THE CASE OF IRAQ AND THE EXPORT-IMPORT BANK
Henry B. Gonzalez, (TX-20)
(House of Representatives - February 24, 1992)


[Page: H513]

The SPEAKER pro tempore. Under a previous order of the House, the gentleman from Texas [Mr. Gonzalez] is recognized for 60 minutes.

Mr. GONZALEZ. Mr. Speaker, this special order is another in a series of special orders related to the Banking Committee's investigation of the Atlanta branch of the Banca Nazionale del Lavoro [BNL]. Today I will show how the State Department continually pressured the Export-Import Bank to approve loans to Iraq despite the fact that Iraq was not creditworthy.

BNL was the second largest bank participant in the Eximbank program for Iraq. Eximbank insured 51 BNL financed transactions which aggregated $47 million in value.

Over the years, top levels of the administration, including President Bush, repeatedly intervened with the Eximbank in order to assist Iraq. During the entire United States-Iraq relationship, the State Department and other agencies pressured the Eximbank to disregard its charter in order to provide credit assistance to Iraq.

The policy toward Iraq is by far the most tragic foreign policy episode of the Bush and Reagan administrations. Whether that policy was to use Iraq to stop Iran, or later, to eject Saddam Hussein, or to bring about regional stability--it is a policy that ended in war and the loss of many precious lives--and with no long-term goal achieved--yet it remains a story that is largely untold.

The Iraqi invasion of Kuwait had a financial cost to the United States taxpayer because Iraq has now defaulted on $2 billion in loans guaranteed by the Agriculture Department and the Export-Import Bank on letters of credit to Iraq financed through the agency Banca Nazionale del Lavora in Atlanta.

The following will illustrate how the Export--Import Bank was cajoled into granting credit for Iraq even though the financial experts at the bank repeatedly warned that extensions of credit to Iraq did not offer a reasonable assurance of repayment. In fact, Iraq later defaulted on its Eximbank commitments.

INTRODUCTION

On June 15, 1990, Assistant Secretary of State John Kelly explained in congressional testimony the latest goals of the administration policy toward Iraq. There were: First, maintaining the supply of oil from Iraq: second, maintaining stability in the entire Gulf and its oil supply; third, ensuring Iraq's moderation in the Middle East peace process; fourth, preventing the proliferation of missiles and nuclear, chemical, biological, weapons, and fifth, promoting the improvement of Iraq's human rights record.

[TIME: 1220]

The most important event early in United States-Iraq relations was the Reagan administration's removal of Iraq from the list of nations supporting terrorism in 1982. By removing Iraq from this list, the administration granted Saddam Hussein instant access to United States agriculture assistance and opened the door for Iraqi participation in Eximbank programs as well as making sophisticated United States technology available to the Iraqi military.

Starting in 1983 Iraq exploited its newfound status by using CCC backed credit to purchase $365 million in United States supposed agriculture products. By 1990 the amount of United States Government guaranteed sales of supposedly agriculture products to Iraq had grown to over $1 billion annually.

This policy not only fed the people of Iraq, which is fine and well, but it fed the armies that Mr. Saddam Hussein had been raising and had enabled him to wage war and prepare for additional war, and it helped to keep him in power.

It also assisted U.S. agricultural producers who were down on their luck due to the farm crisis experienced during the first half of the 1980's. The U.S. was not alone in pursuing this policy.

A lot of the credits that were funneled in the name of the agency in Atlanta, B&L, actually went through, roughly speaking, a syndication process, the Morgan Bank in Pennsylvania, which in turn went through multiple other banks in Germany, France, and other countries. But the total exposure by the time of the invasion in Kuwait in August of 1990 of Iraq to 10 major Western creditors was over $12 billion.

While Iraq's removal from the terrorist list instantly opened the door for the sale of Government guaranteed agricultural exports to Iraq, the ability to utilize Eximbank programs was more difficult.

The Eximbank relationship with Iraq, which began in 1984, has a long and checkered history. Eximbank opened up for business not long after President Reagan removed Iraq from the list of nations supporting terrorism. There was no relationship prior to that time because the Eximbank charter prohibited the Bank for dealing with terrorist nations.

The Export-Import Bank Act states that all transactions supported by the Bank shall and I quote from the charter, `* * * in the judgment of the Board of Directors, offer reasonable assurances of repayment. * * *' But during the 1980's Iraq rarely, if ever, truly met this criteria. It took interventions and constant pressure, often from high level State Department policymakers and even President Bush, to permit Iraq to utilize Eximbank programs.

Both the administration and Iraq saw the Eximbank program as vital to their interests. For the United States, it promoted United States technology sales, and supposedly added stability to the region by permitting the administration to use the program to modify the actions of Iraq.

For Iraq, an Eximbank program would allow access to United States high technology goods, but most importantly, it would send a signal to other nations that the strongest country in the world, the United States, considered Iraq creditworthy. That would have the effect of opening up new sources of credit which in turn could be used by Iraq to sustain itself during the tough economic times brought on by its war with Iran.

Under the Eximbank program, American exporters were insured against the risk of nonpayment by Iraqi purchasers under a short-term facility--that means that the guarantee was usually good for only 1 year. From the inception of the program in 1984 until March 1986 when Iraq was suspended from the program, Iraq used the program to buy United States agricultural products, pesticides, small motors for air-conditioners, medical supplies, oil equipment, and heavy machinery. The Iraqi military also utilized the Eximbank program by purchasing 250 armored ambulances and portable communications equipment.

While most of the transactions were relatively small, the largest transaction approved by Eximbank was the Aqaba oil pipeline project. Eximbank guaranteed $484 million of the $1 billion project led by the giant firm Bechtel. For unknown reasons this project was never consummated, but later in this presentation I will reveal that this was the first time then Vice President Bush intervened at the Eximbank to win approval for an Iraqi project.

In March 1986, Eximbank suspended Iraq from its programs because of continual payment problems. This suspension was effective until the Exim Board of Directors reopened for business with Iraq in July 1987. From July 1987 to August 2, 1990, the Kuwaiti invasion, Eximbank provided financial assistance for 187 United States export transactions totaling $267 million.

The chronology of the Eximbank decisions to finance the Aqaba pipeline are extremely interesting and at the same time, in retrospect, quite troubling.

On March 16, 1983, the Secretary of the Department of State, George Shultz, received a memo explaining the Eximbank position regarding Iraq. The same memo read, and I quote:

Eximbank is discouraging the new inquiries from U.S. exporters regading Iraq because of the war's effect on Iraq's economy.

This decision was based upon the Export-Import Bank Act requirement that there be a `reasonable assurance of repayment.'

Over the next 7 years the State Department and the White House would pressure the Eximbank repeatedly to gain access to guaranteed financing for Iraqi projects.

The most prominent of these projects was an Iraqi oil pipeline with an outlet at the Red Sea Port of Aqaba, Jordan. This contract alone was worth $1 billion for its contractor, Bechtel, the California engineering conglomerate. Secretary of State George Shultz and Bechtel had a longstanding business relationship. As a matter of fact, Secretary Shultz came from Bechtel, and he came back from Bechtel. He worked at Bechtel prior to becoming Secretary of State and, as I say and repeat, he went back immediately upon leaving the State Department.

Other high officials in the Reagan administration involved in this project including President Bush, the current Deputy Secretary of State, Lawrence Eagleburger, former Attorney General Ed Meese, former NSC Director Robert McFarlane, and former CIA Director William Casey. At various times, every one of them contacted the Eximbank to obtain financing for the Aqaba pipeline project. These officials all had one thing in common--they saw Eximbank financing as crucial to United States-Iraq relations.

To illustrate that point consider the following:

A December 21, 1983, telex from the U.S. interest section in Baghdad to the Secretary of State says:

[Page: H514]

We should give serious thought to offering Eximbank credits. * * * New U.S. credits in combination with our CCC credits would demonstrate U.S. confidence in the Iraqi economy.

