Statement By G-7 Finance Ministers on Georgia

G-7 Finance Ministers today issued the following statement on Georgia: 

"G-7 Finance Ministers welcome the international mediation efforts to end the hostilities and to bring about a political solution to the conflict in Georgia. The loss of life, humanitarian suffering and wider destruction over recent days is considerable, and we welcome commitments to assist with the urgent humanitarian needs.  

"We, the G-7, stand ready to support Georgia in order to promote the continued health of the Georgian economy, maintain confidence in Georgia's financial system and support economic reconstruction.  

"In this regard we welcome the commitment by Georgia and the International Monetary Fund to work together to reinforce the soundness of Georgia's economic reform program. We also call on the Georgian authorities, other countries, the World Bank, European Bank for Reconstruction and Development, Asian Development Bank, European Investment Bank, and European Commission to promptly identify and support reconstruction needs and the restoration of services that will build a base for future economic growth.  

"Georgia has solid economic fundamentals as a result of economic reforms and sound policies, and we are committed to helping Georgia continue on this path." 

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Statement by Deputy Secretary Robert M. Kimmitt
on Telephone Conversation with
Georgian Prime Minister Gurgenidze

Washington – Deputy Secretary of the Treasury Robert M. Kimmitt issued the following statement on his telephone conversation with Georgian Prime Minister Lado Gurgenidze:

"Earlier today, I telephoned Prime Minister Gurgenidze to express the United States' continuing support for the democratically-elected government of Georgia and to reiterate our willingness to join other countries to support deeper engagement by the International Financial Institutions to assist Georgia's economy.  Prime Minister Gurgenidze updated me on Georgia's economy and I noted that the Treasury Department continues to believe Georgia's sound macroeconomic and fiscal policies – as well as its excellent progress transitioning to a market economy – make it well-placed to weather the current crisis."

Statement by Deputy Secretary Robert M. Kimmitt
on Support for Georgia’s Economy

Washington– Deputy Secretary of the Treasury Robert M. Kimmitt today issued a statement welcoming the statements of support for Georgia's economy by the International Monetary Fund (IMF), World Bank, and the European Bank for Reconstruction and Development (EBRD), as well as their signals of continued engagement with the Government and their clients and banks in the private sector:

"The U.S. Treasury Department welcomes the statements of support for Georgia's economy made earlier today by the IMF, World Bank, and EBRD." 

"Given its sound macroeconomic and fiscal policies and excellent progress in transition to a market economy, Georgia is well placed to weather the current crisis. Georgia's economy has been one of the strongest in the region owing to its proven record of reforms, and this reform effort deserves continued international support. The United States has strongly supported Georgia's reform and economic development programs and is prepared to join other countries to support the International Financial Institutions' future engagement to promote a vibrant economy that builds on the existing foundations," said Kimmitt.

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Treasury Acting Under Secretary for Domestic Finance Anthony W. Ryan
August 2008 Quarterly Refunding Statement

Washington - We are offering $27.0 billion of Treasury securities to refund approximately $43.5 billion of privately held securities maturing or called on August 15 and to pay down approximately $16.5 billion.  The securities are:

• A new 10-year note in the amount of $17.0 billion, maturing August 15, 2018;
• A new 29 ¾-year bond in the amount of $10.0 billion, maturing May 15, 2038

These securities will be auctioned on a yield basis at 1:00 p.m. EDT on Wednesday, August 6, and Thursday, August 7, respectively.  Both of these auctions will settle on Friday, August 15.  The balance of our financing requirements will be met with weekly bills, monthly 52-week bills, monthly 2-year and 5-year notes, the September 10-year note reopening, and the October 10-year TIPS and 5-year TIPS reopenings. 

Treasury also expects to issue cash management bills on a monthly basis during the quarter.

Borrowing Needs in Fiscal Years 2008 and 2009

Over the course of the fiscal year, changes in economic conditions, financial markets, and fiscal policy as well as nonmarketable debt issuance have caused an increase in Treasury's marketable borrowing needs.

Treasury has responded to the increase in marketable borrowing requirements by increasing issuance sizes of regular bills, the frequency, terms, and issuance sizes of cash management bills, and the issuance sizes of nominal coupon security offerings.  In addition, Treasury reintroduced a 52-week bill, with auctions occurring once every four weeks.

