US embassy cable - 02AMMAN4697

S E C R E T AMMAN 004697 
 
SIPDIS 
 
TREASURY FOR OASIA 
 
E.O. 12958: DECL: 08/20/2007 
TAGS: EFIN, ETRD, JO 
SUBJECT: JORDAN CENTRAL BANK GOVERNOR WORRIED ABOUT BANKS' 
EXPOSURE TO OIL FOR FOOD TRADE 
 
 
Classified By: Ambassador Edward W. Gnehm.  Reasons 1.5 (b) and (d) 
 
1.  (S)  Summary.  Jordan's central bank governor is worried 
that a sudden interruption in Oil for Food exports via Jordan 
to Iraq in the event of military action in Iraq could leave 
the Jordanian banking system seriously exposed.  He requested 
U.S. views on possible mechanisms that would help banks cope 
with this problem.  Jordanian ministries are working on an 
assessment of the likely economic fallout of a disruption in 
trade with Iraq, which, the governor expects, would be 
difficult, but manageable at a high cost.  End Summary. 
 
2.  (S)  Central Bank Governor Umayya Touqan told econ chief 
August 19 that an inter-ministerial group led by the finance 
ministry at the behest of the Prime Minister is working on 
economic planning for managing the fallout on Jordan of a 
possible military strike on Iraq.  He said the group was 
preparing a short paper, which should be forwarded to the 
U.S. and other governments soon. 
 
3.  (c)  One area of specific concern to the Central Bank 
that Touqan said he had discussed with the Prime Minister 
(who had also raised it with the Ambassador) is the exposure 
of Jordanian commercial banks to UN Oil for Food program 
exports to Iraq.  At any one time, Touqan said, Jordanian 
banks have USD 400-500 million in letters of credit 
outstanding to finance this trade.  Under current procedures, 
UN officials in Baghdad confirm receipt of goods in Iraq 
before BNP as the bank managing the oil for food account 
releases payment for OFF contracts to Jordanian banks.  If 
this system were unable to function because of military 
activity, Jordanian banks could be left holding the bag. 
 
4.  (c)  Touqan said that the USD 400-500 million estimated 
in outstanding Jordanian bank credit is concentrated in and 
makes up a substantial part of the assets of 4-5 Jordanian 
commercial banks.  He did not think these banks, or by 
extension the banking system as a whole could absorb the 
shock of having so much liquidity tied up in the event of an 
extended conflict. 
 
5.  (c)  Two possible mechanisms for dealing with this had 
occurred to Jordanian officials:  1)  UN inspectors could be 
stationed at the Jordan-Iraq border to take control of 
incoming goods.  In this case, banks could be paid and goods 
could be held at the border until delivered to their ultimate 
destination.  2) Alternatively, goods could be stored in 
Jordan with the Jordanian banks keeping or acquiring title to 
them.  This would allow the banks to use the goods as 
security in order to raise funds.  Touqan said that there 
were no doubt other ways to deal with this problem and would 
appreciate the U.S. government's opinion. 
 
6.  (c)  Overall, Touqan described the impact on Jordan of a 
disruption in its trade with Iraq as difficult, but 
ultimately manageable.  He said the central bank would act 
aggressively by raising interest rates to counter any 
inflationary tendencies arising from a likely increase in the 
government deficit.  This would result from the expected loss 
of the Iraq oil grant, a drop in tax revenue due to a 
contraction in economic activity, and increased emergency 
spending to help companies and individuals cope in such a 
crisis.  At the same time, remittances, export earnings, and 
tourism receipts would drop sharply.  Jordan would use its 
resources, including its foreign reserves, but obviously, 
Touqan said, the more quickly military action was over, the 
easier it would be for Jordan to absorb such a massive shock. 
 
7.  (S)  Comment:  Touqan, an economist and former diplomat, 
is not prone to dramatization; but the scenario he paints 
sounds like a recipe for shutting down the financial system 
for possibly an extended period.  We would appreciate being 
able to convey to him and to the Prime Minister Washington's 
views on the issue Touqan raises. 
GNEHM