exchange controls exist or are imminent, Eximbank will require assurance from appropriate governmental author- ities that the necessary dollar exchange will be forthcoming. If the country is limited in its abil- ity to earn hard currency, Eximbank may give priority to loans which finance enterprise capable of throwing off or saving foreign exchange. In loans to unseasoned ventures, or where the credit of the obligor falls short of "reasonable assurance of repayment" criteria, Eximbank re- quires an unconditional endorsement from a financially responsible guarantor - a foreign pri- vate or governmental bank, the government it- self, a foreign or domestic corporation, or on occasion an individual. Exinibank prefers not to accept mortgages, pledges, or other liens on assets as security for its loans. Finally, the technical feasibility of the project must be appraised. This may involve engineer- ing, market potential, raw material availability, and* similar studies. Since Eximbank operates within the framework of Government policy, it also weighs the effect of the loan on the United States balance of payments and the project's economic and social impact in the host country. Not all direct loans are for capital goods. Eximbank has been a significant factor in financ- ing agricultural commodity exports, principally cotton. Loans have also been made to financial institutions abroad for relending to buyers of PAGENO="0109" 105 United States equipment. A number of sizeable credits have been extended to foreign govern- ments to tide them over temporary periods of dollar shortage, thereby maintaining the flow of United States goods to the recipient country. Eximbank assistance to short and medium term export transactions lies in guarantees and insur- ance. Unlike direct loans, Eximbank neither deals with the foreign purchaser nor provides financing. Guarantees are issued to commercial banks, and sometimes to exporters, on medium term transactions. Risk insurance, for sales on both short and medium term, is issued to export- ers through the Foreign Credit Insurance Asso- ciation (FCIA), a group of 60 of the principal United States marine, casualty, and property insurance companies. Eximbank insures all polit- ical risks and reinsures a portion of the commer- cial risks. Exporters may purchase comprehensive coverage (political and credit risks) or coverage for po]itical risks alone. Financing is left entirely to the exporter who may assign the proceeds of his policy to a bank or other financial source. FCIA insurance or Eximbank's guarantee is protection against the foreign buyer's protracted default in the payment of principal and interest and his insolvency; and against inconvertibility, cancellation of import licenses, war, expropria- tion, and like political risks. Exirnbank ranks countries according to the soundness of the market and guarantee fees and insurance premiums reflect this ranking and the payment terms of the credit. For short term sales the average fee or premiu1~ is less than one-half of 1 per cent of the value of the goods shipped. Short term transactions are those having terms up to 180 days. The exporter, examining his normal marketing p~tttern, must offer for cover -- and pay premiums on - enough of his exports to various markets to give the insurer a reason- able spread of risk. Claims under short term cover are paid at the rate of 90 per cent of com- pensable loss stemming from commercial risks and 9~ per cent stemming from political risks. Medium term transactions are those having terms of 181 clays to 5 years or occasionally more. The foreign buyer is required to ~rnake a cash payment of at least 10 per cent of' the invoice value, and the exporter must carry at his own PAGENO="0110" 106 risk at least 10 per cent of the financed portion of the sale throughout the period of the credit. The term of payment must be appropriate to the goods. Most medium term transactions are au- thorized by Eximbank, case-by-case. Guarantees are issued to commercial banks to cover only those medium term export sales fi- nanced without recourse upon the exporter. To permit Eximbank to rely upon the credit judg- ment of the commercial bank, this bank must assume for its own account the commercial risk on at least the first one-half of the maturities or the first eighteen months of the repayment pe- riod, whichever time element is shorter. Exim- bank assumes the commercial risk on those matu- rities not carried by the commercial bank and the political risk on all maturities. As in medium term insurance, authorization is case-by-case. Eximbank opened a discount facility for export debt obligations on September 1, 1966. Under this program commercial banks may borrow from Eximbank for periods up to one year against their portfolio of debt obligations of more than 180 days stemming from exports shipped after March 1, 1966. In addition, to provide an incen- tive to banks to increase their short term as well as medium term export financing, Eximbank, beginning September 1, 1967, will make loans annually based on the increase over the preced- ing September 1st in a bank's total export loan portfolio - including short term obligations. Under the discount program Eximbank does not purchase the export obligations; instead, it lends to the commercial bank and gauges the amount, term, and interest rate of its loans by the amount, term, rate, and other characteristics of the export debt obligations held by the borrowing bank. PAGENO="0111" 107 Credit has been - and is - the most vital force in building our domestic economy. It generates bus- iness at every level. It affects all of us. . . whether individuals, business or government. * It can have the same vital impact in expanding our sales abroad. * Our foreign competitors are well aware of this. They are energetically offering credit. Guaranteed payments and protection PAGENO="0112" THE CREDIT MANAGER'S RESPONSIBILITY IS * INDISPENSABLE in helping his company's export growth The Credit Manager usually has authority to instruct the company's insurance broker or agent to have FCIA insure collections from credit-worthy overseas customers. What he is then doing is putting a solid foundation under the entire sales structure, Not only does he safeguard his own department's excellent record for minimal credit losses, but he gives management additional reason for confidence in his performance. In thus obtaining FCIA's guarantee of payments and installments, he enables his firm to compete abroad without handicap.. . extends terms just as liberal as foreign competitors who are protected by their governments' insurance against non-payment. Sound credit administration is a prerequisite to a favorable credit record. If it is certain there won't be a loss, there's no need to buy credit insurance. But what happens when a buyer's condition changes or the political complexion of his country is altered? An efficient Credit Manager, aware of rapidly changing world conditions, will minimize these risks with FCIA insurance. Very important, too, your Credit Manager's approval for credit enables you to borrow on accounts receivable, For instance, if he has provided medium- term coverage on invoices payable from 181 days to 5 years, the firm can assign the proceeds of the FCIA policy on a non-recourse basis as collateral for a loan from the bank. This makes your firm a prime cus- tomer at the bank, because the ban is loss-proof. Your company, with the counsel of your Credit Manager and the backing of FCIA insurance, can safely increase its overseas sales quotas with a min- imum of credit risk. Latest FCIA credit information is available for your credit department In doing business in the international field, nothing takes the place of a well managed Credit Department. Nothing replaces its sound judgment in determining the line of credit that should be extended to a given overseas customer, as it does at home. The acknowledged value and importance of the Credit Executive can be virtually doubled by giving him access to the vast pool of up-to-date credit infor- mation amassed by FCIA through its day-to-day activities, FCIA has verified files on literally tens of thousands of buyers in overseas markets. These thousands of files have been accumulated in the short space of four years. In the next few years these files will be numbered in the hundreds of thou- sands which will enable* FdA to make increasingly prompt credit decisions on the latest world-wide credit information available. FCIA maintains constant communications with overseas sources of credit information The informational facilities at FCIA headquarters include systematic exchange of confidential data with credit organizations overseas. FCIA is a member of the BerneUnion whose mem- bers are worldwide credit insurers. The Union makes available to FCIA extensive credit information on worldwide buyers. It also makes available names of buyers who havedefaulted and been reported by its members, FCIA and the Betne Union share recipro- cally the vitally important and often bard.to-get facts about the financial status and ledger experience of firms around the world, FCIA also has access to the credit files and collection experience accumulated over many years by its counterpart insurers in principal nations engaged in international trade. 108 PAGENO="0113" 109 Should any policyholder of FCIA have need for collection or investigative services, he can obtain corn- petent assistance from FdA. Its world-wide associa- tions provide FCIA with a network of foreign credit investigators, collection agents, attorneys and other correspondents qualified to cooperate in its evaluation of credit risks and in the safeguarding and collecting of insured accounts which get into difficulties. FCIA's extensive facilities are always available on a worldwide scale when you insure against export credit losses with FCIA. FCIA makes it easy to obtain insurance against export credit losses I You prepare and submit to FCIA an application form for comprehensive coverage - both commer- cial and political. This simple form requests certain general information about your company and specific data as to its export activities. 2 A quotation is prepared by FCJA and upon receipt of your approval covering the quotation an FCIA policy is promptly issued. The policy will cover all your eligible shipments or that part which you wish to insure provided it represents a reasonable spread of risk. 3 Premiums are based on the gross invoice value of your shipments at rates aasigned you by FCIA which are a part of your policy. 4 Cost? Very low. Only about 48 cents per hundred dollars of invoice value for short-term credit, for the average risk; less if the risk is better than aver- age. And, of course it may be included in the invoice value to your overseas customer. * 5 See your insurance agent or broker for additional information, or contact us direct. ~ ~ ~--~ - .-.~ --~~ ~-. 54-197 0 - 68 - 8 PAGENO="0114" Here are comments from some leading exporters who have benefited from FCIA and have expressed their satisfaction with FCIA services and facilities: "For 1962 our exports were $900,000; for 1963 $2,600,000; for 1964 $4,500,000; and for 1965 $22,295,000. For the first six months of this year we have exported $13,921,000 (of our products). Our FC!A policy has been in force since May, 1962." "FCIA made a special effort to assist us - in obtain- ing approval of the Venezuelan transaction in time to avoid our German competitors from taking the business". 110 From our beginning in 1962 to July 1,1966,FCIA has... insured shipments of a total value in excess of Two Billion Five Hundred Million Dollars, paid claims in excess of Five Million Dollars with additional pending claims in excess of Seven Hundred Fifty Thousand Dollars. Shipments to every Country of the Free World have been insured. Claims have originated in practically every Country of the Free World. The number of policies and value of shipn~ents in- sured is increasing daily. Remember, the importance of foreign credit insurance is twofold: it provides protection against credit and political risk losses; and it provides assistance for financing foreign sales. "The only way that we, as asinall U.S. manufacturer, can compete in export trade is to offer an attractive package. In additio#s to dependable equipment, prompt shipment and service, we must offer attractive credit terms. FCIA is greatly assisting us in extending credit. The rest is up to us." "We wish to tell you how pleased we are with the services given by FCIA to us on the occasion of two unfortunate claims". "The FCIA program is most helpful in our sales activities because it has pertnitted us to compete suc- cessfully in selling to buyei~s who were unwilling to give a letter of credit or who asked for delayed pay- ment". 0 FOREIGN CREDIT INSURANCE ASSOCIATION 250 Broadway, New York, N. Y. 10007 Dlgby 9-2160 All of the above are excerpts from letters in our files. Names will be furnished on request. PAGENO="0115" 111 Reprinted from Inferna tional Commerce September 18, 1967 HOW TO GET EXPORT FINANCING INSURANCE GUARANTEE PAGENO="0116" REVIEW OF INSURANCE, GUARANTEES 112 Export credit. protection vital in competitive era Foreign Credit Insurance Assn., Eximbank programs meet increasing acceptance By DALLAS M. COORS IuSn'sntjem/ Finn,.~ Dinisise, Offim nf Cnn,ne,xin5 ,n,d Firenein! PeIiey, tiC Today morfi than ever this question faces U.S. exporters: are they finding it increasingly dit0tcatt to sell in traditional markets or to expand sales into new markets becaase competing setters in toreign coanlriea are offering helter terms? And to manufacla~ers selling only in the United Stales, have they been con- stdertng overseas markets only to be de- terred by the apparent financial and po. litical risks involved in such trade? An official of the Export-Import Bank of Washington (Eximbank) has staled the problem confronting today's present and potential exporter. "Success in to- day's more highly competitive export market places greater emphasis on the availability of credit than has been the case in the past. Exporters who previously were ably fit sell for cash with order or on a confirmed irrevocable letter of credit `basis now find their foreign easterner de- manding the right to purchase on terms which may ran from cash on arrival of dociamentu or of goods to lime drafts, open account, or instalment paym8nts spread over a number of years." It has not been unusual for large cor- porations to be able to adjust to thete competitive credit terms and even carry their own export paper. Nevertheless, many of the largest corporations are avail- ing themselves, and profitably, of insur- ance protection, Extended credit terms can especially, however, put a strain on the working capital of the smaller ex- porter, and it is essentially for him that credit insurance and guarantees have been made possible. Since February 1962, the U.S. Govern- ment, through the Eximbank, and in' co- operation with the country's commercial banks and insurance industry, has been providing protection for the exporter against the various commercial and political risks inherent in overseas trade, Expurt credit insurance as we know it today is relatively new in the United Stales; although the Eximbank had been offering a syslem of export guarantees to commercial bunks. In February, 1961, in message to the Congress, President Ken- nedy directgd the Eximbank to devise a new program that would place U.S. ex- porters on a basis of equality with their foreign competitors and to seek a way whereby private financial imlilulions could participate, The result of this directive was the establishment of a "partnernhip" between the Esimbank and private insurance com- panies to provide protection to American exporters against commercial credit and political risks when they are obliged to sell on extended terms. This is an example of successful constructive co. operation between government and private enterprise to assist America's business- men. In October, 1961, the Foreign Credit Insurance Ansocialitsn was established and today comprises an association of about 60 of the country's leadinfi stock and mutual insurance companies. FCIA is also backed up by the resources and ex- perience of the Eximbank. Thu is the U.S. Government agency that underwrites alt of the political risks and a part of the commercial risks of the policies issued by FC1A. Though slow to be accepted by our country's exporters, an appreciation of the value of ibis program has become evident. In fiscal year 1967 close to $700 millton in exportu were declared by FCIA policyholders. Some policyholders, per- haps about half of them, had never ex- ported before the availability of this pro- tection; olbers have reported an increase in export sales of 50 to 100%. The chart on page 6 describes in delssit the various insurance programs which are available; insurance protection through FCIA, and guarantees through Exim- bank. It may be helpful, however, to em- phasize a few of the advantages of each policy. FCIA policies I. SUORT-TERM INSURANCE (up to 180 days). This policy is issued to the exporter. He may insure only against political risks, retaining commercial risks for his own account, or he may lake oat a comprehensive policy protecting him against both commercial and political In obtaining this insurance the shipper takes out what is known as a "whole turnover policy" where he agrees, except for specified exceptions to insure all uf his eligible short-term export credit saId. Like any type of insurance, the insurer, in this case FdA, expecis a reasonable spread of risk in order to be able to offer a reasonable premium. FCJA may permit exclusion nf sales t~ certailt major buyets or countries, or allow coverage to be confined to sales of certain product lines, and these excep- lions to the "whole turuodey puticy" can be negotiated. When the policy is issued FCIA will, on request of the exporter, assign a dis- cretionary limit for each of the exporter's customers within which the exporter may extend credit without prior approval of IdA. Whenever an exporter has one or more large customers or occasional out- size shipments which exceed the estab- lished discretionary limit, FCIA will, upon application, grant a "Special Buyer Limit." Additional coverage An exporier may obtain addilionat coverage Over and above the basic policy I terms by means of an ettdorsement lend extra premium. This includes coverage during the period of inanufactsre or as- sembly of Ihe merchandise (the basic policy applies only from the time of ship- ment), or coverage of merchandise on PAGENO="0117" 113 PAGENO="0118" portion that does not exceed 6 percent. ~- Coverage on the basic polic~' starts from date of shipment, but insurance may be obtained to cover the period of manu- facture (pre-shipment coverage) by an endorsement and payment of an addi- tional premium. ~- The policy does not apply to any lees with respect to which a dispute exists be- tween the insured and the buyer until the loss is determined to be a valid and legatty enforceable indebtedness of the buyer or until the dispute is otherwise settted 50 the satisfaction of FCIA. ~` In some instances, when the buyer tacks adequate financial strength for the trans- action in question, FCIA may require a tocal guarantor such as a local bank or an acceptable commercial firm. Public buyers generally must arrange Centrat Bank or Ministry of Finance guarantees. ~` Policy assignable. The medium-term policy carries the privilege of assigning the policy proceeds to a commercial bank. Exporters should note that this frequently can be done whether the bank finances the transaction with or without recourse to the exporter, and once again the protection af- forded by the insurance serves as a strong stimulant to the banking community to assist in export transactions that might not otherwise qualify for bank financing. Protection against what risks? The chart on page 6 indicates the types of protection available under these poli- cies but let's call attention to a few of the more important points. 1. tasolvency of the buyer; or faitare to pay the insured within 6 months of the due date of the obligation. 2. Transfer risk; inability to convert the buyer's local currency deposited in payment of the obligation into US. dollars, 3. Cancellation or non-renewal of ex- port license prior to shipment. 4. War, civil war, rebellion, civil corn- motiOn. 5. Expropriation, confiscation or inter- vention in the business of the buyer or guarantor by a government authority. 6. Transport or insurance charges in- curred after shipment by diversion of the carrier, due to political causm. 7. Cancellation of the import license prior to arrival of merchandise. 8. Also available by an endorsement to the policy and for an additional pre- mium are: preshipmest contracts, pro- viding coverage from date of execution of contract rather than from dale of ship. meat; protection for consigned merchan- dise and sales from consigned stocks or overseas warehouses. As in any insurance program, there wilt be risks which cannot be covered. Policy- holders should consult with FCIA or its agents to understand fully the limits of coverage. MEDIUM-TERM GUARANTEES TO COMMERCtAL BANKS (180 days loS years). As an alternative to the FC8A medium-term insurance policy, an ex- porter may obtain assistance for his credit sales abroad through guarantees issued by Eximbank to U.S. commercial banks. Eximbank offers this unique protection only wheit banks agree to finance medi- um-term export sates without recourse to the exporter. This Eximbank program serves the same basic purpose as FCIA medium- term comprehensive insurance and in general its cost to the exporter is about the same. Its approach, however, is differ- In the FCtA programs an exporter ob- tains the insurance and follows through with the necessary paperwork. If he de- sires financing, he assigm the proceeds of the insurance policy to his bank. In the guarantee program, the commercial bank is the prime mover seeking a guarantee for a credit it is willing to exlend for an exporter. The commercial bank is respon- sible for satisfying itself regarding the soundness of the transaction, making the necessary credit judgment, preparing and submitting the application for the Exim. bank guarantee and following through with the necessary paperwork. As the commercial bank carries part of the commercial risk under such a guarantee, some banks which are rela- tively inexperienced in foreigti trade trans~ actions may not be willing or able to handle Eximbank guarantees. Also, a bank's outstanding commitments and judgment of the risks involved arc factors in its deCisiOn to take on additional gear. antee business. Nevertheless, in the past year some 90 commercial banks or financial institutions -including most of the large banks with experienced international departments it major commercial cities-participated in this program. In all, Eximbank authorized guarantees covering nearly $200 million of export obligations in fiscal year 1967. The facilities of these banks may be avail- able to exporters in other locations as welt, since many of them have corre- spondent relationships with banks which are distant from the major commercial Sizeable transactions Although the Eximbank guarantee pro- gram is by no means confined to large transactions, many of these guarantees cover sizeuble transactions. Some commer- cial banks prefer not to request Eximbank guarantees for the small medium-term transactions, recommending insurance coverage instead. On the other hand, banks familiar with the guarantee pro- gram and willing to take the additional risk, often utilize guarantees rather than PCIA insurance for many transactions, particularly since the collateral advantages to the bank may be greater than when it is assigned an FCJA policy. Under the guarantee program the com- mercial bunk is required to provide fi- nuncing to the exporter usually for 90% of the credit on a non-recourse basis. The bank lakes the commercial risk on the early maturities for its own account and Eximbank guarantees the commercial risk on the later maturities, Eximbank guarantees against political risks for she entire term of the loan. As under FCIA insurance, the buyer provides a cash payment-generally 20% of the invoice value-and the exporter retains at least 10% of the remainder, that is, the portion to be financed. The remaining portion of the invoice value is financed by the commetcial bank, with 114 FCIA in brief The Foreign Credit Insurance Association is an unincorporated group of about óOprivate insurance companies, operating in partnership with the Export-Import Bask of Washington. It wos established in October, 1961. During fiscal year 1967 the amounn of short and medium-term export credit insurance authorized by FCIA reached $690 million, FCIA headquarters is at 250 Broadway, New York, N.Y. 10007. Representative offices are located across the country: in New England, at Room 510, John Fitzgerald Kennedy Federal Bldg., Bouton, Mass. 02203; in the Midwest, at 85 Front St., P.O. Box 272, Berea, Ohio 44016; in the South, at 1520 Texas Ave., Houston, Tea. 77002, ond In the West, at 24 California St., San Francisco, Calif. 