By Mark DeWeaver.
This year the Ministry of Finance (MoF) is set to sell IQD 11 trillion in new debt to the state sector banks, thereby partially filling the hole in the central government budget left by the recent collapse in oil prices. The new issuance should bring total treasury bills outstanding to IQD 18 trillion, a 156% increase over the end of last year and more than double the previous peak level of November, 2010.
T-bill issues of this magnitude could potentially provide a sizable boost to money supply growth. Consider what would happen if the state banks didn’t keep any of the new bills on their balance sheets but instead sold all of them to the CBI (Central Bank of Iraq). The central bank would pay the banks by crediting their reserve accounts, thereby monetizing the increase in government debt by “printing” new money. (Such operations are allowed under Article 26, Section 2 of the CBI Law.)
The resulting IQD 11 trillion increase in base money (commercial bank reserves + cash in circulation) could increase Iraq’s M2 money supply by as much as IQD 15 trillion (assuming the current M2 multiplier of 1.37 times). (M2 includes base money and commercial bank deposits.) That would be a 17% jump, a dramatic acceleration from December’s year-on-year M2 growth of just 3.3% to growth rates last seen in 2013. (See Chart.)
Engineering a monetary stimulus of this magnitude might be a good policy for the government to pursue. With GDP growth at a multi-year low (see my last post) and year-on-year inflation dropping to -0.41% in January, why shouldn’t the CBI attempt its own version of “quantitative easing?”
Yet it is far from clear that the government has any such plan.
This year’s T-bill sales will not be unprecedented. From April, 2009 – April 2010, total T-bills outstanding rose by IQD 7.2 trillion—the same 17% of initial base money that IQD 11 trillion would represent today. And none of those earlier T-bills were sold to the CBI. In fact, the central bank hasn’t had any T-bills on its balance sheet since March, 2006.
If this precedent is repeated, this year’s new issuance will have no impact on the money supply at all.
Ali Allaq, Central Bank general manager, told the Al-Hayat newspaper on Monday that the CBI is responsible for the stability of the market, adding that the parliament’s Economic Committee called on Iraqi ministries to open bank accounts in the privatebanks, “but it seems like Iraq’s finance ministry … think they do not have to deal with private banks, only the governmental ones.”
According to Allaq, $4.29 billion of the loans will go to the Industrial Bank, Agriculture Bank, and Housing Bank and the other $841 million will go to private banks.
|May 14, 2015 | 21:48 GMT|
|May 1, 2015 | 14:37 GMT|
Iraq’s crude oil exports for the month of April were the highest they have been since the 1980s the Iraqi Oil Ministry announced May 1, Alsumaria News reported. A total of 92.3 million barrels were exported during the month, amounting to approximately $4.8 billion in revenue. An estimated 2 million barrels per day were exported at prices that reached $51.70 per barrel.
|April 17, 2015 | 14:13 GMT|
President Barack Obama will host leaders from the Gulf Cooperation Council (GCC) at the White House and Camp David from May 13-14, Reuters reported April 17. The summit will provide an opportunity for Obama to discuss the ongoing nuclear negotiations with Iran and the conflict in Yemen with GCC leaders. Reperesentatives from Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates are expected to attend.
PARIS – Switzerland stunned the markets on Thursday by abandoning a crucial part of its effort to hold down the value of its currency, concluding that the strategy was too risky and too costly given the enormous forces pushing in the other direction.
The move underscores the turbulent state of the global economy. Around the world, smaller economies are grappling with how to navigate the aggressive monetary activism of major central banks like the Federal Reserve in the United States and the European Central Bank.
The Swiss central bank had been trying to cap the value of its currency, the franc, against the euro, with nervous investors fleeing the market tumult and seeking the relative safety of Switzerland. But the euro’s decline has been particularly steep – and the rout may accelerate.
The European Central Bank is expected to announce a major new stimulus program next week to pump money into the region’s troubled economy, which is creating downward pressure on the euro. That pressure is particularly marked against the dollar, which is rising in part because of a strong United States economy and plans by the Fed to raise interest rates.
If the Europeans undertake such an effort, it would make it that much more expensive for the Swiss to buy enough euros to maintain the value of the franc. So the Swiss leaders’ abandonment of its target was taken as a bet that easier money from the European Central Bank is on the way, and potentially on a vast scale.
“Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced,” the Swiss central bank said in the announcement.
The abrupt decision on Thursday sent the value of the Swiss franc soaring, as the country’s stocks broadly plummeted. The shares of exporters, in particular, got slammed over fears that the rising currency would weigh on profit.
“Words fail me!” Nick Hayek, the chief executive of the Swiss watchmaker the Swatch Group, said in a statement distributed to news media, adding that today’s action “is a tsunami: for the export industry and for tourism, and finally for the entire country.”
The move hit some traders especially hard. FXCM, an online currency trading house based in New York City, said that the “unprecedented volatility” had led to significant losses by clients. The company said it had a negative equity balance of about $225 million. As a result, FXCM said it “may be in breach of some regulatory capital requirements.”
