Banks and non-bank financial institutions again refused to participate in the weekly bond auction held by the Central Bank of Iran on Tuesday.
This was the fifth weekly government bond auction that failed to attract big investors and was also snubbed by the stock market as only 703.1 billion rials ($2.5m) at 21% was bought outside the auction process, according to the CBI website. As per an earlier announcement, 64 trillion rials ($230m) in bonds was on offer.
Bond auctions were launched in May where the CBI (on behalf of the government) offers debt to raise funds for the Rouhani administration’s deepening budget deficits.
Banks and investment companies are (were) the main customers of bonds. Retail investors could also buy from the stock market.
While banks have stopped buying in recent weeks, there are rules that oblige them to set aside a portion of their assets to buy bonds.
The Money and Credit Council, the top monetary decision-making body, in August obliged banks to allocate at least 3% of their financial resources for this purpose. It is not known why the banks have not followed the MCC rules and there has been no official word about this issue.
Despite success in the first several auctions, bond sales plunged sharply in the past five weeks. Data indicate that the government was able to generate no more than 25 trillion rials from bonds in the past four weeks. Prior to that, average weekly sale was 40 trillion rials ($140m).
The government so far has generated 711 trillion rials ($2.5b) in 22 weekly auctions.
Grappling with unprecedented budgetary challenges, the government has pinned high hopes on the debt market. Experts say that it needs a minimum 50 trillion rials a week to shore up its finances.
Open Market Operation
Failure in the debt market could hamper the CBI’s efforts to implement open market operation, the highly touted monetary policy that first requires banks to own sufficient bonds.
OMO is a financial instrument through which central banks buy and sell government bonds in the open market to regulate the supply of money. The objective is to influence short-term interest rates. As per the mechanism, banks in need of liquidity offer bonds as collateral to borrow from the CBI.
The CBI announced the OMO in January but little trade so far has been conducted under OMO as banks didn’t announce the need for liquidity.
On Wednesday, however, the CBI said it lent 111.5 trillion rials ($410 million) to two banks in lieu of bonds and within the OMO framework.
