Iraq Loses Credit Rating With Persian Gulf Bankers

The invasion of Kuwait has cost Iraqi President Saddam Hussein both credit and credibility.

Although nothing has crimped Baghdad’s purse more than the U.N. sanctions against its oil exports, the loss of even a modicum of trust in Hussein may have a more lasting effect, say bankers in the Persian Gulf states of Bahrain and the United Arab Emirates.

“Really, who now would do business with Saddam?” said one banker, who asked not to be identified.

A sign of Baghdad’s problems came late last week from Paris, where the French government reportedly refused to reschedule part of Iraq’s $4.6-billion debt. French arms sales to Baghdad during its 1980-88 war with Iran had made Paris its No. 1 European creditor.

Iraqi Ambassador Abdul Razzak Hashimi said that Baghdad had agreed to pay $286 million on its 1990 debt obligation of $953 million, and reschedule the rest. But the Aug. 2 invasion torpedoed the deal.

Hashimi said the U.N. embargo had crippled his country’s ability to service its debts, estimated as high as $80 billion, half in war aid from Saudi Arabia and other gulf states.

In the gulf, the response is based in part on the psychological impact of the invasion, which followed 11111pledges by Hussein to Egypt’s President Hosni Mubarak and other Arab leaders that he would not use force in his territorial claims on his wealthy little neighbor.

“I cannot believe Kuwait is gone,” the banker said. “I mean, if I told you tomorrow that Texas is part of Mexico, which it once was, would you believe me? Well, that’s what this man (Hussein) did with Kuwait.”

The first week of the crisis gave a sharp shake to consumer banking in the gulf. Particularly in the Emirates, where foreign workers make up more than 70% of the population, there was a panic among expatriates.

“In a crisis like this, the whole question is liquidity,” the banker explained. Thousands of expatriates rushed into banks and money exchanges trying to swap their local currencies for dollars.

Many Asian workers had sold land and taken loans to pay labor recruiters for passage to the oil-rich gulf of plenty. “What they’ve made here is their life savings, their fortune. They were afraid they’d lose everything,” a UAE banker said.

The gulf states weathered the panic without damage to their currencies, but the more than 1 million foreign workers in Kuwait were bankrupted by Hussein’s invasion. Their fortunes, in the now-debased Kuwaiti dinar, were lost overnight.

In Bahrain, bankers said that the rapid, American-dominated military buildup in Saudi Arabia has eased the strain, although the Bahrain Monetary Agency has advised banks not to repay time deposits before they mature.

“I don’t want to underestimate the effect of the crisis in the gulf,” said BMA Deputy Governor Ibrahim ibn Khalifa al Khalifa, “but it is difficult to foresee how it will end or how long it would take.

“If the situation continues as it has or escalates, the market will have difficulty maintaining confidence in staying in, investing in, or doing business in Bahrain,” the gulf’s premier offshore banking center.

Despite their problems, the gulf Arabs take pleasure in Hussein’s discomfort. Not only did his greedy grab of Kuwait and its oil resources force a promptly embattled Baghdad to make peace with Iran on Tehran’s terms, the Iraqi president now watches the Iranians selling oil at prices inflated by the invasion.