Center Calls On Sen. Metzenbaum To Investigate New Securities Threat: Soviet ‘Junk Bonds’

The Center for Security Policy today commended Senator Howard Metzembaum’s efforts to examine the impact of "junk bonds" — the securities instruments used to finance leveraged buy-outs — on the soundness of the portfolios of the Nation’s pension and life-insurance funds. The Center urges the Senator and his colleagues promptly give similar attention to a form of junk bonds that will give new meaning to the term, namely those the Soviet Union hopes to begin offering in the near future in the U.S. market.

"One of the principal components of Moscow’s financial agenda toward the West is to develop an expansive presence in the international securities markets," said Roger W. Robinson, Jr., a member of the Center’s Board. "Achieving this goal would broaden the sources of Soviet borrowing in the West from exclusively Western governments and banks to include securities firms, pension funds, insurance companies, corporations, and even individuals."

Robinson added, "Over time, hundreds and perhaps thousands, of Western non-banking institutions and millions of Western citizens could come either knowingly or unknowingly to hold Soviet paper in their bond portfolios and pension funds."

The Soviet Union is presently barred entry into the U.S. market under the provisions of the Johnson Debt Default Act which precludes countries in default with the United States from issuing bonds here. The State Department, however, is currently actively negotiating with the Soviet Union to settle defaulted czarist and other debt obligations (eg., Lend-Lease) to the United States reported to have a nominal value in excess of $1.5 billion. Settlement of American claims for a fraction of this amount is proceeding on a parallel track with the U.S.-USSR Trade Agreement; both are expected to be signed at the June Bush-Gorbachev summit.

Issues associated with the prospective new Soviet junk bonds with which Congress should be concerned include:

• Moscow is very keenly interested in the potential such bonds sales have for recruiting powerful new constituencies throughout Western societies. After all, through this device large numbers of Americans would acquire a financial vested interest in supporting continued economic — and, inevitably, political — concessions to the USSR.

 

• Such an interest could easily be translated into pressure for further expansion of Western government loans, guarantees, and energy-related assistance to Moscow lest the Soviet Union have its access to private credit markets curtailed by the course of deepening economic and political crises.

   

• Bond sales represent a form of Soviet borrowing that is, by definition, untied to any specific trade transactions or projects. Consequently, proceeds from such loans can be used by Moscow to finance any purposes it deems appropriate, including activities inimical to Western security interests. Importantly, undisciplined, general purpose Western lending to the USSR is already costing U.S. taxpayers billions of dollars annually in additional defense spending, expenditures needed to offset the harmful consequences of Soviet global operations made possible by the West’s largesse.

 

• The extension of credits by non-banking institutions to the Soviet Union are not recorded in any Western statistics as adding to the total indebtedness of the USSR and thus constitute hidden Soviet borrowing.

 

• Soviet entry into the securities markets represents a particularly serious security breach insofar as this penetration of Western societies is one for which no ready means is available to determine and monitor the institutions and individuals holding Soviet paper and what amounts are involved.

At this writing, the Soviets have successfully concluded seven or eight bond offerings in the West since first entering the European securities market three years ago. These offerings are valued at between $1.3-1.6 billion and include 4-5 West German-led deals, 1 Dutch, 1 Austrian and 1 Italian.