94)11, PAGENO="0119" Eximbank guaranteeing to the bunk pay- ments of principal and interest on the export paper. Eximbank guarantees are timited to 90% pf the financed portion with interest covered up to 6%. Delaya minimized The exporter deats onty with the corn- merciat bank, teaving the negotiations with Eximbank to the commerciat bank. In many instances-where the transaction conforms with the normal trade pattern for the equipment, the exporter is a regutar customer of the bank, the market is fairty good, and the buyer's credit- worthiness is satisfactory-the contmer- ciat bank can quickty approve a trans- action, usualty within a few days. This is particutarty true now that the commerciat banks participating with Eximbank to this program have the discretionary au- thority to approve-without prior consut- tation with Eximbank-certain trans- actions qp to $t mittion in the better world markets. (NoTe: FCtA has tong hetd a similar authority up to $600,000 to expedite issuance of its policies.) Advance commitment offered As with FCtA insurance, Eximbank guarantees may be for sates for which orders have been obtained or are being negotiated, or they may be provided as advance commitments to meet bid invi- tations. Also, as with FCIA insurance, guarantees may cover a revolving tine of credit instead of the usual single trans- action; this is particularly useful for ex- porters making regular shipments to agents or representatives. Local bank guarantees are not generally necessary but if the financial position of the buyer is "weak" they may be required. Programs stimulate exports Assistance under these insurance and guarantee programs is part of the Gtsv- ernment's overall effort to increase ex- ports. Through use of these facilities the exporter is provided with a climate of greater security. This enables him to ex- pand his business by offering greater amounts of credit to his present cus- tomers, by taking on new buyers and by breaking into new markets. As the tj.S. insurance and guarantee system continues to grow, new improve- ments can be expected. Efforts are being made to kpep costs low, consistent with sound, self-sustaining operations. Credit insurance defined What is credit insurance? Credit insur- ance per se is a branch of casualty insur- ance. It protects manufacturers, agents, other suppliers as well as banks and other financial institutions against possible non- payment losses that may result from granting credit terms to buyers abroad. It does not cover physical damage to products shipped or any risk for which coverage is available through marine, fire or other form of insurance. Credit insurance is never based on the premise that the setter can grant credit without exercising normal pru- dence and business judgment. Nor should it substitute for the seller's own credit department. It does, however, protect against those losses which may be beyond the control of the exporter. These would include not only the insolvency or pro- tracted default of the buyer, but also political and economic contingencies be- yond the control of the seller or buyer. This protection should greatly increase the ability of the exporter to arrange bank financing of the transaction should he wish to do so. Credit insurance not new Credit insurance is not new. History records that a credit insurance company was organized in England in the early 18th century. German traders have bene- fitted from such a government program since 1917, and traders in England since 1918, Today some thirty countries pro- vide export credit insurance and this pro- tection for exporters has markedly con- tributed to the increased export trade of those countries; an increase that has bene- fitted the earnings of local companies as well as the balance of payments of these countries. Traders benefit Competition in other countries is ac- tively seeking new markets and credit insurance being provided them is giving them the added means to be competitive. Traders in the United States are now offered insurance and guarantee programs second to none. Exporters are urged to learn more of this program, to find out how it can help to develop and expand overseas markets. To do so, they may either contact the regional offices of the FCIA in San Fran- cisco, Boston, Cleveland and Houston, or its home office in New York City. Or * contact the nearest branch office of one of the many associated insurance com- panies who are participating in FCIA, the international banking department of the exporter's bank or the nearest De- partment of Commerce Field Office. Ipcreased use of the short term or medium term FCIA protection or the medium term guarantee program of the Eximbank wilt not only give exporters the protection needed in developing over- seas markets, but the expansion of U.S. exports through their efforts will make a marked contribution to the improvement of the country's balance of payments. 115 Eximbank in brief The Export-Import Bank of Washington is on independent agency of the Federal Government originally established in 1934, now operating antler the Export'tmport Bank Act of 1945, as amended. Itis located at 811 Vermont Aye,, NW,, Washington, D.C 20571. In 1961 Eximbank was given the directive to devise a new program that would place U.S. exporters on a basis of credit protection equality with their foreign competitors As a result came the establishment of the Foreign Credit Insurance Association descibed on these pages. Eximbank is the agency that underwrites all of the potticol risks and in certain instances a part of the commercial risks of the policies issued by FCIA. And it has its own export credit guarantee program. Some highlights of this program: * Medium term guarantees to commercial banks are unique. * Only in the U.S. are guarantees available to banks fnancing exporters on * Eximbank relies heavily on credit judgment of commercial banks. * Banks must assume for their own account commercial risks on earlier ma- turities. * Guarantees thus cover political risks on ear8er matarities and both political and commercial risks on later maturities. * Eximbank guarantees are useful so exporters requiring bank financing. * An increasing number of bankn find Eximbonk guarantees valuable stimu- lant to export financing. In fiscal year 1967 Eximbank authorized guarantees covering nearly $200 million of export obligations. 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As usual, you were always alert and very accurate in your answers and we are grateful for you and your associates coming here this morning. The committee will now stand in recess until 10 a.m., tomorrow morning. The witnesses scheduled to appear tomorrow are Mr. Fred Foy, chairman of the board of Koppers Co., Inc., and former chair- man of the National Export Expansion Council; and Mr. Alfred H. Von Klemperer, senior vice president of Morgan Guaranty Trust Co. and immediate past president of the Banhers' Association for Foreign Trade. - In addition, Adm. Wilfred McNeil, director to the Fairchild-Hiller Corp. will either appear as a witness or present a written statement to the committee. (Whereupon, at 12:35 o'clock p.m., the hearing was adjourned, to reconvene at 10 a.m., Tuesday, May 14, 1968.) PAGENO="0123" TO ENABLE THE EXPORT-IMPORT BANK OF THE UNITED STATES TO APPROVE EXTENSION OF CER- TAIN LOANS, GUARANTEES, AND INSURANCE TU:ESDAY, 1VIAY 14, 1968 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CtJREENOY, Wa$hington, D.C. The committee met, pursuant to recess, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Barrett, Reuss, Ashley, Moor- head, Stephens, St Germain, Gettys, Annunzio, Rees, Gahfianakis, Wolff, Widnail, Dwyer, Clawson, Johnson, Brown, and Williams. Chairman PATMAN. The committee will please come to order. This morning the committee continues hearings on H.R. 16162, a bill to enable the Export-Import Bank of the United States to approve extension of certain loans, guarantees, and insurance in order to im- prove the balance of payments and foster the long-term commercial mterests of the United States. Yesterday, we heard from Mr. Harold Linder, President and Chair- man of the Board of the Export-Import Bank of the United States; Mr. John R. Petty, Acting Assistant Secretary of Treasury; and Mr. Lawrence C. McQuade, Assistant Secretary of Commerce. This morning we shall hear from outside witnesses, including Mr. Fred Foy, chairman of the board of Koppers Co., Inc.; and former chairman of the National Export Expansion Council; Mr. Alfred H. Von Klemperer, senior vice president of Morgan Guaranty Trust Co. and immediate past president of the Bankers' Association for Foreign Trade; `and Adm. Wilfred McNeil, director of the Fairchild-Hiller Corp. For the benefit of the members, as previously notified, the committee will meet in executive session tomorrow, and if need be on Thursday, to consider and mark up the following bills: Hit. 15683: To amend the Defense Production Act of 1950, and for other purposes; H.R. 16162: To enable the Export-Import Bank of the United States to approve extension of certain loans, guarantees, and insurance in connection with exports from the United States in order to improve the balance of payments and foster long-term commercial interests of the United States; H.R. 16775: To provide for increased partièipation by the United States in the International Development Association, and for other purposes; and (119) PAGENO="0124" 120 H.R. 16064: To amend the Federal Deposit Insurance Act with respect to the scope of the audit by the General Accounting Office. I would state now in connection with this last one that this bill will be referred to the Subcommittee on Domestic Finance for further con- sideration. We have had 2 days of hearings on this matter before the whole committee, and I have discussed this with Mr. Widnall, the senior minority member, and we think it is best to refer it to the sub- committee for further study. But the other three bills, we expect to do something with them tomorrow. Mr. Foy, I believe that you are first. We would be delighted to hear from you, sir. We welcome you back to Congress. STATEMENT OP FRED C. POY, CHAIRMAN OP T~IE KOPPEBS CO. Mr. F~y. Thank you, Mr. Chairman. Chairman PATMAN. We welcome you back to the halls of the com- mittee because you have spent a lot of time here. Mr. For. Mr. Chairman and members of the committee, I am Fred C. Foy, chairman of the Koppers Co. of Pittsburgh, Pa. Koppers is well known in international commerce both as an exporter of ma- chinery, chemicals, and related products, and as a firm that provides design, engineering, and construction services abroad. Our foreign operations last year amounted to approximately $40 million, and generally they range between this figure and $50 or $60 million. The experience of my corporation in the international field has taught us a number of lessons. One of the most important ones, par- ticularly with respect to large engineering and construction contracts where expensive equipment is involved, is that adequate and adaptable financing can often make the difference between getting the contract and losing it to some foreign competitor. Obviously, financing is no substitute for quality, price, or delivery considerations, but American firms have some control over these kinds of factors, and generally we can hold our own. Where control passes from our hands to our European and Japanese competitors is in the area of financing. Other countries seem to have adopted aggressive financing as a keynote of their trade expansion policies. Usually our foreign com- petitors offer assured, fast, and adequate' financing_-including cov- erage of at least part of local currency costs. Often they are able to offer better and more flexible terms and conditions than we. Also im- portant, `they offer both financing and terms before they receive the contract at th~ time they are still trying to make the sale. I do not need to emphasize the seriousness of this type competition at a time when we are faced with pressing balance-of-payments prob- lems.and must do everything we can to keep other countries' suppliers and contractors from cutting down our share of markets abroad. I believe that the proposal embodied in }LR. 16162, which would establish a special export credit and guarantee fund that would take account of broader U.S. balance of' payments and commercial in- terests, would certainly be a step in the direction of more responsive, imaginative, and flexible export financing. The question has often been raised as to whether Eximbank could not be more aggressive within its present "reasonable assurance of repayment" requirements. The answer is that perhaps it cou~ld, cer- PAGENO="0125" 121 tainly in selected instances, since the Chairman and the Board of Directors have the responsibility for deciding under what conditions a loan meets that criterion. On the other hand, the law as written does not make clear the line beyond which the Bank should not go without breaking its present statutory authority. I, for one, believe that there exists a considerable volume of po- tentially important export opportunities which cannot be financed by the Bank without approval by Congress of the special funds pro- posed by H.R. 16162. The proposed special account would move the outer reasonable limit of Eximbank finance to a point where exports which would now be lost can be retained, or exports not now financeable could be won for American exporters. For these reasons, I believe that the special account arrangement, properly administered, could make a real con- tribution to our commercial and balance-of-payments objectives. The proper administration of the fund is a big "if," however, I would like to suggest a number of steps that would help greatly to carry out the objectives of the bill. First, the fund should adhere generally to commercial lending and guarantee transactions so as to insure that it does not move from the commercial field and become just another aid vehicle. Second, the Export Expansion Advisory Committee that is to be established to provide guidance in the use of the fund should be in- dependent from the Eximbank, but should work closely with the Bank officers and Board to insure that these funds are used to develop truly additional exports rather than transactions that the Bank might otherwise have done for its own account. Third, the Advisory Committee should not only consider proposals that have been formally referred to it by the Bank, but should be used by the Bank to review proposals that are doubtful or applications that would normally be turned down before they get very far into the Bank's machinery. Fourth, the Advisory Committee should look beyond specific export and guarantee transactions to insure that the use of the special fund is coordinated with other export expansion efforts such as the Com- merce Department's trade missions and proposed Joint Export As- sociation in order to insure that both financing and promotion are brought to bear in the same markets at the same time. Finally, the new facility should attempt to maximize the use of commercial channels and bank credit through maximum reliance on guarantees and insurance so that commercial objectives will be served by the proposed account. In conclusion, Mr. Chairman, I might point out my belief that there is more to be gained, both immediately and in the longer term, from positive measures of the type now before the committee that unleash the energies of American business for solving our Nation's problems than from restrictive controls which might be necessary in the short run. It has been a great pleasure for me to have had this opportunity to revie~v the business community's attitudes on the pending bill with this distinguished committee, and I thank you for your invitation. PAGENO="0126" 122 Now I. shall be glad to answer any questions that you might wish to put to me. Thank you~ Chairman PATMAN. Thank you very much, sir. Our policy is to hear `all the witnesses `and each member will then be allowed the privi- lege of interrogating all three of you at one time. Our next witness is Mr. Alfred II. Von Klemperer, senior vice president, Morgan Guaranty Trust Co. of New York, and immediate past president of the Bankers' Association for Foreign Trade. We are glad to h'ave you, sir. STATEMENT OF ALFRED' H. VON KLEMPERER, SENIOR VICE PRESI- DENT', MORGAN `GUARANTY TRUST CO. OF NEW YORK Mr. VON KLEMPERER. Mr. Chairman, members of the committee and the member from my own district, Mr. Wolff. I am very pleased to appear here today and to t'estify for the Bankers' Association for Foreign Trade and for the National Foreign Trade Council. The Bankers' Association for Foreign Trade has 132 member banks t~hroughout the United `States who among themselves handle the bulk of American export financing. We met at our convention about ~ week's ago. We had a very `careful look at this bill and we express strong sup- port for it. `Similarly, the officers and directors of the National Foreign Trade Council discussed this bill at a recent meeting and expressed support for it. Both bankers and exporters are in favor of this bill because it rep- resents a constructive and expansionary, ra'ther than a restrictive meas- ure, to help our balance of payments. We feel that the gold problem. of the United States is better served by increasing our foreign earnings rather than by restricting our foreign expenditures, and H.R. 16162 is a very useful step in that direction. The exporters generally feel that there are important foreign mar- ket's which they could develop for American business, but that many times the opportunities in these markets `are not properly `exploited because the financial risk involved is in excess of `the customary stand- ards of the commercial banks, the Export-Import Bank, and of the exporter himself. It is felt that with proper Government guarantees and insurance fi- nancing could and shouldbe arranged in some of these cases, and that this financing would open up opportunities for additional sales abroad an'd would create new markets for U.S. exporters. To be the first in a new or developing marke't lays the foundation for potential repeat orders, for spare part ord'ers, and in general for for- eign exchange earnings which are quite in excess of the potential losses that could `be incurred from the initial financing. `The technology of American indu'stry and the salesmanship of American exporters would assure us of a vigorous followup of this ini- tial effort which is supported by the Government. Of course, there till be losses from this financing. But the important part is that the overallS balance of earnings from this activity will far outweigh these poten- tial losses. PAGENO="0127" 123 Our experience with past guarantees and insurance of the Export- import Bank have taught us another lesson. There is a very strong edu- cational effect from these initial Government supports. Through these guarantees both exporters and banks have learned some of the techniques that are involved in export financing and to face more equitably some of the risks involved. As a result of this ex- perience, there has been created, I am sure, a considerable amount of risktakmg by the private sector without Government guarantees. This educational effort is particularly important for the banking in- dustry today. As you undoubtedly know, we have about 14,000 banks in this country, most of whom are not well acquainted with foreign financing. Some of these banks today are trying to gear themselves to finance their clients in the export field, and it is especially these smaller banks throughout the country where the educational effect of Governmental guarantees should be able to create a very fine and broad harvest for his exports. We `have noted with particu]ar interest that the President pro- poses to appoint an Export Expansion Advisory Committee, which Mr. Foy has just mentioned. I would like to join with his recommendation that this should be a very important committee. The export expansion effort of `the gov- ernment is a very broad one. It involves many agencies and many de- partments. Their influence should be brought to bear on a day-to-day basis on this program. I would go as far as to suggest that the Committee should be able to be aware of all applications for guarantees and insurance which are received by the Export-Import B'ank and which are either approved or rejected. Obviously, the final decisions as to whi'ch guarantees or insurance or loans should be approved lie entirely with the Board of the Export-Import Bank, but the Advisory Committee should have an opportunity to counsel the Board of the Export-Import Bank and to make its influence felt on a day-to-day basis. 