Economy, Business And Markets

Working for Normalcy With Germany

Working for Normalcy  With Germany Working for Normalcy  With Germany

Reviving banking and financial ties with Germany after the lifting of sanctions is a priority for Iran, Valliolah Seif, governor of the Central Bank of Iran said on Friday.

In a meeting with the German Federal Minister of Finance Wolfgang Sch?uble, on the sidelines of the Euro Finance Week Conference in Frankfurt, Seif emphasized normal banking relations between the two countries.

 "I requested Mr. Sch?uble to prepare the grounds for reconnecting our banks and I am reasonably hopeful it is going to happen," IRNA quoted the governor as saying.

Another banker said the Iranian delegation had held "advanced talks" with German counterparts to resume the so-called Hermes Cover, an export credit guarantee provided to German exporters by the federal government. The cover was suspended when the economic and banking sanctions were tightened over the nuclear dispute.

Seif also conferred with Mario Draghi, president of the European Central Bank and Jens Weidmann, president of the Deutsche Bundesbank. He also participated in a closed-door meeting with 60 top European bankers.

On Wednesday he had said that the CBI is focusing on helping Iranian banks reengage with international financial markets especially by strengthening ties with Europeans.  

"We are eager to establish long and progressive ties with our international counterparts."

Seif was in Frankfurt for a three-day visit from Nov.17-20 to participate in the Iran- Europe Business Forum and the Euro Finance gathering.

Road to Normalization

The end of international sanctions will translate into more foreign trade and investment for Iran when major global banks reconnect with the country. However, Tehran has a tough task ahead in implementing reforms and rise to the occasion.

"Short-term relations between Iran and global partners will not be beneficial - having a long-term perspective for investment in Iran's banking sector is essential," Seif told an open session on Iran at the Euro Finance Week on Wednesday.

Most meetings between Iranian bankers and their potential partners were held in private in Frankfurt. International sanctions on Iran's trade, energy and banking sectors are not yet officially lifted and foreign banks fear breaching them.

Lifting Sanctions

Tehran and the six world powers reached a deal on July 14 to limit Iran's nuclear program in return for lifting international sanctions which cut it off completely from the global markets and banking system.

Once both sides complete their commitments of the deal, sanctions will be lifted - possibly early next year. But a number of banks have jumped the gun.

US financial and judicial authorities have slapped hefty penalties on two dozen European banks for bypassing US sanctions on Iran, Sudan and Cuba. A total of $14 billion has been paid, either in fines or settlements out of court, in the last ten years. French bank BNP Paribas's bill alone amounted to a hefty $9 billion.

"We don't expect the 'bitten banks' to resume relations immediately, but we had very good negotiations with others," Rasoul Dorri, senior advisor to the Seif was quoted as saying by BBC on Saturday.

Stricter Standards

The bigger problem for Iran's banking sector, however, is having a healthy relationship after a decade of separation, and that depends on healthy balance sheets and sound policies.

"Iran's central bank has already started reforms for financial stability, sound monetary policy and effective allocation of resources in the banking system," Seif has said.

Iran's return to the global banking system also means the country has to meet international standards, for example those related to money laundering and minimum reserve requirements that guard banks against major global shocks.

A total of $26 billion of non-performing loans have severely damaged the banking sector. These were cheap credits splashed mostly at corporations and individuals with proximity to power centers, namely with close ties to the government of former president, Mahmoud Ahmadinejad (2005-2013).

Some recipients later abused their thick ties to that government and delayed the repayment of loans. Others, hit by the recession, simply could not afford to repay. Iran's central bank says non-performing loans, on average, amount to 20% of some bank's assets.

Reports over the past two years have it that some big fish despite having enough money have simply refuse to meet their multi-billion-dollar financial commitments to banks and lending institutions.

Higher Growth

At the same time, the extended sanctions are weighing heavily on the economy, and there is a genuine fear that the recession is here to stay. Iranian consumers are holding back spending in the hope of lower prices after the sanctions are removed.

After a recent visit to Iran, a delegation from the International Monetary Fund (IMF) said it expected GDP growth of between -0.5% and 0.5% in the year to March 2016. The IMF says the Iranian economy grew 3% in the previous year and could grow up to 5% a year after the sanctions.

In a sharp U-turn from its previous policy, last month the CBI introduced a package of measures to stimulate spending by providing cheap credit and injecting money into the economy.

President Hassan Rouhani's government had previously tightened monetary policy to curb inflation, which has fallen to 15% from 40% in two years.

Iranian carmakers sold 1100,000 cars in just six days last week thanks to the low-interest loans of $8,000 provided by banks to each buyer. These cars were parked in huge depots for months due to faltering demand.

"This is monetary expansion, though controlled," said Ali Sanginian, chief executive of Iran's Amin Investment Bank."A proper expansionary policy should accompany fiscal expansion."

"The government may soon have to follow in the footsteps of its predecessor, by printing money or devaluating the currency," Sanginian said.