In a December 22, 1983, memo to Mr. Lawrence Eagleburger, the State Department's Richard W. Murphy says:

The U.S./Iraq political relationship could be advanced by Exim financing which has previously not been possible for political reasons. * * * Viewed in combination with CCC credits already granted Iraq, an Exim gesture would go far to show our support for Iraq in a practical, neutral context. * * *

In a letter to William M. Draper III, then Chairman of Eximbank, Lawrence Eagleburger states:

I would like to bring to your attention the important role Exim can play in furthering long range political and economic interests of the United States by being receptive to financing American sales to and projects in Iraq. From the political standpoint, Exim financing would show U.S. interest in the Iraqi economy in a practical, neutral context. This evidence of our interest in increasing commercial relations also will bring political benefits.

[TIME: 1230]

Mr. Speaker, at this time I would like to say that some documents that I have accumulated in support of what I am saying, instead of interspersing them I will offer them at the end of this special order today for the Record.

These documents reveal that in 1983 then Under Secretary of State for Political Affairs, Lawrence Eagleburger wrote to Export-Import Bank Chairman Draper urging the Export-Import Bank to open its program to Iraq, as I have just stated.

In 1989, Mr. Eagleburger wrote the Treasury Department to express his support for the $1 billion CCC Program for Iraq. Remember, that $1 billion is guaranteed by the taxpayers. They are going to have to shell that out.

Previously, I had reported that Mr. Eagleburger was the Director of the Yugoslavian LBS Bank just prior to his confirmation as Deputy Secretary of State. I have already brought this out on two occasions. I offered the documentation.

Mr. Eagleburger was instrumental in getting LBS established in the United States. I wonder where that bank is now, the Yugoslavian.

I also reported that B&L was instrumental in getting LBS established in the United States in that B&L was the largest source of funds for LBS, the Yugoslavian Bank, and this comes back to what I said awhile ago.

Something I will say now parenthetically by way of explanation. When we talk about these foreign entities, banking entities doing business in the United States, there seems to be no perception even among our monetary leaders that we are not dealing like we do with an American banking system, a private system. Almost every one of these banks are government owned. The B&L, for instance, is literally owned by the Italian Government. Therefore, the Yugoslavian Bank from which Mr. Eagleburger was on its Board and intervening in the United States in behalf to help to get set up, dovetailing with the fact that its financial nexus or background would be the B&L, a foreign-based entity owned by another government.

These are facts that are not factored in. The reason we are going into this, and have for over 1 1/2 years, is that it has everything to do with the fact that in our country we are the only country of any consequence of any industrial size that does not have any kind of regulatory protection that will protect the public interest.

We know we have over $800 billion of this kind of money in this country. What we do not know is who knows where it is going and how it is handled and how it is leveraged. Only a small chunk of that is highly leveragable from drug money laundering to such things as the procurement of sophisticated weaponry and technology for other countries that today may be off that list, but tomorrow, who knows, as in the case of Iraq.

Previously I had reported that this B&L was instrumental in this financing, because as I said a little bit earlier, these banks anymore than in the case of Iran and the hostages, at the bottom of all that is banking. Everything that happens around the world and ever has happened, at the bottom of it is financing or banking. Just as in the cause of the Shah where one of our big banks in the United States had a $10 billion exposure, and that is what the hostage taking was all about. What people do not recognize is when the hostages were released, the same day that President Reagan took his oath of office of January 20, 1979, an official at the Federal Reserve Bank in New York pressed a button and released about $3 billion in London to Iran and then they released the hostages. So all of that is at this point in the background. It is not directly connected, other than the fact that it is the pattern that has existed and against which activity that would be contrary to our national policy is possible to happen without any regulatory oversight on our part. Neither the Federal Reserve Board nor these agency banks which are chartered by the States, the Atlanta Agency of the Banca Nationale is a Georgia State-chartered institution.

Now, how in the world, as they found out in the stinkeroo that resulted from these deals, can that State be equipped to adequately monitor and oversee that entity? If the Federal Reserve Board cannot do it in the case of the parent bank in New York, how in the world can a State regulatory commission do it?

So this is why we amended the law. I had been advocating changes in the international banking law, which incidentally we first passed in 1978 as a result of the hearings that I caused to bring about in San Antonio, TX. There was not any law then. In 1978 we got a little law, but never adequate. We had some amendments that strengthened it. My contention is that they are inadequate, yes, and this is why we are going into it, because we have a legislative purpose. We are not bringing out details in order that we can intentionally or with any kind of planned approach try to reveal somebody's embarrassment. We are here to show the sorry role and the breakdown that our regulatory system has been undergoing for decades in our country.

After the war, after 1945, this whole thing changed. We were no longer the still pretty much provincial country we were.

And at this point there is such a tremendous exposure to the national interest that it behooves us to keep talking about it. It is not making any news stories. The newspapers have not picked up on this at any time, and we are not doing it for that reason. We are not issuing releases.

We have had newspapers that have picked up months later because of some independent discovery they made somewhere, somehow, but which actually is repetitious to what we have been placing in the Record for my colleagues to have for more than 1 1/2 years.

Another fact I have previously revealed was that B&L was a client of Kissinger Associates during the time when Mr. Eagleburger and Mr. Scowcroft, who is now the National Security Adviser, were directors of Kissinger Associates.

The beauty of this game is that these fellows can wear all kinds of hats and then they can come and wield all kinds of power. Then they can go back and pick up that other hat that they had temporarily not used.

Now, they are not elected. People have no control over them, only through the President.

What would happen if we were to have anything like that happen on a congressional level? Man, you would be hearing the biggest ruckus ever.

What has not been revealed to date is the following: Mr. Eagleburger who was an active participant in United States policy toward Iran was involved in handling of the B&L scandal at the State Department in 1989 to 1990. The committee has also learned that B&L provided millions in credit to a firm called the Impex Overseas Corp. in New York. Impex, also a Yugoslavian firm, was instrumental in getting the Yugo automobile into the United States. Mr. Eagleburger was also a key figure in the introduction of the Yugo into the United States. He is also a board member of the Yugo Bank. So now he makes policy. He is the Deputy Secretary of State. He is not a lowly assistant somewhere down the line.

As National Security Director, Mr. Scowcroft is instrumental in carrying out United States policy toward Iraq, of course.

I had reported earlier that Henry Kissinger was on the International Advisory Board of B&L in Rome.

A new revelation regarding Mr. Scowcroft is that while working under Mr. Kissinger and Kissinger Associates, Mr. Scowcroft twice briefed the B&L International Advisory Board for a fee. This Board meets in Rome.

[Page: H515]

[TIME: 1240]

Mr. Kissinger also derived a fee. Every time he sat and met, he would get no less than $10,000. So, it was not a pro bono thing. He was an adviser of the Italian Government-owned bank, not a private bank like we are accustomed to seeing in the United States.

BNL loaned over $4 billion in loans to Iraq, $2 billion to the secret Iraqi military procurement network. Also, BNL was by far the largest bank participant in United States credit programs for Iraq, financing over a billion dollars in the United States export guarantees to Iraq.

In fact, it was because of the BNL scandal that the United States withheld $5 million in CCC credit for Iraq in 1990.

The BNL scandal also brought about the cutting off of the prime source of funding to the Iraqi procurement network.

Now, how did I come across this? That is very interesting.

About 2 years ago, a little better than 2 years ago, I believe it was, in the Wall Street Journal, I picked up a little, small item saying that $2 billion worth of letters of credit had been issued through an Atlanta bank to Iraq.

Well, one thing that caught my attention was $2 billion? A bank in Atlanta? What was this all about?