Treasury will continue to monitor projected financing needs and make adjustments as necessary including, but not limited to, considering a second reopening of the 10-year note in the month following the first reopening and moving to quarterly new issue 30-year bond auctions.

We will make an announcement at the November 2008 quarterly refunding regarding any changes to the calendar, including any decision regarding a second reopening of the 10-year note or moving to quarterly new issue 30-year bonds. 

Debt Subject to Limit

In the recent housing legislation, the statutory debt limit was increased from $9.815 trillion to $10.615 trillion. We applaud the efforts of Congress for being proactive in managing the debt limit.

Treasury Cash and Debt Modernization

Treasury is pleased to announce another milestone in efforts to modernize cash and debt management practices. Beginning in November 2008, the Quarterly Dealer Agenda will be prepared in both its current paper format and in an electronic format.  This change will make submission, collection, and analysis of survey data more efficient. We expect to eliminate the paper format and move to a fully electronic platform in 2009.

Please send comments and suggestions on these subjects or others relating to Treasury debt management to debt.management@do.treas.gov. 

The next quarterly refunding announcement will take place on Wednesday, November 5, 2008. 

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Assistant Secretary for Economic Policy Phillip Swagel
Treasury Borrowing Advisory Committee of the
Securities Industry and Financial markets Association Statement

Washington - The U.S. economy has continued to expand at a moderate pace despite the effects of the housing correction, financial market strains, and high energy prices. These developments have weighed on economic growth and the labor market since late 2007.

Real GDP growth was 1.0 percent at an annual rate in the first quarter of this year, after 0.6 percent growth at an annual rate in the fourth quarter of 2007. Net exports sustained growth, while consumer spending and business investment grew slowly, and housing investment fell sharply. A narrower trade deficit accounted for much of the first-quarter increase in GDP, contributing 0.8 percentage point to real growth. Real exports rose at a 5½ percent annual rate in the first quarter, while real imports declined slightly. Consumer spending growth moderated to a 1.1 percent annual rate and the growth of business investment slowed to just 0.6 percent. Residential investment plunged by nearly 25 percent at an annual rate in the first quarter, subtracting more than 1 percentage point from annualized real GDP growth for a third straight quarter.

Later this week, on Thursday, July 31, the Bureau of Economic Analysis (BEA) will release the advance estimate of GDP growth in the second quarter. BEA will also release revised data for 2005- 2007 GDP growth that incorporate more complete source data and methodological changes.

Available data suggest that growth picked up in the second quarter of 2008; the consensus of forecasts is for 2.3 percent growth at an annual rate. Consumer spending has been solid, boosted by nearly $80 billion in stimulus payments received by households. Data on capital goods shipments and on non-residential construction suggest that business investment in plant and equipment expanded at a moderate pace. Export growth remained robust through May, and trade appears poised to make another positive contribution to real GDP growth. Strength in these sectors will be offset by declines in residential investment and business inventory investment.

The housing correction has been a drag on GDP growth since 2006 and residential investment will likely subtract from GDP through the end of 2008. Overbuilding left home inventories far above normal levels; the key to stabilizing the housing market is to work through the inventories. Inventories of unsold new single-family homes have declined by 26 percent since their peak in July 2006, but remain near historically high levels. A decline in construction is a necessary part of the housing correction after years of overbuilding--and housing starts and building permits are down sharply. Single-family starts have fallen by 65 percent from their peak in January 2006 and in June slipped to a 17-1/2 year low.

A stabilization of home sales at a high enough level to outpace construction is the key to working through the inventories of new homes. New single-family home sales have been roughly flat for the past 3 months after having fallen by about 60 percent from their peak in July 2005. Existing home sales also show signs of stabilizing since the beginning of this year. These are fragile signs, however: new home sales stabilized for several months in the spring of 2007 before falling again.

