An important meeting is scheduled today in New York among Treasury Department and Federal Reserve Board officials and leading investment bankers to map out a strategy for the U.S. to borrow up to $10 billion in German, Swiss and Japanese capital markets over the coming year.
The sale for the first time of foreign-denominated securities by this country is a key element in the Carter administration's dollar-defense strategy. The $10 billion represents fully a third of the $30 billion intervention war chest the administration is trying to accumulate to counter renewed waves of speculation against the dollar.
The borrowing program in itself is an admission of how far the once mighty dollar has fallen, and an indication of how reluctant foreigners are to hold dollar-denominated assets. It is therefore vitally important that the borrowing, which because of its very size creates many technical problems, be carried off successfully. Difficulty in placing the bonds or the need to pay what amounts to a high-interest-rate risk uremium to attract investors might be considered a profound vote of no confidence in the United States.
But Assistant Treasury Secretary Roger Altman, who has just returned from an initial fact-finding trip to Europe to investigate the situation, said "every indication I have is that it will go well."
"This program is being done for exchange stabilization purposes, and it's extremely important that it succeded, "he added. Altman emphasized that most of the major decisions on how to proceed have not yet been made.
"We haven't chosen a maturity yet, we haven't decided whether the offerings will be public or private, and we haven't decided in what amount or in what country to make the initial offering," he said.
Altman indicated, however, that the United States would like to move quickly, and that the first securities offering "will be considerable."
Informed sources have sketched at least the broad outlines of what the Treasury is formulating.
The first sale of securities will probably take place in two months, and will most likely be done in the West German capital markets. This will probably be followed soon afterward by a similar sale in the Swiss markets.
There has been no discussion yet about making a yen offering in the Japanese markets.
The maturities on the foreign currency bonds will probably be close to five years, rather than longer, to limit the U.S. borrowing exposure in the mark and the Swiss franc. And the most likely method of selling the securities will be through private placements with financial institutions, rather than through public market offerings.
U.S. citizens will be barred from participating, but it is possible that foreign affiliates of U.S. companies might try to purchase the bonds if public offerings take place.
Altman said he expected the U.S. to be able to borrow at a rate at least equal to what the West German government pays in its own capital markets, and "we might be able to do it less expensively."
Recently the West German government negotiated a 10-year loan at a 6.97 percent interest rate, nearly two points lower than our government pays to borrow in U.S. markets.
There were reports in West German newspapers yesterday that the initial tranche or borrowing would total 1.5 billion marks, or about $800 million at current exchange rates.
Other sources indicated the Treasury may try an even larger offering if the markets seem receptive.
There is concern, however, that too large a call on West German capital markets, which recently have been described as congested, could in effect crowd out domestic borrowers and send interest rates climbing there - something both the United States and West Germany would like to avoid.
Jochen Bissler, a deputy manager at the Deutsche Bank; West Germany's largest financial institution, said in a telephone interview from Frankfurt that the markets there responded well to the 1.5 billion mark borrowing rumor and predicted the United States could expect to accomplish an offering of this size at rates comparable to the West German government.
We still have very good liquidity in Germany, and the United States is a prime borrower," he said.
Altman said that following today's meeting with the investment bankers, a team from the Treasury will return to Europe next week to make the borrowing plans firm.
If the initial offering is successful, he said, it could soon be followed by others.
Proposals for the United States to raise intervention funds in foreign currencies had long been advocated by central bankers like West Germany's Otto Emminger, but were strongly resisted by Treasury Secretary Michael Blumenthal and others until the latest dollar crisis exploded.
Some observers believe the United States would like to borrow as little of the "up to $10 billion" as necessary. If the initial offerings are successful and are followed by an improvement in fundamental trade and inflation statistics that strengthen the dollar, the first foreign-denominated borrowing could also prove to be the last.
"They would like to avoid at all costs having to raise much money this way," one banker commented.