Post From Wealthwatch.world Chat Room
News With Links & Discussion
Wealthwatch OOTW News & Comments 2-2-16 Part 1 of 2
OOTW: STERILIZATION, ECONOMIC (Social Science) The term sterilization is used in international economics and macroeconomics to describe the actions a central bank undertakes in order to neutralize the effects of central bank interventions in the foreign exchange market on the supply of domestic currency in the economy.
Sterilization usually takes the form of an open market operation, in which a central bank sells or purchases government bonds on an open market in the amount it purchases or sells foreign currency on the foreign exchange market, so that the amount of domestic currency in circulation remains unchanged.
OOTW: THE ISSUE HERE IS THAT THERE ARE SEVERAL FORMS OF STERILIZATION
OOTW: WHAT WE'RE TALKING ABOUT IS A FORM OF CURRENCY INTERVENTION (AS IT APPEARS ON THE SURFACE) OOTW: webcache.googleuserconten...
OOTW: A sterilized intervention to prevent currency depreciation Assume that a country's currency is depreciating. To prevent this, the country's central bank may decide to intervene in the foreign exchange market.
To prop up the value of the nation's currency, the central bank may resort to creating artificial demand for its currency. It can do this by using some of its foreign exchange reserves to buy local currency.
The resulting demand stops the currency's depreciation but also acts to reduce the domestic money supply in two ways. First the bank is directly removing some of the nation's currency from circulation as it buys it up.
Secondly, if the central bank overshoots the target, the intervention can create or worsen a current account deficit due to the propped-up exchange rate being more favorable for importers than for exporters.
This deficit sends currency out of the country, further decreasing liquidity. The resulting lowering of the money supply likely will have a deflationary effect which can be undesirable, especially if the country already has substantial unemployment.
To offset the effect on the money supply, the central bank may sterilize its foreign exchange intervention. It can do this by engaging in open market operations that supply liquidity into the system, by buying financial assets such as local-currency-denominated bonds, using local currency as payment.
A sterilized intervention against depreciation can only be effective in the medium term if the underlying cause behind the currency's loss of value can be addressed.
If the cause was a speculative attack based on political uncertainty this can potentially be resolved. In practice, the cause driving sterilized interventions in the late 20th century was often that a high money supply had meant local interest rates were lower than they were internationally, creating the conditions for a carry trade.
This involves market participants borrowing domestically and lending internationally at a higher rate of interest, a side effect of which is
OOTW: a side effect of which is to exert downwards pressure on the currency being borrowed. Because a sterilizing intervention holds the money supply unchanged at its high level, the locally available interest rates can still be low.
The carry trade therefore continues to be profitable and the central bank must intervene again if it still wants to prevent depreciation. This can only go on so long before the central bank runs out of foreign currency reserves with which to intervene.
OOTW: BASED ON THESE TWO ARTICLES....
OOTW: Markets | Thu Jan 21, 2016 10:12am ESTRelated: FINANCIALS Iraq to sell local bonds to public for first time since 2003 - finance minister BAGHDAD Jan 21 Iraq plans to sell local bonds to the public for the first time since 2003, with a 5 trillion dinar ($4.24 billion) issue expected this year, the finance minister said on Thursday, as the country seeks to cover a widening budget deficit.
The three-year bonds will carry an interest rate of 10 percent and will be sold to "citizens and employees", Hoshiyar Zebari told a news conference in Baghdad. Iraq already issues treasury bills to domestic banks and has international bonds outstanding. ($1 = 1,180.0000 Iraqi dinars) (Reporting by Saif Hameed; Editing by Gareth Jones)
OOTW: AND THIS ONE
OOTW: CBI calls on citizens to buy bonds and stop "hoarding money" Author: HH, MK Editor: AT, HH 01/02/2016 18:25 Number of Views: 124 Called on the Central Bank of Iraq, on Monday, citizens to the acquisition of national bonds, which will present soon, rather than reliance on “hoarding money”, as he emphasized that those bonds will have a “good financial benefits.”
The governor of the Central Bank on the Keywords during a press conference in the Green Zone in central Baghdad, with a number of officials in economic affairs and attended (range Press), said that “national bonds would investigate citizen good financial returns,” noting that “the Central Bank put interest on the bonds so that compete on foreign interest. “
He called on citizens to “the acquisition of national bonds, which will put it soon rather than the adoption of hoarding money,” pointing out that “the central bank wants to bring in the interest of the citizen through internal bonds instead of resorting to asking foreign bonds.”
The Central Bank of Iraq announced earlier, take the necessary measures to support liquidity in the banking system, and decided to facilitate the sale of foreign currency “to sustain the exchange rate” procedures.
The Central Bank of Iraq, said in (the 18th of January 2015), that the financial reserve for Iraq equivalent and a half times the weakness of the currency bloc, returned as “best rates” in the countries of the world,
and as he emphasized that Iraqi financial institutions are “unable” to cover the fiscal deficit, he stressed the need to reconsider the structure of the budget and spending and to diversify sources of income and achieve the investment more broadly to address the decline in oil prices.
OOTW: IT APPEARS THAT IRAQ, BUT OFFERING NATIONA/LOCAL BONDS IS TRYING TO PULL IN IQD
OOTW: THERE ARE SEVERAL FORMS OF STERILIZATION, EITHER MEANT TO APPRECIATE OR DEPRECIATE THE VALUE OF "LOCAL" CURRENCY
OOTW: BY IRAQ OFFERING BONDS IN LOCAL CURRENCY, THE ATTEMPT IS TO DRAW IN IQD BY OFFERING THE BONDS FOR SALE IN THE VALUE OF THE LOCAL CURRENCY..AS THE ARTICLE STATES AT "1180"
OOTW: THEY WANT TO PULL IN THE "LOCAL" CURRENCY TO BRIDGE THE DEFICIT IN THE BUDGET
OOTW: BY BRIDGING THE DEFICIT IN THE BUDGET, (BY PROXY) THEY'RE ATTRACTING IQD AND INVESTORS WHO ARE HOPING TO REAP PROFIT BY PURCHASING THE BONDS AT A (TBD) INTEREST RATE
OOTW: THIS IMHO, WILL TEST THE CONFIDENCE OF IRAQI'S AND ALSO PULL IN IQD
OOTW: it appears to me that they do this by buying foreign currency reserves Once the cbi stops this intervention And people continue to buy dinar This will cause the exchange rate to go up - that is the hope anyway
OOTW: i keep hitting my caps key sorry
Comments may be made at the end of Part 2 Thank You