O-F-F CONTRACT EXPOSURE OF JORDANIAN BANKS

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