Ok, I am going to toss out a theory…You may or many not agree, but based on actions within Iraq and other events. It may be very close to what we will see happen in the near future.
I believe the plan always was to release the dinar at a “staging rate” at or about 1 to $1. There are many documents that reference that from Dr. Fadel, to the SIGIR report. So we can say with high probability that was, or should have been the plan.
The issue is, if that was the case, some liability falls on the CBI and Iraq. They must be able to sustain this rate. Remember as much as 10 trillion dinar may have been sold outside the country for what Saleh said, “will be held as a foreign reserve currency...for a very long time.” What that means is that the world’s central banks would, in essence, be funding the RV. We have discussed this before as central banks around the world, through “inter-banking,” would buy/sell the dinar creating benefit to each central bank holding it. Where this becomes sticky is the magnitude in which financially the world would become dependent on Iraq to sustain that initial rate. To have a GOI stable enough, to continue to progress economically and open to the world investment firms waiting to come into Iraq. One wrong move, possible violence, and the dinar could plummet leaving these central banks holding the bag on a near worthless currency.
So we see Shabibi has attempted, on at least two occasions, to bring his dinar to the international level (June, 2011 and again in April, 2012). To launch this initial rate, only to be denied by the GOI and CoM. After much thought, I have come to the conclusion that as corrupt as the GOI and CoM is, their reasons I am sure are selfish in nature (many of them hold lots of dinar)…knowing under the current conditions, the probability of failure is too great to risk with the currency - currency they hold. To bring the dinar to the international level to only have it fail.
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Therefore, as time passes, the CBI is caught in a difficult situation. Economically, Iraq needs the RV yesterday. We have seen several articles pertaining to the advancement of the economy, the poor living conditions or lack thereof, investment into agriculture, manufacturing, etc. So the CBI has a real dilemma…
Do they launch the dinar at this rate?…And take the risk of collapse of the GOI, etc., taking Iraq back into a sectarian war?…Which would create a situation in which the CBI could not sustain the rate, dropping it’s value creating a setback of 2-10 more years? Leaving central banks around the world holding a worthless dinar? Or is there another solution?
Shabibi has a decision to make. Due to the current political conditions, demand economically in Iraq for advancement, and global financial conditions, time is not something Shabibi has to just sit and wait this out. His people are starving, investment is waiting, and economic growth is standing at the doorway. Shabibi can put people back to work, rebuild world class structures, and see his country prosper at least financially from the wealth of the country…But how?
Answer: The CBI can toss the responsibility back to the international community.
We have talked recently about ECNs or Market Makers. We see from the Iraqi Banking and Investment Conference, banks, hedge fund, and private equity institutions are all going to this event scheduled for Sept 18-19th, 2012. Clearly, these types of companies all have something in common...They are good at making money supporting currency...especially one with great potential such as the Iraqi dinar. We know the CBI wants to develop a world-class financial industry in Iraq, and these players can help Iraq get there.
So my theory is a switch in the plan. From a risky sustainable .86 or 1 to $1 rate to a aggressive possible free float starting at 1166 or so, letting the global market dictate the rate. Letting the world raise the value of the dinar based on what it “sees” as progress in Iraq. This creates a situation where the CBI is now “off the hook,” sort of speak it does not have to be concerned with failure. And as the GOI resolves it’s differences, mandated issues become resolved, the world will see…and the dinar will rise. The greater the progress in Iraq, the faster it will rise. The more open Iraq becomes to the international community, the greater the benefit to Iraq. The key here is…the risk of collapse and risk of global loss by central banks is now eliminated...or at least minimized.
I think it is entirely possible we may see the dinar come out on the world market, rising to .10 almost overnight. It may rise to 1 to $1 within weeks if the GOI can resolve issues. There is no way to tell for sure until it happens…there is no way to know how fast or how high the dinar will go, but this plan takes a load off of Shabibi and rests it on the world’s financial market's shoulders.
In a best case scenario, the plan will go forward as documented…with the “staging rate” of 1 to $1 or about. In a worse case, we must watch the dinar rise gradually as Iraq’s political stability takes hold. The rate you choose to cash out is then something you need to consider.
BTW, I agree with Senator Lindsey Graham. The blame falls sole on the US on this one. Lack of direction, commitment, and leadership is why we are even still discussing this issue.
Something to think about.