  Use of the Exchange Stabilization Fund to Provide Loans and
                       Credits to Mexico

As part o f an international financial support package for Mexico, the President and the Treasury Sec­
   retary have the authority under section 10(a) of the Gold Reserve Act of 1934 to use the Treasury
   Department's Exchange Stabilization Fund to provide loans and credits to Mexico in the form
   o f (i) short-term currency “ sw aps” through which Mexico will borrow U.S. dollars in exchange
   for Mexican pesos for ninety days; (ii) medium-term currency swaps through which Mexico will
   borrow U.S. dollars for up to five years; and (iii) guaranties through which the United States
   will backup M exico’s obligations on government securities for up to ten years.

                                                                                                March 2, 1995

                       M e m o r a n d u m O p in io n   for t h e   G en er a l Co u n sel
                                    D epartm ent         of the   T rea sury


   On January 31, 1995, the President proposed to use the Treasury Department’s
Exchange Stabilization Fund (“ ESF” or “ fund” ) to provide $20 billion in loans
and credits to Mexico as part of a financial support package for that country (the
“ support package” ). On February 21, 1995, the Treasury Secretary (“ Secretary” )
signed a series of agreements with the Mexican government implementing the
support package. Prior to the execution of the agreements, we orally advised your
office that, in our view, the President and the Secretary could use the ESF in
the manner contemplated by the President when he proposed the support package.
We also provided comments on drafts of a legal opinion, prepared by your office
for the Secretary, regarding such use of the ESF. This memorandum confirms
the oral advice we provided to your office. It also confirms that we have reviewed
the final version of your legal opinion, and that we concur in your conclusion
that the President and the Secretary have the authority to use the ESF in connec­
tion with the support package. We would like to take this opportunity to set forth
briefly the basis for our determination that your conclusion is correct.

                                              I. Background

A. The Support Package

  Under the support package,1 the loans and credits to Mexico from the ESF
will take three forms: (i) short-term currency “ swaps” through which Mexico

   1 Our understanding o f the support package is derived from the following sources, (i) public information released
by the Treasury Department when the President proposed the support package on January 31, 1995; (ii) the Secretary’s
testimony on the support package at a February 9, 1995 hearing before the House Committee on Banking and Finan­
cial Services, see United States and International Response to the Mexican Financial Crisis: Hearings Before the
House Comm, on Banking and Financial Services, 104th Cong. 92-97 (1995) (“ 1995 H earings"); (iii) public
                                                                                                         Continued


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will borrow U.S. dollars in exchange for Mexican pesos for ninety days; (ii)
m edium-term currency swaps through which Mexico will borrow U.S. dollars for
up to five years; and (iii) guaranties through which the United States will backup
M exico’s obligations on government securities for up to ten years. The ESF loans
and credits will supplement billions of dollars in financial assistance that will be
provided to Mexico by the International Monetary Fund (“ IM F” ) and other
lenders. As a whole, the support package is intended to help Mexico resolve its
serious economic problems, which, in turn, have resulted in a significant desta­
bilization of the Mexican peso and have threatened to disrupt the international
currency exchange system.

B. The E S F

   The ESF was established by Congress in 1934 pursuant to section 10(a) o f the
Gold Reserve Act, which is now codified at 31 U.S.C. §5302. The ESF “ is under
the exclusive control of the Secretary,” whose use of the fund is “ [sjubject to
approval by the President.” Id. § 5302(a)(2). Initially, the statute provided that
the ESF was to be used “ [f]or the purpose of stabilizing the exchange value of
the dollar.” Act of Jan. 30, 1934, ch. 6, § 10(a), 48 Stat. 337, 341.2 That is no
longer the case. The provision governing the Secretary’s use of the ESF now
states:

          Consistent with the obligations o f the Government in the Inter­
          national Monetary Fund on orderly exchange arrangements and a
          stable system of exchange rates, the Secretary or an agency des­
          ignated by the Secretary, with the approval of the President, may
          deal in gold, foreign exchange, and other instruments of credit and
          securities the Secretary considers necessary. However, a loan or
          credit to a foreign entity or government of a foreign country may
          be made for more than 6 months in any 12-month period only if
          the President gives Congress a written statement that unique or
          emergency circumstances require the loan or credit be for more than
          6 months.

