Squeezed by rising oil prices and a falling deutsche mark, West Germany has taken the unusual step of turning to Saudi Arabia for a multibillion-dollar infusion to tide it over a balance of payments shortfall.
As West German officials confirmed today that terms of the arrangement were being negotiated, Bonn also disclosed that West German companies have secured two major long-term contracts for Saudi crude oil, marking a strong bid by the West Germans to win some independence from the major international oil firms.
Together, these credit and oil deals reflect the mounting economic pressures in Europe that are driving countries to take exceptional measures.
The extraodrinary spectacle of West Germany, the strongest of Europe's industrial economies, negotiating what would be, in effect, a large loan from the Saudis indicates the high degree of difficulty for even the best of Europe's managers in controlling their economies -- difficulties compounded by the combined effects of oil price shocks and now, tougher U.S. anti-inflation measures.
Details of the arrangement are not being revealed. An amount as high as 10 billion marks (5.6 billion) has been rumored in some financial circles, but government officials say they are asking for less than that. Other financial sources place the sum between 5 billion and 6 billion marks ($2.8 to $3.3 billion). It was not even certain whether all of the infusion would be in marks, or if it would include dollars and other hard currencies.
Private discussions between the West Germans and the Saudis reportedly have already been held in Geneva as well as in Bonn and Riyadh, and the arrangement is likely to be brought up by West Germany Finance Minister Hans Matthoefer when he visits Saudia Arabia next week, officials said.
West German negotiations with the Saudis until now were assumed to involve a Western effort, spearheaded by Bonn, to come up with massive loans for the crisis-ridden economy of Turkey. However, the amounts involved in that operation, while in the hundreds of millions of dollars, are far smaller than those mentioned in the effort to shore up the mark.
State Department officials in Washington said they had been aware of West Germany dealings with the Saudis on efforts to underpin Turkey, but expressed surprise at the amounts being mentioned in the reports from Bonn.
[Assistant Secretary of Treasury C. Fred Bergsten said, "We know the Germans have issued some treasury instruments which could easily be resold through commercial banks to the Saudis." He said he had no details on the amounts involved but he foresaw no adverse effects for the United States.]
West Germany's current situation contrasts with that during the 1973-74 oil price increase, when Bonn adsorbed the shock with relative ease.Then the West Germans surprised everyone, including themselves, by managing to finance the additional oil import bill by expanding their exports.
This time, however, effort have been made more difficult by a sluggish world economy that offers few new opportunities for rapid export growth.
West Germany's current account balance of payments deteriorated sharply last year, showing a deficit at year's end of 9 billion marks ($5 billion) -- the first such deficit in 15 years. This year the government has forecast that the deficit will more than double to $11 billion.
A current account deficit arises when the value of goods and services flowing out of a country is less than the cost of those flowing in.
This deficit is one reason for the weakining of the mark, which in turn has been compounded by the strengthening of the dollar.
The fact that the mark is falling has sent Germany central bankers into mild fits because it shows that foreigners have been taking their billions out of mark assets and pouring them into short-term dollar ones now offering higher interest rates. The dollar has appreciated by about 7.5 percent in relation to the mark over the last six weeks.
West Germany decided earlier this month to start playing tougher against tighter U.S. monetary moves, as did the Swiss and Japanese. In a reversal of longstanding policy, West Germany's central bank opened the way for the sale of shorter-term mark-denominated securities abroad and the government began pushing them to Middle East investors, among others.
The Saudi contribution will likely take the form in part of these short-term government securities. In addition, however, the London Financial Times reported today that Bonn is asking for a direct loan from Saudi Arabia, which would circumvent normal commercial banking channels.
While the sight of the West Germans borrowing aboard is itself unusual, this direct approach by Bonn to an oil-producing country would set a precedent.
The Saudi oil-supply contracts obtained by West Germany also represented a notable development. Avia, a group of small, independent West German oil companies, contracted with Petromin, the Saudi Arabian state oil company, for the supply of 100,000 barrels a day for the next three years.
Veba, West Germany's largest industrial company, announced earlier this week that it had won an additional contract for an extra 66,000 barrels a day of crude oil on top of an existing contract.
Both deals reportedly received strong backing from the Bonn government, which is keen to bolster the position of West German independent oil companies against the majors.
Saudi Arabia is West Germany's biggest supplier of oil, accounting last year for 17 percent of the total crude oil imports of 2.1 million barrels a day.