CRISIS IN THE PERSIAN GULF : Capital Floods Out of Mideast Into U.S. Banks

Middle East investors have shifted at least $1 billion to U.S. banks as part of the largest Arab capital flight ever, a leading authority on Arab investment said Tuesday.

Since Iraq invaded Kuwait almost two weeks ago, private Arab investors and foreigners in the Middle East have funneled between $2 billion and $5 billion into foreign banks, primarily in the United States, Switzerland, Germany and Britain, said David T. Mizrahi, editor and publisher of MidEast Report. The New York-based newsletter tracks Arab investments in the United States.

About half the outflow is to U.S. banks, said Mizrahi, who bases his estimates on information from Arab bankers.

“During the revolution in Iran there was a flight of capital, but nothing like we’ve seen today,” he said. He added: “You cannot find one U.S. dollar in the (Persian) Gulf.”

Many investors in Saudi Arabia, the United Arab Emirates and Bahrain--three of the most threatened nations in the region--have invested in short-term U.S. securities such as bank certificates of deposit and Treasury bills, Mizrahi said.

Most have avoided world stock markets, recently jolted by higher oil prices and prospects for increased inflation, because short-term securities offer more liquidity.

“It doesn’t matter any more, as long as they are getting some interest on the money,” Mizrahi said. “They don’t care because this is scared money.”

Demand for U.S. securities could push up the value of the dollar against other currencies and lift the bond market, but most U.S. consumers likely will feel little impact, analysts said.

The consumer is “going to feel much more effect having to pay more for his gasoline and having a slower growth in the U.S. domestic economy,” said Larry Veit, an international economist with Brown Brothers, Harriman & Co. in New York.

The transfers are straining weaker banks in Middle Eastern countries--as they scramble to accommodate withdrawals. In an effort to pacify fearful depositors and throttle a frenzy of outflows, the central banking authority in the United Arab Emirates has assured investors that it will be able to meet all withdrawals. Saudi Arabia has attempted to restore confidence in its system with similar assurances.

One Middle East observer, however, said U.S. intervention is likely to prove the most effective way of restoring confidence.

Although the amount of funds transferred to U.S. banks is difficult to peg, U.S. institutions probably will receive a smaller percentage of transfers than in previous Middle Eastern crises, Veit said.

That’s because buying and selling Japanese and German securities has become easier, making them increasingly attractive to fearful investors, he said.

Were it not for adequate oil supplies and a diminished threat of conflict between the Soviet Union and United States, the capital flight would be even greater, Veit said.

“If the crisis were to escalate so it were to involve a shortage of (oil) supply, not just higher oil prices, I would suspect there would be larger capital inflows” to foreign banks, he added.