limitation that the covered costs may not exceed the value of the insured's interest in the proven reserves of oil and/or gas.

Let me give an example to illustrate this. Let us take an insured who has coverage of $25 million, has spent $500,000 in seismic work, $20 million drilling a series of dry holes, $1 million in drilling a well which is still in the process of being drilled, and has $3 million worth of drilling rig and supplies on hand. If that insured's investment is expropriated prior to discovery of a commercial quantity of petroleum, OPIC would be liable for 90% of $4.5 million, which is the amount of all of the costs except for the $20 million spent in drilling dry holes. We have excluded liability for dry holes costs on the theory that prior to discovery of a commercially exploitable field such costs represent commercial losses, not political losses. If the investment was expropriated after the discovery of a $30 million reservoir, in which the insured has a 50% interest, OPIC's liability would be $16.2 million. Since the intangible costs exceed the insured's $15 million share of the reservoir, only $15 million of intangible costs will be recognized. OPIC's $16.2 million liability is computed as 90% of $18 million, which is the sum of the insured's share of the value of the reservoir plus the $3 million value of the insured's tangible property, i.e., the drilling rig and supplies.

OPIC's insurance for petroleum exploration, development and production is offered as a package of 3 political risk coverages; inconvertibility of currency, expropriation, and war/resolution/ insurrection. Unlike our other insurance programs, we have not offered primary energy project investors the option of covering just one or two of these political risks. Our present thinking is to offer a package of three coverages. We might decide to do otherwise if asked and if we find an overriding reason to do so...

OPIC doc.

Chapter 10

INTERNATIONAL ECONOMIC LAW

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International Monetary Law

Regional Cooperation

On February 18, 1977, the U.S. Board of Governors of the Federal Reserve System and the Federal Open Market Committee released the record of policy actions taken by the Federal Open Market Committee at its meeting on January 17-18, 1977, when the Committee approved on behalf of the United States an agreement reached in Basle. Switzerland, for a medium term standby credit facility relating to official sterling balances for the Bank of England. An excerpt from the record released by the Federal Open Market Committee follows:

For some time prior to this meeting [January 17-18, 1977] discussions had been under way among representatives of central banks of the Group of Ten countries and Switzerland in regard to a medium term standby credit facility relating to official sterling balances for the Bank of England. Concurrently, officials of the U.S. Treasury Department and the Federal Reserve System had been considering arrangements for U.S. participation in such a facility. As announced on January 10, an agreement in principle for a $3 billion facility was reached at a meeting in Basle, Switzerland, by representatives of the Bank for International Settlements (BIS), the Bank of England, and a number of other central banks, including the Federal Reserve. The U.S. share was $1 billion, to be provided through the Federal Reserve System and the U.S. Treasury's Exchange Stabilization Fund (ESF). At this meeting the Committee ratified the agreement reached in Basle and arrangements made with the Treasury Department for Federal Reserve-Treasury participation.

The objective of the Basle agreement was to help the United Kingdom achieve an orderly reduction in the reserve currency role of sterling and thus to avoid the kind of disturbances to the international monetary system that had occurred at times in the past as a result of fluctuations in official sterling balances. In general, the agreement provided for the extension of a $3 billion facility to the Bank of England by the BIS, with backing, as necessary, by the other participants, for a period of 2 years-and for a third year if mutually agreed upon by the participants. For its part, the United Kingdom agreed to reduce official sterling balances to working levels over the "drawdown" period. In exchange for official holdings of sterling, it would offer negotiable bonds denominated in currencies

other than sterling and having maturities of 5 to 10 years. The Bank of England would be entitled to draw on the credit facility to the extent necessary to finance reductions in official sterling balances other than those associated with sales of foreign currency bonds. Repayments would begin at the end of the "drawdown" period and would be completed within the succeeding 4 years.

It was understood that eligibility to draw on the standby credit facility would be conditional on continuing eligibility of the United Kingdom to draw on the $3.9 billion credit recently negotiated with the International Monetary Fund (IMF). The facility could also be suspended if the United Kingdom were not making reasonable efforts to achieve reductions in official sterling balances; the Managing Director of the IMF was being asked to assist in making a determination on this score.

With respect to U.S. participation, the Federal Reserve and the Treasury had agreed that if the United States were required to provide financing to the BIS in support of the standby facility, the funds would be provided initially by the Federal Reserve through its existing swap arrangement with the BIS, taking the form of a usual 3-month swap, subject to three renewals. Should such financing be required continuously for more than one year, however, it would subsequently be provided by the Treasury, acting through the Exchange Stabilization Fund. Risk associated with such financing, whether provided by the Federal Reserve or the ESF, was to be borne equally by the two.

Federal Reserve Press Release, Feb. 18, 1977.

The Group of Ten includes Belgium, Canada, France, the Federal Republic of Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States. A Federal Reserve Press Release of Jan. 10, 1977, indicated that the participating countries in the Basle agreement were Belgium, Canada, the Federal Republic of Germany, Japan, the Netherlands, Sweden, Switzerland, and the United States.