1 would hope, Mr. Chairman, that when you write your report on this bill you could include a specific recommendation that the President give a clear `mandate to this Committee to involve itself in the work of this program on an effective day-to-day basis. As Mr. Foy also stated2 it will be tremendously important just how this program will be administered, and its success and the achievement of its purpose will depend very much on how it will be administered. We have carefully read the testimony by Mr. Harold Linder, Chair- man of the Export-Import Bank, and other Governmen't officials at the Senate hearings, and we gathered therefrom that this is not going to be anot'her soft-load window' or a catch-all basket for weak and soft loans, or give-away loans. We understand that it will be administered as an aggressive sales tool for American industry, and on this basis we are glad to support it and believe that it will be in the national interest. Thank you. Chairman PATMAN. Thank you, sir. Next we have Adm. Wilfred J. McNeil, director of the Fairchild- Hil'ler. Corp. Admiral, we are glad to have you and you may proceed in your own way. PAGENO="0128" 124 STATEMENT OP WILFRED J~. JYIcNEIL, DIRECTOR, FAIRCHILD- HILLER CORP. Mr. MCNEIL. Mr. Chairman and members of the committee. My name is Wilfred J. McNeil. I am a member of the board of directors and a consultant to the Fairchild-Hiller Corp. Since my retirement a year ago as president of Grace Line, Inc., I have served as a member of the board and as a consultant to W. R. Grace and Co. and currently, also, president of the tax foundation. I appreciate the opportunity to appear here today in support of the purpose of H.R. 16162, a bill designed to make it possible to increase the markets for U.S. products abroad and to make a significant con- tribution to this country's balance of payments. First let me say that the Export-Import Bank has been an important factor in the growth of our export trade. It has enabled U.S. industry to gain a foothold in the markets of many areas where it would have been impossible without the help of the Bank. Operating within the framework of present legislation and under Conditions that have existed, I think that the Bank has been pru- dently managed. However conditions have changed. The industrial reco~rery of competing nations is an accomplished fact. They are now aggressively wooing old customers and actively pursuing the new. They already have either special financing facilities of the type coy- `ered by this bill or enjoy a variety of special arrangements to facilitate their sales efforts. Here I would like to emphasize a point first made by Mr. Foy, and that is the vital importance of financing in export sales. The emerging and underdbveloped countries desperately need more modern equipment. Our competitors have recognized this need and are offering attractive credit packages. If, through these offerings, the British or Japanese-_to mention only two-are successful in pene- trating these areas, they will dominate these particular markets for a long time to come. During these years the requirement for service, spai'e parts and support equipment would provide a continuous income to the country making the original sale. There is general agreement that ways and means must be found to solve the balance-of-payments problem. Increase in the volume of exports is a logical and most effective means of accomplishing this result. As Mr. Merle R. Crockard, president of the Bankers' Associa- tion for Foreign Trade, recently stated before the Committee on Banking and Currency, U.S. Senate: We believe that in addition to the exports now being financed through private channels and under the present export credit program of the Export-Import Bank there are many opportunities for tjnited States suppliers to develop export markets which have not been seized upon because the financing was too risky for the private sector and did not fall within the Export Import Bank's loan standard of only making loans that have a "reasonable assurance of repay- ment." Such loans may nonetheless be in the national interest because Of their potential balance of payments contribution. * * * if this special facility is used exclusively to support an aggressive sales policy of United States exporters in foreign markets, it will fulfill its intended purpose of greatly benefiting our balance of payments. The established marketplace can and will be exploided, but the per- centage increase could be explosive in the areas H.R. 16162 is designed to assist. PAGENO="0129" 125 The bill we are discussing today addresses itself primarily to the degree of risk the Bank may assume in making loans or guarantees. I do not wish to detract from this most worthwhile objectwe, but the ability to meet competition as to terms is as important as resolving the problems of transactions which do not meet the test of reasonable as- surance of repayment. Special terms are frequently required if U.S. companies are to make the sale. Sometimes longer terms are a question of the optimum use of equity capital in a growth situation and not a question of credit standing. Earlier I mentioned that terms are being offered by competitors which are more liberal than the generally accepted practices of the Bank. For example, under normal practice, the extension of credit for the purchase of turboprop aircraft for 8 years might be considered prudent and fa~ir. As a matter of fact, there has been such an agree- ment between several countries. However, certain of these competitors have offered credit on a 10-year basis for a similar prdouct, with little or no downpayment. Other competitors have agreed to match this offer. The United States must meet the terms or lose the sale, granting that it is the natural tendency of the customer to play one manufac- turer a~ahist another to gain the most favorable credit package. I believe that the United States should take the position and have it understood throughout the world that we are prepared to meet the competition. It would allow the U.S. exporter to act rather than react since he would know that, within reason, his product could be financed on equal terms. Such a statement of policy might well clear the air and our competitors, in their own self-interest, compelled to fall back to reasonable and agreed upon terms and conditions. If this plan for the expansion of exports is to be achieved, the lati- tude of the Bank should not be restricted by the wording of the bill or the legislative history. Rather, the Bank should be encouraged to meet special situations as they arise. Further, its work should not be unduly complicated by the operation of the Advisory Committee. Here again I think the recommendation of Mr. Foy at this point should be seriously considered. In my opinion, the amount authorized by the bill is' not excessive. However, it does seem adequate to get the program underway and test the intent of the legislation. If we are to improve the export position of the United States, we have no alternative hut to face the hard facts of international competition and take positive steps to improve the situation. H.R. 16162 may not be the complete answer, but it is a step which, I believe, should be taken. Thank you, sir. Chairman PATMAN. Thank you. Do you know of any particular project that was lost because the Export-Import Bank under present authority and loan criteria could not service it, and if this law had been passed it could have been saved, Mr. Foy? Mr. Foy. Mr. Chairman, I have to say to the committee, I do not personally know of any such situation. I know of a number of situa- tions that are pending which involve substantial export sales, which would require the Bank to make changes in its present policy, which changes, I believe, would be made readily as a result of conferences between the Advisory Group and the Bank, which might not be made by the Bank alone. 94-197-68----9 PAGENO="0130" 126 For example, in my own company, we have put together several: international corisortia for the purj~ose of building steel mills, engi- neering design, and building these in developing countries. We have one at the moment in which we are doing the engineering in Korea. This would involve participation by five different countries, England, the United States, Germany, France, and Italy. The participation financially, a total package of some $100 million of foreign exchange, would be divided between those countries. The present assumption would be that the Un~ted States would have a share somewhere in the area of $30 million. The Chairman of the Bank has said to the Koreans on their recent visit that he had a feeling that perhaps the Eximbank had loaned all they ought to loan to Korea at this time and he did not want to encourage them with the possibility of the Export-Import Bank participating in such a package. They were quite worried about this. I suggested to them that they should go ahead and complete their engineering and file the application and put the matter before the Bank officially. And actually our partners in Europe had indicated to the Koreans that in the event the Export-Import Bank did not see fit to participate in this mill they would increase their credit participation and the mill could be built in any event. So this would be a case, if this were the case, we would lose some $30 to $35 million of exports from the United States in a project that is already underway. Chairman PATMAN. That seems to be the case, in answer to the~ question I asked you. The reasonable assurance of repayment, is that the phrase that is' involved? Mr. Foy. That is the phrase, sir. Chairman PATMAN. In other words, that would be the difference~ between the existing Export-Import Bank and its authority, and the authority though would be extended to it under this act? Mr. Foy. Yes. In this case, when this project of which I speak is presented to the Bank, it will have to `stand on its feet economically. We have never presented to the Bank any project that did not do so, and so far no project we have presented to the Bank, whith has been, accepted, has failed to do so, The question here, I think, would be more in the Bank's mind as to whether the Republic of Korea has overextended itself and would not be able to muster the necessary foreign exchange even though the corporation within Korea might be solvent and able to pay the interest and principal. So that you get into this kind of a question in which the Bank is looking at rea'sonthle assurance of repayment perhaps on broader terms than one might normally do looking at a commercial: transaction. I would believe if this bill were passed and the Advisory Committee~ were there, the decision might very well be made that not only the immediate support prospects, but long-term support prospects, would~ warrant taking this slightly additional risk in view of the fact `that Korea has been having such a large surge of growth in its gross national product and in its economy generally. For example, this mill, which would start with 500,000 tons, is~ designed to go eventually over a period of 12 to 15 years t~ a million~ PAGENO="0131" 127 and a half tons, The initial sale involves some $30 to $35 million from the United States. Should we get the same proportion of the expansion over the 12 to 15 year period, the U.S. share could well amount to somewhere up around $75 to $100 million. This has been the history of many such projects. Chairman PATMAN. Mr. Widnall. Mr. WIDNALL. Thank you, Mr. Chairman, Mr. Foy, Mr. McNeil, and Mr. Von Kiemperer. I think we are very fortunate in having all three of you here today, because you have excellent background out of your own experience that can be most helpful to the committee, and we are anxious to know what we can do to be more helpful towards the exportation of Amer- ican goods and toward making it possible to meet the exacting and higli competition that we have overseas today, in contrast of having the field pretty much to ourselves a few years ago. Before I ask a few questions, Mr. Foy, is George Naylor still with you? Mr. Foy. George Naylor has retired. He is living some of the time or' his farm down in New Jersey and most of the time he is doing con- sulting work for the World Bank and other organizations, because he just cannot stop. Mr. WIDNALL. The reason I asked, he used to be a constituent of mine. I think he is one of the finest and niost able men that I have met, and certainly an expert in that field. Mr. Foy. I-Ic is a very, very able man. Mr. WIDNALL. I had hoped that he would find a place somewhere in a high place in Government where his talents could be utilized and where he could give the advice the Government needs. Mr. Foy. He seems to be doing this by doing consulting work as requested, and I would say from what I know a great part of it hap-j pens to be for the World Bank rather than the U.S. Government. Mr. W1DNALL. I am very pleased he is active. It would be hard to put him down. Do you believe that we could make even further advances by having more of a partnership between business and the Export-Import Bank? There have been some suggestions to me that possibly business could become, through their contribution, part of the capital of the Bank and have more of a say in the policy of the bank in its operations, and there might then be a better understanding of the needs of business than they have even now. I know many businessmen are frustrated by the closeness with which the Eximbank yewed to the line in passing out the export guarantees and also the developing of the export business. This bill is certainly a step in the right direction, but I just wonder if we could not possibly go further and obtain business participation in capital, business participation in management, to the extent where we could meet the needs even better than we do at the present time. Would you all comment on that? Mr. Foy. Well, Mr. Congressman, I think I would like to comment on it to the extent that I am qualified. I am not at all sure that business participation in capital or man- agement of the Bank would necessarily add materially to the ability of the Bank to work with business. PAGENO="0132" 128 I have had a good many years' experience working closely with the Bank, and I want to say that the Bank `has been on th~ whole very cooperative. I think it has felt2 because of the wording of the Bank's bill, with two phrases, one saying insofar as possible to help exports, and the other saying hut make loans with `reasonable assurance of re- payment, and assurance is rather a strong word, that the Bank has regarded its `function as being that of a bank. It has in essence waited until the borrower had come to it with a `project loan which it requests. I should call this committee's attention generally to something you may not be quite familiar with, and that is, that it is the custom of the Export-Import Bank, and I think a proper one, perhaps, as a bank, for it to take the position that it will act only, or commit itself either potentially or actually only, `when a potential borrower comes to it and asks for a loan. Which means, for example, going `back to the Korean example I gave you, the Bank will not give a position on this until the company w'hich has `been formed in Korea comes to it and asks for a Joan. Now, on the o'pposite side of the coin, all of our foreign partners, the Germans, the British, Italians, and French, are able to go to their government guaranty agencies, such as the Board of Trade in Britain and Hermes in Germany, tell them about the project in advance and get an advance commitment in principle. They have to still finally bring the project in but they do get an advance commitment in principle, so that `when they go t'o seek the buyer they say we can finance this project, if we are given the contract. Our pr~blem and my own, for example, I have to say to the Koreans `that I believe that when this project comes in, if it is sound economi- cally, that you will get from the Export-Import Bank the loan you are seeking. But this does not make them very happy because they say, well, ~ll the other countries have said the money will be available. Why can you not say so in the United States? And then I have to ex- plain that we operate differently. Now, I `believe that if this `bill were passed, and if the advisory Com- mittee were set up, arid you had thus indicated that it was the intent of the Congress o'f the United States to `ase our financial resources more aggressively in the international field and in any case at leaSt as aggres- sively as our competitors abroad do, it would be possible through the advisory committee and the Board of the Bank to `work `o'ut a working basis where we could perhaps go in advance on major projects involv- ing considerable sums of money, describe those fully and know in ad- vance that if the project finally came in as represented and economically sound, that we would be able to count on U~S. financing. Personally, Mr. Congressman, I believe the Chairman and the Board of the Bank would welcome this. I think that they would welcome such guidance from you, and I suspect that this is why they have testified in favor of this bill. Mr. WIDNALL. Mr. Von Kiemperer, would you care to comment? Mr. VON KLEMPERER. Mr. Widnall, I think that what you are trying to accomplish is being gradually accomplished now by the increasing activity of the Export-Import Bank through guarantees to the com- mercial banks and through insurance through the FCIA I think to the extent this activity increases and the bank's own lending activity do not increase to the same degree, this partnership between the private PAGENO="0133" 129 and public sector would be accomplished better than if we were to attempt to have a company that is jointly owned by public and private bodies. I think another measure that would be helpful in the area that you suggested is a proposal that was made by the export expansion sub- committee of the National Export Expansion Council, and this was to broaden and to strengthen the Public Advisory Board of the Export- Import Bank. They do now have a Board on which I had the pleasure of serving myself, but it is not as broad a board nor as active a board as, for instance, the British have for the ECGD. If this would be a broader board of, say, 10 to 15 people, where you had active representation from exporters, banks, insurance companies, including small business, and if they would meet with the Export-Import Bank not twice a year but every second month, it could become a truly advisory body that would bring to bear forward looking and constructive suggestions. Mr. WIDNALL. Mr. McNeil, would you comment, please ~ Mr. M0NEIL. I would like to emphasize the point that Mr. Foy made about the importance of getting a commitment before you sit down to negotiate a contract. It is vital. Frequently, you and your prospect agree that the product meets all the technical specifications and probably is superior to anything they can find in the world market. If the seller is not in a position to offer definite financial commitments, the sale may well be lost. This is a very important point. If I may go back just a moment, the chairman asked a minute ago~ if there were any examples of, or any instances, where one could point to sales being lost because of the terms and conditions. I can name probably two or three in a single country. And in this particular country it is not a question so much of the credit of the individual borrower but the question of the total advances that have been made by the Bank to that country. This is in Brazil. Approximately 2 years ago a U.S. manufacturer offered for sale eight F-27 aircraft to Yang Airlines. They are a well known airline. The U.S. manufacturer won the technical evaluation. At that time the limit of credit made available by the Eximbank was 5 years as far as the loan repayment was concerned. The British offered 8 years and got the order in spite of the fact the United States had won the technical evaluation. The Export-Import Bank then increased their terms on turbo- propeller aircraft to 8 years but too late to be of assistance in the Yang transaction. The Japanese subsequently sold several aircraft to the Cruzeiro Do Sul Airline in Brazil. This is another case where the technical equip- ment of the United States was superior, but the financing terms the Japanese offered were much more liberal than those the U.S. manufacturer was able to offer. Now, just t~ show what can happen, however, and I was a part of this because I was down in Brazil last week. Our company delivered five FH-227's to Paraense Airline, a privately owned airline. The entire transaction was supported in very excellent style by the Export- Import Bank and the terms were made equal to those offered by the ~ompetition. Their inaugural flights were made last Wednesday. Use of these aircraft will contribute significantly to the development of the PAGENO="0134" 130 whole Amazonian area. It is an example of what can happen when we do meet the world competition in financing terms. Mr. WIDNALL. Could you make any further comment about the terms under which the British and Japanese are now making their sales as to top length of term, possible postponement of the payment of the principal, and the interest rates Mr. McNEIL. For the most part, the question is one of term. But the interest rate does affect the sale, of course. I think this is a problem we have throughout the world, whether it is a military matter or a business matter. If the world knows we will meet the competition, granted we want to stay on a sound, prudent basis, but if the world knows we will meet it, I think we have a chance to force them back into a position where they will also offer credit on prudent terms. May I give an example? I think that if the Japanese and the British knew we would meet their terms on this 10-year credit at 6 percent, or some reasonable percentage, I think they would probably live up to their agreement with the Export-Import Bank which is on an 8-year basis. Now, normally we would be satisfied with 8 years. I think that makes a prudent loan and when you pay it off you still have some residual value in the equipment when the loan has matured. The British, how~ ever, in a recent instance took the position that we agree on 8 years unless we find the competition has offered more. The Japanese offered more, so immediately Britain offered 10 years in this instance. I think we almost have to take the position that if we are goiiig to be in international competition, that we must meet the competition. Now, of course, we must not go completely overboard, but within reason I think we should meet world competition, and in so doing I think we can get the rest of the world to live up to reasonable, prudent terms. Mr. WIDNALL. Would you, too, comment on it, please? Mr. For. Mr. Congressman, our principal experience in this field, of course, ~iS for the large-type engineering construction contracts `of steel mills and this sort of thing that take a long amortization time. The most recent credit terms that we are aware of that are being offered, France today is offering 13 years with a 3-year waiting period, with interesj at 61/2 percent; England has gone as high as 15 years with a 3-year waiting period, interest ranging from 6 to Gi/2 percent; Italy is at the moment holding pretty tight at 10 years with a 3-year waiting period, interest at 6 to 61/2 percent; Germany has recently offered a loan `of $61/2 m'illion to Brazil for palletizing and signaling equipment, `for 15 years, whidh i's 12 years' `amortization, a 3-year `wait- ing period. These `are, I would say, longer than most normal commercial terms, but they `are for plants whose investment `i's heavy ~nd `whose recovery is over a long period of years. When you look at these terms, I would remind you that in the United States where our own steel industry is a mature industry, if