KAPERONI: Ok, I have studied these articles and some checking. There are two main highlighted areas One good and one bad. Let me explain what I believe is going on...
#1 Alsumaria news/Baghdad
The Central Bank announced, Tuesday, to allow banks to open documentary, alaatmadt also decided to increase the share auction downloads and given to bureaux de change and remittance, and adopted a resolution authorizing the Governor to reduce the selling price of the dollar as the market requirements. LINK
#2 Central Bank decides to allow Iraqi banks to open letters of credit
12/11/2012 - 2:26 pm
Central Bank of Iraq, Tuesday, allowing Iraqi banks to open documentary Alaatmadt, while also decided to increase the share of the weekly auction and given to the exchange companies and money transfer, also adopted a resolution authorizing the Governor of the Bank to reduce the sale price of the dollar as the market demands. LINK
Read More Link On Right
#3 Central bank: authorize the Governor of the Bank to reduce the exchange rate to enhance the value of the Iraqi dinar
Revealed CBI authorize the Governor of the Bank to reduce the exchange rate to enhance the value of the Iraqi dinar.A source at the central bank said in a statement singled out Iraqiya that authorization comes in the framework of the decisions taken by the bank on monetary policy and the stability of the market and to encourage Iraqi banks to open letters of credit and increase the share of banking companies and financial transfer applicable to the instructions in the auction currency. LINK
#4 All banks licensed to open letters of credit and funded by the Central Bank of Iraq according to a mechanism designed for this purpose,
The statement noted that "the Board of Directors authorized the Iraqi Central Bank Governor the power to reduce the sale price of the dollar and of 1179 dinars to the dollar to enhance the value of the Iraqi dinar based on market demands." LINK
KAPERONI: Ok, I have studied these articles and some checking. There are two main highlighted areas above. One good and one bad. Let me explain what I believe is going on...
1. "all banks licensed to open letters of credit and funded by the Central Bank of Iraq according to a mechanism designed for this purpose"
This is potentially very bad. This appears to be Maliki's way to get the CBI's reserves. What he has come up with is for the local banks to "open letters of credit" guaranteed by the CBI.
In other words, the CBI is now in the business of guaranteeing loans and it's reserves are the guarantee. This IMO, effects the reserves of the CBI as they now become the collateral for these "open letters of credit."
If I am correct, Maliki could initiate some loan through a local bank (through some fictitious company) and default, thus making the CBI spend it's funds to reimburse the local bank. He clearly is very clever finding ways to get access to the reserves of the CBI.
The question will be, will the IMF and WB allow this? Steve (Enorrste) does not seem to think so. I not so sure. The problem with this is it would clearly effect the value of the dinar.
2. "the Board of Directors authorized the Iraqi Central Bank Governor the power to reduce the sale price of the dollar and of 1179 dinars to the dollar to enhance the value of the Iraqi dinar based on market demands."
This appears to be confirmation that the CBI is going to move forward with a free float. They are going to let "market demands" (float) dictate the rate of the dinar as we stated. It appears it will start at the current CBI rate and rise. This authorization is very good news and hopefully we will see something soon.
CARRELLO: Other than final divorce papers, Iraq is the only thing that has made me giggle and cry at the same time. One question: If Dr.Shabibi was going to go ahead and free float in an effort to go around Maliki, why would the current Governor need to gain authority? Because he is not in a permanent position? Thanks for all the information and thoughts.
TERRY: away with that. It is just too transparent what would happen. When has a Central Bank ever let their credit (reserves) be put at risk?
re no. 2-" market demands " sounds pretty darn good. I hope the float can happen even though the letters of credits doesn't happen. We shall see.
ELLIE: Thank you Kap for explaining this article! :) It does sound like the float could be "rolling round the bend" (lol epophroditus). I tend to agree with Steve though about the WB and IMF not allowing the "bad news." Miss Sherry - please move to Colorado - I am here :) lol
KAPERONI: I did get this from Kirk, pertaining to this article...
No, it translated well enough, the problem is the Arabic version. Did a quick search and it looks like they didn't take their time with it - longer articles phrased it differently.
It isn't the Dinar they plan to weaken, rather the Gov has been given the authority to lower the price of the dollar - that's why it would strengthen the Dinar.
I presume this would go with the increased supply of dollars - it would make it easier for merchants to buy dollars since it is devalued against the dinar.
But note that in other articles I've seen, this is just one item mentioned near the bottom, it is not emphasized. The increased dollar sales is the true news here. Kirk
WN: Kap, you hit the nail with your head, oh wait, too much time in Colorado. There is no way the IMF, WB etc. would back the obvious Malimonkey business with the LOC. I wonder how we will know about he float when it happens? My eyes ara crossed in anticipation.
CAPTAINSTRIKEDOWN: Kap, I apologize for having a hard time understanding Kirk's points in relation to your two points made earlier. Could you please reconcile the two. For example, is the increased dollar sales a problem with respect to our investment? Is it still likely that the article suggests an imminent float? Thanks
KAPERONI: Captain, Kirks view is good because it confirms they are going to pump more dollars into the market. Which for all practical purposes should remove more dinar.
OLDWAZHISNA: Not all letters of credit act as "guarantees of loans". In international trade, they serve a critical role in making international trade work by allowing goods to be shipped across borders.
There are two types of letters of credit: a "stand-by letter of credit" and a "trade letter of credit". The first acts as a third party guarantee for an agreement between two parties (hence a "stand-by" where the bank will provide monies if the primary obligor fails).
This is the one that Kap should rightly fear that the Central Bank ought not to engage in.
A country's central bank is absolutely the wrong financial institution to be issuing these.
However, the trade letters of credit may be something of a logical financial instituion for the CBI to help the the opening of trade in an Iraq trying to emerge from being a third world country. They are the only banking company operating in Iraq with enough resources and credibility to operate on behalf of Iraq interests what is probably an otherwise vaccum to facilitate trade.
Trade letters of credit, if done right, have much less risk than the stand-by type. Banks that accept letters of credit are taking mostly currency risk if they only accept the transportation documents that drive the transaction and have been truly verified as to their validity.
It is true that in other countries, these types of transactions are typically handled by large international commercial banks but just as importantly they have to have a presence in the country to work smoothly. Maybe the CBI is a temporary stand-in until a better commercial banking operation is functioning in Iraq. I don't neccessarily see this as a Maliki-driven money grab.
GAINSMORE: there will not be a CBI if they start directly lending to the regional banks- this will not stand. It appears Maliki will go to great lenths to see the west not profit from this rv- which,imho- is one of the main reasons why he keeps tackling the idea. Would have been a great defensive linebacker....
BLUEYESINLEVIS: Very logical and informative post.. OLdWAZ.
Gainsmore.. I seriously doubt Maliki cares one whit about the West and the investment. he is all about power and control and holding onto that power and control.