Loan Guarantees:

Export Credit Guarantee Programs' Long-Run Costs Are High

NSIAD-91-180: Published: Apr 19, 1991. Publicly Released: May 16, 1991.

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Pursuant to a congressional request, GAO examined the Commodity Credit Corporation's (CCC) Export Credit Guarantee Program and the Intermediate Export Credit Guarantee Program, focusing on: (1) the programs' estimated long-run costs due to loan payment delinquencies; and (2) whether program regulations effectively prohibited foreign-owned, U.S.-based financial institutions from receiving credit guarantees for financing agricultural commodity sales to their owner countries.

GAO found that: (1) the long-run costs for the programs would be about $6.7 billion, or 60 percent of the $11.2 billion in outstanding credits and accounts receivable as of May 1990; (2) the average long-run cost was high, since CCC provided guarantees to high-risk countries; (3) the programs were slightly more risky than the highly concessional food aid programs that were specifically targeted to high-risk countries; (4) CCC established few program restrictions governing the participation of U.S.-based financial institutions and relied on arm's-length business transactions to ensure that financial institutions and the borrowing government conducted program loans properly; (5) at least three financial institutions that were directly or indirectly owned by the borrowing foreign country received credit guarantees for sales to that country; and (6) CCC planned to issue regulations to prohibit such guarantees.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: USDA disagrees with the GAO methodology for estimating CCC long-run costs of its GSM-102/103 programs and, therefore, the GAO estimated cost itself. USDA has refined its country risk analysis, weighing quantitative factors more than qualitative. This should help in making better decisions for providing loan guarantees and should result in fewer defaults and less program cost.

    Recommendation: The Secretary of Agriculture should direct the Administrator, Foreign Agricultural Service (FAS), to lessen long-run program costs by reducing the average risk of new guarantees.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: FAS issued a notice to exporters and other program participants, including financial institutions, stating that credit guarantees may not be assigned to financial institutions related in any way to the overseas bank issuing the letter of credit.

    Recommendation: The Secretary of Agriculture should direct the Administrator, FAS, to issue regulations specifying that financial institutions in the United States that are owned or controlled by a foreign country that also owns or controls the local bank issuing the letter of credit are ineligible to receive credit guarantees.

    Agency Affected: Department of Agriculture

 

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