Mr. COSTANZO. To the ordinary capital, and our share is 42 percent. Senator WILLIAMS. That would be around $2 billion.

Mr. COSTANZO. After the increase our total subscription would be about $2 billion; $1.997 billion, of which the callable part would be $1.667 billion.

U.S. UNDERWRITING OF IDB BONDS

Senator WILLIAMS. Yes, that is what I was thinking.

To the extent that the outstanding bonds did not exceed the callable features of the U.S. Government pledge, we are, in effect, underwriting those bonds. Is that not correct?

Mr. COSTANZO. We are, but all the members are underwriting the bonds, and if a call is made all the members are liable.

Senator WILLIAMS. I understand that. Suppose the worst developed and this $776 million was called and the members were called upon. Would we be liable for the 40 some percent that we owned in the bank, or would be liable to the full amount to the extent that we had a commitment?

Mr. COSTANZO. We would ultimately be liable for the full amount in the hypothesis that the other countries did not live up to their obligations.

Senator WILLIAMS. We would be guaranteeing the bonds to the extent that we guarantee separately as well as collectively. Is that not

correct?

Mr. COSTANZO. That is right; in effect it is a "joint and several" guarantee.

Senator WILLIAMS. If the outstanding bond issue were to reach a point where it exceeded the pledge of the U.S. Government, what rating do you think these bonds would have?

Mr. COSTANZO. The Bank has committed itself in its present bond indentures not to issue bonds or assume obligations in excess of the U.S. subscription to callable capital.

Senator WILLIAMS. That is my understanding. So the purchasers of these bonds have been assured that they will be issued only to the extent that the U.S. Treasury as a last resort can be called upon to make them good; is that correct?

Mr. COSTANZO. Yes, sir.

Secretary KENNEDY. The point you are making, Senator, is that it is affecting the market for the bonds and the rating.

Senator WILLIAMS. I understand.

Secretary KENNEDY. There is no question but what they get a better rate than they would if there was no real assurance that the United States would not in the end potentially be responsible.

Senator WILLIAMS. I fully understand that. Then, in effect, these bonds are carrying a 100-percent guarantee of the U.S. Government in the event all other nations or any part of them fail to make their commitments good.

Mr. COSTANZO. That is right.

Secretary KENNEDY. Yes, it is through the callable capital, but in effect your statement is right. If all other countries did not meet their obligations, the Bank could call solely on the U.S. callable capital and we would have to put up the money.

Senator WILLIAMS. If this legislation goes through, to what extent would we have a commitment? If this legislation is approved, the Bank

can sell $1,697 million in bonds in the international markets with the full 100-percent guarantee of the U.S. Government. Is that correct! Secretary KENNEDY. That would be right, if they had need for the money because of defaults by other members.

Senator WILLIAMS. If they needed it.

Secretary KENNEDY. Yes, sir.

Senator WILLIAMS. The various bond holders who buy these respec tive issues are buying them with the firm commitment, as I understand it, that when that ceiling is reached there will be no further bond issues that would weaken their position.

Secretary KENNEDY. That is included in the bond indentures that are outstanding.

PRESENT INTEREST RATE OF IDB BONDS

Senator WILLIAMS. What rate of interest is the Bank paying on its most recent bonds? I am not talking about the old ones, but what rate of interest are they paying now?

Secretary KENNEDY. Recently they have been borrowing in Ger many, on the continent; they have not borrowed recently in the United States. I think the last issue in the United States was 1968; it was 65% percent then. In Germany from 612 to 7 percent in 1969-$25 million they borrowed at 7 percent, $11 million at 7 percent.

Senator WILLIAMS. What is the most recent bond issue that they had! Secretary KENNEDY. Italy, 6 percent, 1969. They haven't issued any this year.

Mr. COSTANZO. No bonds. The Bank has borrowed from Switzerland at a rate of 714 percent.

Senator WILLIAMS. What date was that?

Mr. COSTANZO. That was this spring in May.

Senator WILLIAMS. Does that cover the possible service charge or is that a flat amount?

Mr. COSTANZO. That is the total cost of the money to the Bank.

