Statement by Assistant Secretary for International Affairs Clay Lowery
before the 41st Annual Meeting of the Asian Development Bank

Madrid, Spain -- It is delightful to be here in Madrid for these meetings, and I would like to thank our gracious hosts, the Government of Spain and the City of Madrid, for their warm hospitality. We want to thank them for hosting the successful replenishment of the Asian Development Fund – which like Real Madrid's triumph last night – needed the final minutes for a result. Let me begin on a sad note and say that our hearts go out to the victims of the cyclone that hit Burma over the weekend.

In the United States, we are going through a difficult housing correction that has impacted our capital markets. We are taking a number of aggressive measures to minimize the downturn's effect. We believe our long-run fundamentals remain sound and we have confidence that we will work through this period.

Much of the rest of the world is suffering from large increase in global food prices, and the response requires both immediate and medium-term actions. We applaud the ADB's announced intention to take both kinds of action consistent with its comparative advantage and strategic vision. Structurally and strategically, we believe the most meaningful manner in which the ADB can contribute is by strengthening agricultural productivity through building rural infrastructure and providing appropriately scaled financing initiatives for farmers and rural organizations.

Asia is the world's fastest growing region, and despite the sharp rise in commodity and food prices and the recent slowdown in the United States, the ADB is forecasting growth in Asian developing economies of 7.6 percent in 2008. As the ADB itself forecasts, by 2020 Asia and the Pacific will account for more than 25 percent of global GDP in nominal dollar terms, have 90 percent of its population living in middle income countries and have only 2 percent of the population living on less than $1 per day.

While some countries have roared ahead, however, others have lagged behind and too many are still among the world's poorest countries. They need the institutional and policy reforms that create opportunities for private sector job creation, sustained growth and improved living standards. Infrastructure gaps prevent the connections to markets and products that drive essential private-sector commerce, both within and across borders. And where incomes have grown significantly, rapid growth is putting strains on the environment and natural resources.

To address these challenges, the ADB should put its efforts into three areas: building on the replenishment, adapting to changes in middle income countries, and strengthening institutional reforms.

First, we applaud the agreement's clear focus on the Bank's comparative advantage, focusing on four key areas – infrastructure finance, the enabling environment for private sector development, basic education, and preventing environmental degradation. On this last point, we look forward to close cooperation with ADB as the United States and other bilateral donors launch the Clean Technology Fund to help developing countries finance advanced technologies to cut greenhouse gas emissions.

Second, the ADB's role in middle-income countries has been a matter of rich debate among shareholders and we urge continued dialogue as we try to determine the optimal mode of engagement with countries that still face crucial development challenges even as they succeed and gain access to private financial markets. In some countries, this will mean shifting from financial assistance to fee-based policy guidance of the kind that the Bank is uniquely qualified to provide. Adaptation to change is a challenge, but it also presents a tremendous opportunity for the Bank to use its knowledge to help countries in new ways, and we look forward to helping the Bank stay true to its Charter.

Third, my boss Secretary Paulson likes to say that private entities that do not reform with the times go bankrupt, whereas public entities become irrelevant. At the ADB, we think a number of changes are needed to avoid being irrelevant. The ADB needs to ensure that it measures and manages for development results and its evaluation unit remains independent.

And, some have asked me why the United States cares so much about the human resources department. My answer is that the most valuable asset of the ADB is its people. The recruitment, retention, and career development of the kind of dedicated, qualified professionals needed by the Bank to fulfill its mission are central to the ADB's success. It is imperative that the management take concrete steps to professionalize human resources management. One place to start is scrapping the anachronism at many levels of the organization for a bias toward nationality as opposed to merit.

We think with efforts in these three areas – combined with the solid work in such countries as Afghanistan – the Bank will truly have a long-term strategy.

I would like to close by thanking President Kuroda and the entire bank staff for their work in preparing for our meetings here in Madrid, and my government looks forward to continuing our work with the Bank and fellow shareholders as we pursue our common vision of a region of growth and prosperity for all its citizens. Thank you very much.

Assistant Secretary for Financial Markets Anthony W. Ryan
May 2008 Quarterly Refunding Statement

Washington, DC--We are offering $21.0 billion of Treasury securities to refund approximately $74.0 billion of privately held securities maturing on May 15 and to pay down approximately $53.0 billion.  The securities are:

• A new 10-year note in the amount of $15.0 billion, maturing May 15, 2018;
• A 29 Ύ -year bond in the amount of $6.0 billion, maturing February 15, 2038

These securities will be auctioned on a yield basis at 1:00 p.m. EDT on Wednesday, May 7, and Thursday, May 8, respectively.  Both of these auctions will settle on Thursday, May 15.  The balance of our financing requirements will be met with weekly bills, monthly 2-year and 5-year notes, the June 10-year note reopening and the July 10-year TIPS offering and 20-year TIPS reopening.

In addition, Treasury will commence issuing a 52-week bill, with the initial announcement on Thursday, May 29 at 11:00 a.m. EDT, the initial auction on Tuesday, June 3 at 1:00 p.m. EDT, and settlement on Thursday, June 5. Treasury will auction this security once every four weeks, concurrently with the 4-week bill, with settlement two days later on Thursday.

Treasury also expects to issue cash management bills in May, June, August, and September.  Some of these cash management bills may be longer-dated.  The issuance of longer-dated cash management bills is in response to stimulus program payments and other potential seasonal fluctuations in cash balances. 

Changes in Borrowing Needs and Treasury's Response

Over the last several months, changes in economic conditions, financial markets, and monetary and fiscal policy have impacted Treasury's marketable borrowing needs. Financial market strains have impacted the real economy, and the nation has experienced lower economic growth, lower receipts, and increased outlays.

As a result, projected marketable borrowing requirements have increased significantly over the last three months, driven by changes in the deficit estimate, a decline in SLGS issuance, and redemption and outright sale activity undertaken by the Federal Reserve in its System Open Market Account (SOMA).