The Swiss policy dates to September 2011, near the height of the sovereign debt crisis in Europe.
As panic set in, investors and savers dumped euros in favor of the Swiss franc and other safe havens. The rising value of the Swiss franc, however, could contribute to pushing the country into deflation and create problems for the country’s exporters, which suddenly found their products less competitive overseas. Switzerland’s economy is heavily dependent on such companies.
So the Swiss monetary authorities instituted a policy to try to keep the euro to a floor of 1.20 francs. Only last month, it reiterated a pledge to continue to support that floor by buying the euro in “unlimited quantities” if needed.
The Swiss central bank’s strategy, which involves selling francs on the open market in exchange for euros, has been controversial at home. Many exporters had welcomed the decision to hold down the franc.
But as the central bank’s balance sheet grew by several hundred billion euros, the central bank came under fire from opponents. In a December referendum, those critics tried to force the central bank to convert much of its foreign exchange holdings into gold. That initiative failed.
On Thursday, the central bank surrendered to the market dynamics, saying in a statement that it was giving up the minimum exchange rate.
“This exceptional and temporary measure protected the Swiss economy from serious harm,” the central bank said in a statement. “While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.”
Phyllis Papadavid, foreign exchange strategist at BNP Paribas in London, said after the Swiss central bank action that monetary authorities were “still sensitive” to the overvaluation of the franc, but that they had adapted to changed conditions – particularly the dollar’s recent rise – by changing course.
“They haven’t given up,” Ms. Papadavid said. “They’re clearly going to continue watching it.”
As it scrapped the cap, the Swiss central bank simultaneously cut interest rates, already in negative terrain, hoping to offset some of the damage in foreign exchange markets. It changed the rate on deposits to minus 0.75 percent from minus 0.25 percent, tripling what it costs lenders to park money at the central bank.
But that was too little to stop the tide, and the franc jolted 15 percent higher against the euro. Swiss stocks plummeted in value as investors hastened to sell equities priced in francs.
Shares of Swatch, the global watch brand, fell 16 percent, leading the Swiss Market Index nearly 9 percent lower. But the decline was broad-based, including Nestlé, the food manufacturer; Holcim, the giant cement maker; and the chemical company Syngenta.
“We can only guess at what was in their minds,” Carl B. Weinberg, chief global economist at High Frequency Economics, said of the Swiss central bank’s move. “Maybe they are afraid that the euro is coming on some hard times, and they didn’t want to be tied to a sinking ship.”
Mr. Weinberg said it was hard at the moment to tell what the fallout would ultimately be, but that it would mainly be “micro effects, rather than macro effects.”
“A lot of people were borrowing in Swiss francs because they were cheap,” Mr. Weinberg said. “Well, anyone who borrowed in francs now owes something like 15 percent more than they did yesterday.”
“But anyone who has Swiss assets is a little bit richer today,” he added. “Net, there are winners and losers.”
David Jolly reported from Paris and Neil Irwin from Washington.
|December 22, 2014 | 14:57 GMT|
Russian energy company Gazprom will heed the request of Russian President Vladimir Putin and will sell its foreign currency reserves on the domestic market, Reuters reported Dec. 22. The move is meant to help stabilize the ruble, which is down some 45 percent against the dollar so far this year.
|December 19, 2014 | 16:50 GMT|
Russia’s deteriorating economic situation has struck another blow to Russian President Vladimir Putin and his ability to maintain a firm hold on the country and the government. Uncertainty in the Russian economy continued for another day Dec. 17 as the Russian government was forced to step in to stabilize the ruble after the currency plummeted 20 percent the previous day. The fall in the ruble’s value came after the Central Bank of Russia raised interest rates from 10.5 percent to 17 percent — the largest interest hike since the devastating 1998 financial crisis that led to Russia’s massive defaults. These developments in what was already a weakening economy increased pressure on and within the Kremlin, spawning rumors throughout Russia about the cause of this instability and about what could come next.
Before the past few frantic days, the Russian economy was already in a sharp decline caused by several factors. Russian industrial growth and production began stagnating in 2013, and the Russian-supported conflict in Ukraine had soured investor sentiment and prompted economic sanctions from the West. Moreover, oil prices fell below the government budget’s forecast of $93 per barrel for 2014 and $80 per barrel for 2015.
