World Bankers Juggle the Huge Oil Debts

OPEC is flush with money, while the developing nations go deeper into the hole

Is the wobbly world of international finance and banking about to be buried under a mountain of endlessly multiplying petrodollars? Almost from the moment that oil prices first began shooting up six years ago, bankers, businessmen and government officials have been asking themselves that question. Now, with petroleum prices once again rising steeply, the issue is cropping up anew; and this time the implications are scarier than ever.

Leading finance men, including former West German Bundesbank President Otmar Emminger, warn of bad trouble looming ahead. Chase Bank Chairman David Rockefeller says with a nautical flair: "What we see ahead are treacherous economic seas and gale-force financial winds, strong enough to capsize even large, well-manned ships." Former British Chancellor of the Exchequer Denis Healey paints a chilling future in which soaring oil prices could all too easily threaten bankruptcy for entire nations, forcing them to default on loans to Western banks. This, he says, "could bring the whole international banking system crashing down."

The worst-case scenario: a country with sky-high oil debts defaults on its loans to a major bank, causing that bank, and eventually others as well, to fail. Financial panic then spreads around the globe, bringing world trade and commerce to a crawl, much as happened during the Great Depression.

In fact, such an apocalyptic outcome seems to be highly unlikely, at least any time soon. But the oil price surge of 1979, which has sent the worldwide cost of crude leaping by more than 100%, to $30 per bbl., is placing unexpected new pressure on international banking and financial institutions.

This oil-debt game is being played out in the arcane and complex world of international finance. There, large multinational banks such as the U.S.'s Chase Manhattan and Citibank, West Germany's Dresdner and Britain's Barclay perform two vital and interrelated functions. Operating largely from London's money center, the big financial institutions have first of all provided a safe and secure place for Croesus-rich oil exporters, particularly Kuwait, the United Arab Emirates and Saudi Arabia, to park their unspent petro-profits, which by now amount to over $90 billion. The security and peace of mind that comes from feeling that their money is safe in these banks have been crucial factors in encouraging oil sheiks to go on pumping and selling more crude than they really need to. This in turn has helped keep the global energy pinch from getting any worse than it already is.

Equally important, the banks have also been ready and willing lenders to the cash-strapped countries of the developing world, which have been hardest hit by the remorseless rise in energy costs. Unlike the industrial nations, which have so far been able to cover much, if not all, of their oil import costs by boosting exports, Third World nations, for instance, Turkey, Peru and Zaire, have not even been able to come close. Of the $348 billion in Third World loans expected to be built up by the end of this year, $190 billion have been provided by commercial banks. The rest comes from government agencies and institutions like the International Monetary Fund (IMF).

Following the first surge of OPEC prices in 1973-74, the international banking system performed smoothly enough. The oil producers deposited their new wealth in the banks, which loaned the money back out to petroleum importing nations, especially rapidly industrializing ones, among them Brazil, South Korea and Taiwan.

The financial system's problem with OPEC's staggering new wealth was also partially solved by the oil producers' buying spree in the West. Out of the $893 billion earned by the 13 OPEC members since 1973, some $660 billion have been spent on everything from building new airports and steel mills to buying gold, Beverly Hills real estate and Mercedes-Benz limousines. The deposed Shah of Iran, for example, spent $14 billion of his nation's vast oil income, from 1972 to 1978, on sophisticated U.S. military hardware. Partly as a result of these heavy purchases, the annual OPEC surplus that was left over after purchases in the West were paid for shrank from $68 billion in 1974 to only $7 billion in 1978.

Last year's mammoth increases in oil prices, however, again put OPEC members in the comfortable position of having more cash than they knew what to do with. The cartel's surplus rose nearly tenfold in 1979 to $69 billion, and may this year grow by anywhere from $75 billion to $100 billion more.