Treasury has responded to the increase in marketable borrowing requirements in its traditional manner and consistent with our comments in the February 2008 quarterly refunding statements.  Over the past several months, as borrowing needs have accelerated rapidly, the Treasury has significantly increased issuance sizes of regular bills, the frequency, terms, and issuance sizes of cash management bills, and the issuance sizes of shorter and intermediate-term nominal note offerings.  

Given issuance sizes of securities on our current offerings calendar, future borrowing needs for the remainder of fiscal year 2008, as well as deficit projections for fiscal year 2009, we believe it prudent to add an additional maturity point at this time.  Treasury will continue to monitor our projected fiscal needs and make adjustments as necessary.  

Auction Calendar Addition with Issuance of the 52-week bill

Treasury will commence issuing a 52-week bill, with the initial auction on Tuesday, June 3 at 1:00 p.m. EDT and settlement on Thursday, June 5. The announcement date for this initial bill will be Thursday, May 29, 2008 at 11:00 a.m. EDT.

In the future, Treasury will announce the size of 52-week bills once every four weeks on the Thursday prior to auction in conjunction with the announcement of sizes of the 13-week and 26-week bills. This security will be auctioned once every four weeks, concurrently with the 4-week bill on Tuesdays at 1:00 p.m.  Settlement for the 52-week bill will be, as with all other bills, on Thursday.

The addition of the 52-week bill should help reduce Treasury's reliance on cash management bill issuance.

Financing Needs in Fiscal Year 2008

We anticipate continued increases in bill and nominal coupon issuance over the remainder of fiscal year 2008 to address increases in net marketable borrowing needs associated with the fiscal outlook.  

Financing considerations related to the Federal Reserve (SOMA)

While the decisions of the Federal Reserve are independent of the Department, Treasury may also need to alter weekly bill issuance sizes or to issue additional cash management bills to offset cash shortfalls arising from Federal Reserve redemptions and open market sales of Treasury securities.  Treasury will adjust such issuance as transparently as possible.

Introduction of the New Treasury Auction System

On April 7, 2008, as part of its Cash-Debt management modernization initiative, Treasury introduced its New Treasury Automated Auction Processing System (NTAAPS).  This enhanced auction system significantly upgrades Treasury's auction process by improving system flexibility, reliability, security, analytics and transparency.

Notable improvements include the following:

• Bidders receive immediate system feedback regarding receipt of their bids.
• Award notices are available immediately after auction close.  Previously, it took upwards of 20 minutes for successful bidders to receive award notices. 
• Treasury publishes preliminary results of the offering amount awarded to non-competitive tenders 15 minutes before auction close.
• An enhanced user experience to provide ease in data entry.
• Robust fail-safes in case of contingency situations.
• $100 minimum denominations of marketable debt instead of $1000 to broaden access to all market participants.

Treasury Repo Market and Private Sector Initiatives

Treasury continues to encourage efforts by the private sector – notably initiatives taken by members of the Securities Industry and Financial Markets Association (SIFMA) and the Treasury Markets Practices Group (TMPG) - to address issues related to the Treasury financing market.  The current low interest rate environment potentially leads to an increased likelihood of chronic fails in the Treasury repo market. Such activity is not favorable for Treasury market liquidity.

Treasury strongly believes that the private sector, given its interest in maintaining robust financing markets, should implement initiatives discussed over the past three months in a proactive manner.

In addition, private sector participants should take additional steps from a monitoring and supervisory perspective to ensure that fails do not reach levels that impact financing markets. 

Treasury will continue to routinely monitor the Treasury financing markets, and encourage additional steps when necessary.

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, July 30, 2008.

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Nason Statement On Insurance Information Act

Washington- Treasury Assistant Secretary for Financial Institutions David G. Nason released the following statement today regarding H.R. 5840, the Insurance Information Act of 2008:

"The Treasury Department welcomes Subcommittee Chairman Kanjorski and Ranking Member Pryce's introduction of legislation to create a federal insurance adviser within the Department of the Treasury. This legislation, similar to a proposal in Treasury's Blueprint for a Modernized Regulatory Structure, would help the United States address international regulatory issues affecting our markets' competitiveness. We look forward to working with Congress to move this idea forward."

Statement by U.S. Treasury Secretary Henry M. Paulson, Jr.
at the Development Committee Meeting

Washington, DC –While the long-run economic fundamentals remain sound, the U.S. economy faces challenges.  The housing correction, credit market turmoil, and high oil prices are all weighing on growth and short-term risks are to the downside.  However, the fundamental drivers that make the U.S. economy healthy over the long term are sound, including the flexibility, innovation, and entrepreneurship that characterize our country. 

These risks notwithstanding, it is important to remember that developing countries are on track to record their sixth consecutive year of average GDP growth in excess of 6%, an accomplishment unparalleled in recent history.  Stronger macroeconomic policies, buoyant external demand, low real interest rates, and increased access to private capital markets – over $600 billion in net private inflows in 2007 – are major factors for strong growth performance.

Recent Market Developments – Challenges and Opportunities Resulting from Higher Commodity Prices

The strong upward movements in world commodity prices in recent years have generally produced large beneficial shifts in the terms of trade for many developing countries.  For these countries, we support the recommendations contained in this year's Global Monitoring Report (GMR) that sound management of these windfall revenues is essential to translate this boom into the foundations for higher sustainable growth.  This will require establishing and maintaining sound institutions, combined with good governance and public finance management to ensure quality spending.

Governments of countries that are experiencing severe negative shifts in the terms of trade due to higher commodity prices, including higher food prices, may need to implement better energy demand policies and targeted safety net programs while considering longer term measures, such as promoting sustainable energy development and agricultural growth.  Existing international facilities can also help mitigate the impacts of negative terms of trade movements when appropriate.  Governments, however, need to resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups.  They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries.