Elevated inventories of unsold homes continue to weigh on house prices, which fell 4.8 percent over the year ending in May, according to figures from the Office of Federal Housing Enterprise Oversight (OFHEO). Other measures of home prices, including the S&P/Case-Shiller indices, indicate that home prices continue to decline in many major U.S. cities. Mortgage delinquencies and foreclosures are up sharply--the number of mortgages past due and the number of foreclosures started have both risen over 150 percent since early 2006. Rising foreclosures are a source of difficulty for many families. They also prolong the adjustment process for housing, since foreclosures add to the supply of homes on the market and because homes sold out of foreclosure put additional downward pressure on home prices. Subprime adjustable-rate mortgages are largely responsible for the elevated delinquency and foreclosure rates, but foreclosure starts on prime loans are rising as well, suggesting that credit difficulties have spread.

Weakness in housing, credit market strains, and high energy prices have taken a toll on the labor market, which has stalled since late last year. Nonfarm payrolls fell by an average of 73,000 per month in the first six months of 2008. These were the first job losses in 5 years and together nearly offset the 453,000 jobs gained in the last half of 2007. The unemployment rate stood at 5.5 percent in June, up nearly a full percentage point over the past year.

Overall inflation recently hit a 17-year high, with the consumer price index up 5 percent in the 12 months ending in June; this compares to an increase of 2.6 percent in the year-earlier period. Surging energy prices and sharp increases in food costs are responsible for the pickup in consumer inflation. Excluding these categories, core consumer price inflation remained contained at 2.4 percent in the latest twelve month period through June. This was a pace of core inflation just 0.2 percentage point higher than in the year ended June 2007.

Consumer energy prices rose further in July, although at a slower pace than in April through June. Retail gasoline prices increased about 1 percent in the first three weeks of July to an average of $4.09 per gallon but have since fallen off somewhat. Gasoline prices had risen by an average of 7.6 percent in each of the prior 4 months, with the cost of regular gas up by more than 30 percent so far this year. Higher gasoline prices largely reflect oil market developments: between late 2007 and mid July of this year, the benchmark one-month futures price of West Texas Intermediate crude oil rose by more than 50 percent, closing at an all-time high of $145 per barrel on July 14. Oil prices have eased substantially since then, falling by nearly $25 to $123 per barrel as of last Friday (July 25). Though oil is still 70 percent more costly than a year ago, the recent drop in price is good news for consumers and businesses alike.

Elevated overall inflation has more than offset nominal wage increases so that real average hourly earnings are down by 1.8 percent for the year ending in June. The stimulus measures enacted early this year have countered some of the impacts of high energy prices and the slow job market, boosting real household income and thereby helping to sustain household spending. A total of 112.4 million stimulus payments were sent to households through July 11, totaling $92 billion. Around 12 million additional rebate payments are expected to go out through the remainder of 2008 and the first half of 2009 as additional people file returns or reconcile their 2008 incomes during the 2009 tax season. This includes stimulus payments that will go to the over 5 million seniors and veterans who must still file a simple tax return to receive their payment.

The economic slowdown and increased expenditures associated with slower growth and with the stimulus has had an effect on the federal budget. Today the Office of Management and Budget released the Mid-Session Review of the FY2009 Budget, which contains updated estimates of federal receipts, outlays, and the deficit for the next five years. For FY2008, the deficit is projected to be $389 billion, or about 2.7 percent of GDP. In FY2009, the deficit is projected to rise to $482 billion, about 3.3 percent of GDP. The rising deficits in FY2008 and FY2009 largely reflect the slowing economy and the stimulus package. Federal receipts are projected at 17.9 percent of GDP in FY2008 and FY2009, about 0.4 percentage point below the long-run average. As the temporary stimulus provisions end and the economy strengthens, receipts are projected to rise. Spending discipline and rising receipts would bring the federal budget to surplus in FY2012 and FY2013.

The Mid-Session Review is based on an updated economic forecast in which GDP growth in 2008 is projected to be 1.6 percent on a year-over-year basis, more than a percentage point lower than the forecast in the FY2009 Budget. The Mid-Session Review GDP forecast matches the private consensus projection for growth in 2008. The updated forecast projects relatively sluggish growth in 2009 (2.2 percent), which is 0.8 percentage point below the growth projected in the Budget. The economy is predicted to recover as the housing market stabilizes and financial turmoil recedes, with annual GDP growth picking up to average about 3.2 percent through 2013. This pace of growth would bring the unemployment rate down to 4.8 percent in 2012 after it increases in 2008 and 2009 as a result of sluggish growth.

