Iran's Bubble Boys

These are the men who make up Mahmoud Ahmadinejad's inner circle -- and will determine if the Iranian president can strengthen his tenuous grip on power.

Over the last seven months, Mahmoud Ahmadinejad's base of support appears to have steadily shrunk: Countless conservative politicians and clerics, such as former Intelligence Minister Gholam-Hossein Mohseni-Ejei, have even parted ways with the Iranian president and joined the expanding group of his foes. But though his list of detractors is getting longer, a number of men continue to stand behind the president, ensuring his hold on power.

Even some symbolic leaders of the opposition green movement, such as former President Mohammad Khatami, declared in recent days that they recognize Ahmadinejad as president of Iran, even if they remain convinced that his re-election on June 12 was rigged.

All the president's men -- and they are all men, with the exception of the female health minister, Marzieh Vahid Dastjerdi -- fall into two categories. Ahmadinejad's chosen advisors and cabinet members are either his relatives or men close to Supreme Leader Ayatollah Ali Khamenei, his powerful supporter. No matter the amount of criticism or condemnation heaped on the men in this inner circle, the president has remained as loyal to his appointees as they are to him.

The most glaring example is Ahmadinejad's appointment two weeks ago of Judge Saeed Mortazavi as the head of Iran's Task Force Against Smuggling. Mortazavi was just named in a report issued by the Iranian parliament as the man largely responsible for atrocities committed in July, following Iran's contested presidential election, by state security forces at the Kahrizak detention facility. According to the report, some demonstrators in the opposition movement imprisoned in Kahrizak were killed, and others tortured, due to mismanagement and abuse. The parliamentary committee said the dissidents were taken to the detention facility based on orders from Mortazavi, who at the time was Tehran's chief prosecutor. After the deaths were reported in July, Khamenei ordered the facility closed.

Despite Mortazavi's tainted reputation -- he is also notorious for shutting down hundreds of reformist newspapers and imprisoning their journalists in the late 1990s when he was a judge -- Ahmadinejad has ignored widespread criticism of his appointment as the anti-smuggling chief.

The closest person to Ahmadinejad is his chief of staff, Esfandiar Rahim-Mashaie, who is also the president's brother-in-law. After Ahmadinejad was declared the winner in the June 12 election, he initially tapped Mashaie to be his vice president. However, Mashaie's statement in 2008 that Iranians are "friends of all people in the world -- even Israelis" angered conservatives, who pressured Ahmadinejad to rescind the appointment. Ahmadinejad refused to back down until Khamenei instructed him to remove Mashaie. Ahmadinejad's subsequent decision to appoint Mashaie as his chief of staff was striking because it defied even Khamenei.

Ignoring Mashaie's dismal reputation within Iran, Ahmadinejad praised him last week as "Olya Allah," a man of God, when a group of supporters questioned him over his reliance on his chief of staff. Such public adulation has become one of the hallmarks of Ahmadinejad's presidency. Last summer, when bidding farewell to outgoing Health Minister Kamran Baqeri Lankarani, who is highly respected in Iran, Ahmadinejad praised him by saying: "He really worked hard. I like him in a very special way personally. He is such a clean and lovely person. I said somewhere that he is like a peach and you just want to eat him."

Unswerving loyalty has proven to be the blueprint for career advancement within Ahmadinejad's circle. When Ahmadinejad wanted to secure control of the Intelligence Ministry, he appointed Heydar Moslehi as minister in August 2009, even though Moslehi had no experience in intelligence work and was unknown in government circles. Shortly beforehand, the president sacked Mohseni-Ejei, then intelligence minister, after he refused to participate in cabinet meetings with Mashaie, who was vice president at the time. Some analysts in Iran think that Ahmadinejad used this as an excuse to place his own loyalist as head of the ministry, which plays a key role in spying on and identifying Iranians who work with the opposition movement inside Iran and outside the country.

Moslehi has served Ahmadinejad well. He is the leading advocate of a government crackdown on the public intellectuals and journalists who form the intellectual wing of the opposition. After the massive demonstrations in Iran last December, Moslehi stated in an interview on state-run television: "This unrest is different from that of the past and is a prearranged counterrevolutionary movement, designed by agents of the sedition."