Challenges and Opportunities for Low and Middle Income Countries

Despite impressive advances in most developing countries, the World Bank and other development partners have a large unfinished agenda.  While many developing countries have been able to capitalize on the opportunities offered by increased globalization and a favorable export environment, a key challenge for the international financial institutions is to assist those countries whose growth is lagging.   We agree with the assessment in the GMR that three broad areas emerge as major factors necessary for strong growth: sound macroeconomic policies, favorable private investment climates, and good governance.

We also agree with the conclusion in the GMR that the relationship between trade expansion and economic growth is positive and that trade reforms are critical means to lifting people out of poverty.  Reducing barriers to trade in goods and services enables local firms to access low-cost and high-quality services such as telecommunications, transport and distribution services and financial intermediation, thus enhancing their ability to compete more effectively in international markets.  

Overcoming Poverty in Fragile States and Post-Conflict Countries

The development challenges are all the more formidable in fragile and post-conflict states.  It is increasingly becoming apparent that the international development community needs to be more effective in its efforts to lay the groundwork for economic growth and employment so that the people living in these states believe they have a stake in the future.

The development programs for these countries, which are mostly located in sub-Saharan Africa, will require a challenging mixture of security enhancement, political reform and consolidation, capacity building, and actions to build private sector growth opportunities.  While international aid flows are an important element for successful development, establishment of basic government capacity is required to ensure that aid is used effectively.  The Bank Group, working with other members of the international community, has done much in the last year – including in IDA15 – to develop a more effective strategy for promoting development in these countries and we urge swift implementation of these measures. 

Environmental Sustainability and Climate Change  

The World Bank and its sister institutions face multiple and growing challenges in incorporating environmental sustainability into their development and anti-poverty mandates.  For instance, the MDBs are generally financing a shrinking share of investment projects relative to other lenders (especially in International Bank for Reconstruction and Development countries), which reflects positively on these countries economic development and access to private markets but dilutes MDB leverage with respect to the overall environmental performance of projects in those countries.  

The Bank needs to continue to emphasize its core mandate while becoming more creative in utilizing the linkages between environmental trends and poverty. Potential areas for this include leveraging its own tools – for example safeguard policies, environmental capacity-building, payments for ecological services, techniques for adaptation to climate change, and monitoring trends in natural capital.  Second, the bank should maximize the global as well as local benefits of its work in the areas of environment and climate change.

We welcome the Bank's increasing focus on climate change as it becomes clear that the issue must be addressed in the context of development efforts.  However, we realize that addressing climate change is also technically and financially challenging.  In this vein we applaud the Bank's work to create the Climate Investment Funds, which we intend to support with a $2 billion contribution over the next three years through the Clean Technology Fund that will help developing countries invest in a clean energy future.

Conclusion

President Zoellick outlined six strategic themes for the World Bank Group at the Development Committee meeting last fall.  As these strategic themes evolve and are incorporated into a strategic framework, the Bank Group will need to make key decisions on where it will focus its resources and how to best coordinate and lead activities with other development partners.  We look forward to working with President Zoellick as this strategy unfolds. 

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Statement by Secretary Henry M. Paulson, Jr.
at the International Monetary and Financial Committee Meeting

Washington, DC –Today's meeting takes place against the backdrop of considerable challenges to the global economy.  In recent years, global economic conditions have been quite favorable, with growth averaging nearly 5% per year.  2008 will be a more difficult year, with headwinds coming from adjustments in the U.S. economy, financial market stress, higher commodity prices, and higher than desirable inflation.  Downside risks will vary, and many European and emerging market economies have stood up relatively well so far to the recent financial turmoil, but no economy is entirely immune from global forces.  In this context, it is critical for policy makers to put in place sound policy frameworks that support growth and enhance economic resilience.

Following several years of what, in retrospect, was unsustainable home price appreciation, the U.S. economy is undergoing a significant housing correction.  The weak housing market, together with high energy prices and stress in financial markets is penalizing U.S. economic growth.  While I am confident in the long-term economic prospects of the United States, clearly for the moment, the risks facing the U.S. economy are to the downside. We are responding vigorously.   First, we have adjusted macroeconomic policy to support the broad U.S. economy while the corrections take place in the housing and credit markets.  The President and Congress responded with a bipartisan fiscal stimulus package that will inject more than $150 billion into our economy in the near term and boost GDP growth this year. Second, the Administration has supported a number of initiatives – both private-sector led and public-sector initiatives – in response to the housing correction, designed to prevent avoidable foreclosures and maintain viable credit markets while allowing the needed adjustment to proceed.

Since last August, financial markets have been  reassessing risk, re-pricing assets and de-leveraging.  It took time to build up recent excesses and it will take time to work through the consequences.  We must expect more bumps in the road.  Global financial institutions are making progress, with some announcing write-downs and acting to raise capital.  Additional disclosures of risks and material conditions and sound capitalization continue to be important, as does the ability of financial market participants to provide liquidity and of banks to extend credit.  I have confidence in our capital markets and in their resilience, flexibility, and strength.

In the United States, the President's Working Group on Financial Markets (PWG) released recommendations in mid-March to improve market transparency and disclosure, risk awareness and risk management, capital and regulatory policies, practices regarding and use of credit ratings, and market infrastructure for over-the-counter derivatives products.  We are working closely through the G-7 and the Financial Stability Forum (FSF) to address global challenges and take concrete actions.  We support the recommendations of the FSF, which are broadly consistent and complementary to PWG recommendations.  The FSF has focused its efforts on risk management; transparency, accounting, and valuation of structured products; credit rating agencies, prudential oversight and arrangements for dealing with stress in the financial system.  While no silver bullet exists to prevent the excesses of the past from re-occurring, working together we can strengthen market discipline, enhance risk management and improve the efficiency and stability of our capital markets.

The IMF, as a member body of the FSF, has an important role to play in providing analytic support and conducting financial surveillance of its member countries.  We support complementary roles, with the IMF reporting findings from its monitoring of financial stability risks to FSF meetings, and in turn incorporating FSF conclusions into its surveillance work.

