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Drinking the Hemlock
Drinking the Hemlock

Drinking the Hemlock

Most bank shares have not traded since mid-June and their symbols are frozen

Drinking the Hemlock

It’s difficult to wake up to reality from a good dream, if you have a choice. Especially if you know you will wake up to find yourself wrapped in rags in a street corner.
It certainly makes me pause, and ask: Must I wake up? How can I dull the pain? The same questions are on the minds of many bank managers, shareholders and, of course, market regulators. The day of reckoning for banks and their shareholders is here.
The central bank wants lenders to start absorbing the losses they have swept under the rug. Lenders and their shareholders are killing time looking for some miracle bailout and a way to avoid posting losses. They are calling for government backing to ease the pain but the government’s pockets are empty. 
The media are simplifying the situation. And securities market regulators are looking for the nonexistent scenario where these losses don’t deepen the bearish hibernation in equity markets. In the resulting deadlock, most bank shares have not traded since mid-June and their symbols are frozen.
Iranian lenders had a fantastic run in the 2000s. The eased regulations on banking allowing private and state-owned banks to flourish. A boom in petrodollars translated into over-the-top government spending and explosion in money supply, which needed banks as handlers. But, little oversight and the central bank’s weakening by former president Mahmoud Ahmadinejad, along with the profligate policies he forced lenders to finance, were headed for a severe headache.
Intensification of sanctions against Iran’s nuclear energy program catalyzed the turning of the tables. As the economy took a turn for the worst, property prices stagnated, businesses went bust and banks were unable to sell their properties or recoup their outstanding loans.
But no bank went bust. Banks rolled over bad loans for their clients by giving new loans to cover the interest and principal of prior loans, knowing borrowers could not repay, and their shareholders took out lavish dividends from these on paper profits. This was done well after bank balance sheets bloated with bad debt.
It has made the central bank obstinate on adopting better accounting standards, partly because it wants Iranian banks to be able to work with their current counterparts and put away money to stop the dividend payouts. The bad loans, however, are still sitting there and growing by the minute.
Government officials want to resolve the mess with the least damaging effects to Iran’s fragile recovery. The central bank wants lenders to first show the losses and then absorb them in the coming years, but that means plummeting share prices, which securities market officials despise. In Iran, even stock performance is a political issue, as economist Mousa Ghaninejad once said.
Right now, bank shares remain halted, despite the central bank saying they have complied with its mandate to adopt international financial reporting standards. 
A few big lenders have posted losses and investors are angry because of the uncertainty. Some have sent angry letters to the head of the Securities and Exchange Organization demanding explanations and change. Yet the halt is going on without anyone taking responsibility.
The markets, regulators and banks have to drink the hemlock in the end, no matter how long they avoid the inevitable. Killing time just magnifies the problem. There is no going round a reality check.

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