Treasury Secretary W. Michael Blumenthal yesterday pressed strongly for legislation to provide $2 billion in federal loan guarantees for New York City, saying a bankruptcy was "an unthinkable situation" and one which could have the major international repercussions.
"To the rest of the world, New York City is synonymous with the United States," Blumenthal told the Senate Banking Committee. "It is considered the world financial center. Wall Street is almost a generic term. And it would be very disturbing, in my judgement, to all entities who invest in the U.S. if we were not able to keep our largest city afloat."
The Treasury secretary predicted that the impact of a bankruptcy by the country's largest city on the value of the U.S dollar abroad "could be serious."
Blumenthal testified on behalf of the Carter administration's bill to give New York City 15-year guarantees on up to $2 billion, short-term loan program enacted in 1975 that expires on June 30.
Although expressing reservation about the precedent the guarantees might set for other cities, he said the administration had concluded the guarantees were preferable to continuing the present short-term laon program because they provided "the only way out" for New York City from its long-running fiscal crisis.
"If we are to get the city back into the (public bond) market; we couldn't do it with continued short-term financing" because "the city would be back in four years again asking for more," Blumenthal said.
Much of the discussion and debate in yesterday's session before the Banking Committee - the second of four days of hearings - centered on guarantees and short-term credits rather than on whether New York City should get any further federal assistance at all.
Banking Committee Chairman William Proxmire (D-Wisc.), who has said he is leaning against extending further assistance, continued to lambast New York State, they city's public employe pension funds, and the big New York City banks for not doing enough to keep the city afloat so it would not need more federal aid.
But at the same time, Proxmire repeatedly raised the alternative of continuing the short-term loans instead of the guarantees. He claimed that the city would be kept on a shorter leash and a more disciplined course with the so-called "seasonal" loans, which require annual repayment. And other members of the panel also seemed to back this argument.
New York Gov. Hugh Carey testified that the short-term loan extension would keep New York "on a umbilical cord directly tied to the federal government" and not allow for a longer-term economic recovery that the guarantees would provide.
And Municipal Assistance Corp. Chairman Felix Rohatyn said the distinction between the short-term aid and the long-term guarantees was artificial because, with short-term assistance, the city would have to keep returning to Washington for renewals.
"As a realistic matter, a seasonal loan that gets rolled over and over because it doesn't do the job it's intended to do becomes a long-term loan," Rohatyn said.
"Guarantees are cheaper, less risky, involve less cash on the part of the federal government, and will get you and us out of this exercise faster," Rohatyn said.
The Treasury secretary testified that, without further federal assistance. New York City almost certainly would face bankruptcy after June 30, but said this was "not an alternative."
Blumenthal said that if the city defaults, the resulting chaos would put "enormous" pressure on the federal government to step into the breach and provide the funds which he said would end up costing more than the proposed loan guarantee plan.