Openness to trade and investment helps underpin global growth and has been a source of strength for the U.S. economy.  We remain committed to opposing protectionist sentiment wherever it may be found and to advancing greater openness globally.  The Doha Development Round is at a critical juncture if negotiations are to be completed by the end of the year.  The United States is willing to step forward with the necessary leadership – however, a significant contribution by the advanced developing countries is critical to Doha's success. Doha's development promise can only be met through agreement to significantly open markets, including financial services markets.

IMF Reform

In today's rapidly evolving global economy, the IMF must reform to retain its relevance and legitimacy.  Strong international cooperation – and an effective IMF at the center of such cooperation-- remains as important as ever to global growth and financial stability.  But to meet today's challenges, the Fund must sprint quickly and far to adapt to rapid technological change, the rise of dynamic emerging market economies, and the increasing internationalization of financial markets.  In this context, the IMF needs to sharpen its focus on: 1) exchange rate surveillance; 2) openness to international investment, particularly meeting policy challenges posed by sovereign wealth funds; and 3) supporting global financial market stability.  The Fund must also maintain its capacity to provide balance of payments support to countries in crisis, and to promote macroeconomic stability in low-income countries, while avoiding straying into the World Bank's development mandate.

Fundamental to the IMF's relevance is the vigor with which it carries out its core mission of surveillance over members' exchange rate policies.  The Fund's surveillance work on fiscal, monetary policy and financial sector issues is strong.  The new exchange rate surveillance decision provides an improved framework, but more important is how IMF staff carries out its day-to-day work in this area.  We believe surveillance discussions have become more focused on key exchange rate issues, but staff must follow through consistently with strong analytics and clear views and judgments on exchange rate policies, particularly where currencies are not set by market forces in deep, liquid markets.  The IMF's implementation of the new surveillance decision is still a work in progress.  Strengthened implementation of this core mandate is integral to IMF legitimacy; insufficient progress would put success of the broader modernization effort at risk.

Last October, the IMFC recognized the systemic importance of rapidly growing sovereign wealth funds.  The IMF has responded to the international community's call for analytic work on sovereign wealth fund best practices by setting forth a broad framework and process to guide work going forward.  We welcome these steps, and look forward to a timely and credible set of sovereign wealth fund best practices ahead of the Annual Meetings this fall.  It will be important for the Fund to work closely with both sovereign wealth fund countries and recipient countries to ensure a comprehensive, high-quality product.

Reform of the IMF's governance structure is overdue.  I welcome the opportunity to join emerging market countries and the broader IMF membership in supporting a quota reform package. While we would have preferred a more ambitious reform package, this reform is a first step forward in the right direction, which boosts the weight of dynamic emerging markets and will result in a governance structure that better reflects the realities of the global economy. It improves on the status quo. We are particularly pleased that GDP will have a stronger weight in the quota formula, which will position dynamic emerging markets to see their voice in the IMF rise in the years to come.  The voice of the poorest countries will also be protected.  Achieving consensus on an issue of this kind was not easy, as political realities posed significant constraints and headwinds.  But this package has gained the broad support of emerging market and developing countries, and represents a consensual first step forward.  With this package, the Fund cannot rest on its laurels, however.  Its governance structure will need to continue evolving in the years ahead, and in particular the Fund must refine the new quota formula to better reflect the realities of trade among countries.

As part of governance reform, we call on other IMF members to join us in supporting a smaller, more strategically focused Board. The Board is simply too costly and a smaller and more streamlined Board could focus more strategically on the management of the institution and less on the voluminous crush of papers.  In this regard, we favor reducing the number of Board chairs from 24 seats presently to 22 seats by 2010 and 20 seats by 2012.  To facilitate consolidation of seats, we also favor eliminating the current practice of permitting the five largest shareholders to appoint their own directors, and instead believe all Board chairs should be elected.

We welcome progress toward putting IMF finances on a sustainable footing.  We support Managing Director Strauss-Kahn's proposal for staff cuts on the order of 10% and a $100 million reduction in the medium-term administrative budget, in real terms, to meet a medium-term budget gap estimated at $400 million.  For our part, we recognize that new sources of income are also necessary and we are committed to seeking Congressional authorization for a limited sale of IMF gold to finance an endowment.  Looking forward, on-going budget discipline will be critical to ensure that savings are not eroded.

Other Key Issues

We must continue to apply vigorous efforts to combat money laundering, terrorist financing and other forms of illicit finance, in order to protect the international financial system from abuse and to support global financial stability and economic development.  To this end, we have revised the mandate of the Financial Action Task Force (FATF) to include in its important work combating the financing of WMD proliferation, in addition to other forms of illicit financing.  We commend the ongoing close cooperation between the FATF, the IMF and the World Bank. We emphasize the importance of preserving the IMF's capacity to provide assistance in implementing international standards to countries that are systemically important to the global financial system.

We urge all nations to vigorously implement the financial provisions of UNSCR 1803, particularly with respect to the financial institutions identified in the resolution.  We further underscore the recent statements by the FATF highlighting the money laundering and terror financing risks to the international financial system emanating from Iran.  Accordingly, we urge all nations to advise their financial institutions of these risks of dealing with Iranian commercial banks, and the Central Bank of Iran, and we recommend increased vigilance towards all Iranian commercial and financial relationships.

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Statement by Secretary Paulson
Following Meeting of G7 Finance Ministers And Central Bank Governors

Washington, DC-- Today G-7 Finance Ministers and Central Bank Governors met in Washington at a time of slowing global growth and increased downside risks to the global economy. As you might expect, most of our discussion focused on the ongoing challenges in the global economy and the international financial system, and the policy responses to these challenges.

I am confident in the long-term economic prospects of the United States. However, the housing correction, together with high energy prices and financial market turmoil, are weighing on U.S. economic growth. Given the significant short-term downside risks, we are taking action. The economic stimulus package passed in February will provide over $150 billion of individual and business tax relief in 2008, leading to the creation of over half a million additional jobs by the end of the year. The Administration has taken a number of steps specifically designed to minimize the spillover from the housing sector to the real economy, such as convening the HOPE NOW alliance and implementing the FHASecure program. The Administration continues to push for legislative action on FHA modernization and reform of Government-Sponsored Enterprises as well.

