Many European money managers ignore Iran’s label

Jul 05, 2002 02:00 AM

Iran's first foreign bond sale since the Islamic revolution of 1979 is attracting interest from Deutsche Bank, Pictet and other banks outside the United States that are not put off by its place in President George W. Bush's "axis of evil.". Money managers who met with Iranian officials in Frankfurt and Paris said they might buy some of the EUR 500 mm ($ 489 mm) of bonds underwritten by Commerzbank and BNP Paribas.
"Nobody in Germany or Continental Europe agrees with Bush," said Holger Friedrich, a fund manager at Union Investment in Frankfurt. Many European money managers are ignoring Bush's January statement that Iran, along with Iraq and North Korea, supports terrorists like those that destroyed the World Trade Centre on Sept. 11. Instead, these money managers say that Iran's oil and its history of repaying debts make it more trustworthy than emerging-market alternatives such as Brazil, Turkey or Argentina.

For some US investors, European willingness to invest in countries accused of sponsoring terrorism is abhorrent, particularly after the attack on New York's financial district. "I lost friends on that day," said Stapley Mitchell, a fund manager at Fifth Third Investment Advisers in Grand Rapids, Michigan. "I don't care how much money you can make, these are people that are trying to kill.".
Frank Scheidig of Deutsche Asset Management said there was no evidence that Iran supported the attacks on the United States. After a meeting with Iran's deputy central bank governor, Mohammed Mojarrad, Scheidig said he might recommend that investors buy the bonds.
"If there was the smallest confirmation that they supported Sept. 11," Scheidig said, "we would never spend a cent on any investment in a country that would do something bad."

Iran has recently tried to improve relations. President Mohammed Khatami expressed his "deep sorrow and sympathy" within hours of the Sept. 11 attacks, and "Death to America" chants were dropped from Friday prayers.
But Bush has maintained a hard line against Iran. In his Jan. 29 State of the Union address, Bush said Iran was developing weapons of mass destruction and accused Tehran of "exporting" terror. He also said Iraq and North Korea were building biological and nuclear weapons, and he accused Iraq of supporting terrorists as well.
"States like these and their terrorist allies," Bush said, "constitute an axis of evil, arming to threaten the peace of the world."

But despite Washington's hard-line stance, Iran, the second-biggest producer in OPEC, still attracts investment from international oil companies. Shell Group, ENI and TotalFinaElf have invested $ 10.5 bn in the country since 1997, according to the Congressional Research Service, the public policy research arm of the US Congress.
Analysts also note that Iran has the lowest debt level relative to gross domestic product among more than 60 governments monitored by Fitch Ratings, the London-based ratings agency said in a May 10 report. Unlike some other emerging markets, Iran has not defaulted on its debt and had a current account surplus in the seven of the past eight years.

Fitch rates Iran's foreign debt B-plus, on a par with Brazil, Uruguay and Romania and one level below Russia. Moody's Investors Service last month withdrew its rating on Iran because of concern updating its research might violate American sanctions. In 1987, the US government barred American citizens and companies from most trade with Iran because it determined that the country supported international terrorism. Corporations can be fined as much as $ 500,000 for violating the Iranian Transactions Regulations.
Iran plans to price the five-year bonds to produce a yield of 8.46 to 8.96 %. That rate is less than half the 23 % yield on Brazil's dollars-denominated bond due in 2007. Russia's 2007 dollar bond recently traded to yield 8.67 %. Turkey's EUR-denominated bond due in the same year yields 14.7 % at recent prices.

Some investors said Iran needs to pay higher returns because the US sanctions make it a bigger risk. "You can't argue that Iran has as good credit as Russia," said Dominique Audin, who helps manage securities for Pictet Asset Management in London. "Russia isn't being pointed at by the US president as a potential target.".
Some European investors are also trading the defaulted loans of countries that are under US sanctions, including Iraq, North Korea, Cuba and Sudan. The 11 countries on Washington's embargo list have about $ 51 bn of outstanding debt, according to Exotix, a unit of ICAP, a London-based derivatives brokerage firm.

Colm McDonagh, a fund manager at Aberdeen Asset Management, has invested in Iraqi and North Korean debt on expectations the loans will be repaid if President Saddam Hussein is removed or the two Koreas reunite. "It's toxic stuff, but when it moves, it really moves," McDonagh said.
Mark Mobius, managing director of Templeton Asset Management, said fund managers should not stop investing in countries like Iran because of the US blacklist. "In some ways, there is a moral obligation for us to get involved," Mobius said. "Business relationships, built over time, could help promote political relationships. I think the arguments in favour of commercial relationships are stronger than for cutting these countries off."

Source: The International Herald Tribune
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