Dollar May Be Achilles’ Heel of Noriega Regime

The United States is trying to engineer the first financial coup d’etat in modern times--the effort to unseat Panamanian strongman Manuel A. Noriega by choking his regime economically.

The effort hinges on a little-used provision in U.S. law that has enabled a shadow Panamanian government operating from a high-priced lawyer’s office in Washington to win control of the Noriega government’s dollar assets and foreign bank accounts.

In less than two weeks, the ploy has brought the Panamanian economy to its knees, intensifying pressure on Noriega. Whether it finally pushes the general out of office--and how soon--remains to be seen.

Rare Success

Even before the final chapter is written, however, the strategy marks one of the few recent occasions in which U.S. economic sanctions have exerted any pressure at all. For example, Washington has maintained trade embargoes against Libya and Nicaragua for several years, with scant result.

U.S. pressure has sometimes backfired. A 1973 soybean embargo shocked Japan into looking elsewhere for its second most important agricultural staple, leading to the buildup of the Brazilian soybean growing industry as a major competitor to the United States.

And a Reagan Administration attempt in 1982 to embargo oil and gas pipeline equipment to the Soviet Union accomplished little besides straining relations with America’s European allies, which wanted to continue selling equipment to Moscow. Washington finally abandoned the effort a few months after it began.

Unusual Leverage

Whether the United States can take the lessons learned from Panama and apply them around the globe is not clear. What makes the campaign against the Noriega regime so much more effective is that Panama uses the U.S. dollar as its currency. Thus, the United States has unusual leverage over the country’s financial affairs.

The only other nation to use the greenback as its official currency is Liberia, although Haiti and Bermuda also use currencies pegged to the dollar. If Washington cuts off the flow of dollars in such cases, the country has no immediate recourse.

What that may mean, said former Assistant Secretary of State William D. Rogers, is that the United States is still powerful enough to throw a small Third World country’s economy into chaos--as long as the country is Panama or Liberia.

In addition, the U.S. sanctions this time have been designed to curtail financial transactions rather than merely to restrict trade or technology. The Panamanians cannot circumvent them easily simply by buying the same goods or services elsewhere.

“Financial sanctions tend to speak to the people who run a country,” said Gary Clyde Hufbauer, a former Treasury official who has become an expert on economic warfare. “You strike directly at the pocketbook of the rulers. You get a cascade effect that spills over into all aspects of the economy.”

Norman A. Bailey, a former National Security Council strategist, noted that Panama also depends heavily on the United States for its income. The U.S. government pays for use of the Panama Canal; U.S. oil companies are charged for using the Trans-Panama oil pipeline, which carries 600,000 barrels per day of Alaskan crude oil across Panama to the Caribbean for shipment to U.S. Gulf Coast refineries, and Panama’s banks collect substantial American revenues.

“Practically all Panama’s legitimate income comes from the United States,” Bailey said. “Even if they didn’t use the U.S. dollar as their currency, they’d need the U.S. to make all kinds of payments.”

Although U.S. officials have talked for months about an economic war against Noriega, they launched their campaign almost inadvertently.

Little Support at First

Secretary of State George P. Shultz has been urging Noriega to step down as Panama’s leader since last June, when large-scale opposition to his military rule first erupted in Panama. But the State Department got little support within the U.S. government until February, when two federal grand juries in Florida indicted Noriega on drug-trafficking, money-laundering and racketeering charges and several former Noriega associates publicly accused the general of flagrant corruption.

On Feb. 25, after long talks with U.S. officials, figurehead President Eric A. Delvalle announced that he was “firing” Noriega as commander of the Panama Defense Forces. Noriega retaliated by having the national legislature, dominated by a pro-military party, depose Delvalle, who went into hiding, apparently somewhere in Panama.

Delvalle supporters in the United States, including incumbent Panamanian Ambassador Juan B. Sosa, hired Rogers, 60, a Washington lawyer who had served in the State Department under former President Gerald R. Ford, to handle the affairs of the “government in exile.”

Deadlocked Discussions

As late as Monday, Feb. 29, the Reagan Administration’s internal debates over possible sanctions were deadlocked. “We couldn’t get our heads together,” one senior official confessed.

That was when Robert E. Mannion, one of Rogers’ partners, stuck his head in the doorway of Rogers’ office and suggested a solution: Section 632 of Title XII of the U.S. Code of Federal Regulations.

Under Section 632, American banks holding deposits credited to a foreign government need not honor withdrawal requests if the United States does not recognize that regime as the country’s valid government. If the State Department certifies a rival faction as the “true” government, U.S. banks can be required to hold the money for the rightful depositors. All it takes is a ruling by the State Department and a court order to the banks.