I have the greatest confidence in the resiliency, flexibility and strength of our economy and our capital markets. We have been undergoing a period of financial market stress since last August. Markets are pricing and reassessing risk and there are always difficulties during periods such as this. There may be more bumps in the road. As we work through this period, our highest priority is limiting its impact on the real economy. We are focused on maintaining stable, orderly and liquid financial markets and ensuring that our banks continue to support the economy by raising capital when necessary and making credit available to consumers and businesses.

The financial market turmoil and its impact on global growth underscore the need for all countries to remain open to trade and investment. I reiterated the United States' commitment to open investment policies and to combating rising protectionism. Protectionist pressures threaten to deprive countries of the significant benefits generated by foreign investment. I support the work of the IMF to develop best practices for sovereign wealth funds (SWFs) and look forward to a final set of best practices by the IMF Annual Meetings in October. I encourage the OECD to continue its work, and to identify this year, best practices for the inward investment regimes of countries that receive government-controlled investment, including from SWFs. We agreed that a successful completion of Doha is also critical to this effort.

Many actions across the globe are being taken to address the financial market turmoil. International cooperation and coordination has been excellent. We have worked, and will continue to work, closely to address global challenges and take concrete actions. Here in the United States, the Administration is taking steps to enhance the functioning and stability of the U.S. financial system going forward. I briefed my colleagues on the work of the President's Working Group on Financial Markets (PWG) and Treasury's analysis on an optimal financial regulatory structure for the United States, which benefited from comments that we sought from around the globe. The PWG issued a policy statement in mid-March, with recommendations to improve market transparency and disclosure, risk awareness and risk management, capital and regulatory policies, practices regarding and use of credit ratings, and market infrastructure for over-the-counter derivatives products. Implementation of these recommendations can strengthen market discipline, enhance risk management, and improve the efficiency and stability of our capital markets. Later this year the PWG will report on progress towards implementation of its recommendations. The PWG is working closely with foreign regulators, finance ministries, and central banks through the Financial Stability Forum (FSF) on financial market issues. Working together, we can strengthen market discipline, enhance risk management and improve the efficiency and stability of our capital markets.

I welcomed the update from Mario Draghi, Chairman of the Financial Stability Forum, on the Forum's report identifying the underlying causes and weaknesses in the international financial system that have contributed to the financial market turmoil, and formulating detailed policy recommendations to enhance market and institutional resilience. The FSF report presents recommendations in several key areas: risk management; transparency, accounting, and valuation of structured products; credit rating agencies; dealing with stress in the financial system; and strengthening cooperation among supervisors and authorities. We discussed the importance of rapid and effective implementation of the FSF findings, and I support efforts encouraging the FSF member organizations, including the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, the International Accounting Standards Board, and the Joint Forum of banking, securities, and insurance supervisors, to accelerate their timetables to conclude their efforts by the end of the year. The broadly consistent recommendations of the FSF and those of the PWG complement each other and strengthen the effectiveness of our response. The G-7 will review an update on the implementation of the FSF policy recommendations at its October Ministerial.

Following our extensive discussion on the global economy and international financial markets, we discussed several key issues of IMF reform. I stressed that the IMF must vigorously reform itself in order to remain legitimate and relevant in today's global economy. I underscored the need for firm implementation of the IMF's new framework for exchange rate surveillance. The Fund has worked to strengthen its focus on exchange rate analytics, but there is clearly a great deal more progress to be made on implementation of the new framework. The Fund has an important role to play in surveillance and its success moving forward as an institution will depend critically on its ability to demonstrate this.

The United States supports the recent agreement on IMF quota and voice reform. It is a modest, but important, step forward in realigning the distribution of IMF quota shares to be more reflective of the current global economy. The deal is not as ambitious as we would have liked, but we were impressed that many dynamic emerging markets consider it an improvement on the status quo and a first step in recognizing their growing role in the international monetary system. I welcomed the progress that has been made toward putting IMF finances on a more sustainable footing, which includes a significant downsizing of IMF staff. I am pleased that both expenditures and revenues are being addressed, and I commend Dominique Strauss-Kahn, the Managing Director, for putting a concrete plan on the table to deal with the IMF's administrative expenses. As part of this reform, I explained to my colleagues that the U.S. will seek Congressional authorization for a limited gold sale for an IMF endowment.

Finally, we reaffirmed our commitment to vigorously counter money laundering, terrorist and proliferation financing in order to safeguard the integrity of the global financial system. We remain particularly concerned about the ongoing risks of illicit finance emanating from Iran and urge all countries to urgently and fully implement the financial provisions of UN Security Council resolutions 1737, 1747, and 1803. We strongly support the public actions of the Financial Action Task Force (FATF) to protect the international financial system from these risks, as well as the risks arising from substantial jurisdictional deficiencies in Iran's anti-money laundering and counter-terrorist financing regime. We agreed that FATF should continue its important work in identifying and responding to emerging illicit financing threats to the international financial system. We also agreed that FATF should continue to apply its expertise in providing guidance to assist states in implementing their financial obligations under U.N. Security Council resolutions to combat WMD proliferation. We strongly support the continued cooperation of the IMF and World Bank with the FATF to combat money laundering and terrorist financing worldwide.

Statement of G-7 Finance Ministers and Central Bank Governors

Washington, DC – We met today amid ongoing challenges to the world economy and international financial system.

The global economy continues to face a difficult period. We remain positive about the long-term resilience of our economies, but near-term global economic prospects have weakened. While economic conditions differ in our countries, downside risks to the outlook persist in view of the ongoing weakness in U.S. residential housing markets, stressed global financial market conditions, the international impact of high oil and commodity prices, and consequent inflation pressures. The performance of emerging markets has been a bright spot, but these countries as well are not immune from global forces.