you look at their own bond issues, they are almost without exception 25- to 30-year bond issues. So when you look even in these developing countries at something in the area of 15 years, you are not looking at PAGENO="0135" 131 ~a term of years for dtht that has not been exceeded right here in the United States. Mr. WIDNALL. Mr. Von Kiemperer? Mr. VON KLEMPERER. As hankers, we do not get directly involved in this question of quoting terms. We hear it indirectly from our e~- porter clients. We find that especially in the last year or two the in- ~creased flexibility of the Export-Import Bank and its increased re- sponsiveness to the marketplace in general has been very useful. We have heard from our clients that from time to time business has been lost, especially to the French, I believe, where there have at times been differences in the interest rates due to Government assistance. But in general, we have not heard of any large ticket items that have been lost because of terms, but then we are not directly and intimately `in- evolved in that end of the negotiations leading to a sale. Mr. Ri~s. Would the gentleman yield? Mr. WIDNALL. I yield. Mr. Ri~s. Could I ~sk the panel, through you, Mr. Widniall, wiiat js more important, the interest rate or the term of the loan? Mr. WIDNALL. I think they have already answered that. Mr. Foy. I think the term of the loan is more important, generally, than the interest rate. Mr. VON KLEMPERER. I would also agree with this. Mr. WIDNALL. That is all, Mr. Chairman. Mr. Foy. The only country that is difering interest rates that are not generally the same and competitive throughout the world are the Russians. They offer such ridiculous interest rates in terms there is no possibility of competing with them commercially anyway. If we decide to compete with the Russians in the United States, we will have to do it for political and strategic reasons. For example, we were working on a steel mill project in Iran. We were getting very fine assistance from the U.S. Embassy which was very much interested, and we had it pretty well along. It looked like something might develop on normal commercial terms on the type *we are talking about, 15 years. The Russians walked in and offered them 40 years at 2 percent and offered to take payment in gas and oil and a few other things, and we were out of business, period. As I say, unless the American Government for strategic reasons wanted to keep the Russians from building such a mill, there is no commercial w~y to compete with those people. Chairman PA'TMAN. Mr. Barrett. Mr. BARRErP. Thank you very much. Mr. Von Klemperer, I noticed on the first page of your statement you indicate that the Bankers' Association for Foreign Trade has 132 member banks throughout the United States who handle the bulk of U.S. export financing from nongovernmental sources. It seems to me there is an atmosphere of bank opposition to this export expansion facility, but you indicate your 132 member banks have held their annual meeting in April and gave this 100-percent ~ipproval. Would you say that is right? Mr. Vo~ KLEMPERER~ That i~ correct. Mr. BARRETT. Now, with your knowledge, have you heard any other banking interests against this export expansion? PAGENO="0136" 132 Mr. VON KLEMPERER. I am not aware, Mr. Barrett, of any opposition on the part of banks. If there is any, I am not aware of i~. Mr. BARRETT. There is another climate, I observe, and, of course, this is my own observation, that the Export-Import Bank has in its present law the authority to do what this `bill is asking to do. Would you comment on that, please? Mr. Voi~' KLEMPERER. I think, Mr. Barrett, on this particular ques- tion we just assume and we accept the statement by the Government lawyers that it does not have this authority. I think our experience with the Export-Import Bank approval or disapproval of application for guarantees would bear out that in prac- tice at least the Export-Import Bank has followed a policy indicating that it `does not have these powers. Therefore, we believe that if it is the opinion of the Government lawyers that it does not have these powers, we ought to help them get it. There is another reason, too, Mr. Barrett, why we would like to have this congressional expression of intent. There has been a great deal of talk in the last 10 or 12 years about export expansion. I think there has been a great deal more of talk than action on export promo- tion, and I do `not want `to single out `any governmental or private sector here. There has in fact been much less action than talk. `To us this expression here `by the Congress and by the Export-Import Bank and the Treasury, which initiated this bill, is a reassurance that export promotion `and export financing, will now in fact, receive a priority whi~h `has been in the discussion stage for many years. Mr. Asth~r. I wonder if you would be kind enough to identify the Government lawyers that you referred'to a moment ago. Mr. VON KLEMPERER. The Government? Mr. ASHLEY.'The lawyers. Mr. VoN KLEMPERER. I cannot, Mr. Ashley. I assumed, from the fact that this bill has been `introduced in "the Congress, that the Treasury, the Commerce Department, and the Export-import Bank felt `that this is a requirement. Mr. ASHLEY. Now, what you stated, however, was that it was your understanding that Government lawyers have indicated that there is not presently statutory authority for the Export-Import Bank to engage in the extension of credit in types of transactions which this bill seeks to cover; and if you are going to make that statement, I think that rather than predicate it, an assumption that it should be based on fact. Mr. VON KLEMPERER. That is correct. Mr. ASHLEY. Well, I am glad the record is clarified to the extent that you know of no Government lawyers who have so interpreted the present statute. Mr. VON KLRMPERER. My remark is based on an assumption, Mr. Ashley; that is correct. Mr. ASHLEY Very well. Mr. BARRETT. Mr. Von Klemperer, I have another question. On your page 3, you indicate "it is our suggestion that your committee include in its report a recommendation that the Export Expansion Advisory Committee should receive a specific mandate from the President to involve itself in an active way in the administration of this program. PAGENO="0137" 133 Would you elaborate on that for us and tell us exactly what you assume or what you think should be done there in order to improve this. Mr. VON KLEMPERER. Yes, Mr. Barrett, I would assume that we had a committee here like the present interagency coordination committee, I do not know the exact name of that committee, but it is a committee which coordinates the loans of the Exportdmport Bank and the loans of the International Bank, AID, and so forth. I could envisage that this particular committee would have a staff group and that this staff group consisting of the representatives of various departments or agencies would meet perhaps once a week; that at every one of these meetings the Export-Import Bank would submit a list of applications and projects that have been presented to it under this bill; and that at this meeting the representatives of the other Government depart- ments would have an opportunity to discuss the Export-Import Bank's refusal `or approval `of each `application. In this way, there would be a useful and continuous interchange of ideas. Once this committee would have made its recortimendation, Mr. Bar- rett, it would be up to the Export-Import Bank to make the final decision. But since this is a committee with a clear mandate from the President, I think the advisory assistance of the other members would have a considerable bearing on the Export-Import Bank's own policies. Mr. BARRETT. Are you of the opinion here that this committee would direct the funds into the most appropriate countries and be careful that `tffi'e Bank `does not oi~erextend itself in any country ~ Is this a part of the aim and- Mr. VON KLEMPERER. I would think, Mr. Barrett, j~~5 aim would largely be directed toward expansion and toward being responsive to the needs of the market. We have the many field offices of the Commerce Department. They hear a great deal about individual trade opportunities. That involves many small exporters all over the country who do not have an oppor- tunity to come to Washington and sit down with the Export-Import Bank. Through these fle~id offices of the `Commerce Department and throug~h the sources of the State Department, there would be a knowl- edge of trade needs and trade requirements, and this is a broader knowledge than the small staff `o'f the Export-Import Bank itself `can have. We hope that this knowledge can be brought to bear on the thinking of the Export-Import Bank. I think of this committee less as a brake on the Export-Import Bank, as a constructive, expansionary and sales-minded influence of the marketplace. Mr. BARRETT. I have two very short questions and I hope we don't have long answers. But I am going to ask you this one political prac- tical question. Would not through this committee's inauguration, this committee would be asking to put more people on the governmental payroll ~ Mr. VON KLEMPEm~R. No, sir. Mr. BARRETT. Lastly, I `would like to ask you now, Mr. Von Klein- perer, d'o you `have `any idea of the help in terms of dollar inflow this bill might have on the next 5 years ~ PAGENO="0138" 134 Mr. VON KLEMPERER. I would assume that it will be small `initially and that the whole $500 million would certainly not be used for some time. But we are building in a constructive way for the future. That is the thing that counts in my mind. It will not be the immediate solu- tion for our balance-of-payments problem. Mr. BARRETT. Mrs. Dwyer? Mrs. DWYER. No questions. Mr. BARRETT. Mr. Ashley? Mr. ASHLEY. Mr. McNeil, on page 3 of your statement, you say that- The ability to meet competition as to terms is as important as resolving the problems of bransiacttions which do not meet the test of reaconable assurance of repayment. Then on page 4, you go on to say: * * * that terms are being offered by competitors which are more liberal than the generally accepted practices of the Bank. The statute actually is silent with respect to terms; i's that no so? Mr. MCNEIL. I believe you are correct, sir. Mr. ASHLEY. Well then, that leads to the reluctant conclusion that competing facilities in other countries are somewhat more aggressive more competitive, with respect to terms than our Export-Import facility? Mr. MCNEIL. That is our experience, sir. Mr. ASHLEY. Well, based on that conviction, it is quite understand- able that you should say further on in your testimony: I believe that the United States should take the position and have it under- stood throughout the world that we are prepared to meet the competition. Certainly, this is so, if you mean to be aggressive in our foreign' trade effort. This leads you, on page 5, to state that- The Bank should not be restricted by the wording of the bill or the legisla~ tive history. I am not entirely sure, Mr. McNeil, what you mean by, "restricted by the wording of the bill." Do you mean by the basic statute? Mr. MCNEIL. By the `statute or the legislative history. Let us say,. the discussions during the hearings both here and in the Senate. Mr. ASHLEY. You mean back when the Export-Import Bank came into existence-with respect to legislative history? Mr. MCNEIL. I am thinking of the legislative history that is being made here this morning and was made in the Senate recently during their hearings. I understood there was an amendment proposed yesterday that if read carefully, I think, probably could be construed `as not restrict- ing the bank. On the other hand, reading it cold the first time, I thought it was really somewhat restrictive. In other words, it didn't really suggest to the Bank that they step out in an aggressive way to support exports. I think the Export Bank has been well run over the years. Condi- tions, as I mentioned earlier in my statement, have changed during these years. Some of our foreign competitors have had their entire industrial complex rebuilt. PAGENO="0139" 135 They are now very aggressive, more aggressive, of course, than they were 10 years ago. So times have changed a bit. We must find some way to meet this competition. I do think that congressional expression of intent would be most helpful at the moment, regardless, because I am not qualified, really, to say whether the language of the law is broad enough to cover everything. Mr. ASHLEY. It does appear to me that what you are suggesting, really, is since the Bank won't move on its own initiative, you had better come to the Congress for support legislation, because you have said that there is nothing restrictive in the basic statute with respect to terms, that these are really within the prerogatives of the chairman and board of directors. Essentially the same thing is true with respect to the reasonable insurance of repayment, isn't it? We have already commented with respect to terms. The Bank has not been aggressive and competitive in this area. Now, with respect to reasonable assurance of repayment, which is what the bill is pointing its finger at, I must say that here again, going back to the basic statute, we find the following language: It is the policy of the Congress that the Bank in the exercise of its function should supplement and encourage and not compete with private capital, and that loans, so far as possible, consistent with carrying out the purposes of subsection (a), shall generally be for specific purposes, and in the judgment of the Board of Directors offer reasonable assurance of repayment. There is nothing very restrictive about that grant of authority, is there? Mr. MCNEIL. No. But over the years, the last decade or 20 years, certain practices and customs have been accepted. I think they have been on the side of operating a prudent banking business. I think the Bank, operating under those conditions with their parent commit- tees here in Congress, has had a conservative interpretation accepted. I would like to repeat, that our foreign competition, having had their industrial plants rebuilt, are more aggressive now than ever before.. They are offering terms and pursuing sales, and offering con- ditions they would not and could not have done 10 or 15 years ago. I was in the Department of Defense for some years and had almost daily contacts with the Armed Forces Committee and the Appropria- tions Committees, both the House and the Senate. It perhaps is not a good analogy, but I rather considered the Armed Services Committee and Appropriations Committee as a board of directors for the Department of Defense. And I felt that it was very proper for the Armed Forces Committee to give us an indication of - their views .and an expression of their intent. I think it helped very much over the years, and in the same atmos- phere, I would think, at this time an expression of intent by this com- mittee would be most helpful. The Bank could then pursue a more aggressive policy knowing it had your support. Mr. ASHLEY. Suppose we came up with a sense of a Congress resolu- tion that the Bank should be more aggressive. Wouldn't that answer the problem that you are suggesting? Because the authority with respect both to terms and reasonable assurance of repayment is loose language, if it exists at all. Mr. Foy, let me pursue this with you a moment. You say in your statement where we see advantages going increasingly toward Europe PAGENO="0140" 136 and Japanese competitors in the area of financing, which echoes the sentiments and observations of Mr. McNeil and our other witness. You go on to say, The question has often been raised as to whether Eximbank could not be more aggressive with its present "reasonable assurance of repayment" requirements. The answer is that perhaps It could, certainly in selected instances, since the Chairnian and the Board of Directors had the responsibility for deciding under what conditions a loan meets the criterion. Then you hedge a bit and say, On the other hand, the law as written does not make clear the line beyond which the Bank should not go without breaking its present statutory authority. Well, yes, that is true. But obviously, the Congress did not intent to fasten a set of rigid requirements or criteria on the Bank, but rather to give it the broad flexible authority that we find in the language that I read. So I am not entirely persuaded by this last sentence of yours that I have just quoted. Mr. For. Mr. Congressman, I can understand your lack of per- suasion. I might suggest that if you sat in my chair or Mr. McNeil's you would be more easily persuaded, because experience would be giving you a background that I don't believe it is possible for you to have, even in hearings like this. I have worked along with this Bank and its Board of Directors and with more than one of its chairmen, and I believe the Bank sincerely and honestly wants to do a good job of helping exports. But I do believe also that each chairman that I have known has read this legislation in essence to primarily require it to be a banking Bank, and that they have read the words "reasonable assurance" to mean if they have any doubt in their minds about whether a loan might or might not come out, to be paid promptly, then their judgment says, well, we had better not make it. Now, it seems to me, going clear back to the original history of the Export-Import Bank, if the Bank were only going to make those loans that were truly likely to be repaid with assurance, the commercial banking system could have taken care of it all the way along, except perhaps for loans of such size that commercial banks by virtue of their lending limitation wouldn't be able to take them. Mr. ASHLEY. So, reasonable assurance o~t repayment, with respect to the governmental facility has to be - Mr. For. I believe it should be construed a little more broadly than any one of the major commercial banks might do. Actually, I don't think that has been the case on the whole. Now, you have asked some very intelligent questions, all leading to the question of, do you need to pass this bill at all ~ My feeling is this: if we are in need of aggressively increasing our exports-and I believe we are-and I speak not only as an individual, but I remind the committee that I was chairman of the National Ex- port Expansion Council for a period of years. You need, in essence, shall we say, a sort of sales department working with the Bank. And I view this advisory committee as sort of getting the Bank a sales department. Mr. ASHLEY. I am not arguing with you on that. Mr. For. I am in the. manufacturing business, among other things. PAGENO="0141" 137 I know that our production people like to make things a certain way and if left to them, they wouldn't make very saleable products. But the sales department comes along and puts the heat on them and says, "We can't sell it if you don't do this to it.~ I think we are, in essence, at this critical period. We are just putting into action a piece of machinery, in essence it gets another voice into the act along with the Export-Import Bank. As I said prior to your arrival, I believe the Bank would welcome this also because there would be two points of view with respect to the requested loans an~ they would get an opportunity to review with the more sales-minded side, the export and promotional side, the degree to which that group felt we were increasing both immediate and long term exports. I agree with Mr. Von Kiemperer, I don't think this requires addi- tional staff. I think this is a matter of getting an additional voice that already exists but today has no voice into the act at this time, and I am sure-well, I said, I believe, I am sure the Bank would welcome it, or I don't think they would be here testifying in favor of it. Mr. ASHLEY. Do you think this is the best way, the bill before us, to accomplish the more aggressive competitive activity on the part of this credit institution? What I am saying is, if you gentlemen were to have drafted the bill, would you have drafted it this way? Mr. Foy. Mr. Congressman, I have no experience in drafting bills and I don't know one can say anything is the best way to do anything. But I do think this is a good way and I think this one will work and I think it will work well if you decide to pass it. And I believe it will definitely stimulate exports. Mr. ASHLEY. Thank you. Mr. BARRETT. Mr. Clawson. Mr. CLAWSON. Mr. Foy, perhaps I misunderstood one response you made to Mr. Ashley, that in the test of "reasonable assurance of re- payment," it has been rather strictly interpreted by the Eximbank up to this point, and with that interpretation, the banking industry could have handled this themselves; is that correct? Mr. For. You understand me correctly, Mr. Congressman. In a sense what I was saying was that the evaluation of the question of rea- sonable assurance of repayment as made by the Board of Eximbank ~as been, in general, no different than the evaluation that would be made by any first-class commercial bank. Mr. CLAWSON. Would it follow that all of their activites up to this point could have been handled by the industry without their assistance? Mr. Foy. No, sir. Because of the funds that the Bank has had avail- able to lend. And I would remind the Congressman that the Bank has lent money on many very large projects, projects of a size that involves sums beyond the scope, mostly, of normal commercial banking. They also have loaned sums into developing countries where, as a Watter of policy, we wanted to help these countries develop, where again, the commercial banks could not have, considered the risks of sums that large. But the care with which the Eanl~ has done this has been evidenced by the fact today its record of default on most of ~hese kans is so `small as to be almost infinitesimal. Mr. CLAWSON, It has a very good record, almost as good as most of the banks. PAGENO="0142" 138 Mr. For. That is right. And that is for the very reason that I out- lined. Mr. CLAWSON. The area where the bank need has been demonstrated up to this point is in the amount of the loans and in underdeveloped countries where there might be some question about the investment of a commercial bank? Mr. For. That is right. Mr. CLAWSON. You also gave an example of a project in Korea where a consortium was put together in order to get sufficient funds to finance the project. Mr. For. Yes, sir. Mr. CLAWSON. I don't believe that you gave us the interest rates or the terms, and `whether or not there were other factors. Mr. For. I did not, `sir. The interest rate has not, of course, yet been determined. The terms will-~that will be presented for consideration of the customer-will be 15 years with three years' waiting period `dur- ing construction, and the interest rates will be in the area of six, six and a half percent, and something at that moment is generally competitive with basic interest rates. Mr. OLAwsoN. Then the other countries are really not reducing interest rates. Oompetition has been more in the term rather than the rate? Mr. For. Yes, Mr. Congressman. By and large, we find interest rates tend to find their level around the world and they tend to follow pretty much any `other `set of interest rates. It is terms, basically. What we are