31 U.S.C. § 5302(b).
   The first sentence of the current provision stems from 1976 amendments to
section 10(a) of the Gold Reserve Act. Those amendments eliminated the require­
ment that the ESF be used “ for the purpose of stabilizing the exchange value
o f the dollar,” and provided instead that the fund was to be used consistent with

information released by the Treasury Department when the Secretary signed the agreements implementing the support
package on February 21, 1995; and (iv) your legal opinion for the Secretary.
   2 See also H.R. Rep. No. 73-292, at 2 (1934).

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U.S. obligations in the IMF. See Bretton Woods Agreements Act Amendments,
Pub. L. No. 94-564, 90 Stat. 2660, 2661 (1976).3 The second sentence of the
current provision stems from a 1977 amendment to section 10(a) of the Gold
Reserve Act. See Act of Oct. 28, 1977, Pub. L. No. 95-147, 91 Stat. 1227, 1229.4
The intention of that amendment was to ensure that longer-term lending from
the ESF was limited to “ unique or exigent circumstances.” 5

                                           II. Statutory Analysis

   In carrying out the support package, the Secretary will be “ deal[ing] in gold,
foreign exchange, and other instruments of credit and securities” within the
meaning of 31 U.S.C. §5302.6 The first question in the statutory analysis is
whether use of the ESF in connection with the support package is “ [consistent
with the obligations of the Government in the International Monetary Fund on
orderly exchange arrangements and a stable system of exchange rates.” Id.
§ 5302(b). We believe that it is. Again, the stated purpose of the support package
is to stabilize the value of the Mexican peso and prevent disruption of international
currency exchange arrangements— which is entirely in keeping with U.S. obliga­
tions in the IMF.7 Moreover, since the statute states that the Secretary may use
the ESF as he “ considers necessary,” it is up to the Secretary (subject to the
President’s approval) to decide when such action is consistent with U.S. obliga­
tions in the IMF. The Secretary’s decisions in that regard “ are final.” Id.

    3 The 1976 amendments to section 10(a) of the Gold Reserve Act were part of a law that modified the Bretton
Woods Agreements Act — the statute that implements U.S. obligations in the IMF. Congress concluded that those
modifications were necessary because o f an early 1970s shift in international monetary arrangements from fixed
to variable currency exchange rates. As a result of that shift, the United States was not, in 1976, pursuing a policy
“ to stabilize the exchange value o f the dollar at any par value, or fixed rate.” H.R. Rep. No. 94-1284, at 13-
 14 (1976). Rather, its policy was “ to permit a wide degree o f fluctuation for the exchange value of the dollar,
and to conduct exchange rate policy subject only to [its] obligations” in the IMF. Id. at 14. The modifications
to the Bretton Woods Agreements Act authorized the U.S. to “ accept amendments to the IMF Articles of Agreement
. . . [that] permitted [members] to choose any . . . exchange arrangement, fixed or floating, subject to a general
obligation to avoid exchange rate manipulation, promote orderly economic, financial, and monetary conditions, and
foster orderly economic growth with reasonable price stability.” S. Rep. No. 94-1295, at 2-3 (1976) ( “ 1976 Senate
Banking Comm. Report” ) When the ESF statute was first drafted, the dollar was pegged to a fixed rate. Therefore,
a change to the statute that corresponded with changes in U.S. and international monetary policy was required.
Simply put, the original language from 1934 specifying that the ESF was to be used to stabilize the dollar had
become “ anachronistic” by 1976 H R. Rep. No. 94-1284, at 14.
    4 The amendment was originally proposed in the Senate as part o f the 1976 amendments to section 10(a). See
 1976 Senate Banking Comm. Report at 11; see abo 123 Cong. Rec. 33,219-20 (1977) (statement o f Sen. Helms)
(introducing amendment requiring that the President notify Congress o f any use o f the ESF for loans o f greater
than six months, and commenting that the amendment had been proposed in connection with Senate consideration
o f the 1976 amendments).
    s 1976 Senate Banking Comm. Report at 11.
   6 The short- and medium-term swap arrangements are loans, in that Mexico will borrow dollars from the U nited
States in exchange for pesos. The guaranties o f M exico’s government securities obligations essentially serve as a
line of credit from the United States on which Mexico can draw in the event that it cannot satisfy those obligations.
    7 As your legal opinion for the Secretary notes, Article IV o f the IMF Articles o f Agreement requires the United
States to “ collaborate with the [IMF] and other members to assure orderly exchange arrangements and to prom ote
a stable system o f exchange rates.” Members are to fulfill that obligation “ by fostering orderly underlying econom ic
and financial conditions and a monetary system that does not tend to produce erratic disruptions.” See also supra
note 3 (discussing 1976 modifications to federal statute that implements U.S. obligations in the IMF).