Rogers and other Delvalle lawyers went to court two days later, and Deputy Secretary of State John C. Whitehead signed the State Department certification.

Dried Up Cash Flow

That was all the signal that American banks--and corporations--needed. Within a few days, U.S. companies had all but dried up the flow of cash to Panama, hobbling the country economically while preserving the diplomatic illusion that the U.S. government was remaining aloof from the fray.

“We didn’t have to do anything,” a Reagan Administration official exulted. “The private sector did it.”

Today, Panama’s economy is in shambles, the country is in the midst of a general commercial strike, banks and most businesses are closed and financial transactions in what was once a freewheeling international banking center have come to a halt. Bartering has replaced the cash economy.

With Congress demanding even harsher action, Reagan decided March 10 to place U.S. payments for American use of the canal in escrow and suspended Panama’s eligibility for U.S. trade benefits.

Deal Fell Through

Last week, two State Department officials offered Noriega a deal: a comfortable exile in Spain, complete with protection from extradition by the United States to face the drug charges, if he stepped down immediately. Noriega rejected the offer, leaving Panama and the United States in a standoff.

Noriega may still hold out for several more weeks or months, and even those who engineered the economic coup acknowledge that they are about out of tricks if the general decides to tough it out.

Washington still could invoke the International Economic Emergency Powers Act and freeze private Panamanian assets in the United States, as it did in the wake of the Iranian hostage incident in 1979. But the Administration still is reluctant to take that step, lest it raise the specter of direct U.S. intervention that Washington has been so careful to play down so far.

A Nicaragua-style trade embargo probably would not hurt Panama very much and could well harm American business. “We just don’t have a lot more in the basket,” Rogers admitted.

Few Options

But Noriega does not have many options either. Technically, Panama could try to rid itself of a dollar economy by printing its own currency--the balboa--to substitute for the American greenback. But monetary experts say it is unlikely that anyone would take it seriously. “They’d just drive their own domestic inflation rate up,” Bailey asserts.

Continuing the barter economy indefinitely also would be extremely difficult, U.S. analysts say. And so far, the Soviet Union, Cuba and Libya have rebuffed Noriega’s requests for short-term economic aid.

What’s more, U.S. officials say Noriega seems resigned to the notion that seizing the Panama Canal is not a realistic option. Under the 1977 Panama Canal Treaties, Washington has the right to use force to keep the waterway running.

For now, the Noriega government is trying any trick to circumvent the sanctions.

Bizarre Incident

In one bizarre incident, Panama’s central bank, the Banco Nacional de Panama, ordered the country’s banks last Tuesday to settle their accounts with each other and send outstanding balances due Banco Nacional to an account maintained by Panama’s export agency, Bladex, at Chase Manhattan Bank in New York.

The letter, written on Banco Nacional stationery and signed by central bank treasurer Alejandro Pino, contained a conspicuous postscript imploring the bankers: “Do not make reference to the fact that the payment is in favor of Banco Nacional de Panama.”

After the “secret” admonition was made public by anti-Noriega forces, Banco Nacional disavowed the letter, insisting that the whole thing had been a mistake.

For Panama’s government in exile, the most pressing problem may be not how soon Noriega actually steps down but how to rebuild the country’s economy when the transfer of government finally takes place.

Was Already in Trouble

Even before the Noriega crisis broke out in earnest, Panama’s economy was in serious trouble. The country already had missed a major loan payment on debt to foreign banks. It is in arrears on interest payments to the International Monetary Fund and to the World Bank.

And it has been hurt badly by the flight of local capital to the United States and other industrial countries. Kim Elliott, an analyst for the Institute for International Economics in Washington, estimates that anxious Panamanians may have shipped as much as $20 billion to $30 billion out of the country over the last six months.

The Washington-based government in exile, managed here by anti-Noriegans such as Sosa and former Panamanian Ambassador Gabriel Lewis, has been meeting informally with U.S. and international officials to pave the way for financial aid when a new government takes over.

Americans who have been in on the negotiations say that the group’s first job will be to assemble a safety net for Panama to restore confidence and ward off a run on the banks when the country’s financial institutions reopen. That means an infusion of cash sufficient to cover the estimated $2 billion in bank deposits in Panama that is now frozen.

Second, Panama will need a sizable line of credit--and international backing--for new measures to discourage further capital flight.

And finally, a new government will have to put its financial house in order, paying off about $53.7 million in arrears and negotiating new economic restructuring plans in cooperation with the IMF and the World Bank. Panama also will have to resume talks with commercial banks to stretch out repayments on its current debt and to secure new loans.