Credit Reform:

U.S. Needs Better Methods for Estimating Cost of Foreign Loans and Guarantees

NSIAD/GGD-95-31: Published: Dec 19, 1994. Publicly Released: Dec 19, 1994.

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Pursuant to a legislative requirement and a congressional request, GAO reviewed the Executive Branch's methodology for calculating country risk ratings and cost estimates for foreign loans and loan guarantees, focusing on the: (1) default rates for beneficiary countries; and (2) executive branch's authority to reschedule international debt owed to the U.S. government.

GAO found that: (1) the Executive Branch could improve its methodology for estimating the subsidy cost for international loans and loan guarantees by using an empirically and econometrically rigorous evaluation method; (2) there are a number of weaknesses in the methodology used to calculate risk premiums for high-risk countries; (3) the Executive Branch's subsidy cost estimates for new loans may be overstated because the Executive Branch is precluded from distinguishing between new loans to countries of higher risk; (4) the estimated subsidy costs for the $13.7 billion of international loans and loan guarantees authorized through 1992 was $3 billion; (5) cost estimates will differ depending upon market expectations for a particular time and the group of foreign loans and guarantees; (6) the United States does not have the incentive to collect the full loan debt owed by sovereign nations because it has other goals, such as enhancing foreign policy objectives, promoting U.S. defense goals, and helping domestic constituent interests; (7) for the 167 countries reviewed, the default probabilities ranged between 0 and 92.1 percent; (8) the Executive Branch has the authority to reschedule international debt owed to the U.S. government; and (9) although Office of Management and Budget (OMB) rescheduling guidance is consistent with legislative requirements, OMB officials believe that some agencies are not following its guidance, making annual re-estimates on international loans and guarantees, or including the cost of rescheduling loans at below-market interest rates in their initial estimates.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress did not take up the issue during its last session.

    Matter: Because of the greater difficulty in making risk estimates for international credit programs, Congress may wish to consider how the principles included in the Credit Reform Act ought to be applied to direct international lending and lending guaranteed by the U.S. government.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: OMB officials indicate that they do not intend to respond to the recommendations in the report beyond their comment letter of September 8, 1994.

    Recommendation: The Director, OMB, should ensure that agencies make annual re-estimates of subsidy costs.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  2. Status: Closed - Not Implemented

    Comments: OMB officials indicate that they do not intend to respond to the recommendations in the report beyond their comment letter of September 8, 1994.

    Recommendation: The Director, OMB, should ensure that agencies make initial estimates of subsidy costs that include estimates of potential rescheduling at below-market rates.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  3. Status: Closed - Not Implemented

    Comments: OMB officials indicate that they do not intend to respond to the recommendations in the report beyond their comment letter of September 8, 1994.

    Recommendation: The Director, OMB, should ensure that the Interagency Country Risk Assessment System's rating method is revised so that it makes greater use of empirically tested criteria and weights.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  4. Status: Closed - Not Implemented

    Comments: OMB officials indicate that they do not intend to respond to the recommendations in the report beyond their comment letter of September 8, 1994.

    Recommendation: The Director, OMB, should revise the Executive Branch's method of estimating the cost of country risk so that it econometrically utilizes available information from the secondary market on how prices are affected by country risk and other debt characteristics.

    Agency Affected: Executive Office of the President: Office of Management and Budget

 

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