Arab nations have acquired a powerful, $50 billion "money weapon" that could be wielded against the United States and its Western allies in the event of another Middle East war, according to a Senate study released yesterday.
The $50 billion represents that part of surplus oil revenuthat is in short-term bank deposits, or close-to-cash assets like U.S. Treasury obligations, that could be pulled out quickly.
Withdrawal of the $50 billion, combined with another oil embargo, could cripple Western world economies, a report by the staff of the Senate Sub-committee on Foreing Economic Policy said. About $25 billion of this $50 billion is invested in the United States.
The subcommittee estimated that total financial assets held by the oil cartel in multinational banks and in other Western world investments have accumulated to $97 billion.
Equally alarming, report found, is the opposite side of the petrodollar problem - the ever-mounting debts of less developed countries (LDCs).
"An international debt* crisis is coming to a head," the report said bluntly, warning that the private banking system, which has financed the greatest part of the poor nations debt since the beginning of the oil crisis, must begin to retrench. The public ndebt of poor nations had soared to an estimated $200 billion by 1976, about $131 billion of which was loaned by big banks on easier terms than provided by the International Monetary Fund or the World Bank, according to the report, which was drafted by staff aide Karin LIsakers. American banks had $69 billion of that $131 billion outstanding.
Now, in a more cautious frame of mind, the private banks are desperately seeking, with help from the IMF, to prevent any single country from defaulting and touching off a domino effect.
Subcommittee Chairman Frank Church (D-Idaho) said the root of both problems - the creation of a new "money weapon" and the mirror image debt of the IDC's lies in the Western World's failure to challenge the oil cartel's grips on oil prices.
"There is no end in sight to this cycle of a few permanent financial surplus oil producers countries and burgeoning international indebtedness by weaker oil importing countries, Church said in a foreward to the report.
Staff sources conceded that the Arab countries have never threatened to withdraw theirfunds on deposit here or in other Western countries, and the report itself notes that all of the countries, including Saudi Arabia, which alone may have $50 billion in such surplus deposits "have shown no inclination to use these assets in a destablizing manner."
But they point out that the funds can be moved quickly, and that in the last Mideast War, despite "warm" relationships, Saudi Arabia did not hesitate to use the oil weapon.
The report also conceded that statistical data on petrodollar holdings and deposits is very limited - a situation that the United States are belatedly trying to correct. Thus, the estimate that $50 billion of the $97 billion in Western-held assets is highly liquid is partly a guess, but staff aides say it is conservative.
Overall, the report says, the Organization of Petroleum Exporting Countries (OPEC) accumulated $133 billions in surplus assets between 1974 1976, of which $49 billions in surplus assets between 1974 rcial banks, mostly in New York and London, and $48 billion has been invested in government securities, stock market issues or direct investment in the industrial West.
Only $16 billion of the $133 billion, or 12 Per cent, went to developing countries, mostly as grants to Moslem nations, while $9.75 billion was loaned to international institutions. The small remainder went to Eastern block countries.
The principal beneficiaries of OPEC's inability to spend all or most of the money it takes in for its oil exports, the reports says, are the big banks. The buildup of surpluses provided a vast new source of funds, and the committee estimated that by June, 1976, the total assets of U.S. banks' foreign branches had doubled - from $90 billion in 1972 - to $181 billion.
Many had created so-called shell, or "brass-plate," branches in bank haven or bank secrecy countries such as the Bahamas, the Cayman Islands or Luxembourg, the report says, in order to reduce their U.S. tax liabilities.
The gloomy staff report analysis of the debt problem precedes by a few days hearings by the subcommittee, and the annual joint meetings of the IMF and World Bank which begin in Washington next Monday, where the debt problem will be an important topoc of discussion.
U.S. Treasury officials, as well as spokesmen for major banks, have in recent days acknowledge the complexity of international problems exerted by the OPEC surplus and poor nations debt, but with considerably less public concern than detailed in the Church subcommittee staff report.
At the end of August, in response to a statement by Sen. Jacob Javits (R-N.Y.) that a worldwide depression could result in two years unless steps were taken to shore up the present international monetary system. Under Secretary of Treasury Anthony Solomon and Federal Reserve Governor Henry C. Wallich took a much more ""relayed view". They both denied that the debt buildup poses an imminent threat to the world financial system.
They argued that a new $10 million pool of money collected by IMF Managing Director or H.J. Witteeveen, along with other funds available to the IMF, would cover all needs for the next several years.
The subcommittee claims that the "Witteeveen facility" will cover only a fraction of the needs, but conceded it would "give the IMF more clout in putting pressure on deficit countries to undertake the often painful and politically difficult adjustment policies required to bring their external accounts into balance."
It noted, however, that the tough IMF "conditionality" requirements increase economic hardship, and "there appears to be a direct correlation" between economic hardship and political repression in many countries.
The report therefore suggested that the Carter administration, if it backs IMF austerity moves as a way to diminish the exposed position of private banks, may have to compromise its drive for international human rights.
Whatever role the IMF plays, the report said, the multinational banks now face a "large exposure" in many countries, notably Zaire, Peru, Turkey, Mexico, Portugal and other Mediterranean countries.
Mexico and Brazil, the U.S. banks' best customers, each owe about $12 billion, with Chase Manhattan Bank of New York and First National City Bank of New York holding especially heavy commitments.
The report notes that the debts of Argentina, Chile, Brazil, Peru and Uruguay, and most recently Zaire, have been rescheduled, but suggests that bankers are afraid to slam on "the credits brakes at this juncture, with an already depressed [world] economy and a jittery and fragile international financial system."
In fact, the report suggests that some of the more crucial debtors, like Zaire, have held old bank loans as hostage for new ones, putting principal payments into frozen accounts, until the banks promise new lines of credit.
The report concludes that the essential question that bankers must ask themselves is "how to save the system." The same bankers who once tempted small countries into overexpansion with better terms than the IMF would provide, now seek the shield of the organization's tough "conditionality" loan requirements for their own commitments, it said.
The staff report also raises some new questions, relating to the stability of the $250 billion Eurocurrency market, built up largely by the expansion of U.S. banks overseas when they began actively seeking new customers among the LDCs.
The report charged that aggressive merchandising by U.S. banks in their branches overseas has now made foreign profits almost as important as domestic ones for the 12 to 15 banks that account for two-thirds of the overseas activities of all U.S. banks. A side benefit has been a reduced tax burden.
Although regulatory oversight has improved in the last couple of years, the report charges that neither the Federal Reserve System nor the comptroller of the currency has adequate controls in force. "No comprehensive system for regulating international lending or the Euromarket has yet been devised," the report says.
It quotes a British cabinet officer as saying: "Let's face it, the Eurodollar market is a black market. It exists because it is unregulated.
"Regulate it and it disappears. The money, for the most part, will wind up in New York and that's all right. The Federal Reserve can then control it. But how will the secondary recycling then be handled?"
The British official's reference to "secondary recycling" refers to the jerry-built system that has evolved, after the five-fold increase in oil prices, by which the banks have financed the bulk of the accumulated deficits of the oil-importing countries.
"The surplus states," the report continues, "have interposed the commercial banks and international lending institutions as a buffer between themselves and high risk borrowers' which have big deficits and large external debts."