The whole global payments system is long overdue by a complete shakeup and an onset of dynamic change. Trump is not wrong to overplay his hand and set the stage for real reform and solving no end of festering issues.
byMike Mish Shedlock
The stage is set for a major confrontation between the US and EU over Trump's sanctions on Iran.
The European Union said late Monday that it would establish a special payment channel to allow European and other companies to legally continue financial transactions with Iran while avoiding exposure to U.S. sanctions.
The move is a direct rebuke of President Trump’s policy on Iran and his decision to withdraw from the nuclear deal in May, and sets the stage for a confrontation between the U.S. and Europe in the days ahead at the U.N. General Assembly, where Iran is among the prominent themes.
EU foreign-policy chief Federica Mogherini and Iran’s Foreign Minister Javad Zarif made the announcement of a “special purpose vehicle” jointly, in English and Farsi, after a meeting at the U.N. of the parties still committed to the deal—Iran, EU, U.K., France, Germany, Russia and China.
The mechanism—the details of which would be set up in future meetings with technical experts—would facilitate payments related to Iran’s oil trade, exports and imports, and “reassure economic operators pursuing legitimate business with Iran,” the statement said.
Ms. Mogherini said Iran has remained fully committed to its obligations under the nuclear deal, as certified by a dozen reports from U.N.’s nuclear watchdog, the International Atomic Energy Agency.
Europe has Excuse to Challenge the Dollar
Bloomberg writer Leonid Bershidsky says Europe Finally Has an Excuse to Challenge the Dollar
With more and more European companies fleeing Iran following the re-imposition of U.S. sanctions, it may be tempting for Americans to write off Europe’s efforts to save the Iran nuclear deal. It would be wiser to resist the temptation. A new plan by Germany, France, Britain, China and Russia to create special financial infrastructure to work with Iran could be a credible challenge to the U.S. dollar’s long global dominance.
Federica Mogherini, the European Union’s top foreign-policy official, said in New York on Monday that the plan to create a “special purpose vehicle” for trade with Iran “will mean that EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran, and this will allow European companies to continue trade with Iran.” The technical details are still to be worked out, but her wording provides some useful hints on how the scheme will work.
Mogherini indicated that Germany, France and the U.K. would set up a multinational state-backed financial intermediary that would deal with companies interested in Iran transactions and with Iranian counter-parties. Such transactions, presumably in euros and pounds sterling, would not be transparent to American authorities. European companies dealing with the state-owned intermediary technically might not even be in violation of the U.S. sanctions as currently written. The system would be likely be open to Russia and China as well.
Europe Unveils "Special Purpose Vehicle" to Bypass SWIFT
According to Mogherini, the plan to create the SPV "will mean that EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran, and this will allow European companies to continue trade with Iran" despite Trump's opposition.
And, in a potentially massive development, the system would be likely be open to Russia and China as well as it would enable the world's economies to trade with each other, fully independent of SWIFT.
Europe would thus provide an infrastructure for legal, secure sanctions-busting — and a guarantee that the transactions would not be reported to American regulators.
More importantly, it strikes at the heart of the current economic and financial system which is held together by the dollar. By providing an alternative, the global resistance sets the stage for what potentially could be the ascendancy of other global reserve currencies, and/or a world of bilateral trade agreements which bypass both the US Dollar and Swift entirely, eliminating Washington's "veto powers" on global trade.
Given U.S. law enforcement’s wide reach, there would still be a risk involved, and European governments may not be able to protect the companies from it. Some firms will be tempted to try the new infrastructure, however, and the public isn't likely to find out if they do. In any case, in response to Trump's aggressive foreign policies and "weaponization" of the dollar, it is worthwhile for Europe, Russia and China to experiment with dollar-free business.
End of Dollar Dominance
Bershidsky concluded: "No currency’s international dominance has lasted forever, and there’s no reason for the U.S. dollar to be the exception to this rule.
Trump’s confidence in his ability to weaponize the dollar against adversaries and stubborn allies alike could eventually backfire for the U.S. as efforts to push the dollar off its pedestal grow ever more serious."
I strongly disagree.
Attack on SWIFT and Sanctions Not the Dollar
No currency's dominance has lasted forever. The dollar will be no exception, eventually. But this is not a direct attack on the dollar, per se.
Neither China nor Germany want to have the world's reserve currency because it would disrupt their mercantilist export models.
Moreover, China is not remotely close to meeting the necessary conditions for the yuan to have any major role in international trade.
Bershidsky is nearly correct about one aspect: "Trump's move could eventually backfire."
This is more accurate assessment: Trump's ill-advised sanctions have already backfired.
That the EU would go ahead with SWIFT-avoidance is proof. This is an attack on a US payment system and the ability of the US to single-handedly set sanction policy for the entire world.
It is absurd for one person, in this case Trump, to decide sanction policy for the entire world. That ability will soon end.
I applaud this effort by the EU. A global means to avoid idiotic US sanctions cannot happen soon enough.
The SWIFT replacement system will be Euro-based. That part is certain. There would be no faith in a Russian or Chinese system or their currencies.
Initially, the large European players will avoid it.
Smaller European players that do little business with the US, as well as firms in India and Turkey, will step up right away. They have little fear of US sanctions.
Eventually, the larger European players will use the system. "Eventually” will come sooner rather than later. Likely in steps unrelated to Iran simply to let the big players test the system. At some point, a big player will be willing to tell the US to go to hell.
This progression is a good thing.
The idea that the yuan will soon replace the dollar as the world's reserve currency is absurd for currency reasons, political reasons, and economic reasons.