The Saudis and the Dollar

By Marshall Loeb

It may seem odd, ironic and even unbelievable to anybody paying those pumped-up OPEC oil prices, but the Saudis feel they are the suckers of th world In their own sardonic way, they even joke about it. They say that they have piped out their black gold but the paper money they have accumulated in return for it has suffered from the decline of the dollar. They are worried about the shakiness of the international monetary system and of some Western banks in which they have put their money.

Whatever the merits of this mindset, it is deeply disturbing to experts on Arabia -and to none more than Minos Zombanakis, a Crete-born and Harvard-educated banker who straddles two worlds. For over 20 years, Zombanakis, 52, has been advising Arabs and Iranians on how to deal with Western executives, and vice versa. He knows the Saudis about as well as any Westerner can. He ranges far from his elegant London offices, where he has been the international chief for a series of American banks: initially Manufacturers Hanover, then First Boston, now Blyth Eastman Dillon -INA. He is one of those multinational deal makers who live in Concordes, four-star hotels and mahogany-walled counting houses. He always rides a crest in good times and bad, making money -much money -despite a few sour deals among all the bonanzas.

In a voice that sounds like retsina tastes, sharp and rich, Zombanakis argues that the U.S. must strengthen the dollar for many reasons, not least so Saudi Arabia and the other OPEC countries will continue to sell their oil for dollars To do that, he says, "Washington must realize that the dollar can no longer act as the sole reserve currency in the world. The dependence of the world on the dollar is not a blessing but a curse for America."

The dollar is weak, he believes, because it is the only significant international trading currency and more than 75% of the official reserves of all non Communist countries are held in dollars. This unique dominance has enabled U S banks to lend out so many billions of dollars that the world is awash with them, and their value has been tumbling. Nobody knows how Turkey Zaire, Peru and many other impecunious countries will ever pay back their loans to Citibank, Chase or the rest of the big U.S. lenders. The debtor countries, pleading poverty, could indefinitely defer repayment. Then the Federal Reserve Board would have to cover those bad debts, meaning that the U.S. taxpayer would finance the bailout. Says Zombanakis: "We have created a system in which almost the entire debt of the world rests on the Federal Reserve."

To strengthen the dollar, Zombanakis continues, governments must devise a new system, a collective responsibility that would spread the risks of financing international debts. One way would be to set up a world central bank that would issue a new reserve currency to supplement the dollar. Perhaps a revised International Monetary Fund could fill that role, in Zombanakis' view, and the IMF's Special Drawing Rights could serve as the new money. The SDKS would be backed by deposits from the countries that have large surpluses -notably Saudi Arabia, West Germany and Japan -as well as the U.S. All of them would have major voices in managing the world central bank.

Say that Turkey had borrowed $100 million from a private American bank. The IMF would make an exchange: give Turkey $100 million in SDKS take Turkey's $100 million in greenbacks and use them to pay off the U.S. bank loan.Result there would be fewer dollars floating around the world, the greenback would strengthen, and the IMF would relieve the Federal Reserve of some of its risks The advantage for the Saudis is that the money they get for their oil -the dollar -would harden. OPEC countries might well want to exchange some of their hoard of dollars for SDKs. Reason: the value of this money would be guaranteed by the IMF. The oil-rich nations could use the new money for lending and investing, just like any other hard currency.

But if the system is to work, the U.S. must ultimately correct its huge trade deficits. That means it would have to take extreme steps to conserve and develop energy. Will it? Says Zombanakis: "America has everything, but it does not have the willingness to lower its standard of living to develop its resources.

This file is automatically generated by a robot program, so viewer discretion is required.