Friday, May 25, 2007

Cutting off the nose to spite the face

Too early to tell what Iran is up to here, but I don't think you can chalk it up to incompetence. A geopolitical systems disruption ("we'll show the West how much they need us to succeed in a globalized world"), a cry for attention ("oh, please save us from financial chaos, India, China and Russia - you need our oil!"), or just politics as usual:

"Mr Ahmadinejad's argument is that the lower the interest rate, the more access people will have to money," said one analyst. "But you can't command interest rates down. They have to match inflation. To cut rates, the government has to balance its budget better."

Another economist, Saeed Leylaz, claimed the move was a reward to powerful groups who had supported Mr Ahmadinejad. "I believe the president knows the consequence of this decision but he doesn't care about the future."

"There are groups which helped put Mr Ahmadinejad into office and in my opinion, he is paying them back. In the last two years, the value of (outstanding) debts has reached US$11bn, compared with $3.5bn in the previous 100 years. Mr Ahmadinejad ordered the banks to pay these accelerated loans to the special groups. If you cut interest rates, it means they have less to pay back. You can imagine how disastrous this is to the banking system."

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