Two Department of Agriculture (USDA) programs—the Office of the General Sales Manager (GSM)-102 and GSM-103 export credit guarantee programs—are intended to promote the export of U.S. agricultural commodities. The programs’ goals—under the 1990 Food, Agriculture, Conservation, and Trade Act, also known as the 1990 Farm Bill—are to develop, expand, or maintain U.S. agricultural markets overseas by facilitating commercial export sales of U.S. agricultural commodities.However, the statute also provides that the Secretary of Agriculture may not issue credit guarantees in connection with sales of agricultural commodities to any country that the Secretary determines cannot adequately service the debt associated with such sale. The law also prohibits issuing the credit guarantees for foreign aid, foreign policy, or debt-rescheduling purposes. More than $16 billion in export credit guarantees were provided by the GSM-102/103 programs during fiscal years (FY) 1990 through 1992. The former Soviet Union (FSU) and two of its successor states, Russia and Ukraine, received 43 percent of the guarantees that were made available in fiscal year 1992. During fiscal year 1991 and fiscal year 1992, the FSU obtained more GSM credit guarantees than any other country in the world. In deciding whether to extend GSM export credit guarantees to any country, USDA considers the prospects for developing and maintaining U.S. markets in that country, on the basis of our review of USDA documents and interviews with agency officials. Before providing guarantees, USDA also assesses the country’s overall creditworthiness. Creditworthiness, in the context of this report, concerns a country’s ability and willingness to service or make timely payments on its current and future foreign debt obligations. Assessing the creditworthiness of nations generally involves a technical analysis of economic and financial indicators of the risk of nonpayment due to insufficient foreign currency and the likelihood that political or other nonfinancial events may disrupt payments. Some of the factors that affect creditworthiness are a country’s level of indebtedness relative to its economic and financial resources, the ability of the country’s government to effectively manage the domestic economy, and the general economic and political situation in the country. Creditworthiness also involves temporal considerations. For example, some debtors may be judged not creditworthy over the short run due to a lack of readily available foreign exchange but may be considered capable of servicing their debts if additional time is allowed for them to organize and marshal their resources. The Department of Agriculture’s GSM-102 and GSM-103 programs are aimed at facilitating the export of U.S. agricultural commodities to developing countries and middle-income countries with hard currency shortages. They are intended to help importing nations make a transition from concessional financing to cash purchases, as well as to maintain import levels during periods of financial difficulties. Under the two programs, the U.S. government agrees to pay U.S. exporters or their assignees—U.S. banks or U.S. subsidiaries of foreign banks—in the event that a foreign buyer defaults on its loan obligation. By reducing the risk involved in selling U.S. agricultural products, USDA encourages exporters to explore new foreign market opportunities. The USDA’s Commodity Credit Corporation (CCC), which administers the GSM programs, attempts to share some of the credit risk with the exporter or the exporter’s assignee (a bank or other financial institution). It does so usually by guaranteeing 98 percent of the value of the sale plus a portion of the interest payable. The exporter or the exporter’s assignee is at risk for 2 percent of the principal and a portion of the interest payable. However, CCC has flexibility to adjust the amount of guarantee coverage it provides. USDA considers the GSM programs to be fully “commercial” in that they assist sales that are made by the private sector, and the interest rates are at “prevailing market levels.” However, there is an important element of concessionality in the programs because recipient countries could not make the purchases without credit and loan guarantees. Furthermore, if the countries were able to obtain financing on commercial markets, they would have to pay a premium above the rates that they obtain from the GSM programs, since a U.S. government guarantee reduces the risk to the lender. Section 202(f) of the 1990 Food, Agriculture, Conservation, and Trade Act prohibits the Secretary of Agriculture from issuing export credit guarantees in connection with sales of agricultural commodities to any country that the Secretary determines cannot adequately service the debt associated with such a sale. The provision was established in response to a situation that developed in the late 1980s and early 1990 when creditworthiness considerations were minimized for foreign policy objectives in order to provide Iraq with GSM export credit guarantees. Following the allied response to Iraq’s invasion of Kuwait in 1990, Iraq defaulted on outstanding guaranteed GSM loans. As of August 17, 1994, CCC had received claims from 10 banks regarding Iraq’s defaults. These claims