Press Briefing by Treasury Secretary Bob Rubin and Deputy Treasury Secretary Larry Summers

The Briefing Room

1:45 P.M. EST

SECRETARY RUBIN: As we have discussed many other times, a stable and growing Brazil is very much in the economic interest of the United States. It is our 11th largest trading partner, the 9th largest economy in the world. Obviously, Brazil in and of itself, and a stable and growing Brazil in and of itself, is very important. Moreover, it is vitally important for Latin America, the rest of the world, and the United States that the international community take all steps sensible to limit the contagion that has come from the Asian financial crisis, and helping Brazil is very important in that respect also.

In pursuit of that, a program was announced this morning of nearly $42 million -- $42 billion, rather -- with respect to Brazil. The major elements of that programs are $18.3 billion from the IMF, $4.5 billion from the World Bank, $4.5 billion from the Inter-American Development Banks, and $19.5 billion from 20 bilateral donors, of which the United States will be providing $5 billion -- what, Larry?

DEPUTY SECRETARY SUMMERS: $14.5 billion.

SECRETARY RUBIN: I'm sorry, $14.5 billion from 20 bilateral donors, of which the United States will be providing $5 billion.

Q: $14.5 billion is the total from the bilateral?

SECRETARY RUBIN: That is correct. And of that $14.5 billion, Sam, $5 billion is the United States and the other comes from 20 different countries. So it is truly an international undertaking.

What is most important, though, in this instance, as in all instances of this kind, is effective implementation of the strong economic program that Brazil has announced. Brazil's economic program, fully implemented and with international support, provides a solid basis for restored confidence and renewed growth. While there are no certainties, we believe that this is the right program both for the people of Brazil and the economic well-being of the American people.

President Clinton, as you know, outlined a plan in September to address the challenge of working with countries that are being adversely affected by contagion. The program announced today is consistent with the concept that the President at that time set forth. Most of the IMF money and the bilateral support will be provided on a short-term basis at higher than regular interest rates in order to encourage Brazil to access international capital markets as rapidly as possible. And the innovative use of what we have come to call a "floating tranche" will allow Brazil to draw resources more quickly than previous fund programs.

Once again, this is all in line with the concept the President discussed in September with respect to helping countries that are predominantly being affected by contagion rather than problems specific to themselves.

In addition, we have asked the World Bank and the National Development Bank, to design a program that would cushion the effect of the economic adjustment on Brazil's poor.

With that, Deputy Secretary Summers and I would be delighted to respond to any questions you might have.

Q: Just for starters, where does the $5 billion come from?

SECRETARY RUBIN: The $5 billion is actually part of a bilateral program to guarantee loans will be extended by the Bank for National Settlements -- BIS. So the cash itself will come from the BIS, but those loans will be guaranteed by the bilateral participants. And the guarantee will come from the Exchange Stabilization Fund.

Q: Are you convinced that this amount will do it, or is there a problem as we saw in Russia, where the IMF and others started helping out and discovered it was a rathole?

SECRETARY RUBIN: Well, leaving aside the question of how one might characterize Russia, Russia's a different situation, Sam. You didn't ask for me to determine Russia -- and I think very rightly so, was that the international community had enormous stakes in Russia being successful. And the IMF designed a program -- and there was some additional money over and above the IMF's commitment.

But the key in Russia, as in all of these situations, is that the country that's having difficulty take ownership of the reform or not. And in the case of Russia, as you know, the Russian government never was able to enact the kinds of programs that they had -- at least not all of the programs that they had agreed to at the IMF. So the problem didn't lie in -- at least in my judgment -- we will never know whether the program itself would have been successful -- I think it was a very well-designed program, because Russia itself was not able to accomplish what needed to be to put the reform program in place.

Here I think you've got a very different situation. President Cardoso, under his leadership, there has been very significant reform in Brazil over the last several years. The Brazilian inflation rate, as you may remember, was gargantuan at one time. Inflation now is approximately zero under the Real plan. So what you have is a President who has proven a commitment -- both a commitment to reform and an ability to get reform done, and who was committed to carry forward the reform program.

Q: So the answer is yes, you believe this will do it?

SECRETARY RUBIN: Yes, I believe this should do it; and yes, I believe it is -- I would say totally distinct -- "totally" is a strong word -- but in all relevant respects, a totally different situation than the situation in Russia. I don't think Russia is an analogy that you can use in trying to evaluate this.

Q: Mr. Secretary, could you clarify the interest rates charged on the bilateral or on the U.S. part of the loan, and what collateral has the United States --

SECRETARY RUBIN: Well, as I said, the loans themselves will be coming from the Bank of International Settlements, the BIS. What we will be doing -- we and the other bilaterals -- will be guaranteeing those loans.

