Exchange Rates Still Matter

Jim Geraghty’s Morning Jolt is discussing the history of protests and pundits relative to Iran.  Then Jim brings up the Iran ransom and gives two views of the situation:

This morning, Matthew Dowd looks back at the Obama administration’s Iran deal and laments, “I am wondering how many folks are aware that the money the US sent Iran as part of nuclear deal was actually Iran’s assets to begin with. It was their own money we returned. It wasn’t taxpayer money.” Yes, but we froze those assets after they raided our embassy, took American diplomatic staff hostage in violation of just about every international law and treaty, paraded them before the cameras, and beat them. Think of the seized assets as a criminal fine, one of the few ways we could punish the Iranians for their barbaric acts against our people.

We want to be more direct with Matt.  Most of it was taxpayer money.  Below (no, we don’t cite ourselves) we explain the deal.

Given the turmoil in Iran it is not a surprise that the USD has been the stronger currency over the past 37 years.  So when it is stated in millions of USD we say that we received $400 and paid $1,700 37 years later.  But when we put it in IRR [Iran’s currency], we say that we received 28 billion IRR (an exchange rate of about 71 to the dollar) and repaid 52,904 billion IRR (an exchange rate of 31,120 to the dollar).

So the decision to add interest increased the payment by a factor of four.  The decision to denominate the assets in dollars increased the payment by a factor of over a thousand.  The previous administration caved in every possible way to make a large parent to Iran.  It was a bad idea to give Iran anything but it took fancy accounting to give them $1.7 billion rather than $1 million or so.

 

 

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Iransom Deal

Our feckless leader is up to shady things with Iran.  Everybody knows that but did he make a reasonable deal with Iran?  The deal seems to be repaying $400 the Shah sent us with $1.3 billion in interest.  Without knowledge of the miracle of compound interest we might think that the interest is a tad high.  Even without technology we can use the rule of 72 to get about four percent because 72/4 = 18 so money doubles in 18 and quadruples in 36.  So $400 million becomes $1.6 billion in 36 years and a little more in 37 years.   Technology assures us that the interest rate is extremely close to four percent per year.

So four percent seems like a reasonable deal.  There is, however, one other parameter because this is an international exchange.  That is the exchange rate between US dollars (USD) and Iranian Rials (IRR).  Given the turmoil in Iran it is not a surprise that the USD has been the stronger currency over the past 37 years.  So when it is stated in millions of USD we say that we received $400 and paid $1,700 37 years later.  But when we put it in IRR, we say that we received 28 billion IRR (an exchange rate of about 71 to the dollar) and repaid 52,904 billion IRR (an exchange rate of 31,120 to the dollar).

Sidebar: 1979 was a turbulent year for IRR.  See, for example.  Using 71 is pretty conservative.  Other reports at other times during the year could put it as low as 15.  Exact dates could lead to a much worse deal for the US.  An exchange rate of 15 would mean receiving six billion IRR instead of 28.  The current exchange rate will also change daily but the percentages will be smaller so we are very close there.   End sidebar.

If we keep the deal in IRR then we pay just under 23 percent in annual interest.  Use your time value of money calculator or spreadsheet to confirm.  What has happened is that the USA has assumed the currency risk for Iran at a time when they are a bad risk.  The exchange rate risk suggests there should have been room to negotiate.