So, it took a long time before I could find out what it was and that it was a branch and what not. In the meanwhile other things happened unknown to me that were focusing on the fact that a scandal was brewing, that there had been a lot of cheating, lying, conniving, and cooking of the books at this agency.

And the question was: Did the bank headquarters in New York or in Rome know? To this day they have an investigating committee of the senate, that is the Italian senate in Rome, Chairman Carta.

It is funny how things work out in life. I did not have the slightest notion that there were questions beginning to be raised about some of the mysterious goings-on as far as the bookkeeping was concerned with that agency.

But in the meanwhile the Italian Government has also been very concerned and started, about that time, because the Italian taxpayers were also exposed to about 2 billion dollars' worth on these letters of credit.

So, when we finally did go into it, it was an election year, 2 years ago, and we had the first hearing. Unfortunately, and understandably, it was right on the eve of the election and we could not get much interest, but we had the first hearing.

It was very important because we found out that the Justice Department, the Attorney General, Mr. Thornburgh was very, very incensed that we would dare have hearings on this matter. I could not believe it until he sent me a letter. First, he wanted to meet with me privately. I said, `No, I don't do that.' I never did. I am not the committee. I am just the chairman of the committee.

So, if we have any kind of business like that, it is going to be discussed as a matter of policy with the membership of the committee.

Mr. Speaker, I yield to the gentleman from Kansas.

Mr. SLATTERY. I thank the gentleman for yielding, and I want to rise today to say that I really deeply appreciate the gentleman from Texas [Mr. Gonzalez], the chairman of the Committee on Banking, Finance and Urban Affairs, taking the time that he has today to attempt to inform the American public about what I see as a very serious problem.

Mr. Speaker, I would observe that the newspapers across this country just this weekend carried headlines raising questions about what President Bush and his administration were doing in the days and months preceding the Iraqi invasion of Kuwait.

The Kansas City Star, the paper that I read coming back from my district this weekend, carried a front-page story outlining a very, very troubling record of what I would have to call appeasement.

I would just observe that I think it is important for the appropriate committees of this Congress and for the appropriate press groups around the country to really ask some very important, fundamental questions: Who was really advancing this policy of appeasement with Iraq prior to the war? Who were these people? Was it President Bush? Was it then-Vice President Bush in years past? Was it other aides in the White House? Or was it all of the above?

These stories raise questions about other agencies of the Government resisting attempts, apparently coming from the White House, to extend billions of dollars in credit to Iraq. As far as I am concerned, this is a record that is very troubling.

You know, I would observe to the gentleman from Texas that the President and the team around him like to view themselves as experts in the area of foreign policy. Well, when one reads the press accounts of their record prior to the Kuwaiti invasion, it raises questions about just exactly how much did they know. Where was the CIA? Why could not the CIA tell them what was going on with Saddam Hussein?

Just last night, the television program `60 Minutes' ran a very, very revealing and troubling review of Saddam Hussein's treatment of the Kurds.

It just seems to me that the intelligence community should have been able to provide our President with this kind of information.

Mr. GONZALEZ. The CIA, let me say, our records show--and the gentleman is a member of the Committee on Banking, Finance and Urban Affairs--and he will recall that in fact, I think, he joined us and we voted, all of us, for almost 100 subpoenas for documents. We have not been able to get all of them. The Federal Reserve Board itself, for instance, kind of stonewalled us, and the State Department.

But we had subpoenaed the documents that actually there was no reason why they would not be public and certainly they should be available to the Committee on Banking of the U.S. House of Representatives. But the fact remains that we are in the process of repeating the error, believe it or not, this time in the case of Iran. There is good reason and some evidence to show that here lately we have been sort of helping Iran to obtain quite a heavy procurement of armament and weaponry.

What is the purpose? What does Iran want it for? That is a good question.

But at this time what I have seen, that which I have seen in the newspapers, has been pretty much tracking what we have been bringing out, particularly within the last year.

We placed in the record, showing clearly that the Export-Import Bank had been pressured. The CIA did do its job, but it was neutralized by higher orders.

Mr. Speaker, I yield further to the gentleman.

[Page: H516]

Mr. SLATTERY. I just think the gentleman should be commended for bringing this whole matter to the attention of the American public and our colleagues here on the floor of the House. As far as I am concerned, there are some very fundamental questions that have been raised by the gentleman and also raised by press accounts all across the country.

[TIME: 1250]

These questions need to be answered, and I think that the President of the United States needs to explain to the people of this country what he was doing prior to the Iraqi invasion of Kuwait, why he was so committed to this policy of trying to appease Saddam Hussein, and that is about the only word that I can think of to accurately describe this policy, and, if the gentleman recalls, even a few days prior to the Iraqi invasion of Kuwait we had a vote here on the floor of the House to extend the export enhancement program to Iraq, and the administration's position just a few days prior to the invasion was we did not dare offend Saddam Hussein, for goodness sakes, and this was a man who was committing atrocities against the Kurds and his own people, and apparently

the CIA had knowledge of this.

I just think there are some very basic and important questions here that demands answers, so I commend the gentleman from Texas [Mr. Gonzalez] for bringing this issue to the floor of the House, and I just hope that the appropriate committees seize this issue, bring before them the officials in this Government that had knowledge of these policies. I would like to know who was promoting these policies that were dead wrong, and I would like to know who was opposing these policies in the administration at the time. I think the American public has a right to know that basic information.

I commend the gentleman from Texas [Mr. Gonzalez] for his interest in this.

Mr. GONZALEZ. Mr. Speaker, I deeply appreciate the gentleman from Kansas [Mr. Slattery] who is a very distinguished member of the Committee on Banking, Finance and Urban Affairs. He has not been on it too long, but, by golly, he came on board as if he was a long-time veteran of the Committee on Banking, Finance and Urban Affairs, and I deeply appreciate this.

Let me say in all fairness that the subcommittee that our distinguished colleague, the gentleman from North Carolina [Mr. Rose], heads has and had been looking into the agricultural, the credit commity, aspect of the extension of the letters of credit, and I think they did not have an easy time getting information and documentation either. And as far as the CIA is concerned, as my colleagues know, we voted subpoenas directed to the CIA to see if they would provide us with some documents. They have been cooperative to a certain extent, but we have not bothered. We did coordinate with the Intelligence Committee, but I do know that our records show that in some of the meetings in which they had interagencies, including the CIA, discussing the Export-Import Bank guarantees, the CIA was present. They did indicate their chief financial officer, as I said a while ago, was saying it is not creditworthy, and what I am doing, and I will say this a little bit later, I am asking the GAO to look into that and find if this evidence does not show that the Export-Import Bank violated its charter because their charter mandates that they not provide credit unless there is a very, very positive assurance that the ability to repay is there, and they knew it was not.

Mr. SLATTERY. Well, again I thank the chairman of the Committee on Banking, Finance and Urban Affairs, the gentleman from Texas [Mr. Gonzalez], for his interest, and I look forward to working with him as we try to find some answers to some very important questions that the American public has a fundamental right to, especially during this election year when this President is going to be asking the American public to send him back to the White House based in large part on his performance in the area of foreign affairs.

I would just observe, when we learn more about how we got into this mess in Iraq, there may be a lot of people in this country that conclude, as I have concluded, that some of these people do not know as much about foreign affairs as they would like for the American people to think, and again I thank the gentleman.

Mr. GONZALEZ. Mr. Speaker, I say to the gentleman, `We're going to need your help, Mr. Slattery, and I really appreciate your very kind words.'

What happened, as a result of the questions that began to arise soon after there were some very serious problems arising because of an Ohio plant that was being used as part of the Iraqi network, and then showing where some of the money, based on the extension of the letters of credit, had been diverted for the procurement of such things as that somewhat publicized giant gun, the inventor of which was assassinated in Belgium in the midst of its almost, if not actually, delivery to Iraq. Well, the funding came through these devious mechanisms, or network we call it, that actually originated in America.

