If a friend in need is a friend indeed, then France has just forged a bosom buddyship with Saudi Arabia. With foreign exchange reserves hemorrhaging at an alarming clip, the trade deficit hovering in the $18-billion range and the franc flagging anemically behind the dollar and the deutsche mark, the Socialist government of François Mitterrand has never been more desperate. Barely two months after borrowing $4 billion from a consortium of 126 international banks—the larges.t loan ever syndicated for a government on the Euromarket—the French have already used $2.4 billion of it to prop up the franc. Amid the crisis, speculation rose
that Paris might devalue the franc for the third time in 18 months. But now, fearing the political backlash that such a move would invoke, the French have opted for another course—one that, in the end, might prove even more costly.
A recent flurry of negotiations between Finance Minister Jacques Delors and Saudi officials has produced a deal that bails France out of its liquidity crisis with an estimated $2 billion in cold petro-cash deposited in a nationalized French bank and a flexible agreement for as mu£h as $4 billion in credit. But, despite the fact that the deal signals a revived romance between Saudi Arabia and France, the loan is no gesture of disinterested largess from the desert sands. In return for the transfusion of badly needed dollars, Paris has been forced to pay a heavy price, not the least
of which may be bartering away the independence of its Middle East foreign policy.
The Saudis, substantial French real estate investors—picking up a hotel chain here, a Paris city block there— and lavish contributors to the French Riviera’s glitziest casinos in the chips, fell out of love with the country 19 months ago when Mitterrand came to power. Piqued by both his inclusion of Communists in the cabinet and his proIsraeli tilt, the Saudis made their displeasure known in their own inimitable way: they withdrew massive deposits from French banks, nudging the franc along its long, downward tumble on the
money markets. In addition to Saudi realizations that France’s Communists weren’t the bogeymen they feared—and indeed that they may be heading for an imminent showdown with the Socialists—the Israeli invasion of Lebanon and a wave of anti-Semitic terrorist incidents in France have cooled the Jerusalem-Paris axis.
Although Mitterrand pointedly chose to make his first state visit to Riyadh, the Kingdom of Saud has only recently felt reassured that he would keep the promise he made during the visit: that France would continue as chief arms purveyor to the Arab world, a reversal of Mitterrand’s position before he took office. In fact, as part of the trade-off for rescuing the franc, Saudi Arabia is believed to be benefiting from some especially attractive terms in its $3.35-billion shopping spree for French naval
frigates, SA 365 Dauphin helicopters equipped with air-to-sea missiles and other sophisticated electronic military hardware to be delivered over the next decade. That CONTRACT OF THE CENTURY, as the French headlines rhapsodically called it, makes the Saudis the country’s biggest arms customer. Along with three major civil engineering and construction contracts, which include building Riyadh University and housing for the elite Saudi National Guard, armaments sales have been France’s major weapon in offsetting the $8-billion trade deficit it tallied last year with its chief oil supplier.
Reportedly, the French ceded most in the renegotiation of a 1974 oil contract due to expire Dec. 30. In December Trade Minister Michel Jobert flew to
Riyadh for talks with Sheik Yamani, the Saudi oil minister. Although highly secret, the meetings were reportedly aimed at renewing an agreement that binds France to buy 12 million tons a year of Saudi crude at fixed prices substantially higher than current world market levels. According to the national petro-giant, Elf-Aquitaine, the old contract, also negotiated by Jobert, already obliged France to pay out $6 more per barrel than the going rate. Although France is hardly in a bargaining position, those terms could prove even more disastrous if the U.S. dollar—the currency of oil bills—resumes its climb toward the all-time high in relation to the franc that it registered late last year.
What will be more difficult to measure on any balance sheet is the influence over politics at the Elysée Pal-
ace that the loan now buys King Fahd. Some observers see it as a club to keep Mitterrand on a more staunchly centrist line. Others view it as a sure way to compromise his sympathies for the Israelis. Even as Michel Camdessus, the director of the treasury, jetted secretly between Paris and the kingdom, the French president suddenly and unaccountably pronounced himself in favor of a Palestinian state. Although the position was not in itself new, the baldness and the timing of the proclamation mystified pundits; that is, until news of the bailout leaked out.
The Saudis similarly rescued West Germany two years ago with a $3.2-billion loan when Bonn’s balance of payments moved into the red. But France is considered more politically vulnerable. By mortgaging the franc to the Arabs, Mitterrand has lost much of the trust he still had with the Israelis and, with it, his dream of becoming the Middle East’s independent power broker.
While driving France yet deeper into debt, the loan has been billed as the least of the evils for France. Mitterrand has vowed that he will defend the franc “by all available means.” But, when a recent report showed that foreign currency reserves had sunk by 2.9 billion francs to a record low of 13.3 billion francs for the period ending Nov. 25 (compared with the 40 billion francs on hand when Mitterrand came into office), the government was forced to quash speculation that it might resort to borrowing against its 3,000 tons of gold reserves. At the same time, former prime minister Rayond Barre, the opposition’s chief economist, urged the Socialists to drop out of the European Monetary System (EMS) temporarily. Although the move would unhook France from its draining obligation to maintain parity with the soaring German mark, the government has thus far refused to turn traitor to the EMS, which in turn would further erode the money markets’ confidence in the franc.
Indeed, France’s current conundrum lies in the fact that, no matter what action it takes as a stopgap, including the Saudi bailout, the government seems unable to convince the international exchange brokers that the 14month-old austerity measures will pull the economy out of its doldrums. With the latest statistics showing a drop in gross domestic product for the third quarter of 1982, it seems increasingly unlikely that it will meet its 1.7-percent growth target for the year. Until the moneymen are persuaded that the Socialists have a long-range solution to check inflation and boost productivity, the franc seems destined to remain a captive of Saudi Arabia’s harem while investors go courting the mark and the yen. -MARCI MCDONALD in Paris.
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