Washington still wields a big financial stick – with implications for the Middle East

Some analysts of world politics believe the United States is losing the ability to apply hard military policy in pursuit of its global interests, and cite the situations in Iraq, Syria and Afghanistan as evidence.

Whatever the truth of that – and it would be folly to write off the capacity of the world’s only “superpower” in this respect – there is another sphere in which American policymakers are more enthusiastic than ever to apply the American system around the world.

American financial power has long been used as a backup for its global political ambitions. Indeed, the cynical would say that US foreign policy, especially since the end of the Cold War, has often been subservient to the desire to maintain US primacy in the global economic hierarchy.

But two recent examples have shown in even starker contrast how Washington is prepared to use its financial clout as an extension of its geostrategic ambitions.

How the world reacts to the new brandishing of American financial power has important implications for the rest of the world, and especially for financiers, bankers and businessmen in the Arabian Gulf.

The first case is that of BNP, the French bank accused by the American banking authorities of breaking sanctions policy towards Iran. BNP has been in long negotiations with US regulators, in effect admitting that it bent the American-imposed rules forbidding certain financial relationships with Iran, but arguing over how much it should pay as recompense. Around US$9 billion seems to be the eye-watering price the French will have to pay to satisfy Uncle Sam.

There is no point in debating the precise detail of what the French are supposed to have done wrong. The US is using financial power, especially its control of dollar transactions throughout the world, as an instrument of foreign policy, and it will have its way in the end.

Other banks have faced, or are facing, similar action by the Americans. HSBC and Standard Chartered have coughed up billions of dollars, while Barclays is currently the subject of US investigations – for slightly different reasons to the other two – that could similarly result in handing over a sizeable amount to the US.

Some commentators believe this amounts to an unprincipled use by the Americans of its control of the global financial system to protect its own banking industry and handicap foreign opposition wherever it can. Because the greenback is the unofficial global reserve currency, the US can threaten foreign banks with exclusion from the US system if they do not toe the Washington line.

The second case is that of Argentina, and had direct implications for businesses and financial policymakers in the GCC. US courts have ruled that the South American country, which has long been a borrower on the global financial markets but which has often neglected to acknowledge the need to pay back the high amounts it borrows, must pay all its debtors back in full before it can renegotiate further debts, or even pay interest on those borrowings it has agreed under repayment schedules with creditors.

It is a draconian ruling, and threatens to change the way countries with sovereign debt issues, as well as businesses that from time to time might need to refinance its debts, approach relations with creditors.

Argentina wants to convert its debt (largely in the form of bonds) to new instruments that it promises to repay on the nail in a new schedule, but which it wants to be outside the jurisdiction of New York courts. (Because Wall Street is in New York, and all global dollar transactions go through there at some stage, courts in that city find themselves applying judgements with repercussion far outside the boundaries of Manhattan).

The situation with Argentina is further complicated by the fact that much of its debt is no longer held by the original creditors, but has been bought on the cheap by traders in distressed financial instruments, often know as “vulture” funds. Their incentive is to take as hard a line as possible in restructuring situations, to maximise their profit.

This new hard line will undoubtedly affect business in the Gulf, for example the Al Gosaibi business family of Saudi Arabia, which is seeking a deal with creditors over billions of dollars of debt. It could also change the game in Dubai’s repayment plans. Corporates in the emirate have to find some $4bn next year to repay creditors from the 2010 restructuring.

The region will soon find out how the US use of “hard” financial power affects UAE and regional financial interests.

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