lem of rescheduling previously contracted debts when, notwithstanding the fact that the agreement has been made in good faith, the debtor nation at some later date faces the prospect of imminent default on its obligation.

It cannot be denied that provisions in an agreement for repayment of principal and interest negotiated with developing countries in long-term credit transactions are necessarily based on somewhat speculative projections as to the future ability of the borrowing country to repay. In the instant case, for example, agreements were made following a period of grave political and economic difficulty. We are informed that an independent study commissioned by creditor nations has found that Indonesia presently lacks the necessary domestic resources in foreign exchange to service its current external debt, and that unless a renegotiation is effected, payments it is required to make under its existing obligations will be beyond its financial capacity for some years to come. We understand that the United States Government has accepted these findings pursuant to an agreed minute of April 24, 1970. That minute may fairly be compared to a composition of creditors concerning the Indonesian debts.

Nothing in P.L. 480 suggests any congressional certainty that every single agreement for repayment would be carried out according to its terms. Giving the statute the broadest reading consistent with its language, we find that it neither expressly not impliedly prohibits renegotiation under the circumstances here presented, where the facts clearly establish that the debtor nation faces imminent default. Indeed, the broad congressional policy underlying sec. 106(a) and its predecessor-that the maximum recovery be obtained for the United States-may well be furthered, rather than hindered, by the sort of rescheduling of debts on the part of the creditor nations which is here contemplated. Accordingly, rescheduling of the debts incurred by Indonesia under P.L. 480 is authorized, it having been found by those officials charged with the responsibility that it will in fact maximize repayment to the United States.

Sincerely,

JOHN N. MITCHELL.

244-574 O - 78 - 30

EXPORT-IMPORT

BANK-GUARANTY

OF INTEREST-SUBORDINATION OF CLAIMS FOR REIMBURSEMENT AND SUBROGATION

Agreements by the Export-Import Bank to guarantee the interest payable on securities issued by a private corporation for the purpose of obtaining funds for the financing of exports from the United States are authorized by section 2(a) of the Export-Import Bank Act, as amended (12 U.S.C. 635 (a)), and hence constitute general obligations of the United States backed by its full faith and credit. If the Export-Import Bank pays interest on those securities pursuant to that guaranty, the resulting rights of the Bank for reimbursement and subrogation will be subordinated to the claims of the holders of those securities.

MARCH 10, 1971.

THE SECRETARY OF THE TREASURY.

MY DEAR MR. SECRETARY: On January 27, 1971, your predecessor, Secretary Kennedy, requested my opinion with respect to several questions which arise by reason of a proposed agreement between the Export-Import Bank (hereafter referred to as "the Bank”) and Private Export Funding Corporation (hereafter referred to as "PEFCO"). These questions are (1) whether the Bank has the power to issue the guaranties contemplated under the agreement, (2) whether the obligations incurred pursuant to such guaranties are general obligations of the United States backed by its full faith and credit, and (3) whether the Bank's claims against PEFCO arising from the guaranties issued pursuant to the proposed agreement would be subordinated to the claims of the holders of PEFCO's debt obligations to receive payment of the principal of the debt obligations when due. For the reasons set forth below, I am of the opinion that all three questions are to be answered in the affirmative.

I

The economic and legal considerations underlying the proposed agreement are explained in detail in the memorandum of law prepared by the General Counsel of the Bank, attached to your request for an opinion. They may be summarized as follows:

The proposed agreement constitutes a part of an arrangement designed to utilize for the financing of export transactions certain sources of private capital which traditionally limit themselves to long-term investments. PEFCO would establish a pool of obligations issued by foreign importers to United States exporters and bearing the Bank's direct and unconditional guaranty as to principal and interest (Importer Notes). Against this pool PEFCO would issue its securities fully backed by a pledge of Importer Notes (Guaranteed Securities).

While the holders of PEFCO's Guaranteed Securities would be fully secured as to principal in view of PEFCO's pledge and the Bank's guaranty of the Importer Notes, they are subject to certain contingent hazards with respect to the interest borne by those securities. In spite of the Bank's guaranty of interest on the Importer Notes, it is possible that as the result of changes in interest rates the Importer Notes may earn less interest than the rate stipulated for PEFCO's Guaranteed Securities. Moreover, there may be delays in the reinvestment of repaid Importer Notes with concomitant losses of income. To guard againt this contingency, the Bank agrees to "fully and unconditionally guarantee the due and punctual payment of all interest on any debt obligation to PEFCO ***." Your three questions are directed at several aspects of this guaranty by the Bank.

II

Your first question is directed to the Bank's power to guarantee payment of the interest on the Guaranteed Securities. Section 2(a) of the Export-Import Bank Act, as amended (hereafter referred to as "the Act"), 12 U.S.C. 635 (a), provides in pertinent part:

“*** The objects and purposes of the bank shall be to aid in financing and to facilitate exports and imports * * * between the United States *** and any foreign country or the agencies or nationals thereof. In connection with and in furtherance of its objects and purposes, the bank is authorized and empowered to do a general banking business ***; to guarantee notes, drafts, checks, bills of exchange, acceptances, including bankers' acceptances, cable transfers, and other evidences of indebtedness; to purchase, sell, and guarantee securities ***"

PEFCO's Guaranteed Securities are designed to obtain, for the financing of U.S. exports, funds of a kind heretofore restricted to long-term investment. Since the Bank's guaranty of interest will make PEFCO's Guaranteed Securities more attractive to the long-term credit market, the proposed guaranty would further the Bank's objective of encouraging and assisting the financing of exports from the United States. The Guaranteed Securities to be issued by PEFCO therefore are evidences of indebtedness which the Bank has the power to guarantee. That authority includes the guaranty of principal as well as interest (New Orleans v. Clark, 95 U.S. 644, 651-652 (1877); Stearns, Law of Suretyship (5th Ed., 1951) Sec. 4.19), but the Bank obviously can limit the guaranty to that part of the indebtedness which needs additional security, viz., interest. Since the principal of the Guaranteed Securities is already adequately secured, to guarantee it would lead to unbusinesslike duplication and tie up an unnecessarily large amount of the Bank's authority to lend and guarantee (section 7, 12 U.S.C. 635e).1

I therefore conclude that the Bank has the power to guarantee the interest on PEFCO's Guaranteed Securities. This conclusion is, of course, subject to the following self-evident reservations. At the time the Bank guarantees a specific issue of Guaranteed Securities, its obligational authority under section 7 must not have been exhausted and its corporate exist

1 Under business practices which were abandoned only in the recent past, the Guaranteed Securities presumably would have been issued as bearer securities with interest coupons attached. Those coupons would have been securities which the Bank can guarantee under section 2 of the Act. I do not believe the Bank's authority to guarantee interest has changed as the result of the changes in the form but not the substance of business practices.