Well, one thing that those mutterings and those suspicions did do was to cut off the prime source of funding, but that funding was going on, as the gentlemen from Kansas [Mr. Slattery] brought out, right up to the eve of the invasion of Kuwait on August 2, and earlier I read the memorandum from this official Kelly in which even as late as June he was urging the procurement for Iraq. There is no doubt that Mr. Eagleburger and Mr. Scowcroft continued to work on the United States policy toward Iraq despite their past ties to BNL.

This seems to me that, if we reached a point in our country where we have to have conflict of interest spelled out, and this is what I have said about all the code of ethics and what not: I do not care what laws we write. The Constitution says we have to be 25 years of age at least in order to offer our candidacy for the U.S. House of Representatives. If we have to wait after we are 25 to come up here and learn what is ethical and what is not, it is too late. I do not know of any code that is not going to be evaded by those that want to. But it seems to me in this case where we have high policymakers, the case where we have men on August 3 sending an expeditionary force at the time of a quarter of a million Americans, and without the Congress even raising a whimper--now I am on record--I wrote our leaders. I even urged that they call the Congress into session to consider that matter in August 1990. But of course, as my colleagues know, why look upon myself as being a big, earthshaking official, but I do think that there are basic principles involved in this case, the Constitution, where the Congress has a constitutional duty incumbent upon it.

I have always said, and I say it now, and I will always say it despite whatever is done: In the case of conflict of interest, my goodness, if we have the highest policymakers suddenly deciding to tell the President that he has got to go to war over a country that just before they took that office they were working for an outfit promoting the very, very ability and help that this country had to have in order to do what they were declaring war about, it seems to me the least they could do would be to say, `Mr. President, despite our willingness and our ability, we want to advise you that we think you ought to get advice for other quarters at this point in the privity of your confidence with other distinguished Americans. But we think that at this point, no matter what decision would be made, it would be colored by the very fact that we gained profit just a few years ago from our dealings and stimulating dealings with this country now that suddenly is an enemy country.'

But that does not happen nowadays. It used to be we would have men in our offices that, even if they disagreed with the President, not any conflict of interest, but just said, `I just can't go along with this policy,' and they would quit; they would resign. They still do it in Europe and in Britain. Ministers still quit because they do not agree with the prime ministers or whoever.

So, anyway, that is just a little aside that makes me wonder. I do know that we have the ample evidence here that, regardless of the importance of the Export-Import Bank, that all these officials, including then-Vice President Bush, were urging that the Bank go into, the evidence clearly showed at the time, and all the leading financial individuals in Exim, were to the effect that Iraq was not creditworthy.

[Page: H517]

[TIME: 1300]

To illustrate that point consider the following:

A February 21, 1984, Eximbank country risk analysis states:

In the staff's opinion, due to both unsatisfactory country economic conditions and the possibility of physical damage to new projects due to the ongoing war, there would not be reasonable assurance of repayment for any medium-term and long-term transactions. * * *

A November 28, 1984, telex from Baghdad to the Secretary of State said:

From a look at estimates of Iraqi economic statistics one would have to conclude that the Iraqi economy has suffered a serious decline.

On April 15, 1984, Eximbank denied a request to support exports totaling $159 million to Iraq. Eximbank reasoned that the transaction did not meet the legislative requirement of reasonable assurance of repayment.

But the Eximbank decision to limit its exposure to Iraq for practical and legal reasons was not welcomed at the State Department.

A March 8, 1984 telex from Baghdad to the Secretary of State says:

Exim's apparent decision against financing major projects in Iraq has the potential to critically affect vital United States interests.

A March 25, 1984, telex from Secretary of State to Baghdad states:

Exim is not approving medium and long term credits to Iraq because of doubts regarding repayments prospects. We have urged Exim to reconsider this policy in general. * * * We are seeking directly and through the NSC to ensure that [one] decision does not prejudice future consideration of credits for the pipeline.

Given the Eximbank's reticent position regarding Iraq, the State Department raised the stakes by getting then Vice President Bush involved in the project.

The Vice President's staff asked the State Department to prepare a background paper for a phone call to Eximbank Board Chairman William Draper concerning Exim financing of the pipeline.

The memo states:

Given the importance of these projects to our overall policies in the region, Deputy Secretary Dam is calling (Eximbank Chairman) Mr. Draper to reiterate our foreign policy interests. * * * We understand that National Security Advisor McFarlane may also call Draper. A call by the Vice President would be particularly useful in confirming the Administration support for these projects. * * *

One of the talking points prepared for the Vice President's call states:

Eximbank could play a crucial role in our efforts in the region. Early and favorable action on applications would be clear and very welcome evidence of U.S. commitment to these objectives.

Clearly, the highest levels of the administration placed tremendous importance on the Aqaba pipeline project. On June 19, 1984, the Eximbank's Board met and not surprisingly approved a preliminary commitment of $484 million for the Aqaba pipeline for Bechtel. As a side note, the report read:

Under normal peaceful circumstances, this project would not be economically viable.

Can you imagine that? Under normal circumstances this project would not be viable. Oh, but it involves Bechtel. But Bechtel, as President Eisenhower said, is a mighty component of this great industrial defense complex, which in effect has been determining policy for our country, and particularly in the last two administrations.

So wherein is the public protected? If the Congress abjectly sits by and says, `Well, we can't bother too much with it; after all, this is private enterprise.' Let me remind my colleagues, Hitler had private enterprise until the day he died in that bunker in Germany. He did not have free enterprise, but he had private enterprise.

So let us talk clear from here on out, my colleagues.

Because what is at stake at this time, and this is just a small little, little, little bit of the overall complexity of the crisis that our country is perilously hanging on the precipice. At stake is everything. At stake is our economic and financial freedom. Not just the leadership, but the freedom of our country and our children and grandchildren, as well as what is involved inextricably, the vaunted American standard of living.

This is what is at stake. We are much closer to the brink and the precipice than wants to be acknowledged. If people in power are afraid to tell the truth to the people because it is not that they feel acceptable, let me disabuse their minds. The people I know and I met, from one end of the country to the other, want the truth. If they know the truth they can judge the unpalatability and the unpopularity of the political issue. But they are going to be above all grateful for being informed and know the truth, so that they can determine their basic duties as freeborn American citizens, still with some vestige of our processes involved, but which, I fear, unless we work at it, are not self-perpetuating and will not be ensured for our posterity.

But if informed, and only on the basis of information, can that citizen participating in his fundamental duty exercise judgment and function, as the Constitution says we should, properly and knowledgeably.

This was not the last time the State Department would recruit Vice President Bush to assist Iraq with the Eximbank.

CHRONOLOGY OF THE 1987 DECISION TO RE-OPEN FOR BUSINESS IN IRAQ

At this time I would like to place in the Record a February 26, 1987, memo that contains talking points and background for Vice President George Bush's phone call to Eximbank Chairman John Bohn. The memo was prepared by the State Department and it was related to the State Department's desire to give Iraqi Ambassador Nizar Hamdoon the news that the United States would make hundreds of millions of dollars of credit available via the Eximbank.

In short, the memo reveals that the State Department suggested that the Vice President call Eximbank's Chairman in order to urge him and his colleagues on the Eximbank Board to give favorable consideration to Iraq's request for an additional $200 million in short-term credit. The memo was also intended to point out the advantages for United States policy of a quick Exim decision to resume short-term insurance coverage to Iraq.

On May 15, 1987, in a surprise move, and against the advice of the Eximbank professional staff, the Eximbank Board of Directors reversed its policy and approved a new $200,000,000 short-term credit program for Iraq.

This is credit that has not been made good and for which under our laws and responsibilities the taxpayer must end up paying for.

