Credit Reform

This report (1) evaluates the executive branch's method for calculating country risk rating and cost estimates for foreign loans and loan guarantees and provides GAO's own estimates and (2) determines the probability of default for each country. GAO also reviews the executive branch's authority to reschedule international debt owed to the U.S. government and the implementation of the law's provisions for rescheduling international debt. GAO found several weaknesses in the executive branch's method, particularly in the method it used to calculate risk premiums for higher risk countries. The main weakness was that the executive branch's method did not rely on econometric tests and measurements. GAO estimated the long-run probability of default for 170 countries. GAO's estimates of default risk ranged from 92.1 percent for Cambodia to zero percent for the highest rated countries, such as Japan, Switzerland, and Germany. GAO estimated that Russia has more than two chances out of three of defaulting on a loan, regardless of the length of the loan.

GAO found that: (1) the Executive Branch could improve its methodology for estimating the subsidy cost for international loans and loan guarantees by using an empirically and econometrically rigorous evaluation method; (2) there are a number of weaknesses in the methodology used to calculate risk premiums for high-risk countries; (3) the Executive Branch's subsidy cost estimates for new loans may be overstated because the Executive Branch is precluded from distinguishing between new loans to countries of higher risk; (4) the estimated subsidy costs for the $13.7 billion of international loans and loan guarantees authorized through 1992 was $3 billion; (5) cost estimates will differ depending upon market expectations for a particular time and the group of foreign loans and guarantees; (6) the United States does not have the incentive to collect the full loan debt owed by sovereign nations because it has other goals, such as enhancing foreign policy objectives, promoting U.S. defense goals, and helping domestic constituent interests; (7) for the 167 countries reviewed, the default probabilities ranged between 0 and 92.1 percent; (8) the Executive Branch has the authority to reschedule international debt owed to the U.S. government; and (9) although Office of Management and Budget (OMB) rescheduling guidance is consistent with legislative requirements, OMB officials believe that some agencies are not following its guidance, making annual re-estimates on international loans and guarantees, or including the cost of rescheduling loans at below-market interest rates in their initial estimates.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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