AIPAC report argues against granting new loans to Iran

WASHINGTON, D.C. — Western nations provided massive credits to Iraq in the late 1980s, effectively financing the military buildup that led to Saddam Hussein's 1990 invasion of Kuwait. Today, the West is doing the same thing again, this time with Iran, according to the American Israel Public Affairs Committee.

In a study released last Friday, titled "How Western Credits Underwrite Iran's Mullahs," the pro-Israel lobby takes its latest shot at Iran, arguing that tens of billions of dollars are being given to Iran in credits at subsidized interest rates.

With the grace period on most of Iran's massive debts running out, European embassy sources recently said they expect Iran to seek a rescheduling of debts that have already been rescheduled at least once, according to the report. AIPAC urged against any further extensions.

"Credit to Iran is not a good investment, even from a narrow business point of view," AIPAC argued. The organization plans to distribute its report to administration officials, members of Congress, Jewish groups and others.

In recent months, AIPAC has published a steady stream of reports on Iran's activities in an effort to build support for further isolating the Persian Gulf state. Iran is believed to have sought weapons of mass destruction (WMDs) and to support international terrorism, including the Hezbollah in Lebanon and Hamas in the West Bank and Gaza Strip.

AIPAC — which supports President Bill Clinton's trade embargo of Iran and new legislation to impose sanctions against foreign companies investing in its petroleum industry — plans to release three additional reports this year: on Iranian gas and oil pipelines, on foreign investment in Iran and on the exchange rate of the Iranian currency, the rial.

In this latest report, AIPAC determined that within the last three years, Iran has fallen into arrears on $30 billion in debts to creditors in more than 46 countries. Iran's credit ratings have plummeted, and without help from Western governments, the country is unable to qualify for ordinary commercial borrowing in most of the world's major markets, the report said.

According to AIPAC, Iran's mountain of debt is the result of generous commercial credits and lending by Western governments since the end of the Iran-Iraq War, mostly at concessionary, below-market rates. Iran borrowed much more than it could handle, and when oil prices dropped in the early 1990s, Iran stopped making payments. By 1993, Iran was in a deep debt crisis.

"Frightened by the prospect of outright default," the report continued, "the creditor governments, led by Germany, began to reschedule Iran's debt in 1993 on even more favorable terms…."

By forgiving the 12 percent premium normally charged to borrowers in Iran's risk group and permitting an extended grace period on principal payments, Europe and Japan have in effect given Iran an $11.4 billion subsidy since 1993, according to AIPAC.

This situation has enabled Iran to service its debt on time over the past two years. But with the grace period on most debts running out, Iran's obligations to service this debt are growing. "At the moment, much more is flowing out of Iran to service debt than is going in as new credits," AIPAC stated. This predicament benefits the West, the study maintained, "because it reduces Teheran's ability to finance policies inimical to our vital interests."

But the pattern also increases the danger of an Iranian default. "Iran…is not loath to use the threat of default to extract new credits from the West, effectively making the argument: `Why should we service our debt to you if there is nothing in it for us?"' AIPAC wrote.

"The sheer size of Iran's existing debt gives the threat of default considerable leverage with its European and Japanese creditors," the report continued. To demonstrate this point, AIPAC noted, German Chancellor Helmut Kohl told Israel's Knesset Foreign Affairs and Defense Committee last June that Germany would not break trade ties with Iran because, as the Gulf state's largest creditor, it had to make sure the debt was paid.

The Clinton administration, which has had limited success dissuading Western allies from investing in Iran, is currently urging Europeans not to reschedule debts with the Gulf state. According to AIPAC, Assistant Secretary of State Robert Pelletreau said recently: "We intend to go at them harder and higher, from the president on down, to broaden the whole fabric of containment against Iran…."

Recognizing the stakes of this effort, Secretary of State Warren Christopher said last May that: "Concessionary credits…allow Iran to divert scarce resources to military programs and to sponsoring terrorism."

Despite the debt, Teheran still has unused lines of credit from many countries. Two estimates put the total at $1.2 billion and $8.6 billion.