Banks In US Shun A Loan To Moscow

By KEITH BRADSHER
The New York Times, August 15, 1991

American banks have not put up any money to finance Soviet purchases of American grain, despite the Bush Administration’s efforts to facilitate such loans.

No American banks participated last month in a $600 million loan to the Soviet Union for grain purchases, even though the United States guaranteed repayment of almost all of the principal and half of the interest, banking and grain industry executives said.

Despite the Government loan guarantees, American bankers said that they were worried about the declining ability of the Soviet Union to pay its bills and that their own financial problems had limited their ability to make loans to anyone. Eventually four European banks stepped forward to make the loans, reportedly under pressure from their governments. The loans have an adjustable interest rate that is initially set slightly below 7 percent.

Believed to Be a First

Agriculture Department and banking officials said they could not recall a previous instance in which a major guaranteed agricultural-export loan had been claimed entirely by foreign banks.

The absence of American banks is likely to embarrass the Administration, which certified the Soviet Union as creditworthy when it arranged the guarantee. It also spells further trouble for the crippled and shrinking Soviet economy, which desperately needs foreign loans and investment to try to make itself competitive in world markets. In essence, the European banks are charging the Soviets the equivalent of an interest rate exceeding 20 percent on the very small portion of the loan that is not guaranteed by the United States.

The situation could be a vicious circle for the Soviet Union if a disappearance of loans deprives it of the foreign currency needed for imports, which are needed to keep the economy running and creditworthy.

"Declining industrial imports feed back into declining output," said Joseph S. Berliner, a professor emeritus of economics at Brandeis University who has been studying the Soviet economy since 1950.

Some American banks did discuss the loans with Soviet officials, but the Americans wanted even higher interest rates than what the Europeans got, bank executives said. Now, if the Soviet Union defaults on these loans, American taxpayers will end up reimbursing the European banks.

A Sharp Increase

Banking officials said that for a $1 billion guaranteed loan last year the Soviets paid three-eighths of a percentage point above the short-term rate at which banks borrow from each other. For the $600 million this summer, the margin increased to almost one percentage point, so that the profit margin for banks between their rough cost of borrowing money and the interest rate they charge has nearly doubled. The six-month international interbank lending rate is currently at 5.94 percent, and the Soviet loans carry an interest rate adjusted every six months to account for changes in this rate.

The higher rates reflect a calculation by the banks that the Soviets might not repay the loans. If the return on the guaranteed portion of the loan is calculated at the current rate for comparable borrowing by the United States Government and if the considerable extra processing costs of agricultural loans are excluded, then the Soviet Union is paying an interest rate of more than 20 percent on the 2 percent of principal and several percentage points of interest that it is obtaining on the strength of its own creditworthiness.

Government-guaranteed loans for countries buying American agricultural products are not new; nor is allowing the Soviet Union to use this financing mechanism when it buys American corn and wheat.

But after the United States found itself stuck in recent years with $2 billion in guaranteed agricultural loans to Iraq, Congress imposed tighter rules last year on who was eligible for such guarantees. The new rules require that the President certify the creditworthiness of any nation before it can qualify for the borrowing program, but the rules set no guidelines for determining creditworthiness.

Therein lies a problem. Although the Soviet Union has paid back other such grain loans, its fast-deteriorating economy has led many in Congress and outside to see it as a problem credit. But the Bush Administration wants dearly to promote continued Soviet purchases of American agricultural products. In the weeks leading up to last month’s economic summit meeting, the Administration was also seeking ways to help the Soviet Union even while opposing any program of direct government aid from the leading industrial nations.

Giving Guarantees

Over some opposition, President Bush granted a Soviet request for $1.5 billion in loan guarantees on June 11, certifying at the time that the Soviet Union was creditworthy.

The first $600 million worth of guarantees was given to Moscow immediately, with another $500 million scheduled for October and a final installment of $400 million planned for February. The guarantees state that if the Soviet Union defaults on a loan covered by the program, the United States will repay 98 percent of the principal plus the first 4.5 percentage points of interest on that 98 percent of the principal.

But American banking and Agriculture Department officials say the Soviets quickly ran into difficulties in finding banks willing to lend.

"There is significant risk that’s uncovered" by the government guarantee, which includes only half of the interest payments on such a deal, said a top trade-finance executive at a large American bank. "None of us want to smash our balance sheets."

Request Reportedly Denied

Soviet officials asked for the guarantee to be raised from 98 percent, which is the standard for countries with credit problems, to 100 percent, said an Agriculture Department official who insisted on anonymity.

The Administration turned down the request. "As long as you’re able to place those loans, albeit with European banks in this case, there’s no inclination to raise it," the senior Administration official said.

Executives at several American banks said they were reluctant to lend not only because of concerns about creditworthiness, but also because of the heavy paperwork involved in government guaranteed loans, their own weak capital bases, and a desire to limit their already considerable holdings of similar loans to other countries.

American banks lent money to the Soviet Union under a $1 billion export loan guarantee last year. But continued upheaval in the Soviet Union has led to growing worries about a possible default. "Nobody would like to explain to anyone, including your own kids, why you didn’t anticipate something drastic would happen," an American bank official said.

The American branches of four European banks agreed to lend the money instead. The Banque Nationale de Paris agreed to lend nearly $300 million; London-based Barclays Bank, $150 million; Rabobank Nederland of Utrecht, the Netherlands, $100 million; and Paris-based Banque Indosuez promised about $60 million, officials at those banks said.

Paid Out Periodically

The loans have a maturity of three years and are disbursed periodically as each shipment of American agricultural products is sent. Because pieces of these loans are often resold to other banks, American banks could later participate in the loans indirectly if they change their minds.

The Agriculture Department does not receive the paperwork from banks until after the grain is actually shipped, and department officials said they did not know who had made the loans.

American bankers contend that the European banks came under pressure from their governments to make the loans. Western European governments have been more worried than Washington about the potential for civil disorder and large-scale emigration from the Soviet Union, and have been lending the nation huge sums at concessionary rates.

European bankers mostly deny that political considerations played a role. "This was an independent assessment," said Sharon C. Delezenski, the senior vice president in charge of trade finance and commodities and Wall Street lending at Banque Nationale de Paris, which is owned by the French Government.

But another European banker took a different view. "I was mildly surprised that anybody would take Soviet risk," said the banker, who insisted on anonymity. "It’s not an obvious risk to take."

The United States loan guarantees also have the unusual effect of subsidizing European banks in their efforts to establish relationships with American exporters, he added.

Finding lenders for the remaining $900 million may prove difficult if conditions in the Soviet Union do not improve, an American bank official said. Ms. Delezenski said her bank had agreed to lend no more than $300 million of the entire $1.5 billion package, only to find that Moscow wanted to use almost all of this money for the first installment.

Some Latin American countries had trouble borrowing even with guarantees from the United States when their debt problems were most severe in the early 1980’s.

Some members of Congress were critical of the guarantees before they were given in June, and the role of the European banks is likely to draw criticism when Congress returns next month from its recess.

"This shows what we were saying all along — they’re not creditworthy, and this is a giveaway to the Soviet Government and a taking away from the American taxpayer," said an aide to Senator Bill Bradley, Democrat of New Jersey.

But a senior Administration official responded that the participation of European banks showed that the Soviet Union could still borrow if it paid a high enough interest rate.