Glut of petrodollars: a banker's idea for handling it

S. Stanley Katz has an idea for recyling petrodollars. Let the international development banks -- such as the World Bank, the Asian Development Bank, the Inter-American Development Bank, and the African Development Bank -- do it, says the former high US Commerce Department official.

Since he is now an executive vice-president of the Asian Development Bank, Mr. Katz's proposal may have a touch of self- interest in it. But, as he out it here in an interview, "These institutions already know how to borrow and how to lend."

The petrodollar recycling problem first cropped up after the members of the Oganization of Petroleum Exporting Countries quadrupled the price of oil in 1973 -74. The OPEC nations tended to invest their surplus money in such solid-currency nations as the United States, West Germany, and Switzerland. Relatively few petrodollars flowed directly to such deficit-ridden but fast-growing developing countries as Mexico, Brazil, and South Korea. Nor were they invested in other oil-importing poor countries; nor, for that matter, in such industrial nations as Italy with severe international payments deficits.

It was widely feared that these nations, unable to finance their balance-of-payments deficits, would have to cut back sharply on imports. This might have thrown the world into an even worse recession than did occur in 1974- 75.

Well, like knights on white horses, the commercial banks came to the rescue. They accepted massive deposits of petrodollars and relent the money to the defiti nations. They, in effect, took the loan risks that the OPEC nations were reluctant to take. And the banks made handsome profits doing so.

But that rescue, says Mr. Katz, was "more a matter of good luck than of good planning."

He warns, "Our luck is about to run out: The commercial banks will not be able to undertake a similar recycling role in the 1980s.

Mr. Katz's fears are shared by other financial experts. The OPEC nations, by raising prices again, this time by more than 200 percent, have once more increased their surpluses. Estimates of the overall OPEC surplus for this year run around $100 billion.

Meanwhile, the current-account deficits of the non-OPEC developing countries -- their international income minus their expenditures -- have increased from some $29 billion in 1974 to $45 billion last year. They could be more this year , mostly because of the rise in the price of imported oil.

The commercial banks stepped up their lending to the non-oil developing countries lending $13 billion per year to $25 billion during the last oil crisis. The loans covered some 60 percent of such countries' the deficits the last half of the 1970s.

Now, however, the commercial banks are more concerned about the risks of some nations defaulting on their loans. The amount of loans of some banks has reached a point where such defaults could overburden their ownership capital. Thus, many banks do not want to stick their financial necks out much further.

Warned Mr. Katz: "Bank lending cannot be expected to grow at so rapid a rate -- 20-25 percent a year -- as the less-developed-country current-account deficits.

Nor does he expect the OPEC countries to materially step up their present modest long-term loans to the non-oil developing countries. And OPEC imports from these nations have been declining, not growing.

Mr. Katz figures that the international development institutions can step up their regular lending in the future. But he doubts that these institutions, as now contituted, can recycle enough petrodollars to satisfy the need.

These intitutions get their money from member-government appropriations and from loans floated in the capital markets of the industrial nations.

Mr. Katz suggests supplementing these funds by allowing the international development institutions to borrow money directly from the OPEC countries or from commercial banks receiving OPEC deposits.

This would involve the creation by each of these institutions of a separate "Intermediate Financing Fund" to handle the new recycling function. it should be separate from the capital structure and traditional lending approach of the institution.

This new fund would not need any paid- in "capital" as these institutions require for their normal operations.But hard-currency nations, or a pool of such countries and developing countries (including OPEC members), would have to guarantee repayment of fund borrowings, Mr. Katz proposeS.

The new fund's issues of bonds or notes for sale to the OPEC countries would need to bear an acceptable interest rate. That might be 8.5 percent today, Mr. Katz thought. The money would have to be borrowed for 10 to 20 years.

Then it would be relent to the develping countries at market-related rates for the more advanced nations and for concessional rates for a longer maturity to the poorer countries.

Any loss on such low-interest loans could be covered by an annual transfer of funds from the surplus earnings of the institutions, or from national rich-country and OPEC member contributions. If the interest difference between borrowing and lending was a negative 3 percent on a $10 billion recycling volume , the loss would be $300 million a year.

The money would be lent to cover broad development programs, and to cover international payments deficits.

Possibly some other device can be found to recycle petrodollars in the 1980s. Whatever, Mr. Katz says: "Somebody has to fill that recycling breach. Otherwise , the downward spiral of the world economy could accelarate."

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.