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§ 5302(a)(2). In short, in implementing the support package, the Secretary has
exercised the discretion that Congress has vested in him.8
   The plain language of the statute also provides the President and the Secretary
with the legal authority to use the ESF for the currency swaps of up to five years
and the guaranties of up to ten years. The statute explicitly states that loans or
credits with repayment terms of more than six months can be extended from the
ESF “ if the President gives Congress a written statement that unique or emer­
gency circumstances require the loan or credit be for more than 6 months.” Id.
§ 5302(b). W hen the support package was proposed on January 31, 1995, the
President announced that he had determined that the financial crisis in Mexico
constituted unique and emergency circumstances.9 The President made his
announcement in a joint statement that he issued with the congressional leadership,
who expressed their collective view that the use o f the ESF in connection with
the support package was both lawful and necessary.10
  The authority o f the President and the Secretary to use the ESF as a source
of loans or credits o f more than six months has been invoked once before in
the years since the statute was amended in 1977 to provide expressly for such
action. That came in 1982, when President Reagan, acting in response to an earlier
instance o f financial turmoil in Mexico, turned to the ESF to provide loans to
M exico with maturities of up to one year. In accordance with the statutory require­
ments, President Reagan notified Congress in writing on September 8, 1982, that
   8 At the February 9, 1995 hearing on the support package that was held by the House Banking and Financial
Services Com m ittee, Representative Barr suggested that, when considering possible financial assistance to Poland
in 1989, the Treasury Department had concluded that it was unlawful to use the ESF for purposes other than to
stabilize the dollar. 1995 Hearings at 131. Any such conclusion would have contravened the express terms o f the
ESF statute. In any event, that is not w hat Treasury concluded in that case. Rather, Treasury said that it would
not be “ im proper o r illegal” to use the ESF to extend a “ bridge loan” to Poland if the Secretary “ concluded
that such a loan would be consistent with U .S. obligations in the IMF and was necessary.” United States Economic
Programs fo r Poland and Hungary: Hearings and Markup on H.R. 3402 Before the House Comm, on Foreign
Affairs, 101st C ong. 175 (1989) (“ 1989 H earings” ). Treasury determined that, in the particular circumstances of
that case, “ it [was] highly unlikely that such a conclusion could be justified.” Id. Moreover, in the absence of
a com m itm ent from the IM F, Poland had no means o f guaranteeing repayment o f any ESF loan. In Treasury’s
view, the use o f the ESF in such circumstances would be “ much closer to foreign a i d ” Id. at 149 (statement
o f W illiam E. Barreda, Deputy Assistant Secretary for Trade and Investment Policy); see also id. at 162—63. There­
fore, Treasury decided to seek legislative authorization for assistance to Poland. Id. at 148-49 (statement of Mr.
B aireda). Here, by contrast, the IMF is playing an integral role in the support package, and the ESF loans and
credits will have an assured source of repayment. See discussion infra note 12.
   9 It is o u r understanding that the President will promptly provide Congress with written notice of that determination,
as required by the ESF statute.
    10 In pertinent part, the joint statement w as as follows:
       W e agree that, in order to ensure orderly exchange arrangements and a stable system of exchange rates,
       the U nited States should immediately use the Exchange Stabilization Fund (ESF) to provide appropriate
       financial assistance for Mexico. We further agree that under Title 31 o f the United States Code, Section
       5302, the President has full authority to provide this assistance. Because the situation in Mexico raises
       unique and em ergency circumstances, the required assistance to be extended will be available for a period
       o f more than 6 months in any 12-month period . . . . We must act now in order to protect American
      jobs, prevent an increase flow of illegal immigrants across our borders, ensure stability in this hemisphere,
       and encourage reform in emerging markets around the world. This is an important undertaking, and we
       believe that the risks o f inaction vastly exceed any risks associated with this action. We fully support
       this effort, and we will work to ensure that its purposes are met.
Statement W ith Congressional Leaden on Financial Assistance to Mexico, 1 Pub. Papers o f W illiam J. Clinton
130(1995).