Could it be that a call from the Vice President could sway the Eximbank Board into reversing its policy on Iraq? Given the very severe doubts about Iraq's financial condition it is hard to draw any other conclusion. In order to better understand the Board's decision, I will provide ample evidence that Iraq's precarious financial condition indicated that it did not offer a reasonable assurance of repayment as called for in the Eximbank charter.

For 18 months prior to the Board approving the new $200-million credit program, Iraq was suspended from Eximbank programs for constant arrearage. At one time during this period Iraqi arrearage reached over 60 percent of its outstanding commitments with the Eximbank.

Several times during 1986 and 1987, the country risk analysis section of the Eximbank made the determination that Iraq did not offer a reasonable assurance of repayment. The strongest analysis came in a May 5, 1987, memo to the Board. I would like to place that memo in the Record along with the other documents.

The memo, sent to the Board on May 5, 1987, states:

[Page: H518]

Eximbank should remain off-cover for all programs concerning Iraq.

There could be no mistaking the facts--Iraq was not creditworthy and that fact did not change between May 5 and May 15.

Another example, is an April 17, 1987 analysis of Iraq's creditworthiness. This analysis asserts that `* * * there would not be sufficient, Iraqi, earnings to meet all principal repayments until 1990' and that, `Iraq's creditors will reschedule debt payments for the foreseeable future.'

[TIME: 1310]

That reminds me of what happened after World War I. As a matter of fact, I brought this out years ago in special orders. I would bring this up. Nobody would listen, but they are on the record. How right after the war and by the time we got to the famous Hoover moratorium on the payment of reparations from Germany to the Allies and the Allies' moratorium on the payment of their debts to us, which were never collected, but these countries like Germany and Japan, the Imperial Government of Japan.

In 1921, it floated, I forget how many millions, about 20 million, which at that time was a lot of money in that kind of dollar at that time. Twenty million in 1921 would be like several billion today or more.

What they did, they floated Japanese Imperial Government bonds in the Wall Street stock market. Germany did the same thing. They borrowed.

Now, the banks at that time in our country could borrow from the Federal Reserve at about 5 percent. So where did they put all that money they were getting from the Fed? They were not loaning it out any more than they are today. They were putting it in the stock market where they would get yields of 12 percent. Pretty good. There was a 7 percent spread.

But what happened was that then as now, it was a highly speculative and controlled manipulation.

So the Japanese Imperial bonds, like these repayment schedules, they were to mature in 20 years in 1941. Well, that is when they bombed Pearl Harbor. So we have learned nothing. We are like the old Bourbon Kings. Even though we are a democracy, we are no different. We learned nothing and we forget nothing.

Right now, as I said earlier to the gentleman from Kansas [Mr. Slattery], we are in the process of repeating the mistake not with Iraq again this time but with Iran. We will bring out some documentation.

Fortunately, I do not think it involves any of our entities that have jurisdictional potential for us on the Committee on Banking, Finance and Urban Affairs.

That some analysis goes on to say:

Eight of the 12 major (countries) were `off-cover' for medium- and long-term business in Iraq and six were `off-cover' for short-term business. Most member countries reported delinquencies.

In fact, by January 1, 1987, just months before the Board's decision, Iraq had defaulted on a total of $240 million in loans to various major Western governments. Delinquent loans increased from $70 million at yearend 1985 to $730 million at yearend 1986.

Not surprisingly, in the months following the Board's approval, Iraq again became delinquent on its previous exposure to Eximbank. On top of that, in a July 2, 1987 memo to the Exim Board, it was revealed that the Treasury Department had concerns over Iraqi creditworthiness.

Now comes the Treasury. Remember, we heard the State Department intervening, the Vice President. Now we have the Treasury.

The State Department recruited others besides Vice President Bush to help it sway the Eximbank Board. A communication from Ambassador Newton to the Secretary of State says:

We know you are doing all you can on this and assume appropriate economic offices have been mobilized to help get Exim to resume cover.

As another example consider an April 28, 1987 cable from the Secretary of State Shultz to the United States Ambassador in Iraq, in which the Secretary states:

It may be that arguments from State, Commerce, and Agriculture and elsewhere have made themselves felt.

Remember, this is our Secretary of State, but he also could be the Secretary for Bechtel.

The strategy of getting Vice President Bush involved in the Eximbank issue paid off handsomely. Reflecting upon the Eximbank Board meeting where the Iraq credits were discussed in detail, agency documents remark:

The Exim staff presented an economic forecast in keeping with their recommendation against extending new credit to Iraq.
However, Eximbank Board members asked a number of questions which seemed to imply an interest in doing business in Iraq. * * * several key Board members, including Eximbank President Bohn, were leaning in the direction of granting the $200 million for Iraq.

The State Department had won the war to get Eximbank coverage for Iraq. On May 17, 1987 Ambassador Newton stated that Eximbank's decision:

Contained the best economic news we have received in a long time. Despite the limitations * * * Exim's decision will help us politically and help American business develop its foothold in the Iraqi market.

The State Department's actions in 1987 were not an isolated incident. The days between the 1987 Board decision and the Iraqi invasion of Kuwait produced much of the same for the Eximbank-Iraq relationship. While Iraq's financial position did not change materially during this period, the State Department continued to pressure the Eximbank to extend its program with Iraq. This strong support for Iraq occurred despite Iraq's use of poison gas to exterminate thousands of Kurdish people and extensive evidence that Saddam Hussein had stepped up efforts to build weapons of mass destruction.

Working to change the Eximbank policy on Iraq in 1987 was not the last time the State Department worked with Mr. Bush to permit Iraq to continue utilizing Eximbank programs.

THE EXIMBANK WAIVER

On January 17, 1990, President Bush issued a determination waiving the legislative prohibition on Eximbank financing for Iraq. Just 2 months earlier, Congress had passed sanctions legislation specifically singling out Iraq for its atrocious human rights record.

The State Department was working on the Iraqi waiver even before the Congress passed the legislation on November 21, 1989. At the time the atrocious Iraqi human rights record was well known, but what was kept for most of the Congress was the degree to which Iraq was building up its military arsenal even though its war with Iran had long ago ended.

At the time of the sanctions debate the State Department had extensive knowledge of Iraq's efforts to develop additional chemical, biological, and nuclear weapons along with the missiles to deliver those weapons. In addition, the State Department was aware that Iraq had a secret military procurement network operating in Europe and even in the United States. Had the Congress been fully informed about these issues, the waiver authority probably would not have been made available to the President.

At this time I would like to place in the Record a memorandum prepared by the State Department that illustrates their thinking about Iraq sanctions. The memo continues to express the sentiment that the State Department could use the $200 million Eximbank program as an incentive for moderating Saddam Hussein's behavior. Obviously, that thinking was flawed.

GAO REPORT

At this time I would like to say that I will write to Comptroller General Charles Bowsher requesting that GAO investigate whether or not the Eximbank Board's decision to reopen for business in Iraq was in violation of its charter. There appears to be ample evidence to indicate that despite repeated warnings that extensions of credit to Iraq did not offer reasonable assurance of repayment, the Eximbank Board approved the Iraqi program anyway.

During the 1980's Iraq rarely, if ever, truly met the reasonable assurance of repayment criteria. In retrospect, it took constant pressure from the State Department and interventions from high level Reagan and Bush policy makers to get Eximbank to permit Iraq to utilize its programs to achieve policy objectives that were shifting, muddled, and ultimately that worked against our own national interest.

Mr. Speaker, I include for the Record the materials to which I referred.

U.S. Department of State,
Washington, DC, December 22, 1983.
To: P--Mr. Eagleburger.
From: NEA--Richard W. Murphy for
Subject: Exim Bank Financing for Iraq.

[Page: H519]

ISSUE

Whether to sign a letter to Exim President Draper recommending that Exim approve financing for Iraq.