Fissures and disagreements have formed within Putin’s top team on how to manage the current economic crisis, just as Putin is already losing the confidence of Russia’s security chiefs. Because of the failure to predict a change in Ukraine, Putin has already purged factions within the Federal Security Service. Moreover, in recent weeks, Nikolai Patrushev — head of the Russian Security Council and former Federal Security Service chief — has faced public criticism and allegations of corruption from opposition factions led by Alexei Navalny. This could signal even greater pressure among Russia’s security elite, one of Putin’s primary sources of power and stability. With his supporting factions in disarray, Putin is facing another test of his ability to retain the confidence of the people and those inside the Kremlin.
|December 17, 2014 | 00:54 GMT|
Tuesday marked a difficult day for Russia President Vladimir Putin on both the economic and foreign policy fronts. In the early hours of Dec. 16, the Russian Central Bank announced an increase of its benchmark interest rate from 10.5 percent to 17 percent — the largest such hike since 1998. While this decision helped the ruble strengthen for a few hours, the currency then went into a free fall, at one point losing 20 percent of its value and hitting record lows at 80 rubles to the dollar. The ruble finally stabilized in the afternoon, likely due to a Central Bank intervention, and toward the end of the day it strengthened in value, indicating a possible second monetary intervention. Though the escalating economic crisis in Russia puts Putin’s government in a precarious position, it could pose strategic challenges for the United States and Europe as well.
The ruble had been gradually weakening for months before its dramatic decline on Tuesday, with the currency losing about half its value since the beginning of the year due to Western sanctions, lower oil prices and declining market confidence. Should Tuesday’s interest rate increase fail to stabilize the currency in the short term, the Central Bank could implement additional interest rate hikes, currency interventions or even capital controls to stem the ruble’s decline.
On the surface, the Kremlin has worked to present a calm and organized reaction to the ruble’s collapse. Putin’s spokesman, Dmitry Peskov, assured the public that the Central Bank is acting independently and that Putin did not plan to hold any new or extraordinary meetings on the topic that day. Minister for Economic Development Alexei Ulyukayev — following a meeting with Prime Minister Dmitri Medvedev, Central Bank chief Elvira Nabiullina and other top policymakers — reported that Russia’s leadership is not considering capital controls to ameliorate the crisis. A video shown on Russian television, reminiscent of a Hollywood-style movie trailer, promoted an upcoming press conference by Putin on Dec. 18 highlighting Russia’s strength and defiance of the West. Russian state media also largely minimized the ruble fall. Nevertheless, the impact of the ruble’s fall could be felt as Russian banks saw increased demand for foreign currency and cash, while some businesses — such as Russia’s online Apple store — temporary stopped sales.
Meanwhile, the White House announced Tuesday that U.S. President Barack Obama will sign the Ukraine Freedom Support Act of 2014, which passed Congress over the weekend. The bill lays the groundwork for possible additional sanctions on Russia and includes provisions for military support to Ukraine later this week. The president’s move will initiate the deadlines for the separate sanction elements of the bill. The act is structured in a way that gives Obama great flexibility in whether to implement all or only some of the sanctions, but it requires the president to apply sanctions on the Russian defense and energy sectors. Sanctions on Gazprom are also possible if the company significantly decreases natural gas supplies to NATO members, Ukraine, Georgia or Moldova.
The most severe of the defense sector sanctions (depending on how many of the act’s optional elements Obama decides to implement) would still only have a limited effect on the Russian defense industry, since it does not depend on business or banking inside the United States. Meanwhile, the energy sector sanctions could have more significant effects on the activities of U.S. oil majors involved in projects inside Russia. The act may directly target their ability to conduct business if they continue their activities in Russia. Other sanctions targeting Russian energy companies that rely on equipment imported from the United States are optional.
Overall, the act gives Obama tools to target specific parts of the Russian economy, though apart from some areas of the energy sector, most of these would have only limited effects on the country. Nonetheless, the act is noteworthy because the United States has decided to move on the bill just as Russia experienced its worst financial day in several years. Washington is making a point that rather than easing tensions by relaxing existing sanctions, it has the capability to increase pressure on Moscow. The message here is clear: The United States has Putin on the edge, and it can push him over if it so desired.
However, the United States knows that it can be dangerous to push Russia too far. A collapse of the Russian economy would be felt throughout Europe’s economy and those of the rest of the former Soviet space (including countries like Ukraine that are dependent on Western financial assistance). It could have security implications as well. Indeed, Russian Foreign Minister Sergei Lavrov stated in an interview Dec. 15 that Moscow has the right to deploy nuclear weapons in Crimea. This statement came a week after a U.S. deputy secretary of defense, speaking at a U.S. Senate hearing, floated the idea of deploying tactical nuclear weapons in Europe. While both Russia and the West have escalated their rhetoric over the Ukraine crisis, the United States and the European Union certainly do not want the standoff to reach the point where action or buildups on the nuclear front become realistic, particularly at a time when Moscow feels under attack by the West.
It is still too soon to gauge the extent of the damage of Russia’s current financial crisis. But Putin is well aware of the impacts of major economic crises on past Russian governments, as it was Russia’s 1998 financial crisis that ushered in the downfall of former Russian President Boris Yeltsin and facilitated Putin’s own rise to power. At the same time, the United States and the European Union understand that a pushing a nuclear-armed country as large and powerful as Russia toward full-scale collapse can have serious unintended consequences, and such an aim ultimately may not be in their interest, despite the standoff over Ukraine. Thus, both Putin and the West will have to grapple with the dilemmas posed by Tuesday’s events in order to avoid a larger crisis.