Category Archives: Currency
Behind Iran’s currency crash
Iran’s currency is in a free fall, and the sanctions over its nuclear program are mostly to blame. Officially, the Iranian government offers to sell one U.S. dollar for about 12,500 Iranian rials. But it only offers that rate on a limited basis.
So Iranians, who need dollars to both buy imported goods and guard their savings against rampant inflation, have developed an extensive black market in dollars. It’s on this market that the value of the rial has tumbled.
At the beginning of the year, rials on the black market were worth close to the official rate. But by late September, the rial had lost half its value, trading around 24,000 to the dollar.
In the last few days the currency has plummeted even further. Reports Wednesday said money changers in Tehran were charging 39,000 rial for a dollar — a staggering 60% slide in a matter of days.
“This is one of the most intense episodes for the county in the last 100 years,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics.
What sparked the rial’s plunge
Most experts think the fall is a direct result of sanctions designed to get Iran to curtail its nuclear program, which Iranian leaders say is intended to generate nuclear power but many suspect could be used to produce a weapon.
The most recent rial plunge was sparked when the government said it would only offer the official exchange rate to importers of a few select items — namely meat, grains and medicine. Importers who wanted to bring other consumer and industrial goods into the country — most of which come from abroad — would now be offered a rate from the government that is closer to the black market rate.
The move was an attempt to liberalize the currency market, squeeze the underworld traders and hopefully stabilize the frenzied rial.
Instead, it had the opposite effect.
By offering fewer dollars per rial, the Iranian government signaled to the people that it is trying to preserve the dollars it holds as foreign reserves — in effect, preparing for a long bout with sanctions.
“It led to a loss of confidence among Iranians on the ability and willingness of the government to resolve the crisis,” Behzad Yaghmaian, a professor of political economy at Ramapo College, told CNN.
Related: Iran arrests 16 in currency crisis
The sanctions, imposed largely by the U.S. and European Union, have cut Iran’s oil exports in half. Oil exports are where Iran gets the majority of its dollars. Fewer dollars mean people are paying more rial to buy each one — devaluing the rial. When the rial falls, the price of everything else goes up.
A popular bread called barbari — which is made from imported wheat — has gone from about 1,000 rials to about 5,000 rials. A local baker told CNN the cost will likely skyrocket further.
Feta cheese cost 50,000 rials per kilogram in March. The price has since tripled. Meat that cost up to 190,000 rials per kilogram then has doubled in price.
There are a few other explanations being floated for the sinking currency. Some Iranian officials have claimed black market traders were spreading rumors so they could profit off the rial’s decline. Others say the Iranian government is restricting the flow of dollars into the economy so it can balance the budget on the back of a depressed rial.
But even Iranian President Mahmoud Ahmadinejad blames the sanctions. He said the currency drop is part of what he calls an economic war being waged against the country.
Whether the sanctions and resulting price spikes will be enough for the Iranian government to alter course on its nuclear program — or to topple the government itself — is another matter. So far Tehran has shown little interest in halting work on uranium enrichment capabilities that, if perfected, could quickly yield a bomb.
Analysts say the possibility of government reform remains remote.
Despite protests in Tehran Wednesday over the rial’s fall, organized opposition to the government is weak, while the government’s security apparatus is strong.
Plus, the country maintains populist programs designed to keep dissent at bay, including subsidized medicine, education and fuel.
“There has been no significant unrest during the rial’s steep slide,” Cliff Kupchan, a Middle East analyst at the Eurasia Group, wrote in a recent research note. “While this does not at all preclude future unrest, it suggests public tolerance for depreciation.”
U.S. hits debt ceiling
Treasury Secretary Tim Geithner told Congress he would have to suspend investments in federal retirement funds until Aug. 2 in order to create room for the government to continue borrowing in the debt markets.
The funds will be made whole once the debt limit is increased, Geithner said in a letter. “Federal retirees and employees will be unaffected by these actions.”
