Currency war, economic sanctions and consequences of petrodollar economy on financial tech industries

July 21, 2019

File photo showing a man exchanging Iranian rials for US dollars in Tehran, Iran (photo credit BBC)

By:Fatheya Yallas

The announcement of facebook To launch its own new global cryptocurrency (Libra) backed by several FIAT currencies to its users (2.7 Billion) via What-up messaging services will have an impact on how global banking operates. It will undercut current money exchange services such as transfer companies MoneyGram, Western Union, Dahabshiil etc. currently there is an ongoing trade war which could and can evolve into a currency war this will have an adverse effect on how the international regulatory system (SWIFT) mitigate risks, it will effect transparency of financial transactions and whether it can or will disrupt money laundering and criminal enterprises whom benefited from cryptocurrency. This project by Facebook is expected to be operational by 2020, given the data protection breach by consulting firm Cambridge Analytical and political backlash will this new way of banking succeed?

The appointment of a Christine Lagarde as a director of the European Central Bank (ECB) comes at a time of uncertainty and political tensions between Europe and USA. The international trade has been rocked by the USA Tariffs war with China, failure to form multilateral political consensus on Iranian nuclear deal, this had consequences on oil prices and heightened tensions within MiddleEast regional powers mainly Saudi Arabia, UAE, Qatar and Turkey. The financial bond markets are seeking assurances which Simply doesn’t exist anymore, these actions (Brexist, INSTEX, Italian mini BOT, cryptocurrency and Currency war /sanctions) are leading investors to take drastic measures that varies from relocating factories to avoid sanctions or focusing on domestic markets in the case of China.

The political strategies/rhetorics of disconnecting from globalisation had an impact and is creating a strain on world economy and trade movement, the chain of supply and demand has simply been disrupted by various complex events which has consequences on social, economic and geo-political relationships. For instance Bank of England warned about shorter term impact UK Brexit would have on the Car Industry , agricultural production, small businesses (macroeconomics) however because of uncertainty in developing a cohesive structured exist plan by parliament Britain is facing a challenging road a head. Interest rate, currency stability and market volatility are subject to political whims, thus it’s imperative to unite on viable economic strategy in the case of Britain.

Since the banking crisis and housing crash of 2007/8 central Banks have overhauled its policies on lending and procedural structures to safeguard the economy from collapsing as it nearly did a decade ago. However the unintended consequences of bailout and austerity has ushered uncertainties, take for example the current decision by the Italian government to introduce a “parallel currency” alongside the Euro, how will the European Union and ECB react to such flagrant disregard to its leadership and what impact will it have on the status of Euro? The Italian government (Buoni Ordinari del Tesoro) BOT or (Ordinary Treasury Bonds) according to Reuters news has been

rejected by the European Central Bank and Italy’s economy minister Giuseppe Conte
a “parallel currency” places Italy in a precarious position in terms of its commitment to Euro.

Currency devaluation historically assisted central banks into manoeuvring economic downturn/ crisis, China has depreciated the Yuan to support exports and the Iranian decision to reject the American Dollar in preference to the Euro 2018 culminated in the current crisis.

Given Italy’s commitment to China Belt and Road initiatives, is Salvini government heading for a showdown with Brussel and ECB? What is a “mini bill” is it designed to disengage Italy from the euro zone slowly and consequently return the Lira as a currency? If Greece’s Finance minister Yanis Varoufakis parallel Currency was rejected why should Italy’s be accepted!

When the United Kingdom decided on an exit from Europe a referendum was introduced by David Cameron, this decision 2016 created endless and protracted political upheaval in the corridors of Westminster which split the British public. Would Italy’s machination create the downfall of the Euro plunging world market economy into another crisis?

Liquidity, assurance and trust is the name of the game and it’s apparent Italian government flagrant opposition to European rule stems from Its loss of control over its fragile economy but unlike Greece it’s uncontainable.

The population support of Matteo Salvini League hardline politics and sceptical view of European unity indicate a lack of support for European unification/regulation, Italians ever suspicious of Brussels commitment has been tested by immigration and refugee influx. The hardline policies from European bank inflicted on Greece and austerity programme hasn’t waned from the consciousness of the Italian populace thus the lack of robust response from EU powerhouse, it’s retracting. Italy is the 3^rd largest economy after Uk exist and given its precarious economic dire situation the mere fact of its rebellion would herald a breakdown of the European Union because Ireland, Spain and Portugal would readily follow.

The loss of confidence in Euro would lead to a surge in Dollar supremacy this hasn’t happened yet, if this is what China and Russia tactical manoeuvring was about has it succeeded given that Germany, U.K.France trade with Iran flouting US sanctions. The Trump administration determination to alienate allies is facilitating a pivot towards the end of the Dollar as a peg currency.

The Chinese road and belt initiatives has long term ambitions to pave a world without US influence or oversight. The fact that Italy’s signed a non-binding memorandum of understanding March 2019 is indicative of what’s to come to a trade war between the USA, EU, China, Russia for dominance. Italy has set precedent for other European nations to pursue its own interest and this has consequences in terms of Tariffs and trade regulations.

The Iranian sanctioned heavily by the USA and ongoing conflict with Saudi Arabia and its allies complicated further a strained relationship between European nations (France, Germany and Uk) with Trump administration. The US is considering a $4 billion Tariffs on European goods as a result of the European decision to avoid sanctions on Iran by developing (Instrument in support of trade exchange) INSTEX by passing Dollar or swift system altogether.

The EU companies importing and exporting products is suppose to only provide humanitarian goods such as medicines, medical devices, food but it seems Washington hasn’t been too pleased with this decision hence the Tariff threat looming over Europe. Given this economic ineptitude and short-sightedness stemmed from lack of coherent policy on how to deal with the Iranian nuclear enrichment programme the US government ought to rethink its foreign policy to avoid economic isolation.

The money transfer system operating in Africa and Asia benefit people outside the realm of normal banking and financial transaction, Facebook digital monetisation is designed to capitalise on the enormous data it has to further its interest. Would its offer of cheaper banking services entice regular Hawala customers in East Africa particularly young users to switch to the libra is a gamble Facebook and others dealing with cryptocurrency wish to pursue.

The global financial industry needs checks and balances, cryptocurrency, parallel currency such as Italian bonds and European nation-states circumventing sanctions could trigger another financial crisis with substantial consequences in the already ailing system.

By:Fatheya Yallas

Political analyst MSc international Conflict

Fatheyaabdi@gmail.com