The fragility of the world's financial system and the growing interdependence of various nations' credit markets are coming into sharp focus. The tremendous drive for loan expansion by the world's banking community during the 1970s and into the '80s is fast turning into a can of worms. It became proper for sizeable U.S. banks to have branches in London or the Orient. Similarly, all the European and Eastern banks, of necessity, needed branches in the United States and Timbuktu. Loan growth was essential -- at my price. Much of the fuel for this expansion came from the surplus oil payments of the OPEC nations that were deposited worldwide in many banks, which in turn loaned the money out to the "less developed countries," or LDCs, of the Third World. At the same time, the oil-producing countries embarked on ambitious construction programs at home, based on the belief that the price of oil would climb to $40, $50 and $60 per barrel over the next several years.
But then came the period of high interest rates and the worldwide conservation of energy. A recession followed, along with a global oil glut. The OPEC surpluses disappeared and the recesssion greatly reduced the need for the exports of commodities from the less developed nations. It was from the revenue received from those exports that the LDCs had hoped to repay their loans.
As a result, many of these emerging nations have huge amounts of indebtedness that they cannot possibly repay on time or under the current economic conditions. Mexico, Brazil, Argentina, Chile, Zaire, Nigeria, Poland and others are now coming forward to reschedule their loan repayments and to borrow more funds to try to stabilize their national economies. Unfortunately, many of the biggest U.S. banks are large lenders to those countries. This means that they will be receiving no interest payments on billions of dollars of loans, which in turn squeezes their earnings and imperils their capital positions. The Federal Reserve, the International Monetary Fund and the Bank for International Settlements quickly came to Mexico's rescue. But the other debtor nations are beginning to queue up for aide.
Consequently, investors have begun to realize the precarious position of the global banking systems, and in times of such stress, investors seek safety in the form of U.S. Treasury securities and high grade corporate and municipal bonds -- but especially Treasuries. Such activity is now occurring.
This turbulence and worldwide uncertainty has helped to cause the great growth in the government money market funds -- up some 30 percent during the last four months. Also responsible for their recent popularity was the decline in the rate of interest -- the repo rate -- that government dealers pay their customers when they finance their bond positions overnight. In the past few weeks, that rate fell as low as 6.0 percent, but stayed mostly in the 8 to 9.5 percent range. Because the government funds, until this week, were paying between 10 and 11 1/2 percent, it became a wise investment for the customers to simply buy shares in the government funds rather than receive the lower repo rate being paid by the dealers.
This continued flight to quality should especially benefit the Treasury, which has a gargantuan amount of financing to do over the next 14 months and beyond. This overhanging fear of the financial markets, plus an anemic economy, could be the Treasury's salvation, especially since the federal deficit for fiscal 1983 is now anticipated to fall between $140 billion and $160 billion.
The Treasury's financing problems are fast becoming evident as the size of its new offerings continues to grow. In January, the weekly T-bill auction was $9.8 billion. This week's will be $11.2 billion. And so far this year the Treasury has unofficially had gross financings of $511 billion, of which $66 billion represented new money. During the similar period in 1981, gross financings of $417 billion were carried out, of which $81 billion was new money. Obviously, the Treasury can use all the help it can get.
On Thursday, $2.4 billion government backed -- HUD -- project notes will be sold. These tax exempt notes will have maturities monthly from January to October of 1983. The six month paper should return 5.5 percent while the year paper should return 6.0 percent.