Prompt and effective policy actions are supporting growth while adjustments in housing and financial markets continue. The fundamental strengths of the U.S. economy remain, notably strong underlying productivity growth and substantial flexibility and resilience. Over time, stronger growth will bring renewed job creation and higher incomes, and this in turn will result in rising federal receipts and move the fiscal position toward a balanced budget.

Secretary Henry M. Paulson, Jr.
Statement on Covered Bond Best Practices

Washington - Good afternoon. Thank you all for coming today. Joining me on stage are FDIC Chairman Sheila Bair, Federal Reserve Governor Kevin Warsh, OCC Comptroller John Dugan and OTS Director John Reich. We also welcome representatives from Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo. I will make a few remarks, my colleagues will also address you and then Jeff Brown with Bank of America will speak.

As we are all aware, the availability of affordable mortgage financing is essential to turning the corner on the current housing correction. And so we have been looking broadly for ways to increase the availability and lower the cost of mortgage financing to accelerate the return of normal home buying and refinancing activity.

The housing government-sponsored enterprises, Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and the Federal Housing Administration are funding more than 70 percent of residential mortgages during these months of market stress. They must continue to be active here.

At the same time, private-label securitization, another important source of mortgage finance, has become severely strained and credit conditions have tightened. In addition to securitization done by housing GSEs, private mortgage-backed securitization benefits the American consumer and our markets. The private-label market will evolve in response to current challenges, and I expect it to return with greater risk-awareness and investor discipline. We also believe it is useful to explore additional mortgage financing options to complement more traditional funding models.

One option we have looked at extensively is covered bonds, which are a $3 trillion market used widely in Europe for mortgage funding. I believe covered bonds have the potential to increase mortgage financing, improve underwriting standards, and strengthen U.S. financial institutions by providing a new funding source that will diversify their overall portfolio.

Treasury has been working with our regulatory counterparts to look at ways to support the emergence of the covered bond market in the United States. We consulted with our European counterparts, including the UK Treasury. We also spoke with potential U.S. market participants, including issuers, investors, underwriters and ratings agencies. While many European countries have dedicated covered bond legislation, the U.S. regulatory environment is different. Covered bonds are a promising financing vehicle and we believe this market can grow in the United States absent federal legislative action.

To help achieve our goal of broader choices in mortgage finance, today Treasury is publishing a Best Practices guide for U.S. residential covered bonds. This document is intended to outline practices that will promote covered bond market simplicity and homogeneity, using high quality mortgages as collateral. It is a starting point and complements the FDIC final policy statement of July 15th.

I appreciate the FDIC's strong leadership in advocating covered bonds and providing clarity to potential investors. Together, the FDIC final policy statement and a Treasury Best Practices guide should give market participants the tools to build a market that will benefit U.S. families and the U.S. economy. A U.S. covered bond market also will present new opportunities for further international investment in the United States.

We knew that this initiative would be successful only if the largest banks paved the way. And so I welcome the announcement by America's four largest banks, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, that they intend to establish covered bond programs and kick-start this market in the United States. And, I am also pleased to know that the two existing domestic issuers of covered bonds intend to align their programs with these new practices.

We applaud these banks for their leadership and for recognizing an opportunity to help increase mortgage funding availability and strengthen our financial system. We are at the early stages of what should be a promising path, where the nascent U.S. covered bond market can grow and provide a new source of mortgage financing.

Covered bonds are simply one tool for mortgage financing and will not, alone, complete the housing correction. We will continue to pursue our efforts to avoid preventable foreclosures and to speed, without impeding, the necessary course of this housing correction. Thank you and now Chairman Bair will say a few words.

Statement by Secretary Henry M. Paulson, Jr.
on House Passage of Housing Bill

Washington - Treasury Secretary Henry M. Paulson, Jr. issued the following statement today on House passage of the housing bill:

"I'm pleased the House acted quickly to pass an important GSE bill that will provide temporary authorities to give confidence to markets and will create a strong, independent regulator better able to address the risks these enterprises pose. 

"I am disappointed that the legislation also includes extraneous provisions that we have opposed as detrimental to our efforts to get through the housing correction quickly. 

"However, as I have said before, the GSE portions of this bill are orders of magnitude more important to turning the corner on the housing correction and supporting our markets and our economy.

"I look forward to working with the Senate to get legislation to the President's desk this week."

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