A Mega Economic Crisis Looms Over the System
Iranian Banks Are Bankrupt
A mega economic crisis looms over the system, according to Iran Gate. Iran’s economy has faced numerous minor and major crises, each with a high capacity to seriously challenge the governance. However, reports from the Central Bank indicate a creeping mega-crisis beneath the surface of Iran’s economy, expanding rapidly but quietly.
The Central Bank’s report on repo operations in January 2023 is a serious alarm for the Islamic Republic system. So far, every crisis that has grown within Iran’s economy has affected the ordinary people on the streets. However, if no solution is found for the crisis infiltrating every part of Iran’s banking system, it is the governance itself, more than the ordinary people, that will face a mega-crisis.
Reports on repo operations indicate a creeping and exponential imbalance in banks, each a fundamental pillar in Iran’s economy. Economists now believe that if this trend continues, the likelihood of a comprehensive collapse of Iran’s economy is very high.
What is the repo story?
Repo, or repurchase agreement operations, is a type of contract in the investment domain involving securities. In this contract, the seller of the mentioned securities commits to repurchase the same securities, or their equivalent in currency or securities, at a predetermined higher price in the near or distant future.
The market where repo operations are executed has a distinct and primary feature: reducing the risk of borrowing processes in the money market. This is because the selling party sells securities to receive the equivalent in currency from the repo buyer and guarantees to repurchase the same securities or their equivalent within a specified timeframe and at a significantly higher price.
The issue now is that one of the uses of repo in the money market is when banks or financial institutions face severe liquidity shortages. In this situation, banks use repo operations to sell securities to other banks or financial institutions. This process, designed by the Central Bank since 2020, was implemented to reduce the risk of lending between banks and between the government and banks. Economists have strongly welcomed such an action, viewing it as a step towards limiting the government’s unaccountable borrowing from banks, read the Central Bank.
What is the mega-crisis story?
Recently, the Central Bank published a report on the trend of repo operations in January 2023, which has become the key to solving a very bitter equation for Iran’s economy. In short, what can be inferred from this report is the presence of an extremely widespread and unprecedented imbalance in the country’s banking system, which is rapidly intensifying.
Looking at this report, it is observed that repo transactions on January 9, 2023, reached the highest level since the inception of this market. The value of these transactions on January 9 surpassed 113 trillion tomans, which is a significant record in this market.
Examining the trend of repo transactions from mid-December to the end of January also indicates an unprecedented surge in this market. In fact, for the first time, the daily value of repo transactions in this timeframe exceeded 100 trillion tomans, causing concern among experts.
Record-breaking Money Creation in January 2023
In the report published by the Central Bank on repo operations, another very important point is hidden. The statistics on weekly money creation have also been among the issues that have intensified concerns. This measure, which records the systematic borrowing of banks from the Central Bank and also borrowing from other banks and financial institutions, indicates the acceleration of government borrowing from banks.
In total, in January 2023, the amount of money creation surpassed 21 trillion tomans, which is unprecedented in its kind. This astonishing and very concerning record can be likened to a ticking time bomb within Iran’s banking system, a bomb that could explode at any moment, with the bankruptcy of banks and financial institutions being just one of its devastating outcomes.
Bank Imbalance and the Government’s Mismanagement
Once again, the budget deficit is involved. So far, the government has borrowed from the Central Bank, either directly or indirectly, to compensate for the budget deficit. This borrowing, as has been repeatedly mentioned, has had devastating consequences for the economy, the most visible of which is the exacerbation of inflation rates.
But for how long can governments continue borrowing? As the saying goes, to borrow from a source, that source must always be full. In other words, when banks are bankrupt, there will be no resources left for the Raisi government to dip into and borrow.
On the other hand, the risk of social unrest is very high if banks declare bankruptcy. There have been repeated warnings about banks like military banks, Ayandeh, and financial and credit institutions that either went bankrupt or were on the brink of bankruptcy, posing the risk of depositor runs. Now, if the bank imbalance, which according to the repo operations report in January is expanding at an astronomical rate, is not stopped, it will undoubtedly heat up the furnace of social unrest even more.
Every Government Has Its Priorities
Economists believe that if this issue is not addressed, we should definitely expect an unprecedented wave of protests that will no longer be motivated by political or even livelihood reasons. In this case, even influential semi-private and private companies and small and large investors will get involved. In fact, it can be said that if this ticking time bomb is not defused, the beneficiary classes of the Islamic Republic will also join the protesters, who have benefited from the flawed mechanisms of Iran’s economy so far, but this pot will no longer boil in their favor.
This is precisely why, in a leaked audio file of a conversation between Mohammad Mokhber and Mohammadreza Farzin, Raisi’s first deputy emphasizes that addressing the issue of bank imbalance is far more important than securing resources for paying retirees’ salaries. In other words, Mokhber is concerned that the government will no longer be able to dip into the banks’ pockets to pay its employees and cover the government’s current expenses.