up against `from the United States point of view in selling is two things: we have to meet the terms offered by our competitors. Our real problem, as I pointed out in my statement, one very im- portant problem, is that our competitors are able at the time they are trying to `get the contract, to say what the terms will be, what the inter- est rate will be, in some cases, to furnish local currency financing. We are not `able to go in with `a statement that our Government has agreed to `support its portion of such a sale or to support `such a sale on any given set of terms and conditions. Mr. CLAWSON. Is this legislation needed in order to give t'hat ad- i~ance information? Mr. For. Yes, I think this legislation will help it, because I think between discussions between the Bank and this Advisory Committee, it would bring about perhaps a change in the point of vie.w of the Bank, wh~dh would go `beyond its present pr'actice and might say, you can say that we will look favorably on such a loan as this, provided when it finally comes in it is in accordance with the prospectus that you are now presenting to us. As ~f today, the Bank occasionally will give a letter of interest in which they express very reservedly an interest in the project, but without any commitment with respect to `whether they will or will not finance it, and so forth. T'his is in contrast to England or Germany. We had a very strong battle in Spain a year and a half ago for a large `contract i~hich involved nearly $35 million of business. The Germans were in there with the German Ambassador taking them by the han'd and going to the Spanish Government and to the plant in question and saying, these are the terms, these are the conditions, thi's PAGENO="0143" 139 Is the interest rate. We are prepared to grant you all these,i~ you sign the contract. In our case, we said to our customer, we believe you will get the money from the Eximbauk. We believe we can ~et you terms equal to those offered by the Germans. We believe the mterest rate will be ~ompetiitive. We almost lost the business, frankly, because we. didn't have a firm statement.. Finally, with the aid of the American Ambas- ~adoi~, who was most cooperative and capable, we were able to con- vince the Spanish Government that the American Government would meet the German terms if the contract were awarded to us, and it was. Mr. CLAWSON. Thank you. Mr. Von Klemperer, perhaps you can answer this question for the record without giving the `answer now. You indicated that with the ~Government of France there were' different interest rates, and also with French Government assistance, some of these projects were lost by our country as a result. I am curious `about the kind of Government assistance, what France actually did in a Government way in order to favor these particular transactions. Then the second question would be, whether or not the Morgan ~Guarantee has an advisory committee to the executive committee, as ~far as their loans and policies are concerned? `Mr. VON KLEMPERER. We do. To answer the second question first, we get a great de'al of advice from our board of directors. But we also have an international `advisory council that advises us on our in- ternatipnal policies. With respect to France, I do remember one case which involved Diesel locomotives and one of the former colonial countries. And here it was `a combination of bank credit and soft-term Government aid which brought `about a low average interest rate and a longer re- payment term than was' customarily offered for the sale of locomotives. Mr. CLAWSON. Do you know the amount of the interest rate in this transaction? Mr. VON KLE1~n'ERJ~. I don't, Mr. Clawson. I can try to get it if it is not privileged information. Mr. `CLAWSON, If you can get it, will you file it for the record? Mr. VON KLEMPEBER. I will be glad to do so. (The following note was received.) (To the Committee: I am unable to reconstruct this information in detail, Alfred Von Kiemperer.) Chairman PATMAN. Before yielding to Mr. Moorhead, I would like to read a letter that the Speaker of the House has just sent over here. It is addressed to him from the White House: DEAR Mn. SPEAKER: In compliance with Section 2(b) (2) of the Eximbank Act of 1945, as amended, this is to inform that I have `determined that it is in the national interest for the Exim'bank to extend guarantees and insurance and credits and to participate In the extension of credits in connection with any transaction involving the exportation of United States products and services to Yugoslavia. The Bank will report the individual guarantees and' insurance credits and participation to the Congress. Sincerely, LYNDON B. JOHNSON. PAGENO="0144" 140 Mr. Moorhead. Mr. M0ORHEAD. Thank you, Mr. Chairman. First, Mr. Chairman, I would like to welcome `all of the witnesses, but extend `a particular welcome to Mr. Fred Foy, chairman of the Koppers Co., which is located in my Congressional District. Mr. Foy, I would like `to continue th'e discussion that you were having with Mr. C'lawson about these advnnce commitments which I think are very important. Is there `anything in the existing law th'a~t prevents `the Bank from giving the type `~f advance commitmeut that other countries give? Mr. Foy. Mr. Congressman, there is~not. `However,' .1 `am not sure I should answer `that quite that strongly. The prOblem `differs in this respect. in all of the countries'withwhich we have torompete, the contract is between `the seller and the "buyer with respect `to' the whOle financial aspect of the transaction. An'd it is then underwritten, in effect, by the Government which guarantees the supplier against loss in this contract Under the way the Export-import !Bank operates-~and I have to confess I am not sure whether this is or is not a matter o'f law, and perhaps some representatives of the B'ank present could clarify this- the Bank acts as the lender directly to the borrower. If we make a sale to Spain, we don't finance that contract. The Bank lends money to Spain which is used to pay us for our contract. For this re'ason, the Bank has not given these advance commitments basic- ally on the ground that it has no application before it. `It has only a potential U.S. supplier saying, in essence, "If we sell this `fellow this batch of equipment and he comes in and asks you to lend him some money, will you do it?" And then the Bank has said in each case, well, when he comes in we will look at it. Then we go over it, usually, with some `of the Bank staff in the hope that they will say. "Well, if he comes in with that proposition, we will look favorably upon it." It works the other way in the other countries `and I `don't know whether the Ex-Im Bank basic law would stop them `from doing it. I think they might he `able to go somewhat further than they have gone up to now. Mr. MOORHEAD. I certainly `think `th'at this advance commitment should be part of the Bank's arsenal of equipment, and if they won't do it under existing law, I don't see any `change in this law. My suggestion to the committee will be that we put something in the report to encourage them, or examine whether we `should really change the law so th'at they can carry out these kinds of advance commitments. Your statement is very eloquent `about the Export Expansion Ad- visory Committee, and you say that it should be independent of the Eximbank And you also describe it as a kind of sales department Do you envisage this committee as having private businessmen serving on it? Mr. Foy. As it is presently constituted, I do not believe that is the plan. But it would be the Department of Commerce which is in charge of export expansion and doing a very vigorous job of it, and it would be represented with an official voice to say, this will help our export program, for this reason we believe thi's particular loan should be PAGENO="0145" 141 granted. And, in essence, it will putthe Bank in somewhat the position of having in a sense to show ~hy it shouldn't be granted, whereas today nobody is saying to them, you really ought to grant this one. They are looking at it in accordance with their terms. Mr. MOORHEAD. Would it be your recommendation to this commit- tee that the Export Expansion Committee, should include private businessmen, or would you recommend against that? Mr. For. I don't believe that would be necessary, Mr. Congressman. The private businessmen that will be involved will be parties to the transaction in most cases, and unless you ~took some retired business- men who are not any longer active, I think you might find some kind of a conflict of interest, probably, finally developing. I would be perfectly content to let the main help for exports be put forward by the Department of Commerce. I think they have done a very good job of trying theft very best, under conditions available to them, of promoting exports. But it always involves other Government departments ~and others have somewhat different points of view and Commerce has not always gotten all the response it wants. I believe the passage of this bill would be, in essence, an indication, as suggested by other witnesses, that it was the sense of this committee and the Congress that the Bank should make a more vigorous effort working with Commerce. Mr. WOLFF. Would the gentleman yield for a comment? Mr. MooRH1~AD. Yes. Mr. WOLFF. I would like to acquaint Mr. Foy, and MT. Von Klemp- erer, who is a highly esteemed constituent of my district, with the fact that I introduced an amendment to the foreign aid bill which pro- vided this type of advisory council to AID, and if implemeiited will materiafly assist AID in the loans and grant activities. It was the private sector aS an advisory group. Mr. VoN Ki n'inmR. May I ~peak to this? Mr. BAREETT (presiding). Mr. Von Kiemperer, I just want to tell you Mr. Wolff is one of our new member~ of this committee. He Is one of the most kno~4edgeable and finest members that ever came from the State of New York. I just want you to know how we appreciate your people sending him down here to us. Mr. WoLr~r. Thank you, Mr. Chairman. Mr. MooRrn~D. Mr. Foy, as you know, there is not one ~word about the Export Expansion Advisory Committee in this bill b~efore the Congress. It is true that the President has stated that he wotdd. name one, but maybe we wifi have a i~w President ñe~t year who mi~ght not agreee with this. If this is as important as your testimony indicates-and I have to agree with you-should we not, in your opinio~i, put into this legis- lation a st~tement about the Export Expansion Advisory Committee and at least some general ground ruies as to what i~s function should be and whattheiimits of its function should be? Mr. For. Mr. Congre~sman, in view of the fact that the discussion we seem to hear here and elsewhere has taken the turn that the Export Expansion Advisory Committee is a very important factor in the success of this program. I am inclined to believe that perhaps you 94-197-68-10 PAGENO="0146" 142 should indicate your acceptance of that by some modification of the bill that would make this committee a part of it. Mr. MOORHEAD. Mr. Foy, you described the Iranian steel mill sit- uation where the Russians came in with a barter deal and very loose terms. Would I be correct in assuming that even if we passed this bill the Export-Import Bank probably would not or could not compete in the Iranian situation? Mr. For. Absolutely not. Nobody would think of that. Mr. BARRETT. Mr. Johnson. Mr. JOHNSON. Thank you, Mr. Chairman. I want to address my questioning to Mr. Foy. I notice in your testimony you state that your foreign operations last year were approximately $40 million, and I would like to ask you some questions about the financing of it. If it is confidential informa- tion, of course you will not have to present it. I am interested in the extent of the activities of the Eximbank in financing your $40 million business last year. What percentage of that business was financed through the Eximbank? Mr. For. Approximately 55 to 60 percent. Mr. JOHNSON. So the role of the bank is quite substantial then; is it not? Mr. For. Yes, sir. I would say over the. last 10 years that between 30 and 50 percent, at least, of our total export has been financed through the Export-Import Bank. Mr. JOHNSON. I am trying also to formulate in my mind just what would be a typical transaction that would, let us say, be approved if this particular piece of legislation is approved. For instance, we just had a letter read saying in effect that the Presi- dent is recommending further credits to Yugoslavia. I notice in the report here that we have already loaned them $114 million and around $9 million, I believe, this year; and we are going to grant them addi- tional `credits. Now, would you consider a loan, in addition to the $120 million that we have already loaned to Yugoslavia, would be a type of loan which this particular legislation would- Mr. For. Mr. Congressman, I do not know how to answer your question; because, as far as we are concerned, we are not seeking any business back of the Iron Curtain at the moment, and I have no basis of judgment for your statement. I would not know. Mr. JOHNSON. Would you answer the question, what would be the typical type of loan that this legislation would make possible, which is not possible now? Mr. For. Well, let me give you an example that might be pertinent. We are at the moment building a steel mill in the Philippines which has been financed by the Bank. The first stage of it we will start into operation about the end of this year. The chairman of that company was in the bank recently wanting to change from electric furnace type of operation to blast a furnace type of operation for his hot metal which has not yet started. This will give them a good deal more total product to take care of the needs of their country. After study they came to the conclusion such a change should be made. PAGENO="0147" 143 Because they are already borrowing from the Bank, it was his obligation and his duty, and he would have done it anyway, to come to the Bank and tell them what he wanted to do. A question arose during the discussion at the bank as to whether this would require additional money to be loaned by the bank for the purpose of going through with this change. The chairman of the company pointed out it would not in essence require an extension of the bank's total amount of lending because by the time he would need some additional money he would have paid back to the bank more than he needed; but at some future point he would want to reborrow some $12 million. At this point the Chairman of the Bank took the position that under the present set of circumstances the Bank does not want to make any more long-term loans of 12 to 15 years, that he was trying to keep the loan limits down around 7 to 8 years at the most; and, therefore, that this chairman of this company in the Philippines should not look to the Bank for that extra $12 million at a later date. He also pointed out that he might not he there and could not commit his successor at that time. But he was rather discouraging about the prospect of reborrowing. I would think if this Committee were in existence the project might be looked on jointly between the directors of the Bank and the advisory committee and the decision be made that it would be wise in essence to plan now to make this loan, because as this plant expands there will be future business. For example, I mentioned the Spanish situation a while ago. The first contract our company got in Spain was about 10 years ago for $4.5 million. This got us in the door with American equipment and engineering. Since that period we have received an additional $40 million worth of business from the same customer over n 10-year period. These are the kinds of things that you have to look at and that I would expect this advisory committee to look at jointly with the Bank, what is the long-term prospect for exports if you do something now? Mr. JOHNSON. Of course, if these loans are made much easier it would facilitate your selling equipment abroad. We hear a lot about dumping in this country by other countries, deliberately dumping. This broadening of the power of this bank to make these relatively soft loans in effect would be a counterbalance against dumping. Would it not make it easier for us to, let us say, dump, or pretty near do tbat~ Mr. For. I am not quite sure I clearly understood your question. Would you restate it ~ Mr. JOHNSON. Well, as I say, at the committee hearings around the Capital, we are discussing the frightful import problem facing the steel industry and we hear about dumping from abroad, financed, let us say, by the foreign nations, making dumping possible. Now, if we make possible your selling your material abroad with soft loans, in effect it would be an answer to the dumping from abroad; would it not? Mr. Fo~r. Mr. Congressman, I suppose it would work this way. When a sale of this type is made from here we do create a lot of work for American workman in our equipment that goes over there. PAGENO="0148" 144 The average steel mill project of the type we are talking about would probably create some 2.5 million man-hours of work in the United States before it was finally consummated. I do not think it would have any effect on stopping dumping coming in here, but such a contract does create more work for American labor and more activity for American industry while it is berng carried out. I would like to comment on another aspect of this for a moment. There has been criticism of money being invested abroad, American financial money to build steel mills abroad, and the steel industry has raised the question with us. They are our largest customer in the engineering construction field and obviously, as you may guess, and as Bill Moorhead knows perfectly well, I have had many discussions with presidents and chairmen of steel companies who say, "My gosh, you are selling us equipment here, and then you are selling it abroad to take business away from us." But I have been able to point out to them two things that I think are quite important. One is our sales have all been to build steel mills in developing coun- tries. These mills have in every ease been designed to take care of the projected internal needs otf those countries. And as of this moment I know of no mill that we have helped that is shipping products into the United States, nor do I see any likelihc~od of their doing so. A steel mill in a developing country is like an electric powerplant or cement plant, you cannot have industry if you do not have one. The first mill we built was in Chile. It was such a small country that there was great doubt as to whether it could support a steel mill and yet the mill has been expanded three times since it was first put in- to operation in 1946. it is still selling almost all of its product in Chile and the little it is exporting goes to the Argentine in exchange for beef. Within 2 years after it went into operation I drove around Concep- cion and Santiago, Chile with the president of that company and we counted 47 new industries that had never been in business before. This happens everywhere and they just soak up their own local steel. So I do not think this kind of financing is hurting the American steel industry. Mr. CLAWSON. Would the gentleman yield? Mr. REUSS. Surely. Mr. CLAWSON. I am curious about the potential use of Japanese steel in the same countries where we are building or assisting to build the Japanese_i do not mean J~apanes&-~but steel mills for their own domestic purposes. Mr. Fov. The Japanese are trying to sell steel in all of these coun- tries. But they also are trying to sell ~teeJ mi~Us in all of them. So they get us either way. Mr. CLAWSON. So they would have gone at us from either direction? Mr. Foy. Yes, they are one of our strongest competitors. Mr. BAmu~rr. Mr. Reuss. Mr. REUSS. Thank you, Mr. Chairman, and thank you, gentlemen of the panel forthe very helpful testimony. I want to see if I can get sowo agreement from you gentlemen as to what is really needed in our export enhancement policy. You all agree we need some lowering of the assurance of repayment rriteria over the way it is now being run. PAGENO="0149" 145 Should we not subdivide the prdbl'ems? There are really two ques- tions in credit. One is the company to whom the goods are sold going to be able to pay for it? And, secondly, is the country in which that com- pany exists going to be in a balance-of-payments position so its currency is going to be convertible? There may be other questions, but there are certainly `those two. It seems to me that relaxation of both of those facets of credit is probably desirable, is it not? Mr. Foy. That is right, sir. Mr. REuss. Then let me ~o on to the next point. Mr. McNeil indicated in his statement that in order to meet the competition-and that certainly seems to be the name of the game-we ought to be prepared to vary the length of the repayment period. And I presume also the time when the repayment period has to start, whether it starts immediately or three years, or whatever. Do Mr. Foy or Mr. Von Klemperer disagree with that suggestion? Mr. Foy. No, `sir. Mr. VON KLEMPERER. I do not. But when it comes to relaxing of credit terms, I hope we would not lead the parade, but follow it. Mr. iREtTss. The next point is the interest rates. Is it the view of you gentlemen that there should be some flexibility in the direction of a lower interest rate in a particularly meritorious deal, with Mr. Von Klemperer's provision, as always, that we meet the competition but do not get `out ahead of it. Do' all of you three ~entlemen agree? Mr. Foy. I would like to say that I do not think we should have-I do not think we have had any problem with the interest rates. I think the Bank has been competitive on interest rates. I do not think we should let it get into the record-at least as far as I am concerned I would not want it to get into the record, that I think this Bank for instance has not been flexible on interests rates. I think it has been flexible on interest rates and I think its interest rates have met the interest rates of competition and I do not see any likli- hood of the problem occurring here unless the Bank were finally to take the position that it would not loan at interest rates, let us say, lower than the U.S. Government is paying on some of its bo'nd sales, which it might well do but has not done really so far, assuming that somebody else was `offering such lower rates. But the current offers that we have run into are up in the 61/4~ and 6'/2-percent area, and I would anticipate that they will be about equal to or around the pre- mium rate in the United States. Mr. REUSS. If that is so, then there is no problem of meeting the competition. But I was asking you to address yourselves to a situation where the competition from some other country offered rates lower than the going Exim rate, though let us also assume that that rate offered by the competing export agency of another country was some- what higher than the rate that the United States has to pay on national debt. Should the U.S. Exithbank be given the discretionary authority to go at least part of the way in meeting the competition, as long as it stays above the rate which has to be paid on the