The turmoil in global financial markets remains challenging and more protracted than we had anticipated. In the context of a weaker economic outlook, financial markets confront the interrelated issues of: re-pricing of risk and significant de-leveraging; managing counterparty risks; accommodating balance sheet adjustments; raising capital; improving the liquidity and functioning of key markets. We welcome efforts by many financial institutions to improve disclosure of exposures to structured products and related risks, and raise significant new capital.

We reaffirmed our strong commitment to continue working closely together to restore sustained growth, maintain price stability, and ensure the smooth and orderly functioning of our financial systems. We welcome the coordination by major central banks to address liquidity pressures in funding markets and recognize the importance of their coordinated actions to address disruptions in global financial markets. In particular, the recent steps taken by some central banks to expand access to central bank lending facilities and expand the range of collateral that they will accept is providing liquidity to financial institutions and helping to support improved market functioning. In addition, we welcome other measures that have been taken including monetary and fiscal policy that aim to give support to underlying economic activity and ensure price stability. Each of us remains committed to taking action, individually and collectively as appropriate, consistent with our respective domestic circumstances.

We reaffirm our shared interest in a strong and stable international financial system. Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate. We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate.

Last fall we tasked the Financial Stability Forum (FSF) for a report identifying the underlying causes and weaknesses in the international financial system that contributed to the financial market turmoil. We thank Mario Draghi, the chairman of the Financial Stability Forum, and FSF members, for the report that sets out detailed recommendations to enhance market and institutional resilience. We, the G-7, strongly endorse the report and commit to implementing its recommendations. Rapid implementation of the FSF report will not only enhance the resilience of the global financial system for the longer term but should help to support confidence and improve the functioning of the markets.

The FSF report presents a specific and substantive set of recommendations across five major areas. We have identified the following recommendations among the immediate priorities for implementation within the next 100 days:

• Firms should fully and promptly disclose their risk exposures, write–downs, and fair value estimates for complex and illiquid instruments. We strongly encourage financial institutions to make robust risk disclosures in their upcoming mid-year reporting consistent with leading disclosure practices as set out in the FSF's report.
• The International Accounting Standards Board (IASB) and other relevant standard setters should initiate urgent action to improve the accounting and disclosure standards for off-balance sheet entities and enhance its guidance on fair value accounting, particularly on valuing financial instruments in periods of stress.
• Firms should strengthen their risk management practices, supported by supervisors' oversight, including rigorous stress testing. Firms also should strengthen their capital positions as needed.
• By July 2008, the Basel Committee should issue revised liquidity risk management guidelines and IOSCO should revise its code of conduct fundamentals for credit rating agencies.

We endorse the following FSF proposals for implementation by end-2008:

• Strengthening prudential oversight of capital, liquidity, and risk management: The Basel II capital framework needs timely implementation. The Basel Committee should raise capital requirements for complex structured credit instruments and off-balance sheet vehicles, require additional stress testing, and enhance their monitoring.
• Enhancing transparency and valuation: The Basel Committee should issue further guidance to enhance the supervisory assessment of banks' valuation processes to strengthen disclosures for off-balance sheet entities, securitization exposures, and liquidity commitments.
• Changing the role and uses of credit ratings: Investors need to improve their due diligence in the use of ratings. Credit rating agencies should take effective action (consistent with IOSCO's revised code of conduct) to address the potential for conflicts of interest in their activities, clearly differentiate the ratings for structured products, improve their disclosure of rating methodologies, and assess the quality of information provided by originators, arrangers, and issuers of structured products.
• Strengthening the authorities' responsiveness to risk: Supervisors and central banks should further strengthen cooperation and exchange of information, including the assessment of financial stability risks. It is important that an "international college of supervisors" be established for each of the largest global financial institutions. Market authorities also should act cooperatively and swiftly to investigate and penalize fraud, market abuse, and manipulation.
• Implementing robust arrangements for dealing with stress in the financial system: Central banks should be able to supply liquidity effectively during financial system stress, and authorities should review and where necessary strengthen their arrangements for dealing with weak and failing banks, domestically and cross-border.

We ask the FSF and its working group to monitor actively the implementation of the report's recommendations. It is important that member bodies of the FSF, including the Basel Committee, IOSCO, the IASB, and the Joint Forum, accelerate their timetables of work to conclude their efforts by end-2008 and that the recommendations of the FSF be fully and effectively implemented. We look forward to an update at the Osaka meeting in June and a comprehensive follow-up report by the FSF at our meeting in the fall. We welcome the strengthened cooperation between the FSF and IMF, which should enhance the early warning capabilities of key risks to financial stability.

We also welcome efforts by private-sector participants to develop proposals to contribute to a better functioning of the financial system.

The current financial market turmoil also has raised broad policy issues about the appropriate regulatory frameworks of our financial sectors. We have reaffirmed the importance of reviewing regulatory frameworks to consider whether changes are necessary to ensure that our financial systems are as efficient and stable as possible in the future.

We reaffirm the important role for the IMF in securing global financial stability. In this light we endorse the significant progress on IMF reform:

• We welcome the agreement on quota and voice reform in the IMF as an important step to recognize the greater global weight of dynamic economies, many of which are emerging markets, and increasing the voice of low income countries.
• We reiterate the importance we place on the IMF's new framework for surveillance, including for exchange rates, and urge its firm and even-handed implementation.
• We welcome progress toward putting the IMF's finances on a more sustainable footing, including a $100 million annual reduction in administrative expenses. Ongoing budget discipline will be required. We support new sources of income, including an endowment financed by a limited sale of IMF gold.

Taken together, these important reforms will boost the IMF's legitimacy, effectiveness, and credibility.

Upholding open trade and investment regimes is critical to realizing global prosperity and fighting protectionism. We highlight the urgent need for a successful conclusion to the Doha Development Round. We also commend the OECD work on open investment and the IMF's commitment to deliver a set of best practices for Sovereign Wealth Funds by the IMF Annual Meetings in October. The policy principles put forward by Abu Dhabi, Singapore, and the United States should be helpful inputs into these processes.

