Spread off Petrobrinkmanship

Banking is dragged deeper into the Iranian crisis

Fear and uncertainty shook the money markets as petrobrinkmanship spread further than ever into the nervous realm of high finance. While Iranian officials openly delighted in the chaos they were creating, the acting Finance and Foreign Minister threatened to renege on his government's debts to foreign banks and other creditors the world over. Renouncing previous pledges of payment, Abol Hassan Banisadr declared: "We will not pay back these debts. How can we repay loans that former plunderers received from their foreign accomplices and put back into the accomplices' banks?" He put the debts at "$15 billion, possibly more."

Whether or not the roundhouse threat was genuine, the danger was that OPEC'S big depositors would grow wary about the stability of the world's banking system, perhaps even calling into question the value of money itself. A number of OPEC nations might even decide that it was wiser to keep oil in the ground instead of pumping up so much of it in exchange for mere paper. At the moment that Banisadr was posturing, U.S. Treasury Secretary G. William Miller was jetting to Saudi Arabia, to try to persuade Persian Gulf leaders not to cut their oil production in the months ahead. He also wanted to assure them that, although the Carter Administration had seized some $8 billion to $9 billion in official Iranian assets, their money was safe in U.S. banks.

The assurance came not a moment too soon. Observed a top international banker in London: "The situation is fraught with peril. There are only potential sellers of dollars out there, no buyers at all." Added Giuseppe Tome, an investment banker in Geneva: "The feeling exists in the banking community that a fuse has been lighted in world finance. No one is yet predicting an imminent explosion or panic, but if one does come, people will hardly be surprised."

Pessimistic moneymen scarcely seemed to notice some surprisingly encouraging news: U.S. consumption of oil is sharply declining. With prices rising dramatically and the nation's economy slowing, people at last are conserving energy. Gasoline consumption in October was down almost 8% from year-earlier levels; diesel and home heating oil sales were off 6.9%. Meanwhile, the Environmental Protection Agency gave permission to New England's largest power plant, the Brayton Point utility in Somerset, Mass., to conserve more oil by converting two of its four generators to burn low-sulfur coal. The energy supply picture also looked a bit brighter because Texaco announced a new find of natural gas in the Baltimore Canyon off the New Jersey coast.

The drop in U.S. oil use should have given the dollar a needed boost on money markets. But the greenback twitched indecisively as traders remained mesmerized by the theatrics of the Iranian drama. Since the freezing of Iran's money in U.S. banks, some of the counterthreats from Tehran have been plainly bluster. "We have the dollar by the throat," chortled Banisadr. Not quite. Though the National Iranian Oil Co. announced that it no longer will accept dollars for oil, Iran needs the U.S. currency to pay for imports of everything from Australian wheat to Japanese machinery, which are all priced in dollars in international trading. Iran's oil exports, which have been declining in recent weeks, amount to about $70 million daily, only a fraction of the more than $150 billion that normally changes hands every day in international dollar transactions.

Iran has been trying to induce other members of the OPEC cartel to refuse payment for oil in dollars and instead to demand a "basket" of other currencies, presumably West German marks, Swiss and French francs, and Japanese yen. In fact, there is not nearly enough of these currencies available to pay for the huge oil transactions, and European and Japanese governments would wind up unavoidably having to expand their money supplies in a most inflationary way to accommodate the deals. Fortunately, the Saudis and other oil producers plan to continue accepting dollars. To ban them would cause the U.S. currency to plunge and OPEC's dollar deposits to be washed out.

Even if Tehran finally does not default on its debts, the danger is that European and Japanese banks might call in their loans to Iran. The possibility became more acute last week. That was because of an action by an eleven-member international financing syndicate headed by the Chase Manhattan Bank. The syndicate voted to declare a $500 million loan to Iran in default for failure by Tehran to pay some $4 million in interest charges. The Iranian central bank retorted that it had instructed the Chase to transfer the needed funds from an Iranian account in New York to Chase's London branch where the interest was owed, but that the U.S.'s freezing of its assets had prevented the transfer. Asserted an official bank statement released in London (before Banisadr contradicted it): "There is no intention on the part of the Iranian government not to meet its international financial obligations."

Chase responded that the Iranian statement was not correct. It and the six other U.S. banks in the syndicate voted, over the protest of the four non-U.S. banks involved, to declare the default. The U.S. banks could use the Iranian assets frozen a week earlier to offset their own $300 million share of the loan, but the non-U.S. banks (two Swiss, one British and one Canadian) had no such recourse. Their only options were either to activate a so-called cross default clause and foreclose on the Iranian government in court for the remaining $200 million, or to refloat their share of the loan independently of the U.S. banks. Said one angry European banker: "This is a dangerous escalation of the financial war that American banks are waging against Iran."

Bankers hate to declare defaults because they can spread like a virus. With Iran's credit in doubt, banks from Tokyo to Zurich may feel obliged to call in Tehran's loans. If Iran fails to pay off, jittery bankers would at the least become far more careful in making loans to any borrowers except those with the very best credit ratings. That could mean sharply higher interest rates to many of the world's developing nations, which collectively owe as much as $124 billion to multinational banks and are borrowing more and more just to pay the existing interest. Quite a few countries are too broke to meet their debts. Warned one London banker: "If allowed to continue, the standoff between Iran and the U.S. could become a showdown between the West and large parts of the Third World."

It is just such an eventuality that troubles conservative bankers the most. In preparation for what could clearly turn out to be some highly unsettled days ahead, many of Europe's leading bankers were expected to meet hurriedly over the weekend in London to decide what if anything, to do about the deteriorating situation in Iran.

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