New weapons: devaluation

link to italian version As you all already know, the Rial – the Iranian currency – is undergoing a strong devaluation: it has lost 80% of its value last year compared with the US$, with a significant acceleration during the last days, while inflation has attested at 23%.

As Victoria Nuland, U.S. State Department spokesperson highlighted,

“The economic sanctions that the international community has put on the (Iran) government […] are having a profound impact on the ground and are being felt in what’s happening to the Rial. Iran is increasingly cut off from the global financial system. Significant amounts of Iranian oil are also coming off the market. The currency is plummeting. And firms all over the world are refusing to do business with Iranian companies.”

Bizarre: while some Mediterranean nations witness the flourishing of anti-euro trends, suggesting to fight the crisis through the exit from the single currency system and the consequent devaluation, somewhere else in the world currency devaluation is a geopolitical weapon used to force a country to its knees. And we’re talking about a specific country: Iran is an oil exporter as well as a pivotal nation in the Middle East geopolitical chessboard. A country with remarkable friendships too.

Hundreds of retailers demonstrated in the streets of Teheran to ask for the resignation of the Governor of the Iranian Central Bank and of Ahmadinejad. The protest was squashed with tear gas and some protesters were arrested, as far as it is possible to know – according to the opposition website ‘Iranpressnews’, protesters had also assaulted a bank on Ferdowsi Boulevard.

But – the question comes naturally – why are Iranian retailers protesting against the devaluation of their currency? Isn’t devaluation the “tool to get competitiveness back”? Well, maybe it’s not exactly like that: the plummeting of Rial has created a strong instability of prices on the market, hence trading is impossible.

Ahmadinejad agrees with the U.S. spokesperson on a single item: the Rial is suffering from the economic sanctions put by the international community against the Iranian nuclear program, from the “economic war” which is currently taking place against Iran.

Ali Khamenei, the Supreme Leader of Iran, underscored that

“Iranian nation has never given in and will never give in to pressures and this is the reason of the enemy’s anger”

A continual devaluation means that one week ago one US$ was worth 24,600 Rial – today, it is worth 35,000 (about 50% more).

It is getting more and more difficult to import goods: inflation has rocketed, and some necessity goods like poultry, for instance, registered a price increase of over 160%.

Who knows, maybe Ahmadinejad is not only denying the existence of the Holocaust (at least, trying to) but also of the Weimar hyperinflation

The Iranian government is trying to create new poverty benefits, more diffused and consistent, but the underlying matter is that oil sales have halved – impeding the arrival of foreign currencies. Oil and local goods are exchanged with other goods – due to the embargo – but this does not prevent the Iranian currency from plummeting.

Let’s try to think for a little while to a country of the Euro Zone deciding to exit the single currency system, redenominating its debt in a new currency and then devaluating massively in order to get competitiveness back. Well, you couldn’t name it embargo, but be sure you won’t find a lot of available counterparts for exchanging goods with an unreliable currency. And be sure that issuing government bonds denominated with this new currency will be quite expensive: which would be the ideal yield for such bonds, given a currency using devaluation and presses as its main surviving strategies?

UPDATE:  thanks to Surfer’s indication in the comments to the Italian version of this post, you can find the report issued by the Iranian Central Bank on its most recent release, April 2012 (sic!) where, even though the effects of the recent acceleration in the devaluation of Rial hadn’t taken full effect yet, inflation rates on necessary goods were higher than 30% YoY (maybe this can help everyone saying that an 80% devaluation would entail “only” a 23% inflation…).

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About bimboalieno

Operatore finanziario professionale dal 1998; ha collaborato con diverse banche italiane ed estere. Si può scoprire dell'altro cliccando qui. Oggi é responsabile di un centro di Private Banking. Professional financial trader since 1998; he has worked with several Italian and foreign banks. You can learn more here. Bimboalieno is currently in charge of a Private Banking centre.