national debt, or should it not? Mr. Foy. I think it has the discretionary authority, Mr. Congress- man, to set its rate at whatever point it needs. PAGENO="0150" 146 * I think the Treasury would take a very dim view of it lending money out for less than the Treasury was borrowing from the public. But that might still have to be a situation where the advisory comnuttee and the Bank would have to make the decision as to whether we would lose some business or whether we would in essence pay that slight difference to get the business. It still might be worth more to the United States. Mr. RETTSS. I asked this question because Mr. Linder in his testimony ruled out any use of this new authority to meet the competition in lending and the start of the repayment period and the interest and so on, and I am wondering if~ in order to give the authority that is really needed, we could not make it clear that this is permissible. Mr. McNeil feels that we should. Mr. MCNEm. In our case, the interest rate has not been the crucial point. There have been differences. The Japanese offered an interest rate of 1 percent less. That has not been the key factor. The key factor really has been the period of the loan and other conditions. I think Mr. Moorhead brought up the question a few minutes ago that perhaps the bill does need some modification. To me a most important point that this bill could make, would be t& include, on line 6 of- Mr. REUSS. Page2? Mr. MCNEIL. Page 1 of the bill. Where it reads, "those export trans- actions which, in the judgment of the Board of Directors of the Bank, do not meet the test of reasonable assurance of repayment." The phrase should add "those export transactions which involve t.he meeting of unusual terms offered by competitors and which, in the judgment of the Board, do not meet the test." I think you really cover the point that has been the most troublesome one we have had in recent months or recent years. Mr. REuss. I think this is a constructive suggestion. I think some- thing has to be done, because as it is now with the wording of the bill and the testimony. He still does not do enough, in that apparently there has been ruled out the use of discretionary lengthening of the repayment period, which seems to be unnecessarily tying our hands, and it does too much in a sense because it squarely proclaims to all the world that now we are going to make loans with no reasonable reassur- ance of repayment. We don't really want to say that. So I think some reworking is clearly in order. Mr. MCNEIL. I don't presume, if I may add, that I am competent to write the language of the bill. That is what I thought might well be included in the first part. Mr. RETJSS. Thank you. Mr. BARRETP. Mr. Brown. Mr. BROWN. Thank you, Mr. Chairman. There have been questions this morning relating to the competitive financing. Do any of you gentlemen have examples of transactions where other countries have offered financing which was better in terms than we could offer through the Export-Import Bank? Mr. MCNEIL. Yes. Mr. BROWN. Could you give me those examples, please? PAGENO="0151" 147 Mr. MCNEIL. Well, I think before you. came in I listed two in one country. One was Varig about 2 years ago. rphat was Varig Airlines. The other was with Cruzeiro Do Sul Airlines. We currently have another example in Paraguay where our com- petitors have offered no downpayment, for example, 2 years longer in terms, and a slightly more favorable interest rate. Mr. BROWN. Were these transactions more attractive, the other financing more attractive, because of terms or because of rates? Mr. MCNEIL. Because of terms, primarily. Mr. BROWN. Our rates have been competitive right along? Mr. MCNEIL. I think, as Mr. Foy said, the Bank has done a good job in being competitive on our rates. At least, to us it has not been a serious obstacle. Mr. BROWN. Do you contemplate that these added-risk loans-if I may call them such-are to be at surcharged rates, or do you contem- plate that they would be at normal rates and that the protection would come through the Congress standing behind the Export-Import Bank ~n authorizing the making of these loans? Mr. MCNEIL. I think the expression of congressional intent would be most helpful. Mr. BROWN. Now, when we talk about aggressive selling, aggressive selling of credit-we should contemplate under this program losses, or greater losses, should we not, since the making of only those loans for which there is a reasonable assurance of repayment contemplates no losses, or minimum losses? Mr. MCNEIL. I think the bill as initially considered by the committee contemplated loans which involved greater risk, which means greater chance of some loss. But the point that we are making, and in addition is very important, that the terms do not necessarily involve a signifi- cant increase in the credit risk. It just makes it possible for the cus- tomer to buy the equipment and pay it off, let's say, in 10 years rather than 8 years. Mr. BROWN. Then you are saying that this bill would primarily give the Export-Import Bank authority to make loans on better terms? Mr. MCNEIL. The way it is worded, I don't think it affirmatively does it. Mr. BROWN. Well now, if the present problem is that our competi- tion is causing us problems, primarily by being able to offer better terms rather than better rates, if we meet that problem, wouldn't that be 90 percent of the solution? Mr. MCNEIL. I think it probably takes both the terms and also some latitude as far as the credit risk is concerned. This has been touched on three or four times this morning. There are examples where a good credit risk within a country does not qualify for a loan because the volume of credit that has been extended to' the country is beyond what might be considered prudent in an ordinary banking operation. I can think of a country where the loans of the Export-Import Bank represent a very substantial percentage of their debt. I can understand, ifom a banking standpoint, the reluctance, even ~ith th~ customer a reasonably good credit risk, to' give an additional guarantee within that country. PAGENO="0152" 148 The provision of authority which would permit the Eximbank to handle loans of this nature would be very helpful in many instances. Mr. Woi~'. Would the gentleman yield? Mr. BROWN. Yes. Mr. Woi~r. I think one case in point has been in shipbuilding. Japanese shipbuilding companies have taken away much of the business from the United States just because of the terms of sale they have offered to purchasers. Mr. McNEIL. Right. Mr. BROWN. Mr. Ashley in his questioning asked you, I believe, or the panel generally, as to whether or not just a resolution of the Con- gress authorizing the Eximbank to make these greater risk loans, would be adequate; and I think your answer generally was no. Mr. MoNEn~. My answer would be no. I think it requires the pro- vision of this additional authority as well as expression of congres- sional intent. Mr. BROWN. Well, of course, the important part of this bill is the reimbursement provision in case of losses carrying out administrative policy. Mr. McNEIL. That is correct. Mr. BROWN. Mr. Von Kiemperer, I was interested in one statement made in your testimony and I am quoting, you say: Both bankers and exporters welcome this new facility because it represents a positive and creative effort to correct our balance of payments deficit by expansionary rather than restrictive measures. They believe that it is more effective to overcome our gold problem through an increase in foreign earnings, rather than through reductions in foreign expenditures. From that statement, I would gather that you don't think the direct investment restrictions that the President advocated are in the best interests of our foreign trade problem.; is that correct? Mr. VON KLEMFERER. Not in the best long-term interest, Mr. BROWN. Thank you, Mr. Chairman. Mr. BAmi~rr. Mr. Stephens. Mr. STEP~HENS. Thank you, Mr. Chairman. I have no questions. But I would like to make an observation along the line of what Mr. Ashley had said and what you gentlemen have said. I think that when there has been in existence for 33 years a policy that the Bank has followed interpreting the statute, that that should be accepted as what the true interpretation of the statute is. I am glad that the Directors of the Bank and the President of the Bank have not taken it upon themselves to change what has become the true interpretation of the law and are coming to Congress for the change in policy or endorsement of a change in policy. I agree with that and I agree with it so mudh more because of the experience we had with the former Comptroller of the Currency who undertook to change many of the existing understandings of the bank- ing laws by saying, in effect, "Well, I interpret it differently from the way 30 years of my predecessors have done so. So I think this is the proper way to do it and is the only way to do it." Sometimes I wish that our courts would do the same thing and allow us to get back to the principle in the legal premise of stare decisis. When people develop a way of conducting a business or a practice and it is generally accepted as the proper way to do it, then I think that is what the intent of the statute was. PAGENO="0153" 149 So I feel like you gentlemen do. I am glad to have it expressed the way you have in your testimony here. If you are going to change the policy that has been accepted for a long period of time, it should be done by the statutory method and not by resolution. Thank you. Mr. BARRETT. Mr. Gettys. Mr. GETTYS. Thank you, Mr. Chairman. I suspect this question has been discused. But if this bill is enacted, wouldn't it in essence get the Bank away from its financing function into a subsidizing function? Isn't that, in essence, what the long-term situation would be? We would be subsidizing exports rather than financing them? Another form of foreign aid? You touched on that, Mr. Foy, in your statement. Mr. For. Mr. Congressman, I don't think that would be the case. I don't believe that exporters would bring to the Bank opportunities for export sales that were of a clear subsidy nature. The Bank has for many, many years followed a policy of analyzing thoroughly, carefully, the engineering, production, financial aspects of every transaction brought before it. Now, I am sure we all have had the experience in our own business, and you gentlemen in your personal experiences, too, that it is not pos- sible in evaluating any project to draw an absolute line that says, on this side of that line that project is absolutely sure to pay out, and on this side, it is going to be a flop. There is bound to be some in here where there could be a little debate. Mr. GETTYS. You don't think we would err on the other side? Mr. Foy. No, I do not. Not as long as the matter is handled by Exim- bank. And I have no desire to change the present position taken by everybody who' has spoken. While this advisory committee could be very helpful in discussing these matters with the Board, I see no rea- son to take away from the Board of the Bank the financial responsi- bility for the loan, and I do not think there is any likelihood of this ending as an aid project. Mr. GETTYS. Thank you, sir. Mr. Chairman, I would like to associate my remarks with your re- marks to our new member, Mr. Wolff. He is a great addition to the committee. And I would also like to associate myself with the remarks of Mr. Stephens, of Georgia, with regard to the activities of Speaker Warren and the Supreme Court in making legislation. Mr. BARRETT. Mr. Galifianakis. Mr. GALIFIANAKIS. Thank you. I was wondering if anyone on the panel has any notion as to how the $500 million figure was arrived at, other than the President just hap- pened to recommend it? I take it, no one has a comment as to that. Maybe I should have pro- pounded that to Mr. Linder. When you get to the tail end of the totem pole, questions are really unwelcome at this point anyway. But if this piece of legislation is enacted, are there particular types of goods that are sought to be financed through this means? For exam- ple, you pointed out there is a demand for the establishment of steel manufacturing plants. PAGENO="0154" 150 Is this piece of legislation designed, to your knowledge, to meet the need for a particular type of export? Mr. Foy. I wouldn't think so, Congressman. It might help Mr. McNeil. It might help us. Mr. GALIFIANAKIS. Is it available for all kinds of exports? Mr. Foy. Yes, sir. Mr. GALIFIANAKI5. As best as you can tell? Mr. Foy. That is right. Mr. GALIFIANAKI5. Then there is no particular need to be filled, is there? Mr. Foy. No. Mr. GALIFIANAKIS. Thank you very much. Mr. BARRETT. Mr. Wolff? Mr. WOLFF. Thank you, Mr. Chairman. Like my colleague, Mr. Galifianakis, being the low end of the totem pole here, I certainly don't have any earth-shaking questions. 1-lowever, I would say that I am happy to see the interest the private sector has taken in the activity of the Eximbank. I think that it is extremely important that the activities of the Advisory Committee be implemented in the legislation that is before us. I would like to see the private sector take a little more of the load from Government. I feel that sometime in the future that we might he able to substitute trade for aid. This is one area, the increase of our export expansion that I feel will solve many of the problems that we do have with the balance of payments. One area that troubles me, however, with the Eximbank has been its lack of activities with small business. I feel that the Advisory Com- mittee will help us to interest more small business in export activities. I wonder if any of you gentlemen would like to comment, since both Mr. Foy and Mr. McNeil represent big business, I wonder if there is anybody here to speak for little business? Mr. Foy. Yes; I would like to comment on that, and I am very pleased that you raised the question. We, not long ago, analyzed where the business would flow in the case of the Korean steel mill that I mentioned to you. We analyzed the question of where the money that was contracted for on this project would finally end up, and we found that it would end in the hands of many different suppliers, most of them medium and small businesses scattered over 10 States. And, actually, out of a con- tract that might go as high as $30 million, our own company might keep $5 or $6 million and the rest of it would be fed out. I believe this is the right way and best way for small-business participation. We have a lot of medium- and small-business specialists we turn to for this kind of vessel, that kind of a crane. Mr. WOLFF. One element, however, is apparent, most large businesses are very conversant with export. They also are heavily engaged in export. I think that one way that we can increase our export is to have small business, who today must be taken by the hand, brought into the export picture, bring small business into joint venture operations that the small businessmen of these developing nations can relate to. Mr. MCNEIL. In the Grace Lines several years ago, I established a separate department which for free, we would help anyone, any type PAGENO="0155" l'l of business that had a kind of interest in export, both as to paperwork, loans, what-not, and we made available all the offices we had in South America, as well as up and down the east and west coasts of the United States. So I think we, in addition to the fact that it completed manufactur~ of product, is really the product of numerous suppliers. We have fa- vored, and we actually took definite steps to see, that both large and small business participated in export e~pansion. Mr. VON KLEMPERER. I think the guaranty program and insurance program, which as you know, is a relatively new one and was intro- duced only 4 or 5 years ago, is doing a lot to help small business. The small businessman many times doesn't have the time or courage to come here to Washington, but these 132 banks which I mentioned, some of whom have tiny foreign departments consisting only of two or three people, are in touch with the local small businessman ever since these banks have had these facilities of reinsurance, either through FCIA or Eximbank, they have been able to increasingly serve small business in facilitating their export sales. Mr. WoLFF. Thank you. Mr. Chairman, just one other observation, and that is, the fact that the refinement and expertise that we have developed here in this coun- try in marketing is certainly something that we can export, and I should hope that we would give some consideration to the fact that our resources in the area of marketing are something that we should bring into these developing nations to help them not only produce but to market their commodities. Thank you, Mr. Chairman. Mr. BROWN. Could I ask just a couple of quick questions? First of all, Mr. Von Klemperer, I was rather intrigued by your reply to my question about your statement with respect to the restric- tion upon direct investment overseas. I think your answer was that this would have a detrimental long- range effect and, of course, from that I necessarily inferred that it would have a beneficial short-range effect. Is that the way you intended your answer? Mr. VON KLEMFERER. I would rather say that it was an unfortunate4 but necessary emergency measure. The long-run damaging effects will be felt relatively quickly, including through reduction of exports from this country. Mr. BROWN. When you say "relatively quickly," could you put that in a time frame? Mr. VON KLEMPERER. In what? Mr. BROWN. A time frame. A time reference-a year, or 2 years? Mr. VON KLEMPERER. Every reduced investment results in a certain reduction of exports. Not every, but almost every. Fortunately, busi- ness has been able to overcome to some extent the unfavorable con- sequences o~ this law by financing abroad. Mr. BROWN. I would like to ask you also, Mr. Von Kiemperer, as well as the panel, what would the rate be for export loans from a typi- cal New York bank during 1967, that engaged in export financing? Could you tell me what the approximate rate would be during 1967? Mr. VON KLrMPEIu~R. This would be a range of rates, depending upon the quality and the credit standing of the importer abroad and of his country and upon the terms of the loan. PAGENO="0156" 152 Mr. BROWN. What would comprise the minimum and what would be the maximum during 1967? Mr. VON KLEMPEKER. I would think it would range anywhere from a quarter percent over our minimum commercial lending rate to about 1% percent over that rate. Mr. BROWN. What are those rates? Mr. VON KLEMPERER. Well, let's say 61/4 to 73/4 percent. Mr. BROWN. Why I asked that, Mr. Von Klemperer, is that the Ex- port-Import Bank fiscal report for 1967 shows that the Eximbank loans were by and large in the 6-percent area. So, I think that we can- not say that the Export-Import Bank has not been subsidizing the loans, because I think it has. And let me also say that I think there is much merit to this legisla- tion, but I don't think we ought to oversell it because sometimes when we try to do that we get to the fool? and many who are familiar with the transactions which are involved with legislation such as this, give us a bit of a hard time. So I think we must be careful when we say there hasn't been and won't be, any subsidizing of the loans. There has been. And anyone examining the facts, can make such allegation and can support it convincingly. Mr. VON KLEMPERER. That is correct. The Eximbank lending rate has generally been below the market rate. Mr. BROWN. Thank you, sir. Thank you, Mr. Chairman. Mr. BARRETT. Mr. St Germain, I know you have been on a very important committee this morning, and we want to recognize you. Probably you have some questions you would like to ask. Mr. ST GERMAIN. I apologize to the panel. I was testifying before another committee on oil import quotas. That is very important to New England. I want to thank the panel for giving us the benefit of their knowl- edge on this legislation. Mr. BARRETT. Thank you, Mr. St Germain. Mr. Foy, Mr. McNeil, and Mr. Von Kiemperer, all time has expired here this morning. I want to say we are very grateful. You have not only been a good panel but you have been, I think, one of the most outstanding panels that has come before this committee. You made a splendid presentation here this morning, and are grateful for your coming. Mr. Foy, I just want to say to you, your coming from Pennsylvania adds to the handsomeness of these other two gentlemen. So it adds to your accomplishments here this morning. The committee will stand in recess until tomorrow morning and we will go, at 10 a.m., into executive session to take up the following bills: H.R. 16162: To enable the Export-Import Bank of the United States to approve extension of certain loans, guarantees, and in- surance in connection with exports from the United States in order to improve the balance of payments and foster long-term commercial interests of the United States. H.R. 16775: To provide for increased participation by the United States in the International Development Association, and for other purposes. PAGENO="0157" 153 H.R. 16064: To amend the Federal Deposit Insurance Act with respect to the scope of the audit by the General Accounting Office. The committee now stand~ in recess until 10 a.m. tomorrow morning. (Whereupon, at 12: 15 p.m., the committee adjourned, to reconvene at 10 a.in., W~thie~day, May 15, 1968.) (The following letters and statement were submitted for the record:) THE BOEING Co., Seattle, Wash., May 9, 1968. Hon. WRIGHT PATMAu, House of Representatives, Washington, D.C. DEAR CONGRESSMAN PATMAN: The Boeing Company wishes to express its support of proposed legislation scheduled for consideration by the Banking and Currency Committee. This bill (HR. 16l~2) provides for the establishment of a special fund of $500 million within the existing Export-Import Bank authoriza- tion for the purpose of expanding the scope of Government export financing assistance. The principal objectives of this fund as set forth in President Johnson's transmittal for the Congress are to: 1. "Support the determined efforts of the entire business community to expand exports. 