Bankers Back Loan to Iraq

Rumors have been circulating in the international banking community for months that Iraq was about to seek a "jumbo" loan in its first foray into the "Eurodollar" credit market since 1978.

On November 15, bankers met in Paris to work out the details of a $500 million, five-year loan being taken out by Rafidain Bank, Iraq's biggest bank, on behalf of the Baghdad government, which is guaranteeing the loan.

The loan is seen as a major test of the credit worthiness of Iraq, which has been locked in a devastating war with neighboring Iran since September 1980 and which, as a result, has watched its oil exports dwindle from 2.5 million barrels a day before the war to 600,000 barrels a day or less today.

Several American banks, including Chase Manhattan and perhaps two other New York banks, are expected to participate in the loan syndication, together with European, Canadian, Japanese and Arab banks. American, European and Japanese companies are gearing up to compete for lucrative reconstruction and development projects in Iraq once the war ends, and their bankers apparently see distinct advantages in making a positive gesture toward the Iraqis now.

Despite the war and its undoubted economic impact, most bankers do not consider Iraq to be a particularly bad credit risk—although the latest country—credit ratings by Institutional Investor magazine placed it below Argentina and Egypt. Iraq possesses some 5 percent of the world's proven crude oil reserves. Even at the reduced rate of production, its oil exports are earning between $6 billion and $10 billion a year. The country's foreign currency reserves are estimated at $6 billion-$8 billion. In addition, the state-owned Rafidain Bank's assets are some $10 billion, greater than that of any other Arab bank.

All this would indicate that the loan now being raised is unlikely not to be repaid, no matter how protracted the war with Iran becomes. Since the start of the war, Iraq's needs have been covered by more than $25 billion worth of grants and soft loans from the wealthy Gulf oil producers—Kuwait, Saudi Arabia and the UAE particularly—who, despite their differences with Iraq's Baathist socialist ideology, have strong reasons for not wishing to see Iran prevail in the Gulf war.

In the view of at least one U.S. banker contacted by The Washington Report, that reality makes Iraq all the more attractive as a prospect, since its "radical" regime, under President Saddam Hussein, has become closely tied to the "conservative" Gulf oil states and is more likely to have a cooperative attitude in the future. Six Arab Gulf oil producers, not including Iraq, have formed the Gulf Cooperation Council to coordinate their policies.

Before the war really took hold, Iraq was getting to be nearly a billion-dollar-a-year market for U.S. goods and services, and a number of steps had been taken to improve the U.S.'s 7 percent market share there (see The Washington Report, May 31, 1982).

Iraq has described the purpose of seeking a Euroloan as being to finance "various development projects," and bankers say this includes anticipated post-war reconstruction schemes. Building on the country's strong economic base, Iraq's leaders have tried to pursue a $130 billion five-year development plan even while fighting the war with Iran.

Bankers concede that their shareholders may not be too happy about their taking another big sovereign loan on their books just now, what with all the well-publicized concern over possible defaults in places like Mexico and Argentina. But a dozen or so banks, including two or three from the United States, have apparently decided that Iraq is a good bet.