On May 8, 1977, President Carter and the leaders of six other industrialized countries concluded an economic summit meeting in London and issued a Downing Street Summit Conference Declaration (London communique) and Appendix. Participating in the meeting were President Carter, Prime Minister Pierre Elliott Trudeau of Canada, President Valery Giscard d'Estaing of France, Chancellor Helmut Schmidt of the Federal Republic of Germany, Prime Minister Giulio Andreotti of Italy, Prime Minister Takeo Fukuda of Japan, and Prime Minister James Callaghan of the United Kingdom.

An excerpt from the Declaration, dealing with imbalances in international payments and the role of the International Monetary Fund, follows:

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-We commit our governments to stated economic growth targets or to stabilization policies which, taken as a whole, should provide a basis for sustained non-inflationary growth, in our own countries

and worldwide and for reduction of imbalances in international payments.

-Improved financing facilities are needed. The International Monetary Fund must play a prominent role. We commit ourselves to seek additional resources for the IMF and support the linkage of its lending practices to the adoption of appropriate stabilization policies.

76 Dept. of State Bulletin 583 (1977).

An excerpt from the Appendix under the heading of Balance of Payments Financing follows:

For some years to come oil-importing nations, as a group, will be facing substantial payments deficits and importing capital from OPEC [Organization of Petroleum Exporting Countries] nations to finance them. The deficit for the current year could run as high as $45 billion. . . .

The International Monetary Fund must play a prominent role in balance of payments financing and adjustment. We therefore strongly endorse the recent agreement of the Interim Committee of the IMF to seek additional resources for that organization and to link IMF lending to the adoption of appropriate stabilization policies. These added resources will strengthen the ability of the IMF to encourage and assist member countries in adopting policies which will limit payments deficits and warrant their financing through the private markets. These resources should be used with the conditionality and flexibility required to encourage an appropriate pace of adjustment.

This IMF proposal should facilitate the maintenance of reasonable levels of economic activity and reduce the danger of resort to trade and payments restrictions. It demonstrates cooperation between oil-exporting nations, industrial nations in stronger financial positions, and the IMF. It will contribute materially to the health and progress of the world economy. In pursuit of this objective, we also reaffirm our intention to strive to increase monetary stability. We agreed that the international monetary and financial system, in its new and agreed legal framework, should be strengthened by the early implementation of the increase in quotas. We will work towards an early agreement within the IMF on another increase in the quotas of that organization.

76 Dept. of State Bulletin 584-585 (1977).

International Monetary Reform

Conference on International Economic Cooperation (CIEC)

On June 16, 1977, Anthony M. Solomon, Under Secretary of the Treasury for Monetary Affairs, testified before the Subcommittee on Foreign Economic Policy of the Senate Committee on Foreign Relations to report on the results of the Conference on International Economic Cooperation (CIEC), concluded in Paris on June 3, 1977. On that date the participants from 27 countries adopted by consensus a ministerial communique dealing with issues in the fields of energy, raw materials, investment, development, and finance.

In his testimony concerning work of CIEC in the financial area, Under Secretary Solomon described the efforts by the participants

from the Group of 19 (G-19) developing countries and the Group of 8 (G-8) industrialized countries concerning monetary and inflationary issues in part as follows:

With respect to monetary issues, the participants noted with satisfaction that the work program laid out for the IMF [International Monetary Fund] by the Interim Committee reflected largely the concerns expressed during the Conference. Strong support was expressed for the initiative taken to establish a supplementary credit facility in the IMF. A number of G-19 participants advanced specific proposals for structural changes in the international monetary system and for easier access to international financial resources. The G-8 resisted inclusion of such proposals as these are matters for discussion in the IMF and not within the competence of the CIEC. The G-19, preferring to have monetary issues remain on the table, withdrew their specific proposals in order to reach an agreed text on these issues, noting, however, that the consensus reached did not cover all areas of interest to them. The paper on cooperation among developing countries largely reflected text agreed earlier in various U.N. fora and deals with ways and means by which bilateral and multilateral financial assistance could help promote economic and financial cooperation among developing countries.

Disagreement on the text on measures against inflation reflected divergent views on the sources of inflation. The G-19 insisted that the only matter of concern was inflation imported from industrialized countries and that the appropriate measure against such inflation is indexation of export prices of commodities. The G-8 maintained that inflation is largely homegrown, and requires appropriate domestic demand management measures. However, the G-8 noted that those countries whose actions have worldwide repercussions-i.e. large industrial countries and countries with important exports, such as oil and some other commodities have a particular responsibility to combat inflation. On financial assets of oil exporting developing countries, participants agreed that some oil exporting developing countries, in order to accommodate world energy requirements and thereby contribute to world economic growth and stability, have been maintaining production levels that, at current prices, yield external resources in excess of their current requirements. However, the G-8 could not agree that, therefore, such assets should receive preferential treatment. Although it appeared possible to come to an agreed text on this issue that would reflect both OPEC and G-8 concerns, agreement fell apart at the last minute and participants returned to their original positions.

Dept. of the Treasury News, June 16, 1977.

The developing country participants were Algeria, Argentina, Brazil, Cameroon, Egypt, India, Indonesia, Iran, Iraq, Jamaica, Mexico, Nigeria, Pakistan. Peru, Saudi Arabia, Venezuela, Yugoslavia, Zaire, and Zambia (Group of 19). For the industrialized countries, the participants were Australia, Canada, the Euro