What is the interest rate, Larry, do you know?

DEPUTY SECRETARY SUMMERS: The interest rate will be approximately 400 basis points in excess of Treasury borrowing rates. And, of course, the premium that's imbedded will come to us as compensation for the guarantees that we are providing. There will also be a premium interest rate that varies with how long the loan is outstanding. On the short-term component of the IMF's procedures, in line with the new procedures at the IMF that we've worked over the last year to establish.

Q: Translate that into today. Today if you had to fix it, what's 400 basis points, et cetera, et cetera? A percentage that Americans would understand.

DEPUTY SECRETARY SUMMERS: About 9 percent.

Q: When you say "short-term," what exactly is the term of that portion of the IMF credit?

DEPUTY SECRETARY SUMMERS: The substantial portion of the IMF credit will be using the so-called SRF, Supplemental Reserve Facility, at the IMF, which provides for loans where repayment begins after one year and can be extended up to two and a half years. The BIS financing will be for six months subject to renewal.

Q: Can you tell us how much of the bilateral aid is going to be provided by the European Union -- $5 billion from the United States. As a group, do you have a number?

DEPUTY SECRETARY SUMMERS: Each country should probably make its own statement of the contribution. But there's a contribution from Japan and Canada, but most of the remaining $9.5 billion is coming from Europe.

Q: In the Mexican Stabilization Plan in 1995, you put an enormous amount of energy in working out basically a collateral system that came through the oil facility. What is the equivalent to that in this case?

SECRETARY RUBIN: David, there won't be an equivalent here. But what you have is a country, in this case -- unlike the situation in Mexico, which where your recollection is correct -- you have a country with $40 billion of reserves at the time that this credit is being extended. What you'll have is the full faith in credit sovereign obligation of Brazil. And as I say, you start with a country that has $40 billion in reserves, roughly.

Q: To what extent is the private sector going to be participating in this deal, and why aren't they part of this -- a big part of the package?

SECRETARY RUBIN: There will be discussions with the private sector, that is to say between the Brazilian authorities and the private sector. They're going to begin next Monday with a road show, that is to say presentations to the private sector. And as there is more to announce on that, that will come from the Brazilian authorities or from the private sector participants they've discussed this with.

Q: Why aren't they in this part of the package?

SECRETARY RUBIN: Because what had to be done first was for the package to be put together and announced and then once public, then that enabled Brazil to meet with their private sector creditors. And as I say, they'll begin that process on Monday.

Q: Do you have assurances of support from Congress on the U.S. bilateral portion of the deal?

SECRETARY RUBIN: We have over the last couple of days placed calls to the appropriate members of Congress. Because people are out of town, we have not gotten through to all of them, though we've gotten through to some. Where we haven't gotten through to the member, him or herself, we've spoken to their staffs.

I'll just speak for myself and let Larry speak for himself -- the people I discussed it with at least have, I think -- all of us have been very focused on the financial crisis for the last, roughly, year and a half, and I think that people have had a chance to think through the interdependence, the global economy, the stakes for our economic well-being, of dealing with contagion and one thing or another. And I think all of that has informed the way people are reacting to this.

Larry?

DEPUTY SECRETARY SUMMERS: Certainly that's been consistent with my conversations. And just to be clear, the 1933 statute setting up the exchange stabilization fund authorizes its use to provide a guarantee in this way on the authority of the Secretary of the Treasury acting with the President's support.

Q: Could you say who you have spoken with on that?

SECRETARY RUBIN: I think at this point I'd probably rather not. If there are individual members who choose to speak to it, they will. But I think it's probably better to say we've spoken to a fair number of members of Congress and we, as I say, spoke to the people who are most directly involved in these kinds of issues.

Q: -- recognize that the Asian crisis has prompted this kind of situation in Brazil and on this side of the world. What impact do you see for that on U.S. growth over the next 12 months?

SECRETARY RUBIN: The Asian crisis? I'll give you my answer, and then we'll ask the true economist to give you his answer. I think very often you get the best sense of what's going on economically from talking to people who are involved in industries that tend to be lead indicators, to some extent. That's what I used to do in the private sector; that's what I still try to do. And my sense of it is we're still very much on a track of solid growth and low inflation with whatever the normal ups and downs might be.

Clearly, this financial instability, the financial crisis has affected some sectors -- agriculture is an obvious example -- rather substantially, and clearly -- and this is what we said so often in discussing IMF funding -- clearly, there is a risk with respect to our economic performance that comes from what's happening in the rest of the world. And that's why it is so much in the interest of the economic well-being of the American people that we continue to exercise a sort of role, leadership, that we have in trying to deal with this.