totaled about $2.2 billion, and CCC had paid claims to nine of these banks, totaling $1.7 billion. Section 202 (f) requires USDA to determine whether a country is capable of servicing the debt that would result from providing export credit guarantees for agricultural commodities. If a determination is negative, the provision prohibits USDA from making credit guarantees available to that country. USDA advised us that before making any loan guarantee commitments, it assesses the creditworthiness of intended recipients of guaranteed sales and uses the information in deciding whether to provide guarantees to specific countries. In contrast to a direct loan, a credit guarantee does not involve dollar outlays to either the lender or the borrower when the loan is made. Nonetheless, budgetary outlays are required for loan guarantees when defaults occur and claims are made. To better account for the costs of federal credit programs, the Federal Credit Reform Act of 1990 required, beginning with fiscal year 1992, that the President’s budget reflect the costs of the loan guarantee programs. To this end, new loan guarantee commitments can be undertaken only if appropriations of budget authority are made to cover their costs, including estimated payments by the government to cover defaults and delinquencies. The act exempted all then-existing CCC credit guarantee programs from the appropriations requirement. However, CCC advised us that it is establishing what it calls an “allowance reserve” to cover its estimate of possible defaults on GSM loans. As of June 30, 1992, CCC had approximately $9.04 billion outstanding in GSM-102 and 103 guarantees on loan principal and $4.51 billion in accounts receivable from loan guarantee payouts on delinquent GSM-102 and 103 guaranteed loans. In a December 1992 report, we estimated the cumulative costs of the programs at about $6.5 billion, or 48 percent of the total $13.55 billion, if the programs had been terminated on June 30, 1992. In the past, decisions to provide GSM loan guarantees to countries were influenced by foreign policy considerations. Principal recipients of guarantees were often countries that had significant foreign policy relationships with the United States. However, the 1990 Farm Bill stipulated that GSM export credit guarantees could not be used for foreign aid, foreign policy, or debt-rescheduling purposes. So, for example, if the Secretary of Agriculture determines under the debt-servicing requirement that a country cannot adequately service the debt that would arise from receiving agricultural export credit guarantees, no credits are to be extended—even if the president believes that such an extension would be in the national interest. Despite the problems that arose from the Iraqi loan guarantees, as cited earlier, many Members of Congress have expressed the view that GSM credit guarantee decisions should take account of foreign policy and national interest considerations. For example, in May 1991 the Senate approved a nonbinding resolution (S. Res. 117) recommending that the administration extend another $1.5 billion in agricultural credit guarantees to the Soviet Union—assuming the administration found the country could service the debt—if certain foreign policy objectives would also be realized. In 1991, attempts were made to provide more flexibility in granting export credit guarantees; amendments to the 1990 Farm Bill were proposed that would have allowed the president to provide guarantees when he believes they are in the national interest, regardless of the debt-servicing requirement and foreign aid/policy restrictions. However, these amendments were subsequently withdrawn. Similarly, the administration’s 1992 bill for authorizing assistance to the former Soviet republicsincluded a provision allowing the Secretary of Agriculture to take into account major economic reforms underway in those states in making a determination about the ability of the states to repay debt associated with GSM sales. However, this provision was struck from the bill that Congress passed in October 1992. USDA officials told us that although the 1990 Farm Bill prohibits the Secretary of Agriculture from issuing export credit guarantees for foreign aid or foreign policy purposes, the law does not mean that such assistance cannot simultaneously serve foreign policy objectives. They noted that during congressional hearings held in late 1991 and in related briefings provided by USDA to congressional staff, the principal congressional focus with regard to agricultural credit guarantees was on keeping U.S. food moving to the FSU rather than on the risks associated with providing the guarantees. Table 1.1 provides information on GSM program sales by country for fiscal years 1990, 1991, and 1992. As shown, total GSM-102 credit guarantees were $4.6 billion in fiscal year 1990, $5 billion in fiscal year 1991, and $6.1 billion in fiscal year 1992. The GSM-103 program accounted for about $1 billion in guarantees during fiscal years 1990 through 1992. The table also shows that whereas the FSU received no GSM credit guarantees in fiscal year 1990, it was the major recipient in fiscal year 1991. In fiscal year 1992, the FSU and Russia, collectively, received more guarantees than any other nation.