48. Memorandum From the Deputy Secretary of the Treasury (Carswell) to the Special Coordination Committee and the National Security Council1
SUBJECT
- Extension of Economic Measures Against the Government of Iran
Background
On November 14, the President blocked all assets of the Government of Iran and its controlled entities held by persons subject to the jurisdiction of the United States.2 This action appears to have blocked assets with a market value substantially in excess of $8 billion, of which more than half are dollar deposits in the foreign branches of U.S. banks. The present estimate of claims of Americans against the Iranian Government is around $3.5 billion but that is probably low by at least $1 billion. Since it is unlikely that we will be able to “vest”, that is to seize, assets outside the United States, at this point it is not certain that U.S. claimants against Iran would receive full payment from the assets presently blocked.
Principally because of that uncertainty, Treasury has modified the blocking regulations so that “setoffs” against blocked deposits in the foreign branches would not be unlawful under the regulations. A setoff is an action by a bank whereby it uses deposits of a customer without the customer’s consent to pay off a loan to that customer. The conditions under which a setoff may be used by a bank are governed by the law of the jurisdiction where the setoff is made, and it is by no means clear that the setoffs described below have been effective. In any event, the effect of the Treasury action was to permit setoffs where the foreign law permits and thereby to satisfy U.S. claims against Iranian assets in foreign countries, thus increasing the chance that the Iranian assets in the U.S. will satisfy the rest of the claims. (Setoffs have not been permitted in the U.S. because to do so might result in banks being paid off 100¢ on the dollar when other claimants receive less.)
[Page 121]Since the Treasury action permitting setoffs in blocked accounts, up to $1 billion in setoffs have been made by U.S. banks—mostly in London. Some banks that have made sizeable loans to Iran did not have Iranian deposits, and they have, therefore, not been able to setoff. Those banks are presently considering attachments, that is action by which they can seize Iranian assets wherever they can find them by a court order known as an attachment, to satisfy their loans to Iran. Again, attachments (like setoffs) are governed by local law and it is by no means clear that they can be utilized in the present state of affairs. The only attachment Treasury knows of is the Morgan Guaranty attachment in Germany of the Iranian’s shares in Krupp.
Generally speaking, neither a setoff nor an attachment is available to satisfy a debt unless the debt is due and unpaid. Debts become due and payable when there is a failure to pay interest or principal when due or when there is an anticipatory breach or a violation of a term in the loan agreement. For instance, some of the Iranian loan agreements contain a provision, known as a cross-default clause, that states that the loan becomes due and payable if Iran defaults under any other loan.
As a consequence of the blocking, Iran did not pay the interest due on a $500 million loan on which Chase Manhattan is the agent bank. Chase notified all the members of the syndicate of the default and asked instructions as to whether the loan should be accelerated and thus become immediately due and payable. A majority of the banks in the syndicate (including all U.S., but none of the foreign banks) voted to accelerate the loan. Chase accelerated the loan on Tuesday (November 20). Several other loans have since gone into default; others are soon expected to. Thus, cross default provisions are being triggered and other loans will also soon become due. That will widen the scope of setoffs and attachments that are possible. It could lead foreign banks to try to protect their positions by setoffs and attachments, thus wiping out most of Iran’s presently free assets. (It also may be relevant to this discussion that last week Treasury modified its regulations to permit the Iranians to pay interest and principal due on a loan, with new (unblocked) dollars. Thus Iran cannot argue that the blocking made compliance with the terms of the loan impossible. Iran has made no attempt to pay interest or principal on any loan with new money.)
Eximbank has about $400 million in loans outstanding to Iran. Several of these are now in default, either because interest has not been paid or because of cross-default provisions. Eximbank has never declared a loan to a foreign government to be in default and initiated attachment proceedings, although there have been a number of defaults in the past.
Options Available
The balance of this memorandum discusses the options available in the context of the situation described above and in the context of [Page 122] possible pressure on the dollar that may come if the Iranians no longer accept dollars in payment for oil or try to shift their unblocked assets out of dollars.
They are not mutually exclusive and are not ranked in any order of preference. All but the first two require active cooperation (which has not yet been forthcoming) from our major allies: United Kingdom, Germany, Japan, France, and possibly the Swiss.