DEPUTY SECRETARY SUMMERS: I know something about Washington as well as economics -- I agree whole-heartedly with the Secretary's forecast for the economy. (Laughter.) I think the basic momentum of expansion should be maintained, albeit with certain sectoral changes, as long as this financial crisis continues to remain contained in its impact, but clearly responding effectively to the financial crisis is essential to maintaining the momentum of growth in our country.

Q: As a follow-up, looking ahead to APEC, can you give us a few details perhaps of the U.S. plan to help restructure debt in Asia that will be presented over at APEC?

DEPUTY SECRETARY SUMMERS: I don't want to preview a plan that will be discussed at APEC in any detail, but I think there has been the recognition for sometime on our part, on the part of a number of the countries that have been affected, on the part of the Japanese, that it is important to address the financial problems of the Asian private sector in a number of ways -- by working to strengthen the banking systems, by working to assure the availability of trade finance, by encourage the working-through of corporate situations involving indebtedness levels that are no longer sustainable, involving infusing equity capital into situations with a great deal of leverage.

And I think those issues will be very much under discussion, and I think there will be recognition at APEC of the central importance of growth, both in order to work through these financial problems and working through these financial problems in order to promote growth. And that will be something that will be very much discussed.

Q: You say that there are vast differences between Russia and Brazil. But in Russia you also had a government that was committed to reform and that had achieved a fair amount over President Yeltsin's tenure. And the problem was you had a legislature that refused to go along with it. Now you've got a pretty balky legislature in Brazil as well.

Let me just put the question in the form of two parts. You can just react to that and then -- what will you do if it appears that the Brazilian Congress is not following -- is not implementing the program that President Cardoso has laid out? Will the loans be somehow cut off or will the Brazilians be unable to draw on them?

SECRETARY RUBIN: I think a very good test of -- this is my view at least -- a very good test of President Cardoso's ability to get this done occurred last week, when on the social security reform, which was always viewed by those who commented on this as a difficult reform, the vote in the Congress was well above the 60 percent that was required.

I don't think there is -- I'll give you, again, just my view -- I don't think there is any serious or significant comparability between this and the Russian situation. You've had a reasonably long period here of real reform. You've had not only a President who has been committed to reform, but you've had a Congress, as I said just a moment ago, approve social security reform -- a very difficult vote and one that was thought of as probably something he was going to have some difficulty with if he was going to have difficulty altogether.

But clearly he has got his work cut out for him and Congress has their work cut out for them. But I think on the basis of what happened with Social Security, plus the history of the last few years, I think it is a totally non-comparable situation to Russia.

Q: What will happen if they fall off the wagon, so to speak?

SECRETARY RUBIN: Well, they're not supposed to. (Laughter.) I don't think that's the right way to focus on this. I think the right way to focus on this is they put out a strong plan. President Cardoso is committed to doing it. He has a record of success as a reformer. They approved Social Security last week by a substantial vote. And we're all working with the international community on the assumption this will happen, and happen as it's supposed to happen.

DEPUTY SECRETARY SUMMERS: If I could just underscore the Secretary's distinctions between the Russian situation and the Brazilian situation. The new Brazilian government has a strong electoral mandate. President Cardoso in the closing days of his campaign emphasized the importance of fiscal consolidation as a key task for Brazil in the next several years.

The Brazilian government has a demonstrated capacity to enforce laws and to collect taxes that is different from that of many other countries in the developing world. And the Brazilian banking system, while obviously there have been some uncertainties at this time, the underlying health of the Brazilian banking system is profoundly different than the underlining health of the Russian banking system was coming into this.

And finally, the Brazilian level of reserves is very different than the Russian level of reserves. I think it's very important as a general proposition that in looking at these things, one recognizes that each country's situation is different. That's why the kinds of economic measures that are most important differ from country to country. And the kinds of ways in which our support is designed and in which the IMF and other support is paced with the efforts at reform differ from case to case as well.

Q: I'd like to ask you two questions. The first one has to do with Japan. Do you think -- I know Japan has been taking steps in the last few months -- do you feel those steps are adequate, or do they still have a way to go? And then, I'd like a follow-up.

SECRETARY RUBIN: Well, let me put it this way, if I may. If you take a look at private sector forecast with respect to Japan, I think what you'll find is they're in the neighborhood of no growth next year. That, obviously, is not only very much against the interest of the Japanese people, it's very much against the interest of Japan's neighbors in Asia and really against the interests of the efforts to be made to reestablish financial stability in the world.

It is our view, what Japan needs to do and what the world needs Japan to do is to take fiscal measures that are sufficient, along with effective implementation of the recent banking legislation, to get back on track and back on track quickly. I think I'd rather not stand in judgment of the recently announced measures, but simply say that there certainly has been skepticism in the markets. And the critical thing is to have a program that is efficient to get them where they need to get and get there quickly.