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he had determined on August 24, 1982, that unique and exigent circumstances
required that the ESF loan to Mexico have repayment terms in excess of six
months.11 It is true that no prior precedents under the ESF involved loans or
credits of maturity lengths and dollar amounts comparable to those at issue in
the support package.12 That said, such use of the ESF is clearly authorized by
the language of the statute.
  We find it telling that when Congress was considering what eventually became
the 1977 amendment to section 10(a) of the Gold Reserve Act, it apparently gave
some thought to restricting use of the ESF to short-term lending exclusively so
that the ESF would not compete with the IM F— which was seen as the primary
vehicle for longer-term lending. In fact, a question to that effect was posed to
a Treasury Department official during the course of a Senate Banking Committee
hearing that explored, among other things, the relationship between lending under
the ESF and lending under the IM F.13 In response, the Treasury official stated:

          [A] statutory requirement that [the ESF] be used for short-term
          lending exclusively would not be appropriate and would unneces­
          sarily impair U.S. flexibility, especially in unforeseen cir­
          cumstances, in implementing our international monetary policy
          . . . . [I]t is conceivable that, in some instances, use of the ESF
          for a somewhat more extended period may be necessary. External
          factors (such as natural disasters, trade embargoes, unforeseen eco­
          nomic developments . . .) may lead a country which has obtained
          a short-term credit from the ESF to seek an extension of that credit.
          It is also conceivable that political assassination or other unantici­
          pated catastrophic event might justify a longer extension of credit,
          and the possibility of ESF operations in such cases should not be
          excluded. In none of these cases would the ESF compete with the
          IMF, and in all of these cases it well may be in the U.S. interests
          to provide somewhat more extended ESF financing.14

   That sentiment carried the day, and ultimately found its way into the statute
through the 1977 amendment. The report of the Senate Banking Committee on
what turned out to be that amendment puts its succinctly:

    11 See Letter for Thomas P. O ’Neill, Jr., Speaker o f the House o f Representatives, from President Ronald Reagan
(Sept. 8, 1982), reprinted in 1989 Hearings at 161-62.
    12 It is our understanding, however, that other critical elements o f the loans and credits to M exico in connection
with the support package— in particular, the structure o f the agreements and the existence o f an assured source
o f repayment— are ftiliy consistent with past practice under the ESF.
    13 Amendments o f the Bretton Woods Agreements Act: Hearing Before the Subcomm. on International Finance
o f the Senate Comm, on Banking, Housing and Urban Affairs, 94th Cong. 157 (1976).
    14Id. at 158 (statement o f Edwin H. Yeo, Al, Under Secretary for Monetary Affairs, Department o f the Treasury).

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          The Committee recognizes that there may be circumstances where
          longer-term ESF credits may be necessary, and the amendment pro­
          vides for that possibility. But the Committee intends, and the
          amendment expressly provides, that such longer-term financing be
          provided only where there are unique or exigent circumstances. As
          indicated by Treasury, these would include natural disasters, trade
          embargoes, unforeseen economic developments abroad, political
          assassinations, or other catastrophic events. In none of these cases
          should the ESF compete with the IMF, however, and every effort
          should be made to bring all medium and longer-term financing
          within the framework o f the IMF or other appropriate multi-lateral
          facilities.15