But this time around the oil producers are less inclined either to go on an industrial world buying splurge or to put their money in the bank. Having seen the Shah's fate following his nouveau riche expenditures, the leaders of Kuwait and Saudi Arabia are having second thoughts about rapid development that might shatter their nations' social structures. Jimmy Carter's seizure three months ago of Iranian assets and deposits in all the branches of U.S. banks has also raised questions within OPEC about just how safe the petro-profits are in any bank. These factors have become strong arguments for holding oil production low and leaving as much crude as possible in the ground. Some OPEC members argue vehemently that petroleum under the sand is more valuable than cash in the bank.

Meanwhile, bankers are growing worried about whether they can continue endlessly lending money to the Third World. Indeed, 17% of all foreign exchange earned by the poor countries goes just to pay interest and carrying charges on their loans. Warns Investment Banker Anthony Lund in London: "Over the next five years the number of default-prone countries is bound to increase. Life will become very difficult for certain borrowers and their lenders."

Some American banks may have to restrict lending to developing countries no matter what happens. That is because U.S. laws prevent financial institutions from loaning out more than 10% of their capital to any one borrower.

Not surprisingly, bank officers are beginning to draw grim little circles around those areas of the globe that they no longer consider good credit risks. Reports TIME'S European economic correspondent Friedel Ungeheuer from Brussels: "In black Africa, no nation with the possible exception of Nigeria, an oil exporter, is still considered a good credit bet. Apart from Singapore, New Zealand, Australia, Taiwan, and Malaysia, all of the Far East is out. In South America, only Brazil and Venezuela, another major oil producer, can still count on jumbo loans. For most of the developing world, the borrowing spree is just about over."

In theory, IMF could probably step in and handle the job of the world's lender of last resort. The fund already has some $40 billion in credits available to help poor nations pay their oil bills. This bankroll is scheduled to be boosted to $60 billion later this year.

But the developing countries tend to shun loans from the IMF because of the stringent repayment and budget-cutting conditions that come along with the money. Nor does the fund seem prepared to ease back on its tough lending conditions. Says one official flatly: "IMF loans are usually harsh but essential to get a country that borrows them out of the economic mess that it is in. While I think that there will be tremendous pressure on the fund to ease off a bit, doing so would clearly be wrong."

Though a number of stopgap solutions are being proposed for the present squeeze, the one that makes the most sense is also the one that bankers and government officials agree has the least chance of being adopted. This is Federal Reserve Governor Henry Wallich's proposal to have the OPEC oil exporters that hold the surpluses make loans directly to Third World borrowers. Says a piqued U.S. official: "I'm not at all sure that we should encourage either banks or the IMF to recycle those funds. We should let developing nations deal with OPEC itself. That way, the blame for higher oil prices and balance of payments injuries can get directed where it belongs--at the cartel--and not at the intermediaries in the process."

In fact, bankers are unlikely to cut off Third World borrowers entirely, no matter how low their credit worthiness sinks. Brazil alone, for example, already owes an incredible $52 billion in foreign loans, and will need to borrow several billion more during 1980. But the world's largest multinational banks have little real choice but to go ahead and extend the required credits, whether they like it or not. Without such loans, Brazil might be forced to default on payments that it already owes, and the banks could lose the billions borrowed so far. The banks and the debtors are thus in many ways hostages of each other.

Last week Brazil's Planning Minister Antonio Netto visited New York and Washington, trying to convince bankers and Government officials that his government was following sound economic policies and that it deserved continued international credit.

World bankers and Finance Ministers will face a tense period as they attempt to muddle through the next few years of growing OPEC wealth and growing Third World indebtedness. New York Investment Banker Felix Rohatyn with grave concern calls the situation a "highly unstable base for our system." Banks will undoubtedly have to "roll over" or refinance some debts, just as many strapped households consolidate their old loans. David Rockefeller and Bank of America President A.W. Clausen also stress that the IMF will have to carry a heavier share of Third World borrowing, especially from the poorest countries like Zaire. With some carefully formulated borrowing from the rich in order to lend to the poor, the world's financial system should withstand this severe test.

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