ESSENTIAL FACTORS

Exim currently opposes loans to Iraq because it considers that loans to Iraq lack a reasonable expectation of repayment. Exim points to Iraq's recent rescheduling of commercial contract payments, large transfers from Gulf governments, decreased oil production and the drop in Iraqi reserves to support its view. In addition, Exim is concerned about the threat of war damage.

Exim has virtually no exposure in Iraq because, until recently, Exim was precluded from doing business with Iraq in light of that country's involvement with terrorists.

Recent analysis of Iraq's economic situation indicates that the crisis situation which prevailed during the early part of 1983 has been alleviated somewhat through imposition of an austerity program which included cutbacks in development projects and major cuts in imports. As a consequence, Iraq's estimated net foreign assets for 1983 are $11 billion although the current account balance is--$9 billion for the year. In addition, Iraq has been successful in obtaining supplier credits and deferred payments for ongoing projects. Current payments on these debts are being met. If present policies and external financing are sustained, the current account should be roughly in balance, but further rescheduling is a possibility.

Iraq's financial condition will remain dependent on petroleum export earnings and aid from the Gulf states. Iraq is determined to achieve alternative outlets for its petroleum exports in addition to the pipeline through Turkey (capacity 750,000 b/d). Iraq expects to increase its oil export capacity through Turkey to just over 1 million b/d in the spring of 1984 with a possible additional 50% increase in exports by the end of 1984. Cash transfers from the Gulf states to Iraq, at least $30 billion since the start of the war, have been and will continue to be important to Iraq. For the Gulf States, there appears to be no alternative to a continuation of this aid flow because of their dependence upon Iraq to resist export of the Iranian revolution.

There is the possibility, on the political side, that internal frustrations resulting from economic deprivation and a seemingly endless war may produce problems for the government. On the military front, Iraq has suffered limited setbacks on the northern front. It is uncertain how long the status quo can be maintained by Iraq in its confrontation with a much more populous Iran as long as Iran exports three times as much oil as Iraq.

DISCUSSION

The U.S./Iraq political relationship could be advanced by Exim financing which had previously not been possible for political reasons. Exim financing would benefit U.S. manufacturers and workers and could serve marginally to bolster the Iraq economy by freeing resources for use elsewhere in the country. Most importantly, Exim financing would signal our belief in the future viability of the Iraqi economy and secure a U.S. foothold in a potentially large export market. Viewed in combination with CCC credits already granted Iraq, an Exim gesture would go far to show our support for Iraq in a practical, neutral context. This would be especially important in the absence of other substantial U.S. gestures, to ease the military pressures of the war, and would provide some incentive for Iraq to comply with our urgings that it show restraint in widening the war.

Although Iraq's economy is confronted with significant problems, we are guardedly optimistic regarding Iraq's ability to manage these problems through 1984.

RECOMMENDATION

That you sign the letter attached at Tab 1 recommending that Exim consider financing for Iraq. Our Interests Section endorses this recommendation. (Baghdad 3134 attached).

--

--

U.S. Department of State,
Washington, DC, December 24, 1983.

Hon. William H. Draper III,
President and Chairman, Export-Import Bank of the United States, Washington, DC.

Dear Bill: I would like to bring to your attention the important role EXIM can play in furthering long range political and economic interests of the United States by being receptive to financing American sales to and projects in Iraq.

I understand that there were legal constraints on EXIM financing for sales to Iraq arising from Iraq's links to international terrorists. Recently, the President of Iraq announced the termination of all assistance to the principal terrorist group of concern, among others. Iraq then expelled this group and its leader. The terrorism issue, therefore, should no longer be an impediment to EXIM financing for U.S. sales to Iraq.

Although we cannot know when the heavy burden of war will be lifted from the Iraqi economy, the threat of economic crisis has receded. A strict austerity program, supplier credits, foreign government project financing, and continued financial assistance from the Gulf states should continue to sustain the oil export capacity by 30% to one million b/d in the spring of 1984, and has plans well advanced for an additional 50% increase in its oil exports by the end of 1984.

From the political standpoint, EXIM financing would show U.S. interest in the Iraqi economy in practical, neutral context. It could provide some incentive for Iraq to comply with our urgings that it show restraint in the war. This evidence of our interest in increasing commercial relations also will bring political benefits, as well as balance-of-trade and employment benefits to our economy.

Sincerely,
Lawrence S. Eagleburger.

--

U.S. Department of State,
Washington, DC, February 26, 1987.

MEMORANDUM FOR MR. DONALD P. GREGG, THE WHITE HOUSE


Subject: The Vice President's March 2 Meeting with Iraqi Ambassador Nizar Hamdoon.

The Department forwards herewith additional background material which may be useful for the Vice President's March 2 meeting with Iraqi Ambassador Hamdoon. This material, supplementing the memorandum of February 14 on the same subject, covers issues which Hamdoon may raise during the meeting.

Since Hamdoon is planning to introduce the issue of Exim credit insurance for Iraq, the Department strongly recommends that, before meeting with Hamdoon, the Vice President telephone Exim Chairman Bohn to discuss the issue. We believe the Vice President should emphasize to Bohn the advantages for U.S. regional policy of resuming short-term credit insurance for Iraq. Recommended talking points for that call to Chairman Bohn are attached

Melvyn Levitsky,
Executive Secretary.

--

--

Meeting With Iraq Ambassador Nizar Hamdoon, March 2, 1987

(ISSUES TO BE RAISED (IF INTRODUCED BY HAMDOON))

1. EXPORT-IMPORT BANK CREDIT INSURANCE FOR IRAQ

In September 1985 Exim offered Iraq a Continuing Guarantee Agreement (CGA), which would have supplemented the short-term credit already available to Iraq with $50 million in medium-term credit insurance. The Iraqis unceremoniously turned down Exim's offer of a CGA, professing to be insulted by the small amount of money called for in the agreement.

Shortly thereafter, the plunge in oil prices seriously set back Iraq's financial situation. During 1986 the Iraqis missed payments on loans from several Western governments, as well as on letters of credit to suppliers from a number of countries.

Among the unpaid L/Cs in 1986 were several insured by Exim. Under those circumstances, Exim stepped back from its offer of a CGA for medium-term credits, and stopped approving short-term credit insurance for Iraq as well.

In the fall of 1986, Iraq's Rafidain Bank began singling out Exim-insured L/Cs for repayment, and we understand that Rafidain has now paid all overdue L/Cs insured by Exim. Moreover, by means of improved internal procedures and bilateral debt rescheduling arrangements with creditors in third countries, the Iraqis have begun to regain some measure of control over their financial situation. Their short-term financial situation is still difficult, but--with their great long-term potential based on vast oil reserves--they should be able to manage in the short term, with an eye to reconstruction when the war winds down.

Considering Iraq's success in continuing the latest Iranian offensive, its clear policy decision to give preference to Exim-insured debts, and its long-term potential, we believe that Exim should give favorable consideration to resuming short-term credit insurance for Iraq. The Exim Board plans to meet soon to decide the issue.

We recommend that, before meeting with Hamdoon, you telephone Exim Chairman Bohn to point out the advantages for U.S. policy of a quick Exim decision to resume short-term insurance cover to Iraq. As appropriate, you could then review the results of your call to Bohn during your conversation with Hamdoon.

2. LICENSING FOR HIGH-TECH U.S. EXPORTS TO IRAQ

Commerce licenses for some high-tech U.S. exports to Iraq have been held up for extended periods because of DOD concerns, putatively about the risk of diversion to the Soviet bloc. From the Iraq perspective, the long delays appear to be capricious. We agree with that assessment.

