Regan on prime rate and Reagan's campaign
The recent jump in the prime interest rate to 13 percent threatens to complicate negotiations over Latin American nations' debts but probably will not hurt President Reagan's reelection bid, Treasury Secretary Donald T. Regan says.
''The timing is very regrettable, particularly from an international point of view,'' and ''might have a tendency to solidify positions in Latin America regarding their debt,'' he said Wednesday. Monday's hike in the prime rate will add an estimated $1.25 billion a year to developing nations' debt-service costs, according to the World Bank.
The increase in the prime came the first business day after a meeting of Latin American debtor nations in Cartagena, Colombia. The conference focused on finding ways to ease the debt crisis. Among other things, participants called for an immediate sharp reduction in lending rates, longer repayment periods, and a dialogue with banks, multilateral lending agencies, and the governments of industrialized nations on resolving the debt crisis.
A further rise in interest rates could ''be very harmful'' to the United States economy, but the effects probably would not be felt in time to damage Mr. Reagan's reelection chances, Regan told reporters at breakfast.
''I don't think, unless (rates) were to rise too precipitously, it could choke off the economy immediately. This economy is too strong for that. It could slow it down abruptly later,'' he said.
Mr. Regan, known among private economists for his optimistic economic forecasts, predicts that interest rates should begin to decline slowly as the election approaches and as an expected slowdown takes place in economic growth.
''I think we must be on high ground right now and (interest rates) would recede from here,'' he said.
By election day, he says, he expects economic growth, adjusted for inflation, will have slowed to a 4.5 percent annual rate and inflation will have climbed a bit to a 4 percent annual rate, using a measure linked to the gross national product. The GNP is the total value of goods and services produced in the economy.
Regan dismissed forecasts from private economists who predict the prime rate will climb to between 13.5 and 14 percent by December and perhaps as high as 16. 5 percent in the first half of 1985. These forecasts assume growing competition between private credit demand and government borrowing to cover the federal budget deficit. Regan noted that the deficit, as a percentage of the GNP, will decline somewhat as a result of the economy's recent rapid growth.
Provisions in the 1984 tax bill, which Congress is expected to send to the President shortly, will ease pressure on US credit markets and could help fuel an upswing in the stock market, the secretary argued. The bill repeals a 30 percent withholding tax on interest paid to foreign investors on new bonds issued by private corporations or the US Treasury. That makes the bonds more salable overseas.
''To some extent it should relieve pressure on the demand side on the US bond and money markets,'' Regan said. Theoretically, at least, that would allow interest rates to fall.
The tax bill also cuts from one year to six months the time an investor must hold a security to get preferential capital-gains treatment. The measure may boost the volume of transactions on various stock exchanges, Regan said. And ''since this is buying and holding for capital gain, one would have to think it would be accompanied by a rising market,'' said Regan, the former chief executive officer of Merrill Lynch, the nation's largest brokerage firm.
Meanwhile, taxpayers should not count on claiming bigger personal exemptions on their federal income taxes, even though some White House aides recently suggested the President was likely to recommend an increase from the current $1, 000 level.
''The story was leaked by a White House staffer who has, apparently, his own agenda,'' Regan said. No conclusions have been reached about the tax-reform package the President has requested the Treasury Department to deliver after the election.
''I would doubt'' that the President will release selected portions of the tax-reform plan in his acceptance speech at the Republican convention, Regan said. Published reports have claimed that was a possibility.
Regan added that, despite word to the contrary from Senate Finance Committee chairman Robert Dole (R) of Kansas and others on Capitol Hill, it ''is premature'' to say another major tax increase will be needed next year.
The Treasury secretary said the US government does not have a plan on the table at the moment to step in if Argentina is not able to make interest payments that will be 90 days overdue June 30.
If Argentina misses these payments, US banks will have to chop their second-quarter profits. Regan planned an afternoon meeting Wednesday with Bernardo Grinspun, Argentina's minster of the economy.