2. Make available to American firms export financing more competitive with that provided by other major trading nations and especially suited to developing new markets." As we understand it, the enactment of this legislation would enable Eximbank to support export transactions which involve a degree of financial risk which, while acceptable, perhaps does not meet their normal standards. The commerical jet transport manufacturers have been and will continue to be extremely export conscious-about one-third of the U.S. industry output has been exported, and this general trend is expected to continue or improve. The second objective cited above is most important to our industry. We have experienced situations wherein foreign manufacturers, through their govern- ments, have quoted more liberal financing terms than were available in this coun- try. Further, the developing countries of the free world are becoming a more important segment of the potential commerical jet aircraft markE~t, and one which should be exploited fully by U.S. industry. The generally accepted technical superiority of U.S. products can in some of these cases be offset by the financing terms. Two additional points are worthy of emphasis. First is the critical importance of the initial sale of an aircraft type. This almost invariably results In significant follow-on sales of aircraft as well as a continued requirement for U.S. made spare parts and other supporting equipment and services. Second is the very fine loan repayment record of the world's airlines, even in the case of the smaller airlines in the developing countries. In summary, we believe the favorable consideration of this legislation will represent a positive step toward improving this country's balance of trade position. Respectfully, T. A. WILSON, President. ELLICOTT MACHINE CoRP., Baltimore, Md., May 9, 1968. Hon. WEIGHT PATMAN, House of Representatives, Washington, D.C. Mv DEAR ME. PATMAN: We have been informed that the House BankIng and Currency Committee, under your Chairmanship, will conduct hearings on House Bill 16162 next week. We understand that this bill is a companion bill to S. 3218 to extend the authority of the Export-Import Bank in order to improve the balance of payments. We would like to go on record with you and your committee that the Export- Import Bank of the United -States has been most helpful and constructive In enabling us to compete in world markets. Our export business over the past twenty years has grown with the assistance of Exim, and each time their au- PAGENO="0158" 154 thority has been extended, we have found that it helps keep pace with the competitive financing available abroad, and we should like to go on record in recommending your favorable consideration of the current bill. Thank you for your consideration. Sincerely yours, RICHARD B. BowE, Chairman of the Board and President SANDY HILL Coup., Hudson Falls, N.Y., May 9, 1968, Hon. WRIGHT PATMAN, Chairman, House Banking and Currency Committee, House of Representatives, Washington, D.C. DEAR Mn. PATMAN: We wish to add our voice to those speaking in favor of a quick approval by your Committee of House Bill 16162, relaxing to an extent certain regulations under which the Export-Import Bank of the United States has been operating. We are wholeheartedly in favor of this legislation which we feel can be extremely helpful in promoting the export trade of the United States with a consequent improvement in our Balance of Payment situation. Sandy Hill Corporation designs and builds Pulp and Paper mill machinery and has served the industry since 1858. Our field of activity includes not only the United States but also those countries which have or hope to establish a Pulp and Paper industry. For almost all of the major installations outside of the United States, we have relied heavily upon the resources of the Export- Import Bank of Washington for the long-term financing which is required for this capital intensive industry. Even in those countries with a fairly well estab- lished industrial background the establishment of a new integrated Pulp and Paper mill is a major undertaking and the long-term financing a basic consider- ation. The fact that we could be helpful in suggesting a source for this financing has been of the utmost importance in our negotiations and a prime factor in successfully concluding a contract. In the recent past, we have become increasingly aware of competition in our particular field from a number of European countries as well as Japan, with reports of extended credit we could not meet. It is obvious that the developing nations and the newly emerging nations have less resources to finance their industrial program than those nations farther along the road. These nations now and in the immediate future will be seeking financial help and it is quite possible that the "reasonable assurance of repayment" required by the Export- Import Bank could not be provided. The proposed legislation could be extremely helpful in such situations. Since the President's message in January on the Balance of Payments, we have been extremely interested in the action taken to implement the recom- mendations. Approval of the House Bill 16162 and the Senate Bill 3218 could well open a number of doors to U.S. exports in areas where we have been un- able to operate. It is our earnest hope that this beneficial legislation will be put into effect as soon as possible. Your good work in the past is well-known and appreciated. Sincerely yours, J. WALTER JUCKETT, President. BEECH AIRCRAFT CORP., Wichita, Kans., May 10, 1968. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. MY DEAR MR. PATMAN: We have been following with great interest the dis- cussions which may lead to the enactment of HR. 16162 which is to enable the Export-Import Bank of the United States to extend their loan authority. Our Company exports over 25% of its commercial production in General Aviation, and has found that with increasing competition from Europe and impending competition from Iron Curtain countries in our Industry, we need expanded Export-Import Bank facilities to remain competitive in the world markets. Our Industry has over the last 20 years developed its foreign niarkets and an effective distribution organization, and all this effort, built with much work and great expense, needs the support of more effective financing facilities than commercial banks and existing Export-Import Bank programs can provide. PAGENO="0159" 155 The development of our Export markets which has a potential of an annual growth of from 10 to 20% may thus become an even more important contribution to the TJ.S. Balance of Payments than our Industry has been in the past, apart from many considerations of National Security with which the success of our Industry in the world is closely associated. We request that these views be considered in the deliberations of Congress with respect to this pending legislation. Sincerely, MICHAEL C. NEUBURGER, Vice Presideat-Ewport $ales. AMERIcAN INsTITUTE or MARINE UNDERWRITERS, New York, N.Y., May 10, 1968, Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MR. PATMAN: The American Institute of Marine Underwriters, the na- tional trade association of the American marine insurance industry, favors the early enactment of H.R. 16162 currently under consideration by your Com- mittee. It is believed that this legislation, by enabling the Export-Import Bank of the United States to approve extension of certain loans, guarantees and in- surance in connection with exports, will be beneficial to the balance of iiiter- national payments and to the long-term commercial interest of the United States. This Institute, as a member of the National Export Expansion Council, sup- ported the development of the policy embodied in the proposed legislation. Also many companies that are members of the Institute are subscribers to Foreign Credit Insurance Association. And individual marine underwriters are active in `the affairs of FOIA. I mention these matters because marine insurers are keenly aware of the importance of maintaining a positive foreign economic policy. We consider the purpose of HR. 16162 to be a positive action. Sincerely yours, CARL B. MCDOWELL, E~vecutive Vice President. AMERICAN TEXTILE MANUFACTURERS INSTITUTE, INC., Washington, D.C., May 13, 1968. Hon. WRIGHT PATMAN. House Banking and Currency Committee, House of Representatives, Washington, D.C. Dmu~ MR. PATMAN: The American Textile Manufacturers Institute, the cen- tral trade association of the United States basic textile industry, endorses and urges early passage of H.R. 16162. This bill, along with S. 3218, would enable the Export-Import Bank of the United States to approve exension of certain loans, guarantees, and insurance in connection with exports from the United States in order to improve the balance of payments and foster the long-term commercial interests of the United States. The textile exporting community has followed closely the development of the Foreign Credit Insurance Association and the Export-Import Bank's guidelines for the insurance program of FOIA. The industry has met with FOIA officials to dscuss problems of insuring exports of textile goods against both political and credit risks. U.S. textile exporters have had a difficult time in maintaining their markets in a number of countries. The situation in a number of countries has become acute. The United States has not as yet been able to provide the insurance coverage necessary to put our exporters on an equal basis with foreign competition. It seems to us completely unrealistic and contrary to a realistic sales pro- gram to expect exporters to go after business overseas' knowing they will not be able to accept the purchasing terms required by importers. In other words, the exporter first has to make a sale under very con~petitive commercial conditions and, if he succeeds, then he has to tell the customer that he cannot grant the necessary credit terms but will have to submit the same to the U.S. Government in the hope that some special facilities may be made available providing for political risk insurance coverage in particular and, hopefully, commercial credit PAGENO="0160" 156 insurance coverage. Meaningful businesses cannot be concluded in so-called higher risk countries on this basis. There are many cases which have come up from time to time which would have meant additional business for our exporters but the needed facility for coverage against political or credit risks was not available under the present Export-Im- port Bank/FCIA guidelines. There are areas of the world in which markets for U.S. textiles could be developed. Perhaps more important, there are markets which have been lost because adequate coverage was not available: these might be regained. The textile industry can export and wants to make its contribution to this na- tion's exporting effort and toward a favorable trade balance. We are not asking that the proposed Export-Import Bank facility go into the soft-loan business. What the textile industry believes is that a broader and more realistic inter- pretation of export financing, as provided under the Senate and House Bills, would provide for financing higher risk business which other countries are now aggressively purthiing. Only the U.S. Government can effectively provide the backing for this needed coverage. Enactment of HR. 16162 would go a long way toward providing a needed facility to promote this nation's exports. Very truly yours, H. BUFORD BRANDIS, International Trade Director. WORTHINGTON Cosv., Harrison, N.J., May 10, 1968. Hon. WRIGHT PATMAN, Uhairmain,, (Jomlin'ittee on Banking and Currency, House of Representatives, Washington, D.C. Mv DEAR Mn. PATMAN: Worthington Corporation strongly favors the enact- ment of H.R. 16162 which is currently under consideration by your Committee. We understand that this bill will enable the Export-Import Bank of the United States to finance export transactions not covered under the bank's present program. In 1967 Studebaker-Worthington Corporation's exports (parent company of Worthington Corporation) totaled almost $95 million. We feel that the new facility provided under H.R. 16162 can significantly help us to increase such ex- ports. We have had several instances in the recent past where financial assist- ance from the Export-Import Bank was not available because (1) the bank was already over-extended in the particular country involved audi the value of the order was too great for the bank to give favorable consideration, or (2) the customer could not obtain an adequate bank guarantee, or (3) the Export-Import Bank felt that loans already granted to the customer was their maximum limit. Worthington manufactures several products which fall into this category: gas turbine generators for jet peaking power plants which may cost anywhere from $1 million to $10 million; stationary diesel engines for power generation in rural areas, etc. Our best markets for such equipment are the under-developed countries which Invariably need medium to long-term financing and quite often state rather than federal utility companies are involved with only state bank guarantees. It is our understanding that the transactions to be financed under this new facifity will be in addition to the bank's regular program of direct loans, guaran- tees, or insurance program. We respectfully request favorable consideration by your Committee. Sincerely, C. A. O'ROTJRKR, Treasurer. & Oo., Moline, Ill., May 13, 1968. Hon. WRIGHT PATMAN, Banlci~ng and Currency lYom~inittee, House of Representatives, WasMngton, D.C. DEAR SIR: I would like to express my support for H.R. 16162. Enactment of this Bill would permit the Export-Import Bank to contribute even more effectively than in the past to the development of American export markets. My company is one of the largest producers of farm, construction, and logging tractors and equipment in the United States. Tn the last five years our exports of such products have averaged approximately $96 thillion per year. PAGENO="0161" 157 The Bank has already been very, helpful tO us In developin~ our export trade. For one thing credits extended by the Bank have enabled us to make millions of dollars of sales on credit terms we couldnot have risked ourselves. In addition, the cooperation of the Bank has been of such importance to the over-all pro- grams of some cOuntries that the participation of the Bank in our transaction enabled us to obtain important concessions from the government involved. Fur- ther, assistance from the Bank on our first transactions in some countries has enabled us to gain a foothold there. We have then been able to expand our mar- kets in such countries either without the help of the Bank or at a much lower level of Bank participation. The present statutory authority of the Export-Import Bank is limited to credits offering "reasonable assurance of repayment". Under S. 3215, $500 million of the Bank's present authorization will be set aside as a separate fund or cate- gory to which `this limitation will not apply. Instead, as to this special fi~nd the criterion is to be whether the loan will `Improve the balance of payments and foster the long-term commercal interest of the United States". This does not mean, of `course, that in committing the new fund the Bank will disregard `the possihi]iity of being repaid. Substantial credits not in the end collected from the foreign debtor would not meet the criterion of helping our balance of payments. It does mean that the fund will be available for reasonable credit risks where the possible payoff in increased sales and market penetration is substantial. Both the new and the old `criteria are stated in pre'tty broad and subjective language. They acquire precise meaning only as they are applied by the Bank to particular situations and they permit a broad exercise of judgment by the Bank. For this reason I have no way of picking out specific examples of credits the Bank will be aible to approve under the new fund which it presently would reject, or specific credit problems which the bill will solve. I can, however, warmly support the principle the bill establishes-that is the commitment of some part of the Bank's resources to truly audacious and imagi- native use of credit which can open trade doors and meet competition. I suspect that one of the most important areas in which the new fund will en- able the Bank to `expand its c'o'ntr'i'bution will be in situations where the so-called "country risk" is high. As the Bank's commitments to credits in a particular country increase, its risk of taking large, sudden losses ks a result of general political or economic developments there also increases. When this has happened, the Bank has sometimes felt it could not approve further commitments even though the in,dividualb'orrowers represented very good commercial cr~di't risks. This can put U.S. exporters at a disadvantage if central banks of exporting in- dustrial countries are not so heavily ~ommitted in the importing country, and are therefore willing to guarantee credits of a much lower quality. The bill will undoubtedly also permit the Bank to' approve some individual credits which cannot now be accepted, or which have been acceptable `only with more assurance in the form of collateral or guarantees than foreign competitors require. For these reasons, I hope your Committee will give favorable consideration to HR. 16162. Very truly yours, E. F. CURTIS, President. NATIONAL FOREIGN TRADE CoUNcIL, INc.,, New York, N.Y., April 20, 1968. ion, WEIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. Mv Dzan Mn. PATMAN: The National Foreign Trade Council favors the early enactment of H.R. 16162 currently under consideration by your Committee to enable the Export-Import Bank of the United States to approve extension of certain loans, guarantees and insurance in connection with exports from the United States in order to improve the balance of payments and to foster the long-term commercial interest of the United States. Without increase in the Bank's established statutory lending authority, the new facility provided under H.R. 16162 cnn significantly broaden the scope of Exhubank financing of commercial exports by making available to American firms export financing which will enable them to sell their products aggressively in new, emerging markets. In so doing, it will serve in a positive way to 94-197-68-----11 PAGENO="0162" 158 strengthen our nation's export earnings and balance of payments position without impairing the established and deserved reputation of the Eximbank as a sound lending institution operated on a businesslike basis. We have noted the assurances of the President and Chairman of the Export- Import Bank of the United States that the transactions to be financed under the new authority would be additictnal to those which can be supported under one of the Bank's regular direct loan, guarantee or insurance programs, applying the criteria ~ow in force for those programs; that the new facility would not be allowed to make the Eximbank a soft loan agency; that usual repayment terms and standard interest rates will apply; and that most of the transactions would be financed by U.S. commercial banks under Eximbank's guarantee or by the exporter himself under an Insurance policy provided by the Foreign Credit Insurance Association in conjunction with Eximbank. It is respectfully requested that this communication in endorsement of H.R. 16162 be made a part of the hearings of your Committee. Sincerely yours, ROBERT M. NoRRIS, President. BANKERS' ASSOCIATION FOR FOREIGN TRADE, April 19, 1968. Hon. WRIGHT PATMAN, House Office Building, Washingtos~, D.C. DEAR REPRESENTATIVR PATMAN As in the past we are pleased to send you herewith the Statement of Principles and Recommendations adopted by this association at its annual meeting on April 5, 1968. Your own views and comments on these matters are always of interest to our Association. Very truly yours, M. R. CROCKARD, President. STATEMENT OF PRINCIPLES AND RECOMMENDATIONS OF THE BANKERS' ASSOCIATION FOR FOREIGN TRADE (Adopted at the Annual Meeting, White Sulphur Springs, West Virginia, April 3, 1968) The members of the Bankers' Association for Foreign Trade at their annual meeting on April 8, 1968 hereby resolve to express themselves in favor of the following principles and policies and recommend them to the Directors and Officers of the Association for careful consideration and implementation during the coming year. FOREIGN COMMERCE AND THE STRENGTH OF THE WORLD ECONOMY The unprecedented expansion of world trade and investment in the past two decades has occurred in an environment of greater freedom for the international operations of private business. We are concerned about the serious problems and uncertainties which now threaten the continued growth of the world econo- my; uncertainties arising from conflicting national policies, the rising tide of protectionism by governments and business alike, and the increasingly more ap- parent weaknesses in the international monetary system. In the following comments and recommendations, we limited ourselves to those measures which we believe will buttress the efforts of the United States and other countries to reaffirm and strengthen the forces of international co- operation on which the postwar prosperity has been based, and which are vital to a continuation of that prosperity. THE U.S. BALANCE OF PAYMENTS We fully recognize the need for the United States to assure the continued integrity of the dollar in its role as the paramount currency for the finance of international trade and finance. Insofar as the continuing and increasing controls over international transactions embodied in the 1968 balance of payments pro- gram of the United States are necessary to this end~ we shall continue to give them our support. At the same time, however, we must point out that if these PAGENO="0163" 15~ restrictions are allowed to beoothè ~erhlanent; their will stifle the creative forces of international finance that have created important sopices of foreign income to the United states. The fundamental goal, it must be remembered, is not the elimi- nation of the deficit by means Of controls over international transactions, however necessary this may be in the short-term. `I~he objective of our strategy should be the adjustment of the balance of paytaents position through responsible and appropriate domestic monetary, fiscal, and budgetary policies such that a sus- tainable international balance becomes consistent with the greatest possible freedom for business enterprise in international commerce and finance. FINANOING or u,s, EXPORTS We again strongly recommend that export credits be exempted from target ceilings for foreign bank loans under the Federal Reserve voluntary Credit re- straint program, ~~here the lender is assured that a b~na fide export Is involved. The ability of commercial banks to develop their export financing has been re- tarded in recent years by conflicts in the policies and directives of the various government departments and agencies involved. Banks have been urged by the government to maximize export financing as part of the U.S. Government's overall program of export promotion. But at least in part this encouragement has been negated by the slow pace at which practical government support of export financ- ing has been developed and by the inclusion of export financing in the restrictions on foreign lending. Some of the efforts undertaken by the banks have subsequently been found to have been in vain. There has been considerable improvement in this situation in the past year. Nevertheless we urge that some government agency be given increased authority for coordinating effectively the policies of the various departments and agencies. We feel that such coordination is essential if the banks are to develop a long-term capability to provide the support to exports which is expected of them. INTERNATIONAL MONETARY REFORM The rapid decline of confidence in the international monetary system which followed the devaluation of the pound sterling last year and which was most recently evidenced by the forced abandonment of the London Gold Pool arrange- ments has had a widespread impact on the environment of world trade and finance. Further actions