Licensing procedures are under interagency review at present, and we may be able to give the Iraqis and other interested trading partners more complete guidance soon. In the meantime, we can point to progress on a few specific cases: After extensive discussions with State and DOD, Commerce has issued long-pending licenses for two high-priority scientific projects, including one at the Iraqi Space and Astronomical Research Center

--

[Page: H520]

Talking Points for the Vice President's Call to John Bohn (Exim Credit Insurance for Iraq)

EXIM CREDITS FOR IRAQ

Iraqi Ambassador Hamdoon is calling on me soon, and I expect him to raise the issue of short-term Exim credit insurance for Iraq. I would like to be as responsive as possible.

I understand that the Iraqis have resolved some outstanding arrearages to Exim, and that the Exim Board will decide soon whether to resume short-term credit insurance for Iraq. I urge you and your colleagues on the Board to give that favorable consideration.

As you know, there are major U.S. policy considerations at work on this issue. Iraq has apparently contained the latest Iranian offensive, and we are taking advantage of that to try to put some life into peace efforts. Exim's support for continued trade with Iraq would be a powerful, timely signal--both to Iraq and to the Gulf Arab states--of U.S. interest in stability in the Gulf.

Although in the near term Iraq will continue to face financial stress because of the war, Iraq's prospects for the medium- to long-term are good, considering the country's vast oil reserves. Now is the time to begin building a solid trade relationship with Iraq for the future.

--

--

U.S. Department of State,
Washington, DC, November 8, 1989.
To: The Acting Secretary.
Subject: Letter to Treasury Deputy Secretary Robson on a CCC Program for Iraq.

In our conversation earlier today, Department of the Treasury Deputy Secretary John Robson asked that you send him a letter outlining the policy reasons for which State strongly backed USDA's proposal for a full, billion-dollar program of Commodity Credit Corporation (CCC) credit guarantees, with safeguards, for Iraq. Attached is a letter for your signature that outlines those policy considerations. It essentially follows the talking points provided for your telephone conversation with Mr. Robson.

RECOMMENDATION

That you sign the attached letter to Deputy Secretary Robson.

Attachment--Proposed letter to Deputy Secretary Robson.

--

U.S. Department of State,
Washington, DC, November 8, 1989.

Hon. John E. Robson,
Deputy Secretary of the Treasury, Washington, DC.

Dear John: Further to our discussion, on foreign policy grounds we support the Department of Agriculture's proposal for a full, billion-dollar program of Commodity Credit Corporation GSM-102 export credit guarantees in FY 90, with adequate safeguards, for Iraq.

In addition to the near-term benefits for agricultural sales, the CCC program is important to our efforts to improve and expand our relationship with Iraq, as ordered by the President in NDS-26. Iraq is a major power in a part of the world which is of vital importance to the United States. Our ability to influence Iraqi behavior in areas from Lebanon to the Middle East peace process to missile proliferation is enhanced by expanded trade. Also, to realize Iraq's enormous potential as a market for U.S. goods and services, we must not permit our displacement as a major trading partner.

With regard to the real concerns which arise from the investigation into the operations of the Atlanta branch of the Banco Nationale de Lavoro, we have received from the Government of Iraq a pledge of cooperation. Our intention is to hold Iraq to this commitment and to work with the Department of Agriculture to ensure that the problems with the program in the past are fully resolved in a new program. The safeguards proposed by USDA, including disbursement of the CCC guarantees in tranches, buttress the program and merit our backing.

I appreciate your support in this connection.

Sincerely.

Lawrence S. Eagleburger,
Acting Secretary.

--

--

Mythology About Iraq

Myth #1: Iraq is one of the largest markets for U.S. exports in the developing world.

Reality: The myth of the Iraqi market is based on two or three years of huge imports around 1980. The Iraqi market was not among the largest before that, nor is it now. Iraq in 1987 was the 28th largest importer (of civilian goods) among non-OECD countries. An end to the war alone does not imply a financial bonanza for Iraq. The conditions existing in 1981--simultaneous 4 mb/d production and $30 per barrel oil--will not return. Any dramatic increase in imports depends on the uncertain prospect of substantially higher oil revenues and the willingness of creditors (such as Exim) to finance the creation of a larger Iraqi market.

Myth #2: Because of its vast oil reserves, Iraq must be a highly creditworthy country.

Reality: Large oil reserves do not imply high oil revenues. Oil revenues depend on oil export capacity and oil prices. In spite of valiant efforts to boost oil export capacity, Iraq's oil revenues remain at half their level of the early 1980s. Neither oil export capacity, nor oil prices, are guaranteed to work in Iraq's favor in the future.

Myth #3: Iraq is perfectly willing to repay creditors; it just does not have the ability to repay right now.

Reality: Because its debt has a short maturity structure, Iraq cannot pay all its debt service. Moreover, Iraq has an attitude problem regarding foreign debt. Iraq only fully repays creditors who offer large new loans. If creditors don't offer new loans, Iraq simply fails to pay, and demands bilateral rescheduling arrangements involving oil barter. This strategy permits Iraq to secure project financing, as well as pure BOP assistance.

Myth #4: Iraq hit rock-bottom in 1986; since then, Iraq's finances have already gotten a lot better.

Reality: The oil price collapse (and Iranian military victories) of 1986 took the Iraqis by surprise; for a time, they weren't even answering communications from creditors. Today, they are better organized, but within an Iraqi context. Iraq has become more sophisticated in its calls for bilateral reschedulings, and in its cultivation of potential creditors (such as Exim).

Myth #5: Iraq's financial problems are temporary; when the next oil pipeline opens up, things will get better.

Reality: Pipeline capacity has more than tripled since 1984, without significant effect on total oil revenues. Weak oil prices, caused in part by Iraq's larger output, offset volume increases. In the long run, oil revenues will depend on Iraq's ability to influence OPEC decisionmaking, to the detriment of moderates like Saudi Arabia. Iraqi attempts to increase oil export volumes may lead to lower world oil prices and thus dampen Iraq's own oil revenues.

Myth #6: The end of the war with Iran, and thus of Iraq's financial problems, is just around the corner.

Reality: The `cease-fire' does not guarantee an effective peace accord. Even if the war with Iran should formally `end', Iraq is not likely to ignore the continuing threats posed by Iran and the Kurds, and will not drastically reduce military spending. Furthermore, Iraq will undertake a costly reconstruction, at the expense of debt repayment. To sustain the benefits of playing one creditor off the next, Iraq will avoid a multilateral Paris Club rescheduling, and continue to use default as a device to secure continued financial assistance.

Myth #7: Closer ties between the U.S. and Iraq will ensure Exim repayment, even if other creditors are not being paid.

Reality: Relations between Iraq and the U.S. are not guaranteed to be warm, because the principal U.S. interest in the region is not in supporting Iraq's objectives (a peace settlement which favors Iraqi border claims, and an end to the Kurdish threat), but in ending the Gulf War. Even if the U.S. offered political and material support to Baghdad, Exim repayment is still not guaranteed. Iraq does not fully repay countries (such as France, Italy, Japan, or Turkey) which have been important to Iraq's military or economic effort, because Iraq believes these creditors have already received a paycheck in the form of greater access to the Iraqi market. Iraq will view Exim credits as something the U.S. does in its own self-interest, not in Iraq's.

Myth #9: Iraq pays CCC; the Iraqis believe we're all one government so they'll repay us, too.

Reality: Iraq pays CCC, and two other export credit agencies, because they have been offering consecutively larger programs of new medium-term credit. Nizar Hamdoon and other sophisticated observers of the American scene know that Exim and CCC do not speak with the same voice. If Exim becomes a `favored creditor', it is only because Baghdad believes that we too will eventually commit to larger and larger programs of long-term credit.

Myth #10: Iraq is no less creditworthy than other heavily-indebted countries where Eximbank is open.

Reality: Creditworthiness has two components, ability and willingness. In the long run, Iraq may have greater ability to repay than many countries. However, Iraq has demonstrated a clear unwillingness to adopt normal debtor-creditor relations. Iraq is more aptly compared to Peru (which pays when it wants to), than to Yugoslavia (which makes a valiant effort) or Argentina (which at least pays lip service to the IMF and the Paris Club).

