Rep. Henry B. Gonzalez is urging the Bush administration not to sell U.S. government securities at a discount to facilitate debt reduction deals with Argentina and Brazil.

In a recent letter of Secretary of the Treasury Nicholas Brady, Rep. Gonzalez, chairman of the House Banking Committee, noted that the Treasury two years ago sold zero-coupon bonds to Mexico at a deep discount that was not subject to bidding by other investors.

The bonds were used to guarantee principal payments on Mexican government securities that were exchanged for outstanding medium and long-term foreign bank loans to Mexico.

Called a |Subsidy'

The General Accounting Office has estimated that the discount on the U.S. zero-coupon Treasury bonds amounted to $192 million and constituted a "subsidy to Mexico," Rep. Gonzalez noted in his letter.

"Now Argentina and Brazil are in the game and the temptation will be to provide another backdoor subsidy through discounts on U.S. securities sold to these two nations," the Texas Democrat said in a statement last week.

"While the direct subsidy goes to the country, clearly these schemes are indirect subsidies to the U.S. banks which hold billions of dollars of loans to Argentina and Brazil just as they did with Mexico."

Rep. Gonzalez estimated that large U.S. commercial banks, including Citicorp, Chemical Banking Corp., Chase Manhattan Corp., BankAmerica, and nine other banks are owed a combined $23 billion by the two countries.

Argentina is due to sign a debt reduction deal with banks later this year on some $23 billion in medium and long-term borrowings and Brazil is seeking a similar deal for some $41 billion in borrowings.

Zero coupons bonds pay no interest until they mature and are purchased a discounts to their value at maturity.

Zero Coupons as Collateral

Brazil needs around $3.2 billion in collateral to guarantee a deal, of which a large portion would be used to purchase in zero coupons.

Argentina has around $4 billion to collateralize its deal.

Slightly less than half the $4 billion will be used to purchase zero coupons to guarantee principal payments on its bonds and the remainder will be placed in other securities to guarantee interest payments.

It is still unclear whether Argentina will purchase the zero coupons it needs on the open market or buy up a special U.S. Treasury issue.

Mr. Gonzalez urged that these securities be sold on the open market and not be sold in a private placement.

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