US embassy cable - 03AMMAN965

C O N F I D E N T I A L AMMAN 000965 
 
SIPDIS 
 
STATE ALSO FOR P, E, EB, IO, PRM 
NSC FOR EDSON, ABRAMS 
TREASURY FOR QUARLES 
CENTCOM FOR POLAD 
DOD FOR OSD 
 
E.O. 12958: DECL: 02/10/2008 
TAGS: EFIN, ETTC, PREF, IZ, JO 
SUBJECT: O-F-F CONTRACT EXPOSURE OF JORDANIAN BANKS 
 
REF: A. AMMAN 313 
     B. AMMAN 793 
 
Classified By: CDA GREGORY L. BERRY.  REASONS 1.5 (B) AND (D). 
 
1.  (C)  In response to the repeated requests from senior 
Jordanians that the USG ask the UN to modify Oil for Food 
Program (OFF) procedures so as to minimize the risk to the 
Jordanian banking system of contracts that cannot be 
delivered to Baghdad under wartime circumstances (ref a), the 
Ambassador urged Foreign Minister Marwan Muasher on February 
5 and Prime Minister Ali Abul Ragheb on February 6 to 
approach the Office of the Iraq Program (OIP) directly.  The 
Ambassador said that Jordan was in the best position to make 
the most compelling and substantiated case about the exposure 
of Jordan's banking system. 
 
2.  (C)  Muasher replied that the GOJ would like the UNSC to 
approve an alternate site in Jordan to which OFF goods could 
be delivered and the terms of the suppliers' contracts 
considered complete.  The GOJ had not made a formal approach 
to OIP to suggest such a plan, he commented, on the advice of 
the Jordanian Ambassador in Washington, who recommended that 
Jordan "wait a couple of weeks" based on his contacts with 
the USG.  When the Ambassador raised the subject with PM Abul 
Ragheb, the PM immediately called Muasher to make sure that 
the Jordanian mission in New York was prepared to make such 
an approach to OIP. 
 
3.  (c)  Comment:  The potential described by the Jordanian 
government of even limited bank failures to have a widespread 
ripple effect on the banking system and the economy as a 
whole appears well-founded.  Even though the banking system 
as a whole is well-capitalized, a few individual banks are 
heavily exposed to OFF contracts.  In several cases, these 
same individual banks were already weakened by the Shamailah 
banking scandal earlier this year, with two of them taken 
over by the Central Bank for restructuring (ref b).  The CBJ 
currently believes that it has the resources to handle an 
expected low-level of capital flight at the beginning of a 
conflict.  However, if even isolated banks should be unable 
to make good on their commitments because of defaults on OFF 
contracts and further central bank takeovers were required, 
limited capital flight could quickly become major capital 
flight in what would be an already deeply unsettled political 
environment. 
 
4.  (c)  Such a scenario could jeopardize the payments system 
and shake the economic -- and political -- confidence in 
which the United States has invested so much in Jordan.  This 
is not a risk worth running.  Reasonably, the Jordanians 
think they will not get anywhere with the OIP or UN 
Secretariat without U.S. support.  It only seems prudent for 
 
SIPDIS 
the United States to intervene now with the UN to ensure that 
this issue is managed so as not to cause unnecessary economic 
or political problems directly contrary to U.S. interests. 
 
5.  (c)  We also point out the importance PRM PDAS Rich 
Greene recently described to us of keeping OFF deliveries 
flowing into Iraq during and especially after a conflict. 
The Jordanians may have alerted us to a potential weak link 
in the financial network that supports OFF deliveries.  A 
mechanism that allowed goods to be held outside Iraq for 
immediate delivery in Iraq as soon as conditions permitted 
would seem to reduce the chances of a blockage in OFF flows. 
Indeed, the potential for such a blockage appears from the 
fact that Jordanian bankers tell us that they have 
substantially reduced their financing of OFF contracts in 
response to the financial risk described above.  This has, 
they say, been reflected in a probable curtailment by more 
than half of OFF flows to Iraq via Jordan over the past 
six-eight months. 
BERRY