--

--

Iraq Country Review Update

(OCTOBER 10, 1989, EXIMBANK COUNTRY REVIEW)

Since our April and June 1989 Country Reviews, Iraq's ability and willingness to repay foreign obligations appears not to have changed appreciably. Unable to service all of it debts, Iraq only pays creditors who it believes are willing to increase their exposure continuously. Recent events confirm this analysis.

ECGD--once Iraq's `most favored' creditor--has suspended its $600 million 1989 protocol because of major arrearages. Iraq was to repay over $400 million in 1989, but permitted arrears because ECGD refused to consider a large increase in its program.

Because of arrears this year, CCC's $1 billion program has occasionally been suspended. Iraq permits arrears to CCC in spite of the program's size and attractive terms. Because of their concerns about Iraqi financial behavior, the Fed and Treasury want CCC to scale back this program.

Other export credit agencies--COFACE, MITI, and SACE--are off-cover or suspended for medium- and long-term credits. Only HERMES has a medium-term program, but it is smaller than Exim's short-term program. Like Exim, most agencies now operate only on a revolving basis--providing cover only as Iraq makes payments.

The BNL incident--which may have involved criminal behavior by both BNL and Iraqi officials--raises additional doubts about the nature of Iraq's financial behavior. Iraq does not wish to repay already-disbursed L/Cs unless disbursements are made on promised L/Cs, even those issued illegally.

In spite of growing international pressure, Iraq continues to refuse to undertake a multilateral rescheduling exercise through the Paris Club. Paris Club reschedulings would force Iraq to treat creditors equally, and would require international scrutiny of Iraq's economic situation and priorities. U.S. policy requires multilateral reschedulings (see attached NAC policy).

The BNL incident has revealed the extent of Iraqi efforts to attract Western financial support for Iraq's military industrialization program. Iraq is pursuing technologically advanced, import-substituting, dual civilian-military industrialization, possibly in violation of Western export restrictions.

Iraq's oil revenues cannot cover Iraq's ambitious industrialization plans. Even before the recent completion of a second Saudi pipeline, Iraq had ample pipeline capacity; however, its OPEC quota permits no room for additional oil exports. Any Iraqi attempt at overproduction risks retaliation by other OPEC members and a revenue-offsetting price collapse.

Iraq continues to cajole export agencies through offers of lucrative contracts to exporters, friendly visits, and promises of favored creditor status.

--

[Page: H521]

Memorandum to the Board of Directors, May 4, 1987

COUNTRY LIMITATION SCHEDULE RECOMMENDATION: IRAQ

Background and Country Summary

Eximbank has been `Off Cover' for all transactions since March 1986 when it ended FCIA insurance coverage under letters of credit from Bank Rafidain and the Central Bank of Iraq because Bank Rafidain became delinquent. At the highest point these arrears amounted to just over $5 million. Some claims were paid. Commencing in late 1986, the Iraqi Government made payments on the delinquencies and brought the payments current by February 18, 1987. Rafidain's letters of credit became over due again on March 17, 1987, but subsequent payments of $1.9 million brought the account current on April 13, 1987. A payment due April 21, 1987 was made on time; the next payment is due May 14, 1987.

The Board conducted an interagency review of Iraq on April 24, 1987. The discussion indicated that, for the first time, it now appears possible for Iran to win the 7-year old war. Over the shortterm, the current situation, chiefly a stalemate with Iran making periodic probes and occasional advances, is likely to continue. But over the medium-term, a slow wearing-down of Iraq's defenses and morale could result in an Iranian victory. No predictions were given concerning the future of the existing Government in Iraq or what could be expected in the post-war period.

Economic conditions in the country have steadily worsened since the start of the war. Foreign exchange reserves are essentially exhausted. Payments on external debt have been rescheduled bilaterally each year since 1983. Berne Union members report payment delays have increased from $70 million as of December 31, 1985 to $730 million as of December 31, 1986; unrecovered claims increased from $238 million as of September 30, 1986 to $314 million as of December 31, 1986. Eight of the major Berne Union members are Off Cover for medium-term transactions and six are also Off Cover for short-term as well. All members have tight restrictions or reduced cover if they are open.

Our balance-of-payments projections, even under the optimistic assumption that Iraq would export more than 3 million barrels of oil per day after 1989, indicate that Iraq will be unable to service scheduled debt repayments over the next 5 years and will require continuing reschedulings. This forecast and a detailed economic analysis are attached.

Eximbank Exposure

Eximbank current exposure in Iraq, all short-term, is $4.3 million with maturities falling due under letters of credit through December 12, 1987.

Recommendation

Eximbank should remain Off Cover for all programs concerning Iraq.

Prepared by: Charles Hammond, Financial Economist, Country Risk Analysis.

Approved by: Thomas A. Forbord, Vice President for County Risk Analysis.

--

Export-Import Bank of the United States, Country Risk Analysis Division, January 23, 1989

ALERT REPORT--IRAQI PAYMENTS SITUATION FURTHER DETERIORATES

Iraq's payments situation has further deteriorated, according to recent reports from Embassy Baghdad, the CIA, and others.

ECGD of the United Kingdom, once Iraq's paramount `favored creditor', suspended all cover in December after two months of significant (and clearly non-technical) arrearages. So far, the suspension has not resulted in any catch-up payments by Baghdad.

The French Finance Ministry has been approached to reschedule interest payments falling due on already twice rescheduled debts. The French recently conducted a poll of export credit agencies to explore methods of negotiating payment from the Iraqis. However, COFACE is very nearly at the point of saying `enough is enough', and going off cover even for short-term credit.

Other creditors--EFIC of Australia (previously a favored creditor), EDC of Canada, HERMES of West Germany, OeKB of Austria, and Japan's Marubeni, Mitsubishi, and Sumitomo trading houses--also report significant new arrearages under previous bilateral rescheduling agreements.

As for the U.S., payments under Eximbank's short term insurance facility are now current, after technical arrearages early last fall. Payments due CCC are also current, after a more recent arrearage (which brought a short suspension of CCC cover). No doubt, the Iraqis anticipate that Eximbank will approve a large medium-term program in early 1989 (assuming an improvement in the political climate), and do not want to spoil the atmosphere, even through technical arrearages.

With export credit agencies off cover for medium-term projection-related credit, Iraq has approached commercial banks and investment banks. Banks are reportedly considering extending credits secured by Iraqi oil export receipts placed in overseas escrow accounts (a la the new Venezuelan debt package). The banks are fully aware of Iraq's severe payments problems vis-a-vis official creditors, and will seek concrete legal mechanisms to ensure that they become Iraq's new favored creditors.

Iraq's payments problems--related to its low, uncertain oil revenues--are likely to continue. In the heady days following the cease-fire, Iraq was convinced that oil prices would immediately rise to $18 per barrel, and boasted of plans for renewed exports of 4 million barrels per day. Since then, reality has set in. Oil prices plunged to $11-12 per barrel, forcing Baghdad to come to terms with its fellow OPEC members and accept an output quota of 2.6 million barrels per day. Plans to rebuild the destroyed Gulf oil terminals--a prerequisite to significantly higher oil output--have been suspended.

The SPEAKER pro tempore (Mr. Vento). Under a previous order of the House, the gentlewoman from Ohio [Ms. Kaptur] is recognized for 60 minutes.

[Ms. KAPTUR addressed the House. Her remarks will appear hereafter in the Extensions of Remarks.]

The SPEAKER pro tempore (Mr. Vento). Under a previous order of the House, the gentleman from North Dakota [Mr. Dorgan] is recognized for 60 minutes.

[Mr. DORGAN of North Dakota addressed the House. His remarks will appear hereafter in the Extensions of Remarks.]

END