In addition to these loyalists, Ahmadinejad has deliberately chosen others who have close ties to the Islamic Revolutionary Guards Corps (IRGC), now the most important institution in Iran. Mojtaba Hashemi-Samareh, who is rarely seen in public, is Ahmadinejad's chief political advisor and maintains close connections to both the IRGC and the Basij militias under their control. He is a close childhood friend of the president and served as his campaign manager during the last presidential election. He also shares Ahmadinejad's affinity for Ayatollah Mesbah Yazdi, the powerful, radical cleric who thinks that a world war needs to occur for Islam to prevail around the globe. Such an outcome, according to Yazdi and his followers, will return the Hidden Imam in Shiite theology back to Earth.

Ahmadinejad and Samareh have benefited from the symbiotic nature of their relationship. When Samareh was the interim governor of the West Azerbaijan province, he appointed Ahmadinejad to be the governor of Maku, a small city in that province. Samareh also has a healthy relationship with Khamenei.

Despite the greatest political upheaval in Iran since the 1979 Islamic Revolution, popular demands for his resignation, and the great disdain in which even many conservatives hold him, Ahmadinejad has endured the storm by surrounding himself with these staunch loyalists. This might enable him to complete his presidential term, but by ousting anyone who does not agree with him, he has deepened the fragmentation within the government and left behind a trail of enemies at a time when he could use more than a small circle of loyalists to confront an opposition movement that grows more formidable by the day.

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Show Me the Drachmas

Could monetary woes lead countries to start dropping the euro?

"You can't put lipstick on a PIIG," analysts at Denmark's Danske Bank wrote in a report earlier this month, noting that the market had suddenly woken up to the long-running financial problems of the so-called European peripheral countries of Portugal, Ireland, Italy, Greece and Spain.

These problems constitute the worst crisis the European Monetary Union (EMU) has faced in its short history, and ironically, have only really emerged as the eurozone area tips into economic recovery. The problem is that some European Monetary Union members are tipping into it swifter than others, creating diverging monetary needs and an almost two-tiered eurozone. The problem has become so pronounced that some are now seriously discussing a scenario that would have been unheard until recent months: countries leaving the eurozone and reverting back to national currencies.

"The economic recovery that the eurozone anticipates in 2010 could bring with it new tensions," Harvard economics professor Martin Feldstein presciently wrote in December. "Indeed, in the extreme, some countries could find themselves considering whether to leave the single currency altogether."

Officially, the idea of countries ditching the euro isn't on the radar screen on European Central Bank (ECB) authorities. ECB President Jean-Claude Trichet was quick to slap down the possibility of a eurozone member exiting the monetary union as an "absurd" hypothesis in mid-January.  "In the euro area, the default does not exist," Commissioner Joaquin Almunia Mira glibly said last Friday.

But despite the certainty of senior officials, the questions persist.

A working paper published in December and written by the ECB's own legal counsel explored the legal possibility of withdrawal or expulsion from the European Union and EMU. While the research for the report was begun in 2008 and not intended to address the current crisis, it has been interpreted in the media as evidence that the PIIGS may be cut loose from the eurozone.  Another piece of research, this time from the European Commission, mentioned the emergence of "competitiveness gaps" between EMU members.

The catalyst for recent concern is the expected tightening of ECB monetary policy. The central bank has signaled that it intends to slowly withdraw many of the extraordinary liquidity facilities it enacted in the wake of the financial crisis, as the larger members of the eurozone recover. This is leaving the still-recovering peripheral countries feeling left out in the cold.

Western European countries like Austria and Germany are enjoying unemployment rates at or below 10 percent. Meanwhile Spain is still bogged down by an unemployment rate of 19.5 percent and a bursting housing bubble. Ireland is plagued with a similar housing collapse, plus bank issues, and Portugal and Italy have structural and budgetary problems. These countries have also been the biggest users of those ECB liquidity facilities, which allow government bonds to be bought by banks using ECB funds.

The country that is prompting the most concern right now is Greece. In recent months, the Greek government has struggled to fix its longstanding fiscal problems and experienced a raft of downgrades to its credit ratings. Greece has a large amount of outstanding debt, which means it's very reliant on market sentiment. It must be able to sell its government bonds to roll over its existing funding requirements.

