By the standards of most international borrowers, Mohammad Jaafar Mojarad is in an enviable position. His country has a buoyant, oil-driven economy and fast-growing reserves, and it lends more abroad than it borrows. But as vice governor of the Central Bank of the Islamic Republic of Iran, Mojarad faces one significant obstacle: The world's richest nation, the U.S., bars its citizens from financial transactions with his country.
That didn't prevent the central bank from last month selling its first Eurobond issue since the 1979 Islamic revolution -- and actually increasing the size of the issue. Nevertheless, Iran had to pay a much higher premium than its economic fundamentals would otherwise have warranted to compensate wary investors for dealing with a country consigned to U.S. President George W. Bush's "axis of evil."
Mojarad insists that the U.S. sanctions "did not affect us at all. The important thing was the outlook and fundamentals of Iran." The government forecasts robust growth of 6.4 percent for the year ending March 2003 (although inflation is projected at a not-so-healthy 14 percent). Powering the Iranian economy, of course, is oil, which generates 50 percent of government revenues and 80 percent of foreign exchange earnings. Foreign reserves stand at more than $17 billion, far exceeding the country's $7.1 billion in external debt.
The bond issue is part of a wider effort to open up Iran's economy, Mojarad says. The government liberalized rules on foreign direct investment in June and earlier this year replaced its two-tier exchange rate for the rial with a single rate. "We are trying to stabilize the effective real exchange rate," Mojarad says.
How much did the sanctions and other associated risks cost Iran on its debt sale? The E625 million ($613 million) worth of five-year bonds (increased from E500 million) were priced to yield a stiff 425 basis points over five-year euro debt. BNP Paribas and Commerzbank led a syndicate of Middle Eastern and European banks, including Arab Banking Corp., Crédit Agricole, HypoVereinsbank and Standard Chartered Bank.
Alexis Plan, syndicate manager at Commerzbank in Frankfurt, says sharp losses on many corporate bonds created a good climate for a rare country credit like Iran. "What investors are looking for is diversification," he says. "There is a need for sovereign risk."
For Moody's, sovereign risk carried a different meaning. On its own initiative, the agency had assigned a B2 rating to Iran in 1999 and placed it on review for a possible upgrade in anticipation of the bond issue. But Moody's retreated when it received a letter from the U.S. Treasury's Office of Foreign Assets Control, which polices the sanctions. "We were afraid a review might have violated U.S. policy," says Lisa Tibbits, assistant vice president of Moody's sovereign ratings group in New York.
Standard & Poor's also has held back but now is lobbying to go ahead with a rating. "We've made clear to the government our view that we should operate in the way we normally do throughout the world," says David Beers, head of S&P's sovereign ratings group in London.
Rival Fitch went ahead and rated the issue B+, taking advantage of its ownership by the French firm Fimilac. Even so, Fitch wasn't taking any chances. It made the rating through its London subsidiary, Fitch Ratings, and didn't involve any U.S. citizens in the work. "We took legal advice," says James McCormack, the firm's director of sovereign ratings (and a Canadian).