Monday, December 18, 2006

Iran To Replace Dollar With Euro In Deals

Via Middle East Online:
TEHRAN - Iran announced Monday it has ordered the central bank to use euros for foreign transactions and transform the state's dollar-denominated assets held abroad into the single European currency.

"The government has ordered the central bank to replace the dollar with the euro to limit the problems of the executive organs in commercial transactions," government spokesman Gholam Hossein Elham told reporters.

"We will also employ this change for Iranian assets (in dollars) held abroad."

Elham implied that the move would apply to oil revenues from the world's number four crude producer, although it remains to be seen how this would be received by the market.

"Foreign income sources and oil revenues will be calculated in euros and we will receive them in euros in order to put an end to our dependence on the dollar," Elham said.

The move comes amid mounting pressure from the United States for the UN Security Council to agree sanctions against Iran over its controversial nuclear programme.

Bankers in Iran have complained in recent weeks that it was becoming increasingly difficult to receive Iranian-held money denominated in dollars from European bank accounts.

They said that this was because of US pressure on European banking giants not to allow dollar-denominated funds to be sent into, or out of, the Islamic republic.

Elham added that Iran's budget would in future be calculated in euros.

"Until now the budget has been calculated according to revenues in dollars, but this calculation will now change," he said.
Now, it occurs to me that one of Iran's biggest customers - especially for oil and natural gas - is China. China is the biggest US creditor and a massive holder of dollars. If China (and indeed the rest of the world) has to convert dollars to euros before paying all its bills with Iran, what kind of effect will that have?

I also want to point out that the last Middle East nation to try converting to euros instead of dollars as the base currency for trade was Iraq under Saddam...and we all know what happened next.

UpdateThe BBC confirms the story but says impact should be minimal:
Analysts said Tehran had been steadily shifting its foreign-held assets out of dollars since 2003 and that Monday's announcement was unlikely to affect the value of the dollar, which has weakened significantly in recent months.

...The dollar slipped slightly against the euro in New York trading although analysts said they did not expect the reaction to be too severe.

"It is something they have been saying they are going to do for quite a long time now, so I wouldn't expect any market reaction," said Ian Stannard, an economist with BNP Paribas.
I think they may be underestimating how political ramifications will effect economic considerations.

Update My pal Fester has an interesting answer for me. He recognises the motive of hiding Iran's cash from "any unilateral/coalition of the willing financial, diplomatic and military sabre rattling" but also has another reason.
If Iran dumps its entire reserve component, roughly $53 billion dollars in dollar denominated assets, we would expect to see the dollar go down slightly as a matter of supply and demand, but that is about it. So why would Iran want to undertake a potentially financially risky maneuver of exchanging all of its reserves into Euros, Yen, potentially Yuan and other currencies?

...The simplest answer is an economic answer. The US dollar has been falling against all major currencies for the past couple of months. There are projections that if the US current account deficit, which is past 6%, is to start to balance, the US dollar against a trade-weighted basket of currencies will need to fall 30-40%. That means holders of dollar denominated assets will lose a lot of real purchasing power if they still hold dollars after the 30% to 40% drop occurs. Whichever major dollar holders can get out before the decline really starts picking up momentum will gain a significant increase in relative purchasing power.
However, Iran's imports amount to around $42 billion and exports to about $55 billion annually and if Iran insists on making all purchases and sales in euros that will be a fair bit of trading on top of the conversion of assets. Japan and China - coincidentally the biggest holders of dollars - are also Iran's biggest trading partners (28% of all trade, between them). So here's a follow-up question for Fester - will Japan and China see this as a trigger for that predicted devaluation and, not wanting to lose out themselves, make it a self-fulfilling prophecy?

Ken Anderson, from Anything They Say, argues in an email that it's an all-or-nothing proposition for Japan and China:
Because the tricky situation that countries like China and Japan are in is that divesting their debt holdings away from USD will collapse the rest of their holdings. I.e. if China dumps 10% of their US debt, the value of the rest of their dollar holdings collapses on the money markets. They loose huge value with such a move, if done too quickly. China and Japan prop the US dollar up because they have to. If they don't, they stand to loose billions if the dollar collapses. Needless to say, it is a tricky situation and is about the only thing keeping the US dollar afloat...But one thing is certain: things will get very "interesting" in the next few months if this continues.

Update Ken has more in a post, pointing out that Russia, the OPEC nations and China have already either quietly begun, or announced they are going to, divest themselves of dollars and diversify into other currencies.

Over at The Agonist, "Bonddad" has the details of the dollars slide and looks at some other nations that are dumping dollars in favor of the euro, such as Indonesia and Venezuela. He concludes:
The dollar is not in a good place. The US economy is slowing and there is a massive trade deficit further weakening its value. Global interest rates are closing in on US rates, taking away the carry trade. And the US’ popularity in some regions is at an all-time low.

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