Senator WILLIAMS. It is the total cost of the money to the Bank. What was the rate of interest that you were paying on Treasury bonds here in this country at the same time?

Secretary KENNEDY. Of course, we are not issuing Treasury bonds. Senator WILLIAMS. No.

Secretary KENNEDY. But the bills

Senator WILLIAMS. And notes.

Secretary KENNEDY (continuing). Notes and so on about 8 percent. Senator WILLIAMS. Do I understand they were borrowing this money internationally at about 1 percent less than you can borrow in this country?

Secretary KENNEDY. The Bank has. That is what happened in the Swiss case, it looks like.

EXTENT OF U.S. GUARANTEE OF INTERNATIONAL BANK BONDS

Senator WILLIAMS. Do you think in light of our financial situation it is good practice for us to underwrite these bonds to this extent in these various international banks? This one is about $1.6 billion and. of course, there are a few others. To what extent are bonds being

ssued in the international market guaranteed a hundred percent by he U.S. Government for all the banks that are referred to in the bill ecently approved by the House Banking and Currency Committee? Secretary KENNEDY. Under that definition you would have to inlude the

Senator WILLIAMS. World Bank.

Secretary KENNEDY. World Bank, the Asian Bank. We will supply he total figure.

Mr. PETTY. Senator Williams, the U.S. subscription to the callable apital of the World Bank is $5.7 billion.

Senator WILLIAMS. Will you furnish to the committee the total mount to which the U.S. Government could be committed by these various international lending agencies. I don't ask this question criically, but I think it is well for us to understand exactly what we ire up against. As I understand it, the bonds of the World Bank are sold with a similar provision and understanding that the outstanding bond issues will not exceed the extent of the call of the U.S. Government.

(The information referred to follows.)

Callable capital subscriptions of the United States in international financial institutions

[In millions of dollars]

Institution:

Amount

International Bank for Reconstruction and Development (IBRD) 5, 715. 0
Inter-American Development Bank (IDB).
Asian Development Bank (ADB)--

Total

1, 023. 5

100. 0

6, 838.5

Mr. PETTY. I think there is a distinction that should be emphasized, Senator Williams. The indenture for the Inter-American Bank bonds specifically limits the total debt of the Inter-American Bank to the callable capital of the United States.

Senator WILLIAMS. Yes.

Mr. PETTY. There is not a similar provision in the World Bank. The total borrowings of the World Bank, however, are around $412 billion, a $1 billion or so below the callable capital figure of the United States, but there is no such restriction to keep it below that level.

Senator WILLIAMS. But there has been a continuous effort to keep our commitments above the level of the bonds outstanding. I think they have been at all times.

Mr. PETTY. No, sir, I wouldn't say that is a current effort at all and certainly it is not a motivating factor in the callable capital request that is presently pending before your committee.

EFFECT ON WORLD BANK BOND SALES OF U.S. GUARANTEE

Senator WILLIAMS. Do you think the bonds would sell as well without that factor?

Secretary KENNEDY. My own view is that with the experience of the World Bank over these years, their bonds might well sell at about the same rate and I don't think at this point they rely to the same extent on the U.S. backing.

Senator WILLIAMS. I am glad to hear

you say that.

Secretary KENNEDY. I have had considerable discussions on this with the World Bank. They have established their own credit standing in the market, their own ability for repayments. I have talked to a good many buyers about this, Senator, and while at the beginning they looked very definitely to the U.S. commitment, they are not now taking that into account in the same measure.

Senator WILLIAMS. Do you think that situation is true with these other banks?

EFFECT ON INTER-AMERICAN BANK BOND SALES OF U.S. GUARANTEE

Secretary KENNEDY. At this stage I would say it is not. In the case of the Inter-American Bank, I think it does help both rate and marketability to have the restriction that is in there. Eventually, I think, the Inter-American Bank will have the same market acceptance as the World Bank if it continues to demonstrate its ability to operate as a financial institution on a sound basis. It was for that reason that I said in my statement, Senator, that based on the kind of operations we foresee and the way they are conducting their affairs, this callable capital would not likely be called.