Q: When President Clinton stood here and announced that the IMF should help those countries that have implemented good programs and are being -- the contagion problem. Do you feel that this agreement with Brazil will serve as a great help to put Latin America back on a positive track? Because you have Mexico, you have Argentina and other countries -- would have been affected very strongly --

SECRETARY RUBIN: Well, I think one of the very important considerations here, as I said in my brief opening remarks, was that not only is Brazil, in and of itself, very important, but adverse circumstances or adverse developments in Brazil could affect other parts of Latin America and it could continue the contagion that has been so much a focus of our attention over the last year and a half. So, yes, I think it's very important to help Brazil, both for Brazil's own sake and because of the effect that what happens in Brazil has on the economic well-being of the United States -- and also, to try to limit the contagion -- or I shouldn't say to try -- to limit the contagion.

Q: Do you believe that this track of solid growth and low inflation you talked about for this country would in any way be adversely affected if interest rates were even lower here in the United States?

SECRETARY RUBIN: Would be adversely affected if market interest rates were lower? I think lower market interest rates, all other things being equal, will be growth stimulating.

Q: To --

SECRETARY RUBIN: Market interest rates -- that are a function of market forces, all other things being equal, tend to promote growth. But I'm not commenting in any way on the Fed or what they should do, or anything else.

Q: A lot of people say -- economists who are smarter than I am -- that you get into a position where inflation then begins if interest rates become too low.

SECRETARY RUBIN: That inflation what?

Q: Will begin, because --

SECRETARY RUBIN: Well, Sam, let's leave aside anything to do with the FOMC, the Fed, or anything else, just stipulate it. There certainly is very little sign of inflation in our economy right now. On the other hand, one always needs to be watchful with respect to inflation. As the President announced in his speech a couple of months ago in New York on this global financial crisis, it was very important to switch the emphasis from inflation to growth and stability. And that's what the international community has been doing, and there's been some important developments, although there certainly are many, many problems ahead.

Q: Back on Japan, Japanese officials would say that they've contributed a great deal to halting contagion from the Asia crisis by, for example, participating in this Brazil package today, by announcing the $30 billion Miyazawa plan, which you now seem to say might support a corporate debt restructuring program for Asia which will be discussed at APEC next week, as well as an additional stimulus package announced this week. How would you respond to that?

SECRETARY RUBIN: I would say that everything that you have said has been constructive, and I think they all are real contributions. Having said that, I think by multiples, the most important thing Japan can do with respect to halting the contagion and turning around the situation with respect to financial instability is to get back on a track of strong growth itself. And while everything else is important, by many multiples that's the most important thing Japan could do.

Q: How will you know if the Brazil package is working? What are you going to be looking at in terms of interest rates, in terms of reserve levels?

SECRETARY RUBIN: As Larry said before, you sort of watch these things country by country, and the circumstance is different in each country. But take a look, for example, at Korea, where short-term interest rates were roughly 25 percent at the time the IMF program was first announced. Those same short-term rates are I think 8.5 percent, something like that. The Korean won has appreciated substantially from its lows. The reserve is somewhere around $40 billion, I believe.

Now, GDP is still declining in Korea, but there have been real signs of progress in the respects I've just mentioned. And that's what you do -- you watch and you see things happen, and then if it takes hold, you begin to see growth begin again, and one thing and another.

In Brazil, I think you'll be taking a look at the same kinds of considerations and you'll be monitoring it and seeing how things go.

Q: Do you have benchmarks in Brazil?

SECRETARY RUBIN: I wouldn't say you have specific benchmarks, but I do think the kind of framework I've just discussed with respect to Korea, although Korea was a very different situation because here in Brazil we're getting in pre-crisis; Korea was post-crisis. So it's in many respects a very, very different situation. But it's that kind of a framework that you would bring to thinking about a country and how it's doing.

Q: The $14.5 billion -- is it correct to assume, first of all, that the U.S. $5 billion contribution is the largest single contribution?

SECRETARY RUBIN: Yes.

Q: And secondly, who is the second largest and how much are they contributing?

SECRETARY RUBIN: I think we'll leave it this way -- I think Larry had it right -- countries can choose themselves whether they want to discuss their contributions and participation, and I don't think it really should be for us to discuss.

Do you agree with that? Yes. Are we finished? We are going to turn the podium back over to Joe, who will be happy to discuss the technical details of this and anything else you would like to discuss. (Laughter.)

MR. LOCKHART: I'll tell you the other countries. (Laughter.)

Q: Thank you, Mr. Secretary and Mr. Secretary-in-waiting. (Laughter.)

MR. LOCKHART: Sam, you never miss an opportunity.

END 2:13 P.M. EST