The Multinational Monitor

September 1988 - VOLUME 9 - NUMBER 9



By John Summa
WHEN U.S. BANKS, led by Chase Manhattan, suspended their South African lending operations in August 1985, it seemed that even apartheid's most loyal allies were jumping ship. The credit crunch sent the rand, South Africa's currency, into a nose dive, which was soon followed by the imposition of exchange controls and a debt "standstill." The debt standstill declared by South Africa froze some $10 billion in payments to foreign creditors. These actions, combined with repressive measures taken at home against those fighting for the dismantling of apartheid, plunged South Africa's reputation to an all-time low. South Africa had truly become an international pariah.

Since then, however, western bankers have had a change of heart. In the face of worsening repression in South Africa, U.S. and other international bankers agreed to reschedule South Africa's debt, thus delivering the country from its status as a renegade debtor. For South Africa's leaders, it was a major victory. "A major source of financial pressure on South Africa [was] lost" by the rescheduling, says John Lind of the California/Nevada Interfaith Committee on Corporate Responsibility (CANICCOR). The agreement between bankers and apartheid officials was reached in March 1987, and will expire in June, 1990. The accord allows South Africa to keep a total of $13 billion of debt frozen (more than half its total foreign debt of $24 billion). Because South Africa will continue to make interest payments, this amounts to a three-year roll-over of the frozen portion of the debt. What is convenient for U.S. bankers, says Lind, is that the arrangement is not called a "roll-over." "U.S. banks can't roll- over loans because that would be against the [1986] Anti- Apartheid Act passed by Congress," Lind notes. But since the loans are in standstill, "banks aren't, technically, rolling over the loans." An "exit" clause in the sanctions legislation, moreover, allows western bankers to convert these short-term loans into long-term ones, payable over 10 years, under conditions that are favorable to the South African government.

Ironically, South Africa's debt crisis grew out of a "back-door" lending apparatus operating in the years leading up to its August 1985 "standstill." Beginning in the late 1970s and continuing until the debt standstill of 1985, a new form of bank collaboration with South Africa emerged. After a lull in lending at the end of the 1970s, U.S. and other Western banks suddenly undertook a rapid increase in lending to South Africa--just as President Reagan's policy of "constructive engagement" was coming to the fore. The lending, however, was going primarily to the private sector in South Africa, principally to private South African banks. The U.S. State Department allowed branch offices of South African private banks to open in New York between 1982 and 1984. This gave these banks access to the U.S. banking system's inter-bank markets. U.S. banks during this period were making lofty claims to have halted lending to the government of South Africa and its agencies, when in fact much inter-bank loan money ended up in the hands of the Pretoria regime. Chase Manhattan Bank, for instance, submitted a letter to Congress in 1983 stating flatly, "Currently, no credit commitments are being extended to the Government of South Africa or its parastatal institutions.... [This] lending policy has been in effect since 1978." Bank declarations of this sort abounded during the early 1980s.

Meanwhile, however, many of the same U.S. banks, including Chase Manhattan, had quietly begun to step-up lending to the private sector. By 1984, U.S. banks had increased this lending by over 400 percent. Public sector loans during this period remained essentially stagnant, while short-term debt to the private sector mushroomed. Eighty-five percent of all U.S. loans to South Africa went to the private sector by 1985, primarily to the big South African banks. Known in banking jargon as "off-balance-sheet" borrowing ("back- door lending" in anti-apartheid parlance), these loans were arranged by private sector banks for South Africa parastatals such as ESCOM, which is involved in nuclear power development and is highly dependent on external financing. ARMSCOR, the state weapons manufacturing concern, was another beneficiary of credit during this period.

The importance of this relationship was made clear by South Africa's former finance minister, Owen Horwood. "The U.S. banks, or some of them, are a little wary to be seen in public," Horwood said in 1984. "But there is a good deal of business with them which doesn't hit the headlines, and they remain important to us, particularly in the private sector." The wariness of U.S. banks toward public disclosure of relations with private South Africa banks was underlined when it was disclosed in 1985 that some $5 billion had been lent to South African banks specifically for use by the parastatals. The majority of the loans were made by leading New York money center banks. In fact, this borrowing had been done with the "full knowledge and specific encouragement of the South African authorities," according to a former high ranking South African bank official.

The same official also charged that the bulk of South Africa's private bank borrowing abroad was used for re-lending to parastatals, and that U.S. banks knew this. The March 1987 rescheduling accord appears to have returned South Africa's financial status to near normality. The agreement was hammered out "behind a veil of secrecy," as South Africa's Business Day reported, and "is likely to substantially boost confidence in the South Africa economy, effectively containing the capital hemorrhage." And the new accord is so lenient that the Johannesburg Star was moved to headline a story on it, "South Africa Makes a Deal ... Which the Rest of the World's Debtors Can Only Envy." The agreement, denounced by anti-apartheid groups in the United Kingdom and elsewhere in Europe, but hardly reported or noticed in the United States, will allow South Africa's central bank to keep a lid on interest rates, thereby assisting the resurgence of the economy. Dr. Gerhard de Kock, South Africa's central bank governor, described it as a "very good agreement for South Africa and its creditors," adding that it was of "enormous significance" that the accord covers a three-year span instead of only one year. The London Financial Times concluded that "the banks have conceded a three-year deal ... [and] South Africa has made no concessions." The paper also noted that the agreement boosted foreign investor confidence and bolstered the standing of P.W. Botha's ruling National Party.

The upgraded creditor status for South Africa means that obtaining credit from banks not prohibited from making new loans will be much easier. Access to trade credit, for instance, will improve. Such credit provides financing for importing vital technology and also facilitates exports. Western bankers were supplying close to $2 billion in trade-related credit in early 1987, according to CANICCOR, and the figure is rising. U.S. banks, however, are supplying much smaller amounts than their counterparts in Europe. Nevertheless, it is essential business for the apartheid regime because it allows for trade to continue between the United States and South Africa. While U.S. banks have reportedly been tougher than European banks in debt rescheduling negotiations with South Africa, the industry has never accepted arguments that it should use its leverage to compel the dismantling of apartheid. In fact, immediately after the standstill was declared, U.S. banks actually helped South Africa escape collection attempts by its creditors. Some U.S. creditors had begun to seize payments to South African bank branches in New York as the money travelled through the U.S. banking system. But big New York money center banks, and the U.S. government, interceded on behalf of South Africa. According to Walter Eubanks, an economist with the Congressional Research Service, "A worse financial crisis was averted when the U.S. Comptroller of the Currency issued a Cease and Desist order to the seizures on South African banks in New York, which stopped the run." Had major U.S. banks not intervened, these collection attempts might well have spread. As Euromoney observed, "The moves could easily have started a worldwide scramble to attach South Africa assets [in lieu of payments]. But the affair was hushed up by some of the big U.S. banks, who moved quickly to pacify smaller creditors by taking over their South Africa loans." It is unlikely, however, that the apartheid regime will be allowed the same access to U.S. bank lending it enjoyed prior to the 1985 standstill.

Many banks have expressed a desire to eliminate South African business because of the "hassle factor." Citibank has announced that it will sell its branch offices in South Africa. But the rescheduling of South Africa's debt shows that U.S. and European bankers do not consider the demise of apartheid as falling within the purview of either their interests or concerns. At the time of the debt standstill in late 1985, Bishop Desmond Tutu and other leading apartheid opponents in South Africa stated that "The rescheduling of South Africa's debt should be made conditional upon the resignation of the present regime and its replacement by a government responsive to the needs of all South Africa's people." The call went unheeded by banks, and a valuable opportunity was lost.