It should also be recognized that none of these economic measures will have much immediate impact. Over weeks and months, they may help to destabilize conditions in Iran. Over a longer term Iran, like Rhodesia and other recent subjects of economic warfare, will be able to frustrate even our best designed measures because eventually it will be able to sell its oil.
Option 1. Continue the present policy of eliminating obstacles to setoff or attachment and maintaining neutrality as to whether defaults are declared and loans accelerated.
• This may result ultimately in most loans to Iran being accelerated and Iran’s assets being wiped out. But it is also possible that some foreign banks may not accelerate but will try to help Iran, in the hope of becoming its lead bank in the future.
• This is the lowest profile position to take and the least likely to antagonize our allies.3
Option 2. Encourage U.S. and other banks to declare defaults by Iran and accelerate their loans. A second variation of this option is to have Eximbank publicly declare a default and accelerate.
• This may happen anyway but overt government encouragement would speed up the process, but it would also identify the U.S. publicly with a quasi-economic warfare measure.
• Indirectly this action would put pressure on foreign banks who would worry about the soundness of their loans which would probably be in default because of cross-default provisions.
• If the Eximbank were to accelerate its loans that would unmistakably signal U.S. resolve.
Option 3. Encourage U.S. and other banks to make setoffs and attachments to collect accelerated loans. A second variation of this option would be for Eximbank to proceed by way of attachment in a foreign jurisdiction.
[Page 123]• This action is the natural corollary to Option 2 and the same considerations apply.
Option 4. Request the key foreign central banks to advise their banks to proceed with calling defaults on Iranian loans and collecting by way of setoff or attachment.
• If the key foreign central banks were to act, this would be the most effective way to ensure that all credits to Iran are collected. That would dry up at least another $2 billion of Iranian dollar assets.
• The central bankers are in a position to advise their private banks that Iranian credits are unsafe and unsound, but they are not likely to do so without instructions or acquiescence from their governments.
Option 5. Obtain agreement from the major purchasers of Iranian oil that they will only purchase, or facilitate the purchase of Iranian oil, through dollar contracts.
• This would preserve the oil market as a dollar market and reduce possible damage to the dollar in the exchange markets.
• Technically it may be difficult to make this stick for the long term because Iran might be able to switch a good part or all its oil sales to the spot market through non-major entities.
• This would expose our allies to possible oil cutoffs by Iran.
Option 6. Obtain the agreement of our major allies to prohibit their central banks from taking substantial increases in non-dollar Iranian deposits.
• This would complement Option 5 and would have the effect of locking the Iranians in dollars.
• On the one hand this would run counter to a general policy of free exchange rates and markets; on the other hand, it might appeal to Germany’s desire to avoid having the mark become a reserve currency.
• So long as the Iranians were unable to find a way to hold large amounts of foreign currencies through intermediaries, this would strengthen the dollar. However, it is unrealistic to think that this type of action would be sustainable over the longer term as too many evasion routes are available.
Option 7. Move to a full export embargo and get our allies to do the same.
• In the longer term quite apart from other considerations, this would not be effective.
• It might have limited appeal domestically as it is readily understandable.
Option 8. Move to a broad range effort to mobilize overt multilateral support, of which some or all of the economic measures outlined above would be a part.
• To be effective, even for a brief period, economic measures will require the active support of our allies. That may be best obtainable through a broader based appeal.
[Page 124]• Such action might be best undertaken under U.N. auspices through action under Chapter VII of the U.N. Charter.4
- Source: Carter Library, National Security Affairs, Staff Material, Middle East File, Box 97, Meetings File, 11/23/79 NSC and SCC re Iran. Confidential. ↩
- See Document 30.↩
- At the November 21 SCC meeting, attendees decided to “nudge” the default process. (Carter Library, National Security Affairs, Brzezinski Donated Material, Geographic Files, Box 13)↩
- Chapter VII of the UN Charter grants the Security Council the right to determine a threat to peace and take military or non-military measures to “restore international peace and security.”↩
- Carswell initialed “RC” above this typed signature.↩