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Could “Reagan Bonds” Help Ease The Nation’s Economic Ills?

January 9, 1988

NEW YORK (AP) _ Once again, the roller-coaster dollar has plunged and soared, stirring talk of prospects for a new issue of U.S. foreign-currency bonds.

First employed during the Carter administration a decade ago, foreign- denomin ated bonds can serve as a powerful tool for reversing an otherwise unstoppable dollar free-fall.

Other potential benefits continue to tantalize some market-watchers, even today: Things like huge, multibillion-dollar flows of new capital. Plunging interest rates. A chance to cut billions from the national debt. All virtually for free.

Most things that seem too good to be true, probably are. But it never hurts to dream.

If the Reagan administration really believes the dollar has fallen far enough, it ″could have the coup of the decade by issuing foreign-currency bonds,″ mused Jay Goldinger, an analyst at Cantor, Fitzgerald & Co. in Beverly Hills, Calif.

Such issues would not only contribute to a stronger dollar, he said, but also could lead to dramatically lower interest rates, stimulating the economy and bringing billions of new revenue into federal coffers.

Foreign-currency bonds support the dollar because they carry an implicit message: By assuming the risk of having to convert its currency in the future to pay back the debt, the United States commits itself to supporting its currency as best it can.

This, in turn, reassures foreign investors, who otherwise might be afraid to put money into U.S. securities.

In addition, since many foreign issues sell at lower interest rates than their U.S. counterparts, this would presumably make U.S. securities more attractive - sending U.S. bond prices higher and interest rates lower.

″Investors in Germany and Japan would eat them up,″ said Goldinger. ″And we’d save a fortune in interest rates.″

Meanwhile, as confidence in the dollar increases, driving its value up against other currencies, it would become cheaper for the Treasury to buy the foreign currency to pay off its creditors when the bonds come due - thereby producing a profit on each bond.

″It’d be an interesting way to pay off the deficit, wouldn’t it?″ he said. ″If we could lower interest rates to, say, the 3 or 4 percent other countries pay, and if we got some appreciation on the dollar...

″It’s a speculative way of playing it. But the timing has never been better.″

The government’s only experience with foreign-denominated debt took place between December 1978 until January 1980, when the U.S. issued $6.44 billion of an authorized $10 billion in 2-, 3-, and 4-year ″Carter bonds″ in West German marks and Swiss francs.

The notes were part of a package of measures aimed at bolstering the dollar, which had been slumping severely against other major currencies in the late 1970s.

Treasury officials and market analysts agree that the Carter bonds were an unqualified success. Not only did they help to turn the dollar around; they even provided some profit on exchange rate differentials when paid back.

″What work I saw of it at the time, it seemed to work extremely effectively, without any problems at all. Amazingly so,″ said Bart Derrick, director of the Treasury’s office of cash and debt management.

What if the Reagan administration were to try it again, but on a much grander scale?

A major issue - say, $30 billion, $50 billion or $100 billion - could amount to a brand new source of income in all the ways mentioned already, without raising taxes.

With fewer dollar-denominated bonds needed, demand for existing issues would send prices skyrocketing, thereby forcing interest rates dramatically lower.

Those gains could pose a worrisome risk, according to Varrick Martin, vice president for foreign exchange at the New York office of Union Bank of Switzerland.

″When you do this, you’re taking a very dramatic, large step,″ Martin said. ″And you don’t do it unless you’re prepared to risk a much higher dollar.″

The larger the issue, the harder it would be to ″fine-tune,″ Martin said. ″If the dollar begins to rally, it may be difficult to control.″

Thus, by issuing foreign-currency bonds, the government could wind up where it started - with a musclebound dollar, soaring trade deficit and all the accompanying problems.

″If you take that gun out and shoot it, God knows where the bullet is going to go,″ Martin said.

End Adv Weekend Editions Jan 9-10