Fallout from a Financial War

The cost of the confrontation may be high for U.S. banks

Low gutter language is seldom heard in the world of high finance, but a lot of strong oaths were echoing last week through the paneled offices of private bankers. Fearful that they might be trapped in the crossfire of the U.S.Iranian economic war, many European moneymen were distressed at the haste with which U.S. banks have declared Iranian loans in default and have seized Tehran's overseas assets. Complained an angry Luxembourg banker: "Third parties are being unnecessarily drawn into the conflict. The Americans are displaying Wild West manners and throwing clubs that will boomerang." Countercharged a U.S. banker in London: "The Europeans have no guts. The dollar is one of the few weapons we have and, believe me, we intend to use it."

That weapon was being battered last week. In hectic trading, the dollar plunged before recovering slightly. Gold, the traditional shelter in troubled times, rose to a record close of $434 per oz. in London, up $52 in five weeks. Traders worried mostly about the volatility of the Iranian confrontation, and they were also troubled by rising oil prices and the slight softening of U.S. interest rates.

Many European and U.S. bankers have been at odds since mid-November. It was then that Chase Manhattan and six other large U.S. banks in an eleven-member syndicate used their voting majority to declare a $500 million loan to Iran in default. That raised fears of still further defaults and sparked the rush to seize Iranian assets as compensation.

Pressure is mounting on Chase in Europe to reconsider and reverse the default. One reason: the bank apparently did not tell its European partners that Iran had asked for a transfer of its funds to pay the interest on the loan, but that this payment had been blocked by President Carter's freeze on Iranian assets one day before it was due. Some Europeans now charge that the U.S. banks are acting as mercenary scouts of the Carter Administration in its campaign against Iran and that they have stopped playing the banking game under the gentlemanly rules of prior consultation.

West German bankers have been particularly angry. Morgan Guaranty, one of Chase's U.S. partners in the defaulted $500 million loan, went into a German court and attached Iran's 25% investment in two big German companies, Friedrich Krupp and Deutsche Babcock. Last Tuesday, a day after a terrorist bomb exploded outside the bank's Frankfurt office, Morgan obtained a second court lien on the same assets to cover yet a further Iranian debt. The German bankers had thought they would have first call on these assets if Iran failed to pay some of its German loans.

The court battles were fought every where, by all sides. In Paris, Iran's Bank Markazi sued the French subsidiary of Citibank to release $50 million in depos its frozen since Carter's order. In London, Bank Markazi sued for the release of $1.8 billion on deposit with the Bank of America there.

It also became known that the assets seizures began earlier than many had supposed. Several weeks ago, a French court had quietly frozen Iran's $1 billion stake in Eurodif, the large multinational uranium enrichment project in Western Europe, after Iranian leaders failed to meet routine payments. The move served notice on Iran's new leaders that no foreign investments were safe from seizure.

In Britain, Chemical Bank, part of the same $500 million Chase consortium, was granted a court injunction preventing some $500 million of Iranian assets from being taken out of the country. Additionally, Citibank filed a lawsuit in London naming both the governments of Iran and the U.S. as defendants. This was designed to force the British courts to rule on the sensitive political question of whether a U.S. President has authority to freeze the assets of a foreign customer held in an overseas branch of a U.S. bank.

This suit has focused attention on the possible conflict between the President's order and local European laws. Partly because of the suit, a high-level U.S. delegation led by Deputy Treasury Secretary Robert Carswell and Under Secretary of State Richard Cooper traveled through European capitals last week to explain Washington's position. These consultations are part of the U.S. strategy to try tightening the economic screws on Iran.

There were reports that the team explored the possibility of European nations joining in Rhodesia-like sanctions, including an assets freeze and a food supply cutoff, to force the release of the diplomatic hostages. While many European governments sympathize with the U.S., they were remaining as neutral as possible. Worried about their own embassies in Iran and their own oil supplies, some governments have instructed their nation's banks not to start default actions on Iranian loans and not to participate in seizing assets.

The tensions among bankers are bound to affect their future behavior. Said a West German bank chief: "People are nervous and concerned, and the crucial confidence factor has been sorely shaken." A number of big European bankers may be reluctant to join lending syndicates controlled by any one national group. Other bankers are either turning off their money taps or becoming much more selective in their lending until calm returns. As always, the first victims will be the poor nations, which will find it harder to borrow at a time when they need more money to pay for oil.

Arab oilmen are also distressed. Rightly or wrongly, they fear that what the U.S. did to Iran today it could, if politics warranted, do tomorrow to any OPEC producer. Some may gradually switch their funds away from the dollar, accelerating the currency's slide. Others will try to divert their cash away from U.S. banks, which then would lose some petrodollar business to European and Japanese competitors. When a truce is called in the economic war, the U.S. may find that the price of battle was high.

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