As Bernanke immolates his credibility by insisting that inflation remains contained, the dollar union is cracking up. The Gulf sheikdoms, which have all been pegged to the dollar for decades, are tired of double-digit and rising inflation so that they can maintain an antiquated currency peg with an obviously politicized central bank.
“Kuwait really did very little,” al-Ibrahim said.
His comments helped the euro strengthen against the dollar. The US currency fell to a two-week low against a basket of major currencies yesterday ahead of a US interest rate decision later in the day.
“The comments are very sensible. Any currency reform needs to be substantial,” said Marios Marathefis, Standard Chartered’s regional head of research. Gulf states should allow their currencies to appreciate by 20% against the dollar, he said late last year.
Simon Williams, senior economist at HSBC, said: “The comments are a very strong sign that the Qatari authorities are seriously examining all of their policy options to deal with inflation, including monetary reform.”
Qatari officials will make foreign-exchange policy recommendations to the government of HH the Emir Sheikh Hamad bin Khalifa al-Thani this year, including possibly a call to revalue the currency, al-Ibrahim said, without saying exactly when.
“We are studying all kinds of possible ways to price our exchange rate or to price our currency,” said al-Ibrahim, who heads Qatar’s General Secretariat for Planning. “The government is willing to look into these alternatives,” al-Ibrahim said.
Qatar currently holds the chair of the GCC which ispreparing for monetary union as early as 2010. “Really, we would like to do everything we can through the GCC,” he said.
“As a small country we cannot float our currency … it has to be tied.”
Still, when asked if Qatar could act unilaterally, he said: “I think we can.”
Gulf states are constrained in their fight against inflation because dollar pegs force them to track US monetary policy at a time when the Federal Reserve is cutting rates.
Gulf currencies rallied last year after the UAE called for the region’s central banks to sever their dollar pegs.
Saudi Arabia dismissed the idea and the Gulf states agreed last month to retain their dollar pegs and keep any talks on currency reform secret.
Qatar, which is contending with the region’s highest inflation rate, reopened the debate last week when its finance minister said that Gulf states could consider revaluing their currencies together at some stage to fight inflation.
The central bank, the General Secretariat for Planning and a state inflation committee are debating several policy options, al-Ibrahim said, after inflation hit 13.73% in September.
A few days ago the Gulf Times cited Qatar’s central bank governor Abdullah bin Saud al-Thani as saying Qatar’s currency-peg to the US dollar is not the cause of rising inflation.
“We do not suffer from imported inflation… the increase in both rents and real estate prices are the ones that are triggering inflation.”
Qatar is highly autonomous in comparison to the other Middle East states. That said, this is not all dollars and sense. There’s some manipulative political manouevering happening here.
Mike Feldman
do you ever sleep? ;-)
Cutting interest rates [in lockstep with the Federal Reserve] when domestic is already high, further increases inflation. It’s a given.
Qatar’s inflation is extremely high. Following the apparent trajectory of the Federal Reserve will ratchet up inflation further, to no benefit, as far as Qatar is concerned.
Qatar is not interested in that route.
As for breaking the dollar peg, I’m sure there are Qatari factions on each side of the issue. Generally people who are afraid of Iran would be against breaking the dollar peg. But the fact of the matter is that the Federal Reserve is paying no heed whatsoever to inflation conditions within the “dollar union.”
I’d argue that it isn’t paying attention to US inflation, either. But that’s a more laborious argument to make.
I don’t think that’s a laborious argument to make. In fact, so many companies in the last few days indicated that their input costs are going up due to which they’ll be forced to pass these on to the consumers.
Inflation without food & energy is a good measure only for dead people. Most human beings (living) do have to eat food and consume energy.
On another issue - what do you put the odds of getting the deal done by Dinallo & his Circus?
I did read your article on this, but do you think the probability is ZERO or is it more?
I think they are probably going to have to break these companies into 2 - muni insurance part could be sold to Ross or Buffett. The other part (CDO/CDO-Square-Cube-Square Root etc.) might be kept in the existing company and be allowed to go down.
Is this a realistic solution?
Shankar,
I am very pessimistic. Dinallo’s circus is very reminiscent of Paulson’s M-LEC. You had a regulator with a grandiose plan to Get All The Big Boys In A Room And Work It Out. The banks rolled their eyes and went along for a while. They never gave supportive comments to the press, because there was nothing supportive to say. All the talking up of the MLEC came from Paulson himself. You’re seeing the same thing with Dinallo here.
As for the monolines, the bottom line is that they are leveraged about 150 times. That means that a .67% deterioration in their balance sheet wipes out all of their assets. Now, something like 85% of their holdings are munis, which as I understand are guaranteed by GNMA.
But the other 15 percent is a sliding scale of risky assets from risky munis all the way up to CDO’s of CDO’s (CDO^2s). So some large percentage of that 15 percent is gone, and Ambac and MBIA are hugely in the red.
All the banks have varying exposures to the monolines. The banks with very little monoline exposure are not going to be interested in propping them up, so that Citigroup and Merrill Lynch can survive. Citigroup and Merrill, meanwhile, do not have the money to support the monolines to the extent that they’re exposed. Again, just like the M-LEC: the banks have asymmetric exposure to the problem, so the ones with little exposure and rich balance sheets walk away. The endgame is more writedowns and more volatility.