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1 1 (April 10, 2020)

handle is hein.crs/govcpyx0001 and id is 1 raw text is: FF. ' ,iE S .r, i , Updated April 10, 2020 Treasury's Exchange Stabilization Fund and COVID-19 As part of the U.S. government's economic response to the Coronavirus Disease 2019 (COVID-19), the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; H.R. 748/P.L. 116-136), was signed into law on March 27, 2020. It appropriates $500 billion to the U.S. Department of Treasury's Exchange Stabilization Fund (ESF) to support loans, loan guarantees, and investments for businesses affected by COVID-19. In addition, the act temporarily permits the use of the ESF to guarantee money markets, as occurred in the 2008 financial crisis. ESF assets have already been pledged in 2020 to backstop several emergency lending facilities created by the Federal Reserve (Fed) in response to COVID-19. The original purpose of the ESF was to give the United States adequate financial resources to stabilize the value of the dollar by buying and selling foreign currencies and gold. In the exigencies of the 2008 financial crisis, the ESF was used differently as Treasury sought a source of unfettered money to quickly stop a run on money markets that threatened further financial instability. Although legislation subsequently forbid Treasury from using the ESF for this purpose in the future, the ESF is being looked to today as a tool to address financial unrest. The ESF was established by Section 10(a) of the Gold Reserve Act of January 30, 1934 (31 U.S.C. §5302) to stabilize the exchange value of the dollar. Similar funds of European countries were heavily intervening in foreign exchange markets at that time, engaging in competitive currency devaluations. The ESF was established with $2 billion appropriated from profits realized from the Gold Reserve Act's revaluation of U.S. gold holdings from $20.67 per troy ounce to $35. During the 1930s, the ESF was actively used to manage the foreign exchange rate of the U.S. dollar. After World War II, when the International Monetary Fund (IMF) was established, the ESF was the source of funds for the U.S. contribution. As provided in the Bretton Woods Agreement Act of 1945 (31 U.S.C. § 5302), $1.8 billion of the ESF's capital of $2 billion was used to make a partial payment on the U.S. subscription to the IMF. The Bretton Woods Agreement Act of 1945 also included permanent authority for the ESF. In 1973, with the demise of the post-World War II gold standard, where the dollar was pegged to gold and other countries' currencies were pegged to the dollar, the explicit purpose of stabilizing the exchange value of the dollar was stricken from the ESF's statute, and its purpose was expanded. Language alluding to stabilizing the exchange value of the dollar was deleted, and language referring to being consistent with U.S. obligations in the IMF regarding orderly exchange arrangements and a stable system of exchange rates was inserted. As a consequence of this change, the Secretary of the Treasury (with the approval of the President) has almost unlimited authority to deal in gold, foreign exchange, and other instruments of credit and securities. Decisions of the Treasury Secretary are final and may not be reviewed by another government official. Nevertheless, Treasury is required to provide monthly reporting on the ESF's operations to Congress. ESF loans are not open-ended. When Congress expanded the scope of the ESF's authority in 1978, it added a restriction that ESF loans could not exceed six months unless the President notified Congress that unique or exigent circumstances were present. Such notifications were provided regarding ESF credit exposure to Mexico in 1982 and in 1995 and to Brazil in 1998. Consistent with the obligations of the Government in the International Monetary Fund on orderly exchange arrangements and a stable system of exchange rates, the Secretary ... with the approval of the President may deal in gold, foreign exchange, and other instruments of credit and securities... - 31 U.S. Code §5302. Stabilizing exchange rates and arrangements In addition to its initial capitalization ($2 billion), Congress allowed the ESF to remain outside annual appropriations and imposed no overall size limit. Instead, the ESF retains all of the earnings from its operations. The main limitation on the ESF's ability to intervene to impact the value of the dollar is the amount of dollar-denominated assets in its portfolio, which are $22.67 billion as of February 2020. To secure more dollars for foreign exchange operations, Treasury could (1) seek an additional appropriation from Congress; (2) monetize its holdings of IMF special drawing rights (SDR, an international reserve asset), valued at $50 billion, by temporarily selling them to the Fed; or (3) engage in a currency swap arrangement called warehousing-in which the ESF sells foreign currency to the Fed and agrees to repurchase it at a later date, during which the Fed credits dollar reserves to the ESF for the duration of the swap. The limit on warehousing is $5 billion, but this limit was temporarily raised to $10 billion in 1989 and $20 billion in 1995. The last use of the warehousing arrangement was from 1988 to 1992. The ESF's primary use until 2008 was to finance short-term loans to foreign countries facing a financial crisis, including Brazil and Mexico, primarily in Latin America and the Caribbean. The ESF has also been used to provide bridge loans to foreign countries while they were negotiating longer-term IMF financing. ~fl:O~ gognpo 'popmm- , goo g , q 'S a X 11LULANJILiN,

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