He went on to urge Congress once again to raise the country’s legal borrowing limit soon “to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens.”
Congress, meanwhile, is not showing any signs of budging. Many Republicans and some Democrats say they won’t raise it unless Congress and President Obama agree to significant spending cuts and other ways to curb debt. (Social Security and Medicare squeezed)
Geithner told Congress that he estimates he has enough legal hoop-jumping tricks to cover them for another 11 weeks or so.
But then he said that’s it. If lawmakers don’t get it together by Aug. 2, the United States will no longer be able to pay its bills in full. (Slashing spending alone won’t cut it)
The rhetoric about whether to raise the ceiling and under what conditions has been loud, harsh and, at times, misleading. Exasperatingly, it’s far from over.
What is the debt ceiling exactly? It’s a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public (i.e., anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare.
The first limit was set in 1917 and set at $11.5 billion, according to the Center for a Responsible Federal Budget. Previously, Congress had to sign off every time the federal government issued debt.
How high is the debt limit right now? The ceiling is currently set at $14.294 trillion. The country’s accrued debt hit that mark on the morning of May 16.
But by taking various extraordinary measures like suspending investments in federal retirement funds, Geithner will be able to bring total debt down enough to allow the government to continue borrowing until Aug. 2.
Hence, by the end of trade on May 16, total debt subject to the limit was a mere $25 million shy of the official cap — or $14,293,975,000,000. Total debt can fluctuate up or down on any given day.
How is the ceiling determined? They don’t admit it, but lawmakers tacitly agree to raise the debt ceiling every time they vote for a spending hike or tax cut.
“Congress has already passed and the president has already signed legislation that increases spending or decreases revenues. Those decisions have already been made,” said Susan Irving, director for federal budget issues at the Government Accountability Office.
So in reality arguing over the debt ceiling is essentially arguing over whether to pay the bills the country has already incurred.
Debt ceiling: Time to get realBut politicians who make a stink about the debt ceiling will always try to make the case that the guy who votes to raise it is a fiscal spendthrift.
And politics, of course, permeates the whole debate. Lawmakers who want to make hay of the issue for political gain may push for a small increase so the debate comes up again soon. Others may want a bigger increase so they don’t have to revisit the issue for awhile.
How many times has the ceiling been raised? Since March 1962, the debt ceiling has been raised 74 times, according to the Congressional Research Service. Ten of those times have occurred since 2001.
Expect more of the same over the next decade. Barring major changes to spending and tax policies, “Congress would repeatedly face demands to raise the debt limit,” CRS wrote.
Why does Congress even bother to set a debt limit? In theory, the limit is supposed to help Congress control spending. In reality, it doesn’t.
Every time the debt limit needs to be raised, lawmakers and the president are forced to take stock of the country’s fiscal direction, which isn’t a bad thing necessarily.
But the decision about how high to set the ceiling is divorced from lawmakers’ decisions to pass spending hikes and tax cuts. It’s also made after the fact, so it doesn’t do much to pull in the purse strings.
That’s why budget experts say it would be better to tie the debt limit decision to lawmakers’ legislative actions.
What happens if Congress doesn’t raise the debt ceiling before Aug. 2? No one knows for sure. But the going assumption is that no good can come of it.
What happens if Congress blows the debt ceiling?Treasury would not have authority to borrow any more money. And that can be a problem since the government borrows to make up the difference between what it spends and what it takes in. It uses that borrowed money to help fund operations and pay creditors.
Geithner’s critics say he could prevent default by simply paying the interest due to bondholders.
But since average spending — minus interest — outpaces revenue by about $118 billion a month, Geithner won’t be able to pay all the country’s bills.
That means he will have to pick and choose who to pay and who to put off every day. And there’s no guarantee that paying interest while shirking other legal obligations will protect the country from the perception of default.
Geithner said it would be akin to a homeowner who pays his mortgage but puts off his car loan, credit cards, insurance premiums and utilities. The mortgage is taken care of, but the homeowner’s credit could still be damaged.