   The Mexican economic crisis would appear to be a prime example of the type
o f unique or exigent circumstances that the Senate Banking Committee had in
mind when crafting the 1977 amendment: according to some observers, M exico’s
financial troubles were exacerbated by the shocking assassinations in 1994 of two
key Mexican political leaders and the unanticipated strife in the Chiapas region
of M exico.16 Furthermore, the support package appears to honor the Committee’s
admonition that longer-term use of the ESF not “ compete” with the IMF. It is
our understanding that the loans and credits from the ESF complement the
substantial financial assistance that the IMF and other lenders are furnishing to
M exico. Indeed, the Treasury Department has worked closely with the IMF in
fashioning the support package.
   Finally, it is worth noting that Congress plays an important oversight role with
respect to use by the President and the Secretary o f the ESF for loans of more
than six months. As the Senate Banking Committee described Congress’s function,
“ [t]he requirement that the President report to the Congress on any such longer-
term financing will provide the Congress with an opportunity to scrutinize such
longer-term ESF credits and take appropriate steps to insure that they are con­
sistent with U.S. interests and U.S. obligations under the IM F.” 17 In that role,
Congress has, over the years, considered various proposals to cabin the authority
o f the President and the Secretary under the ESF statute. Those proposals have

   15 1976 Senate Banking Comm. Report at 11 (footnote omitted). H ie Committee echoed that theme elsewhere
in the report:
      [The] amendment would not bar the U nited States from making longer-term credits to foreign countries
      for exchange market intervention, but it would insure that such longer-term credits are not extended unless
      the President finds that unique or exigent circumstances exist, such as the unavailability o f IM F or other
      international financial resources for th at purpose. By helping to keep ESF financing short-term in nature,
      the amendment would help insure consistency between use o f the ESF and U.S. obligations as a member
      o f the IMF. Id. at 17-18.
   16 See Henry A. Kissinger, Aiding Mexico is Not Just Economics— It's National Security, L.A. Times, Jan. 29,
1995, at M2; Tod Robberson, Mexico's Meltdown, Wash. Post, Jan. 8, 1995, at A24; see also Time, Jan. 9, 1995,
at 44.
   17 Senate Banking Comm. Report at 11.


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             Use o f the Exchange Stabilization Fund to Provide Loans and Credits to Mexico


been repeatedly rejected, however.18 This history reflects the judgment of Con­
gress that the President and the Secretary should retain the flexibility to use the
ESF, as they consider necessary, to respond promptly to sudden and unexpected
international financial crises that undermine the global currency exchange system
and jeopardize vital U.S. economic interests.19

                                                                        WALTER DELLINGER
                                                                      Assistant Attorney General
                                                                       Office o f Legal Counsel




   ,8 For example, in 1984, then-Representative (and now Senator) Brown introduced legislation that he said was
designed to restore the ESF to its original purpose, and thereby prevent the ESF from being used as a “ slush fund
to bail out American banks" that make bad loans abroad. See Exchange Stabilization Fund and Argentina: Hearings
Before the Subcomm. on International Trade Investment and Monetary Policy o f the House Comm . on Banking.
Finance and Urban Affairs, 98th Cong. 129 (1984) (statement o f Rep. Brown). Other members o f the House took
issue with the premises underlying Representative Brow n’s proposal. See id. at 135-36 (statement o f Rep. Neal);
id. at 138-39 (statement of Rep. Leach); id. at 156-57 (statement o f Rep. Barnard). In the end. Congress did not
act on the proposal. Similarly, in 1990, a House Committee held a hearing that was intended, among other things,
to probe whether the ESF had been used “ to circumvent the appropriations process" through which financial assist­
ance to foreign countries is normally tendered. See Review o f Treasury Department's Conduct o f International Finan­
cial Policy: Hearing Before the House Comm, on Banking, Finance and Urban Affairs, JOlst Cong. 2 (1990) (state­
ment o f Rep. Gonzalez) ( “ 1990 H earings"). There loo, the hearing produced no changes to the authority o f the
President and the Secretary under the ESF statute.
   19 As a senior Treasury Department official in the Reagan and Bush Administrations articulated the issue:
      Globalization o f the world economy and financial markets has changed the nature and scope o f strains
      on the balance o f payments adjustment process. There is more latitude for exchange rates to fluctuate,
      and indebtedness problems have arisen with serious implications for world financial markets. The ESF
      . . . is the U.S. Government’s only instrument providing the means for a rapid and flexible response to
      international financial disruption which can impact adversely on the U.S. economy. The ESF provides
      a powerful and flexible means for the Secretary o f the Treasury, with the approval of the President, to
      support our obligations in the IMF, especially those concerning orderly exchange arrangements and a stable
      system o f exchange rates.
1990 Hearings at 4 (statement o f David C. Mulford, Under Secretary for International Affairs).


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