and policies contemplated by the United States and Britain to correct their payments balances, and the threatened retaliatory or defensive measures by other countries could materially and adversely alter the conditions under which U.S. banks and business flrm~ will operate for a long time to come. We believe that the proposed Special Drawing Rights under the International Monetary Fund will provide the needed supplement to gold and national cur- rencies in the world's monetary reserves, and that it is vital that efforts to provide for the orderly expansion of the monetary base of world commerce by this means be accelerated. EXPORT-IMPORT BANK OF UNITED STATES We lend our support to President Johnson's request for the earmarking of $500 million of the Export-Import Bank's authorization for an export expansion program and suggest it be used to permit the Bank to issue guarantees on less stringent risk criteria than called for by the current EXIM/FCIA standards to facilitate exports under unusual conditions. We urge that in the administration of this fund EXIM Bank should give exclusive emphasis to supporting an aggres- sive sales policy of U.S. exporters in world markets. The very limited use of EXIM Bank's rediscount facility since its inception has Indicated that changes in the present terms and conditions are essential. We look forward to operating under the new measures just released and commend the efforts made to bring them about. While recognizing that there has been marked improvement in cooperation between the Export-Import Bank and commercial banks in the past year, we urge continued vigilance to exercised in order that EXIM Bank lending shall not substitute for the lending of commercial banks. To some extent this substitution has been encouraged by the Federal Reserve Guidelines and by the recent shorten- ing of EXIM Bank's traditional terms due to Balance of Payments Considerations. PAGENO="0164" 160 ERPORT FINANCINOr OF MAJOR CAPITAL GOODS Export finanèing of jet aircraft and, in principle, other capital goods, is under study by a separate committee of t~AFP. We commend this investigation and look forward to the forthcoming recommendation. We urge all of our members to give their full support to this essential project. INTERNATIONAL TRADE POLICY We oppose the reversion to strong protectionist sentiment evidenced in the United States. Actions contemplated by Congress or by the Administration to restrain imports by quotas or by import surcharges would severely hinder the movement toward freer world trade which has resulted in great overall benefits to the United States in the past two decades. They are contrary to the spirit if not the letter of the General Agreement on Tariffs and Prade and, in particular, to the recently concluded Kennedy Round of tariff reductions. Finally, retaliatory measures which would be quickly taken by our ti~ading partners would probably more than offset any possible advantages from import restraint. We support the far more preferable strategy of working towards an acceleration of the Kennedy Round timetable in ways that afford. temporary advantages to these countries currently running serious balance of payments deficits. At the same time it is essential that our government show greatly increased zeal and persistence in negotiating with foreign governments on measures that will alleviate the serious non-tariff barriers that impede some United States exports and that are in part responsible for the growing protectionist sentiment in this country. EAST-WEST TRADE We continue to support any action that would facilitate East-West trade within the framework of our national security and economic self-interest. In this connection, we oppose any restrictions on Export-Import Bank guarantees for export loans, providing they cover trade based on these principles. At the same time, we support the Export Control Act which provides for embargoes on shipments of goods or technology to unfriendly nations, if these items make a significant contribution to their economic or military potential and are detri- mental to our national security and welfare. TAXATION OF FOREIGN DEPOSITS IN THE U.S. The Foreign Investors Tax Act of 1966 provides in part that interest on deposits of nonresidents in commercial banks in the United States shall be subject to federal income tax and withholding after 1972. The imposition of this tax will have an adverse balance of payments effect and will result in an outflow of de- posits from the United States. The possible increased revenue from this tax is in- significant when compared with its detrimental effect on the United States bal- ance of payments, and the position of the United States as a financial center. Legislation should be enacted as soon as possible to repeal this provision of the Foreign Investors Tax Act. We strongly recommend that action be taken imme- diately by both the Bankers' Association for Foreign Trade and the American Bankers' Association towards repeal. FOREIGN AID We must stress the obvious fact that the resources of even so wealthy a nation as ours are limited, and because we cannot do everything we would like to do at one time, our national priorities must be reassessed, and our expenditures ordered under a clear and meaningful set of priorities. At the same time we recognize that one of the most pressing problems o,f our times is the relationship between economically advanced and prosperous nations and those which are in the early stages of development. We believe the United States must continue to lend its utmost support in assisting he economic develop- ment of those nations which are conscientiously striving to improve the welfare of their people. PAGENO="0165" 161 F~oREIGN CREDIT INSURANCE ASSOCIATION, New York, N.Y., May 13, 1968. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, TVashington, D.C. DEAR Mn. CHAIRMAN: Foreign Credit Insurance Association, an unincorporated association of private insurance companies organized in 1961 to provide export credit insurance in cooperation with Export-Import Bank of the United States, wishes to record its support of HR. 1.162, now pending before your Committee. It is our understanding that this legislation is design ". . . to enable the Export- Import Bank of the United States to approve extension of certain loans, guaran- tees, and insurance in connection with exports from the United States in order to improve the balance of payments and foster the long-term commercial interests of the United States". The underwriting criterion used by this Association is virtually the same as Eximbank's liberal, but realistic, standard of "reasonable assurance of repay- ment." A review of our underwriting results during the six years of our existence will demonstrate that we have operated at the outer limits of this standard. As a result, we have assisted many U.S. firms, particularly small businessmen, to compete more effectively in world markets. Enactment of the pending legislation will, however, enable us to be of even greater service to the U.S. export community, since Eximbank will be in a posi- tion to approve many transactions which, through perhaps marginal, offer an acceptable prospect of repayment. We anticipate that there will be a wide variety of requests by exporters to utilize the proposed facility for such reasons as new market penetrations and higher limits of liability. There is no doubt that this Association will have an essential screening func- tion to perform so as to make sure that only "acceptable" applications are ulti- mately approved for insurance. Under no circumstances would the management of this Association reconimend utilization of the proposed facility unless it is convinced of the willingness and ability of the foreign buyer to satisfy his obligations arising out of the extension of credit by the U.S. exporter. In summary, therefore, this Association will cooperate with Eximbank in the implementation of this legislation by continuing to insure all transactions, or portions thereof, which meet existing underwriting standards, thus limiting its recommendations for utilization of the facility to those transactions, or por- tions thereof, which, though acceptable, are outside the "reasonable assurance of repayment" limits. Very truly yours, FRANCES X. BO~LAN, President. AMERICAN COTTON SilIrrEns AssoCIATIoN, May 15, 1968. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR CONGRESSMAN PATMAN: On behalf of the American Cotton Shippersi As- sociation, I wish to express our support for your bill, HR. 16162, which would help to improve our nations trade balance. Our Association was founded in 1924, and is basically comprised of merchants, shippers, and exporters of raw cotton. The 678 member firms of the ACSA handle over 70% or the domestic cotton crop and 90% of the export market. The Association lS an affiliation of six federated Associations, located in fourteen states throughout the cotton belt: Arkansas-Missouri Cotton Trade Association. Atianitic Cotton Association. Oklahoma State Cotton Exchange. Southern Cotton Association. Texas Cotton Association. Western Cotton Shippers Association. At our Forty-Fourth Annual Convention in Atlanta. Georgia on 4pril 26, 1968, the Association unanimously adopted the following resolution: PAGENO="0166" 162 "Exiowr EXPANSION BILL, S. 3218 AND ILR. 16162 "Export-Import Bank would be authorized to approve extensions of certain loans, guarantees, and insurance that do not meet the Bank's traditional criterion of reasonable assurance of repayment, if it were found to be in the long-term commercial interest of the United States or helpful to the American balance of payments. "The American Cotton Shippers Association strongly endorses the intent of this Legislation because it can help to increase the exports of U.S. comm~odities." The Association respectfully requests that this letter be included in the record of the Committee hearings on S. 3218. Sincerely, W. D. LAWSON, III, President. FMC CoRP., Chicago, Iii., May 15, 1968. Hon. WRIGHT PATMAN, Chairman, Bunking and Currency Committee, Ho use of Representatives, Washington, D.C. DEAR CONGRESSMAN PATMAN: I write to support early action by your Com- mittee and early passage by the House of HR. 16162, enabling the Export-Import Bank to assist in greater measure the increase of United States exports. As you may know, our company is a large diversified manufacturer of ma- chinery, chemicals, films and fibers. We annually export more than $75 million worth of goods from the United States. We are constantly seeking ways to in- cre~ase our exports and believe that your Bill will be of considerable aid in this regard for all U.S. exporters, large and small. In 1965 I had the privilege of testifying before Senator Magnuson's Com- mittee in favor of the Expoi~t Expansion Bill. At that time I related certain instances where in our judgment we had lost export sales to our competitors in other countries because the Export-Import Bank felt constrained by the language of its Congressional charter to deny loans, guarantees or insurance iii connection with those sales. H.R. 16162 should help considerably in overcoming this problem and in giving our country's exports badly needed and meaningful Congressional support. Liberalization of the Export-Import Bank's criterion for participation is, I be- lieve, long overdue; it is particularly urgent now in view of our balance of pay- ments predicament and the recently announced fact that for the first time l11 many years our country's exports were less than our imports. Very truiy yours, H. L. BYRD, IJrecv tive Vice President, Machinery Divisions. AMERICAN STANDARD, New York, N.Y., May 17, 1968. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, TVashington, D.C. M~ DEAR CONGRESSMAN: As Chairman of a company deeply interested in ex- ports, I wish to urge upon your committee favorable action by it and Congress 011 HR. 16162, the bill to create an export expansion program w-ithin the Export- Import Bank of the United States. This program would specifically contribute to a more favorable balance of payments by promoting exports rather than by the less favorable method of limi- tation on capital outflow. This would be accomplished through permitting a limited quantity of relatively high-risk, export-oriented loans which probably otherwise would not be made. Moreover, in addition to the direct short-term contribution through the im- mediate export, the, program would provide longer term benefits through probable "follow-on" sales. May I add also that I am a member of the Advisory Committee of the Export- Import Bank; and, at a recent meeting of this Committee in Washington, we felt strongly that it would be in the national interest to have this program approved. Yours respectfully, JOSEPH A. GRAZIER, Chairman. PAGENO="0167" 163 INTERNATIONAL SYSTEMS & CONTROLS CORP., Washington, D.C; May 20, 1968. Hon. WRIGHT PATMAN, Chairman, House Banking and Currency Committee, U.s. Congress, Washington, D.C. DEAR Mn. PATMAN: I appreciate the opportunity to submit this written testi- mony on behalf of House Bill 16162. In 1964 and 1965 I served in the government as the President's National Ex- port Expansion Coordinator. At the present time I am Vice President and Direc- tor of the International Systems & Controls Corporation, which does an estimated 35 million dollars worth of business overseas each year. This business consists of consulting engineering, engineering construction, and the export of capital equipment. In 1965 I proposed the establishment within the Export-Import Bank of a Na- tional Commercial Interest Loan Fund to achieve what I believe to be substan- tially `the same objectives as are sought in H.R. 16162. The substance of this proposal, was also contained in a Bill prepared and submitted in 1965 by Sena- tor Warren G. Magnuson, Chairman of the interstate and Foreign Commerce Committee of the Senate. During `the hearings on Senator Magnuson's Bill vari- ous industries-particularly those engaged in the export of capital goods and those engage'd in `overseas engineering `and construction-testified that the estab- lishment of such a Special Fund would make it possible for them to increase substantially their exports to foreign countries. My experience in private business since January 1966 has made it even more clear how urgent is the eztabiishmeiit `of a Special Export Program and Guar- antee Fund as proposed by H.R. 16162. Increasingly we find that, even where American firms have superior technology, better products, and better delivery schedules, the critical factor in competing for overseas markets particularly where capital goods are involved-is competitive finance. I have been convinced for `some time that the export program in the United State's would fare much better if the Export-Import Bank were more willing to take greater risks to support the efforts of American businessmen. The manage- ment of the Export-Import Bank, however, has construed its charter in such a way as to operate with great prudence in selecting transactions which they have been willing to finance. I am pleased, therefore, to see that EXIM has joined in urging the passage of 11.11. 16162 which would authorize it to do financing in sit- uations where the risks are higher than normal. It is an axiom within the business community that if one wants the fruits of new and expanding markets, one must accept the risks of going into them. The private business community has been willing to take these risks, but in the absence of specific legislative authority EXIM has been reluctant to support the l~rivate business community in these endeavors. The following are some examples of situation's where opportunities exist for American businessmen and for export expansion but In which difficulties with respect to finance have been experienced in the past: 1. There are countries such as Iran in the Middle East, Taiwan in the Far East, Spain and Greece in Europe, Mexico and Venezuela in South America which should be classified `as in the intermediate stages of economic development. These countries have moved out `of the AID pha'se; they have developed sufficient rev- enues and a `sufficiently broad economic base so that they have come to represent major opportunities for commercial development and expansi'on. As `the U.S. h'as phased out its aid program in these countries, companies from other industrialized countries hav'e moved in supported by liberal commercial credits on terjns more favorable than those made available through the EXIM Bank. Perhaps on the theory that the longer the terms the greater the risk. EXIM has been unwilling to match `the commercial financing offered by other coun- tries in these burgeoning markets and as a consequence, U.S. business has been increasingly displaced by companies from Wes'tern Europe and Japan. 2. From time to time the developing countries in Latin Americ'a, Africa, Asia and the Middle East experience balance of payments difficulties. At such times the EXI1~I Bank takes the position that it is unwise to extend further commercial credits. Nevertheless, it becomes neces'sary at times to enter the markets of those countries at the strategic time when the market is being developed, or suffer the consequences of bein'g perma~nently excluded. This is because special commercial advantage's accrue to the company and country which initiates certain kinds of PAGENO="0168" 164 projects. Once these projects are started there is a built-in advantage in obtaining the business involved in maintaining ai~d extending the system. Examples are projects involving installation of communication systems, transport systems, power systems, agriculture systems, etc. Many countries will take extra financial risks for the ~pportunity of being first to install the initial major thermal power installations, or to install the first modern telephone communication system, because they know that this gives them a major advantage in obtaining all the on-going business involved in extending these systems. The EXIM Bank has been reluctaiit, in the past, to assume higher than normal risks to make it possible for American businessmen to take advantage of this type of market opportunity. EXIM has also established Informal ceilings on loans to various countries and has been reluctant to set aside the ceilings to approve additional financing eyen when it would confer a long-term commercial advantage on the American com- pany and thereby improve the exptwt position ~f the U.S.A. 3. Even those countries which are recipients of aid from the industrialized countries have a certain quantity of hard currency available to them with which to buy things they need wherever they chose. Such free foreign exchange is mostly derived from their exports or from the support their currencies receive through the bolstering effects of foreign aid. Most developing countries use their free foreign exchange to purchase what they want through world-wide tenders on reasonable commercial terms. EXIM Bank has sometimes refused to provide the commercial credits which would make it possible for U.S. companies to bid on these world-wide tenders on the grounds that the countries by being recipients of aid are thereby poor risks. This denies to U.S. companies the opportunity to recoup some of the dollar exchange which our own aid has generated. The establishment of the Special Fund contemplated in 1111. 16162 should make it possible for U.S. companies to obtain the financing they need to skim off the free foreign exchange expenditures of the developing countries and thereby improve materially our balance of paynients position. While H.R. 16162 does not provide for an Inter-Departmental Advisory Com- mittee to the EXIM Bank with respect to the operations of the Special Fund, my understanding is that The Administration intends to establish such a committee. In the bill submitted by Senator Magnuson in 1965 a Special Advisory Committee was provided for in the legislation. While it is not urgent that there be legislative provision for the Advisory Committee, it is important that the agencies of the government understand that it is intended that the Special Fund be administered by EXIM Bank with the advice and surveillance of a committee, chaired by the Secretary of Commerce and composed of such other departments as: State, Treasury, Interior and Agriculture as appropriate to ensure that the Fund is administered for the purposes contemplated by the legislation. It would also be important to establish the point that all applications to EXIM that are turned down, even in the initial stages, should be subject to review by the Advisory Committee to ensure that the staff at the lower echelon of EXIM are not in effect precluding consideration of certain types of applications for approval under the authority of the Special Fund. I would like to suggest that consideration be given by the house Banking & Currency Committee to an amendment to H.R. 16162 designed to strengthen the rediscouiiting facilities of the EXIM Bank. In 1966 a rediscounting arrangement was adopted in principle by EXIM but it has never been very effective. The other industrialized countries of the world have well developed rediscounting systems which make it possible for private banks to finance exporters on a coffipetitive basis. The arrangements in the other countries are such that the private banks and exporters are assured an adequate supply of credit not with,standing any credit tightening that may be applied to the domestic economy. Moreover-and most important-the rediscounting arrangements of the ether industrialized countries make it possible for the private banks to offer exporters credits at interest rates substantially below those prevailing in the domestic ~iconomy. Thus, in countries where the basic interest rates that prevail in the domestic economy are as high as 7% or 8% exporters are being financed at interest rate of 5'4% and 51/2%. At the present time the lowest rates a U.S. company can offer overseas purchasers where EXIM is guaranteeing private bank credit would be 7%% to 8%. The method by which this is done in other countries is that rediscount rates are established at whatever levels are necessary to permit private banks to o~ei~ PAGENO="0169" 165 the exporter a competitive rate so as to obtain the sougbt-~fter business. A margin is left to pay the private bank for its services, and the government rediscounting facility charges rates that are, when necessary, below the actual cost of money to the government. T~ the extent this is done it constilutes a subsidy of exports. But it is a subsidy available to the exporters of every indus- trialized country except our own. The President has recently announced changes that liberalize the rediscount facility of EXIM; but none of the announced changes deal with the crucial matter of competitive rates. American exporters will, therefore, continue to be non-competitive with respect to this type of financing. In my judgment the enactment of H.R. 16162 would be a significant step for- ward in approving the export performance of the United States. I urge that the. committee report on it favorably and that it be enacted by the Congress. Sincerely yours, DANIEL L. GoLiw. Vice Pre8ident. 0 PAGENO="0170" PAGENO="0171" PAGENO="0172"