Opening Statement by Secretary Henry M. Paulson, Jr.
before the House Committee on Appropriations
Subcommittee on State, Foreign Operations and Related Programs
on the FY 2009 International Programs Budget

Washington − Chairwoman Lowey, Congressman Wolf, Members of the Committee: Thank you for the opportunity to discuss the President's FY 2009 Budget request for the Department of the Treasury's International Programs. This Budget request of approximately $2.241 billion reflects the Bush Administration's commitment to promote economic growth and reduce poverty in the developing world. The Budget request provides support for the on-going efforts of the multilateral development banks (MDBs), debt restructuring programs and technical assistance. In providing these resources, the United States invests in economic, social and political stability around the world. Our support for these programs helps countries establish the policies and programs necessary to create the conditions for long-term private sector-led growth.

The FY 2009 Budget request also includes funding for a new, multilateral clean technology fund that will help major developing countries move towards a low carbon growth path. I will talk about this new initiative first.

International Clean Technology Fund

In September 2007, President Bush proposed the creation of the international clean technology fund (CTF) to help developing countries adopt clean energy technologies. As these countries build infrastructure that will exist for 30 years or more, we need to assist them to take advantage of cleaner, more advanced technologies. Otherwise, developing countries may be locked into a legacy of highly-polluting, less efficient – though less expensive – technologies. The proposed CTF would help cover the cost difference between older, dirtier technologies and cleaner, more advanced technologies. It would be created as a multilateral trust fund administered by the World Bank, and implemented through the MDBs. This fund represents a truly international approach to reduce rapid greenhouse gas emission growth in major developing countries.

The FY 2009 budget request includes $400 million for the first installment of a total U.S. pledge of $2 billion over three years. With additional funding from other countries, we will help finance clean energy projects in the developing world, which will benefit people around the world.

Multilateral Development Banks

In addition to this new initiative, the President's FY 2009 Budget requests a total of $2.071 billion for MDB funding, including $42 million to pay a portion of outstanding U.S. arrears to the International Development Association. The Budget request also includes U.S. contributions to replenish the International Development Association and the African Development Fund. This replenishment pledge will cover the U.S. contribution to the Multilateral Debt Relief Initiative from FY 2009 to 2011.

Through U.S. leadership, the MDBs are reforming their business practices. We have seen important progress in how the banks measure results. They are better at encouraging private sector development and business climate reforms. The MDBs are also showing improvements in transparency, anti-corruption systems and strengthening performance-based allocation systems to ensure that countries with stronger policies receive higher funding priority.

This progress is reflected in the new replenishment agreements that require policies which should deliver results for the world's poorest people and improve the Banks' effectiveness as it works with fragile states such as Afghanistan and Liberia. These measures will also expand the MDB work on anti-corruption policies, regional economic integration, and climate change initiatives.

In response to U.S. urging, the MDBs have made substantial progress to improve the debt sustainability of many developing countries. This includes the 2005 Multilateral Debt Relief Initiative (MDRI) and last year's agreement by the Inter-American Development Bank to provide 100 percent debt relief to the bank's five poorest borrowing countries. To ensure the gains from debt relief are not lost, all MDBs now use the World Bank/IMF debt sustainability framework to determine the appropriate mix of grants and concessional loans.

While efforts to make the MDBs more effective must continue, the banks are more accountable, transparent and results-oriented today than when President Bush took office in 2001.

Debt Restructuring Programs

This request also includes $141 million for debt restructuring programs. These funds will meet U.S. commitments for bilateral debt reduction for Heavily Indebted Poor Countries (HIPCs) and U.S. pledges for contributions to the HIPC Trust Fund. This request also includes $20 million for the Tropical Forest Conservation Act. The HIPC initiative is lifting crippling debt burdens off many of the world's poorest countries, freeing resources for poverty reduction, when those countries have demonstrated both sound economic policy and a commitment to fighting poverty.

Technical Assistance

The third component of this request includes $29 million for Treasury's Technical Assistance program. This is a small program that never makes the headlines. But from my travels around the world I know that it is both cost effective and valuable. Treasury's financial experts help countries strengthen their capacity to manage public finances, lay the financial groundwork for private sector led growth, and combat money laundering and terrorist financing. Building that capacity is also a vital complement to investments in other areas – debt relief, for example – and to the effectiveness of development assistance generally. If developing countries' fiscal houses are not well managed, our investments in schools, hospitals, roads and other critical infrastructure will not be sustained, or will have to be sustained by us indefinitely.

Conclusion

Overall, we believe that full funding of these international programs will allow Treasury to work with and support developing countries throughout the world as they strive to lift their people out of poverty and provide greater opportunities for prosperity and security.

Thank you for your past support and for your current consideration of these programs. I look forward to working with you during your deliberations and welcome your questions.

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Prepared Statement by Treasury Under Secretary David H. McCormick
in Advance of G-7 Finance Ministers and Central Bank Governors Meeting

Washington − Good afternoon. The G-7 Finance Ministers and Central Bank Governors will hold their next meeting here at the Treasury Department on April 11, against the backdrop of the IMF and World Bank Spring meetings. A good part of the G-7 meeting will be devoted to current economic conditions, financial market developments, and the policy response to recent financial market turmoil. They will also discuss progress on the reform of the International Monetary Fund among other topics.

Our G-7 colleagues will be keenly interested in hearing first hand about the U.S. economic outlook, and Secretary Paulson will tell them that the housing correction, financial market turmoil, and high energy prices are weighing on U.S. economic growth. There are significant downside risks to the outlook, and we are taking action to support the economy as we work through these challenges. The economic stimulus package passed in February will provide over $150 billion of individual and business tax relief in 2008, leading to the creation of over half a million additional jobs by the end of the year. In addition, the Administration has taken a number of steps specifically designed to ease the strain from the housing downturn, such as convening the HOPE NOW alliance and implementing the FHASecure program.