Ultimately, if lawmakers fail to raise the ceiling this year, they will have two choices, both awful.
They could either cut spending or raise taxes by several hundred billion dollars just to get through Sept. 30, which is the end of the fiscal year. Or they could acknowledge that the country would be unable to pay what it owes in full and the United States could effectively default on some of its obligations.
0:00 / 1:34 Debt ceiling’s history lessons The first option would be impossible to execute without serious economic repercussions.
And the second option could cripple the economy and send world markets into a tailspin.
“Not only the default but efforts to resolve it would arguably have negative repercussions on both domestic and international financial markets and economies,” according to the CRS.
At a minimum, a default could hurt U.S. bonds, the dollar and investors’ portfolios. “Our bond market and stock market would crash,” said former Congressional Budget Director Rudolph Penner.
Will reaching the debt ceiling for good cause a government shutdown? Not technically.
A government shutdown occurs if lawmakers fail to appropriate money for federal agencies and programs.
By contrast, if the debt ceiling is breached, Uncle Sam would still have revenue coming in that could be used to fund the government, Penner noted.
But if Geithner is coming up short by $118 billion every month, and lawmakers just decide to cut spending by that amount, that could effectively mean a partial government shutdown.
China continues to manipulate its currency
China continues to manipulate its currency and the nation’s “exclusionary” trade policies have contributed to a massive deficit with the United States, a special commission said Wednesday.
According to a draft of its annual report to Congress, the U.S.-China Economic and Security Review Commission said lawmakers should urge the Obama administration to respond to China’s policy of undervaluing its currency and look for ways to overcome trade barriers with the world’s most populous country.
The commission, made up of 12 experts in trade and defense issues, was created in 2000 to provide lawmakers with advice on how to manage America’s economic and military relationship with China.
“China’s currency manipulation continues to harm U.S. manufacturing and employment,” the commission’s chairman, Ohio businessman Dan Slane, said in prepared remarks. “There appears to be no real motivation by the Chinese to adopt market-based approaches with regard to its currency.”
Critics argue that China’s currency, the yuan, is kept artificially low by hoarding reserves, keeping its exports cheap and undercutting international competitors. China has expressed concerns that a stronger currency could hurt its economy and undermine social stability.
The Obama administration should work with its trading partners to pressure China, the report recommended. But U.S. officials should also act independently to “encourage China to help correct global imbalances and to shift its economy to more consumption-driven growth.”
President Obama and Treasury Secretary Tim Geithner have already raised the currency issue with China, most recently at the Group of 20 meeting of global economic powers in South Korea last week. But the talks have failed to gain traction.
While the G-20 meeting ended with a pledge to avoid”competitive devaluation” of currencies, the leaders postponed more difficult decisions on how to rebalance the global economy.
China announced in June that it would allow its currency to fluctuate in a narrow range according to market forces. But the commission and other critics say the move has been insufficient. The yuan has only appreciated 2.3% so far this year.
The commission also said Congress should look for tools to deal with policies that China uses to block access to its markets that are not covered under World Trade Organization regulations.
“The Chinese government quite simply intends to wall off a majority of its economy from international competition,” said Slane.
Under its “indigenous innovation” policy, China has given its domestic manufactures an advantage and forced U.S. companies to disclose “sensitive technological information” to compete for lucrative government contracts, the report said.
These policies and others have contributed to America’s trade deficit with China of a whopping $1.76 trillion annually, the report said.
“The resultant unbalanced nature of the trade and economic relationship between the United States and China has helped give China the financial resources and new technological capabilities that have enabled it to strengthen and grow its economic, military and political power,” the report read.
The commission also advised Congress to direct the Treasury Department to “fully account” for how much U.S. debt is sold to foreign governments, as well as how much they currently hold.
The report acknowledged that China’s position as the largest holder of U.S. debt “has raised concerns about the degree of influence China has on the U.S. economy.” But the commission downplayed those worries, suggesting that China could hurt its own interests if it stopped lending money to America.
