Economy, Business And Markets

Time to Address Structural Problems

Time to Address Structural Problems Time to Address Structural Problems

An independent organization must be established to settle the issue of banks’ toxic assets, said Abbas Akhundi minister of roads and urban development.

The banking sector’s toxic assets are a problem born out of a “non-transparent market” tempting some institutions and organizations to fish in troubled waters, he said, without naming names.

Akhundi suggested establishing a state-owned ‘settlement bank’ or some financial institution or legal entity to settle the issue of toxic assets. He maintained however, that the body must be an independent entity that “buys the toxic assets and helps clean banks’ assets”. It should also take action against those who have defaulted on their debts.  

On the mountings problem of credit crunch and stagflation plaguing the economy, he said “this is partly inherited from the previous administration.”

 The minster made the critical analyses in an exclusive interview with Financial Tribune’s sister publication, Donya-e-Eqtesad on Tuesday.

Emphasizing the importance of finding the roots of economic ills, he saw the “structural problems of financial markets” as one of the root causes.  “The structural failures are in turn rooted in the toxic assets, deficits in banks’ capital adequacy and problems related to the demand side.”

President Hassan Rouhani’s close confidante warned that letting the situation linger would only exacerbate the “problem of toxic assets and credit crunch and contribute to more non-transparency.

 Government Debts

Akhundi believes that another major part of the problem is the government’s mountain of debt to the private sector estimated at 3 quadrillion rials ($100 billion) for which he blamed “the underdeveloped bond market.”

“The absence of a debt market in Iran has led to many problems. One is that the debts have tarnished the government’s reputation and another is that the businesses have been hit severely as they cannot repay their debts.”

Akhundi exhorted the government to use $100 billion of its oil revenues over a 10-15 year period to issue bonds in foreign currencies with an interest rate of 3-4%. He believes this can help serve as a guarantee that the government will be able to clear its debts as well as reduce interest rates. He dismissed issuing bonds in the local currency as “ineffectual due the unpredictability of the inflation rate” in the future.

The senior cabinet member said the next steps should include increasing the capital of banks and resolving the issue of banks’ reserve requirement. Issuing a total of 10 billion rials ($333 million) of Islamic treasury bills, a version of short-term sovereign debt, would simply “not be enough to help ease the government debts.”

The government started issuing $330 million-worth of treasury bills -- a Sharia law-compliant mechanism to raise money -- in late September at a steep discount with the declared aim of reducing its debts.