I know it is a contingent liability and it is possible that it might be.

LIMITATION OF LIABILITY TO FINANCIAL INTEREST IN BANK

Senator WILLIAMS. Do you think it would be advisable to write into the provisions of these various banks that each country would be liable on its callable feature only to the extent of its financial interest in the bank? For example, if we have 40 percent or 60 percent or 80 percent of the bank, we would be liable for the same direct percentage and each country would be liable. In that way every country assumes its own liability.

What do you think of that since the bonds are sold and not bought on the basis of our pledge? There would be no objection to that. Would there?

Secretary KENNEDY. Well, you couldn't very well do it with the bond indenture that is now outstanding.

Senator WILLIAMS. We could do it in this bill for all future commitments.

Secretary KENNEDY. Future commitment? In practice that is what takes place because in case of default then they have the right of individual "several" calls so that it would-I am not sure whether that could be negotiated now, whether it would be worth discussing.

Mr. PETTY. It would seriously disturb the marketing of the bonds, Senator, in my judgment. The best assurance we really have that the contingent liability will remain contingent is that the assets of the bank are well invested, and that we oversee the operations and the management of the bank. I have discussed the questions we raised right here with treasuries of other countries, and I say "well, a lot of people don't look upon the backing of the United States as the sole thing that supports the World Bank's capital." I mention that to a member of the German Finance Ministry or the Canadian Finance Ministry and they recognize they have a share; they have a liability up to the total amount of their subscriptions.

If you were to limit the guarantee to a "several" guarantee as you are suggesting you might deprive yourself of benefiting from the resources and the same type of obligation that Japan, Germany, and Canada have if the hypothetical you are raising comes to pass.

Senator WILLIAMS. Theoretically, any one of those countries could renege on their commitments, whereas we are bound.

Mr. PETTY. It is binding on the German Government the same as it is binding on the U.S. Government, Senator.

Secretary KENNEDY. In that theoretical sense we could renege also, but we wouldn't.

Senator WILLIAMS. No. You could, but I meant it is in this arrangement. I merely raised this as a question. You will furnish to the committee the total amount of the indirect commitments which we have with the various institutions.

(The information referred to appears on p. 77.)

U.S. CONTROL OVER IDB FUNDS

What percentage of the directorship do we have in this Bank? Secretary KENNEDY. Mr. Costanzo, do you want to talk to that? Mr. COSTANZO. Our voting power is 42 percent.

Senator WILLIAMS. Forty-two percent. The bulk of the money is ours. Is it not?

Mr. COSTANZO. The voting power is determined by the shares of subscription to the ordinary capital of the Bank?

Senator WILLIAMS. That is right.

Mr. COSTANZO. And in that our share of the total subscriptions, paid in and callable combined, is 42 percent.

Senator WILLIAMS. I understand that. But the real backing of the Bank is in its ability to borrow money based on the credit of the U.S. Government, which is not represented across the board. I don't say that it should be, but we have a situation where these billions are under the control, as Senator Case pointed out, of groups other than American citizens. Yet they can, in effect, pledge the credit of the U.S. Government to make payment. I wonder if we don't need some little tighter restrictions on it or to have a little better control over it.

Secretary KENNEDY. Our vote is proportional to our ordinary capital subscription. Also, we have, of course, on the Board a voice, a say, in whether they should or should not borrow. To the extent of borrowing dollars in the United States or elsewhere we have a say, as Secretary of the Treasury, in whether they can be permitted to borrow dollars. They cannot come into our market and borrow without our permission, but they can go abroad for other currencies.

Senator WILLIAMS. I realize that, but they can go abroad and in fact pledge the credit of the United States toward repayment. That is the point I make.

Secretary KENNEDY. Yes. We are committing credit through the capital subscription; it is for that specific purpose.

Senator WILLIAMS. I have no further questions.

Senator PELL. Thank you.

Thank you very much, Mr. Secretary.

The meeting is adjourned.

(Whereupon, at 12:15 p.m., the committee was adjourned, subject to the call of the Chair.)