I share Secretary Paulson's confidence in the resiliency, flexibility and strength of our economy and our capital markets. Since last August, markets have been re-pricing and reassessing risk and there will be more bumps in the road. As we work through this period, our highest priority is limiting its impact on the real economy. We are focused on maintaining efficient and liquid financial markets and ensuring that our banks are able to continue supporting the economy by making credit available to consumers and businesses.

In addition to measures to bolster the economy in the near term, the Administration is taking steps to enhance the functioning and stability of the U.S. financial system going forward. The President's Working Group on Financial Markets (PWG) reviewed policy issues and issued its policy statement on March 13. The PWG recommendations include steps to improve market transparency and disclosure, risk awareness and risk management, capital and regulatory policies, practices regarding the use of credit ratings, and market infrastructure for over-the-counter derivatives products. Implementation of these recommendations can strengthen market discipline, enhance risk management, and improve the efficiency and stability of our capital markets. We expect that the PWG will report on progress towards implementation in the fourth quarter of 2008 and consider whether further steps are needed to address weaknesses in financial markets, institutions and related supervisory policies. The PWG is working with foreign regulators, finance ministries, and central banks through the international Financial Stability Forum (FSF) to address these challenges globally.

At our upcoming meeting, Mario Draghi, head of the Financial Stability Forum, will brief the ministers and governors on the FSF's work on assessing underlying weaknesses and formulating policy recommendations. As the G-7 requested, the FSF has focused its efforts on risk management; transparency, accounting, and valuation of structured products; credit rating agencies; and cooperation among supervisors and authorities. We look forward to discussing the rapid and effective implementation of the FSF findings with our colleagues. We will urge that FSF member organizations, including the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, the International Accounting Standards Board, and the Joint Forum of banking, securities, and insurance supervisors, accelerate their timetables to conclude their efforts by end-2008. We look forward to a report by the FSF on progress implementing the policy recommendations at the G-7 Ministerial meeting in October. These efforts are a critical example of cooperation among the G-7.

You will be aware that the Secretary recently announced a blueprint for modernizing financial regulation. Some may view these recommendations as a response to the circumstances of the day; yet this report is the culmination of a year's worth of work at the Department. Our first and most urgent priority is working through this capital market turmoil and housing downturn, and that will be our priority until this situation is resolved. With few exceptions, the recommendations in this Blueprint should not and will not be implemented until after the present market difficulties are past.

The United States is the world leader in financial services. We recognize that a competitive market requires regulation, investor protection and market stability. But our financial regulatory structure has not kept pace with innovations in the markets. The blueprint takes an expansive look at financial regulation in the United States, making recommendations for short, intermediate and long term improvements to our system.

Turning to the global outlook, as you know, the global economy was exceptionally strong the last four years, averaging nearly 5 percent growth annually. It was perhaps inevitable that some slowdown would occur but the financial headwinds and other adjustments underway pose significant challenges to the outlook for 2008. The extent to which particular economies will be affected varies; some commodity producers and emerging market economies are likely to continue to enjoy robust economic growth. Others face downside risks and will need to be more attentive to measures that can support growth. In particular, downside risks persist in view of the ongoing weakness of U.S. residential housing markets, stressed global financial market conditions, continued high oil and commodity prices, and consequent inflation pressures. That said we remain positive about the long-term resilience of the global economy, as well as the long-term resilience of the U.S. economy, and we believe that the IMF's latest WEO projections are unduly pessimistic.

While the bulk of the meeting will undoubtedly center on the global economic situation and financial turmoil, the G-7 will also discuss a range of issues pertaining to the IMF. The U.S. will underscore that the IMF must vigorously reform itself to remain legitimate and relevant and resemble today's world economy. We will emphasize the need for firm implementation of the IMF's new framework for exchange rate surveillance. To date, the Fund has strengthened its focus on exchange rate analytics, but implementation of the new framework is a work in progress and there is clearly far more progress to be made.

The U.S. will also back the recent agreement on IMF quota and voice reform, which – though not as ambitious as we would have liked – represents an improvement on the status quo and a first step in recognizing the growing role of dynamic emerging market economies in the global system. The Secretary will also underscore his support for the approved work plan to deliver a final set of best practices for sovereign wealth funds by the IMF Annual Meetings in October. We will discuss the progress made toward putting the IMF's finances on a more sustainable footing by tackling both expenditures and revenues. In this regard, we commend the Managing Director for putting a concrete plan on the table to tackle the IMF's administrative expenses and the Secretary will reaffirm our intention to support limited gold sales to create a stable revenue base.

After the G-7 meeting, Secretary Paulson will host a dinner that will bring together the G-7 Finance Ministers and Central Bank Governors and leaders from several leading financial services companies to have a further discussion on the causes and consequences of the recent financial market turmoil, and how leaders in the private and public sectors are responding to this challenge.

Secretary Paulson will also be meeting bilaterally with a number of his counterparts from within and outside the G-7. He will be attending a breakfast meeting of the International Monetary and Financial Committee of the IMF, a Ministerial meeting of the Financial Action Task Force, and a meeting of the World Bank's Development Committee. Secretary Paulson will also host a roundtable meeting with the Finance Ministers from a number of sub-Saharan African countries with demonstrated commitment to economic reform. Following up on his trip to Africa last November, Secretary Paulson will discuss with the Ministers options for addressing critical challenges to sustainable, private-sector led growth including financing basic infrastructure and improving the investment climate.

Thank you for coming this morning, and I look forward to answering your questions.

Paulson Statement on Colombian Free Trade Agreement

"I urge the U.S. Congress to show support for the Colombian people and provide greater hope for their future by passing the Colombian free trade agreement without further delay. Congressional approval of the Colombian free trade agreement will reinforce democracy in Latin America by showing support for a key ally who has made significant advancements to combat violence and instability. Leveling the playing field for American farmers, ranchers, and the more than 9,000 U.S. companies exporting to Colombia will also help strengthen our nation's economy."