High levels of external debt are not a problem per se, provided that the economies that foster them are able to maintain their competitiveness and attract more foreign funding to service their existing debt. This has not happened in Greece, and budget deficits remain stubbornly stratospheric.

Given these problems, the temptation to leave the eurozone is difficult to ignore. By ceding full control of their monetary policies to the ECB, the PIIGS are bound to the collective decisions of the central bank.  They cannot engage in things like quantitative easing, a method of stimulating the economy when interest rates are at their lowest. Nor can they move to devalue their currencies -- to date, the knee-jerk response to the problem of outstanding debt.

The European Commission report on competitiveness gaps suggested the real effective exchange rates for Greece, Spain and Portugal are overvalued by more than 10 percent. Germany, in contrast, is undervalued by 3 to 5 percent. So much for a single currency.

An EMU divorce, however, remains extremely unlikely. The eurozone at this point is so interconnected that the costs of exiting are prohibitive. In Greece, local banks have lined up at the trough of ECB liquidity. By mid- 2009 ECB-funded assets accounted for nearly 10 percent of total assets in the Greek financial system. If that liquidity were to disappear it would cause a significant shock to the Greek banking system; something which in turn would hamper the Greek government's ability to fund itself, sparking further credit rating downgrades.

Vicious circles aside, there are also practical problems with leaving the eurozone. If Greece did decide to leave and introduce the new drachma (or Spain the new peseta) the market would likely move very quickly to debase the currency against the euro.

While competitive currency devaluation would clearly be one of the goals of an EMU exit, a beleaguered Greek government, subject to increasing domestic and external political pressures, would face the unenviable task of engineering a near-flawless currency exchange in short order. The changeover would have to be kept confidential until its precise moment of initiation lest people and financial institutions start converting their assets into the euro before the switch.

The European core would also not be immune from the fallout. Despite public prognostications that Greece accounts for just three percent of the eurozone GDP, foreign banks' holdings of Greek debt are relatively high. France, Switzerland, and Germany are the most exposed, according to some estimates, with France having $75.5 billion worth of claims on Greek sovereign, corporate and bank debt. Germany's exposure is valued at $43.2 billion.

It's also not clear if leaving the EMU is even legal, the question the ECB working paper sought to answer. Amazingly, while Article 50 of the Lisbon Treaty talks explicitly about the possibility of withdrawal from the E.U., it makes no mention of the EMU, or distinction between EMU and non-EMU members.

One way of interpreting that lack of distinction is that the European Union did not intend for there to be a unilateral right withdrawal from the EMU. Another interpretation is simply that a divorce from the EMU without a parallel divorce from the European Union would be legally inconceivable.

If leaving the EMU is not a strong possibility, then a bailout by the European Union still is. Under Article 122 of the Lisbon Treaty, EU members do appear to have the legal authority to stage a bailout of foundering members in exceptional circumstances, if needed. And that need could end up being great."

So far, there has been a remarkable lack of economic contagion from Greece's economic tragedy, allowing the European Commission to maintain pressure on the country to help itself financially, but that could change very quickly.

"The situation is getting critical. Whilst Greece managed to secure funds from the bond market earlier this week, it appears unlikely that they could do so as we end the week," wrote Gary Jenkins, a London-based fixed income specialist. "It is going to be difficult for Greece to restore investors confidence in a short period of time, thus we are coming to the stage where either E.U. officials are going to have to be more public in their support for the sovereign or risk carnage in the markets."

But while the doomsday scenario -- Greece or other PIIGS withdrawing from the eurozone -- appears unlikely, the fact that it is being discussed so seriously indicates trouble ahead for the zone's unity. Worries over PIIGS are likely to continue as the divergence between eurozone economies becomes more pronounced. Monetary unions are unwieldy things at the best of times, but financial crises have the tendency to expose and exaggerate structural differences between their members. Credit rating agencies last week began sniping at Portugal, talking again of competitive gaps within the European Union.

Ultimately, the problem of an economically two-tiered eurozone presents European leaders with numerous dilemmas and few easy answers. In the case of Greece and the remaining PIIGS, stronger members must either haul their weaker counterparts up to fiscal austerity, or be dragged down with them. A bailout for Greece would also be a bailout for Europe, and, perhaps more importantly, a bailout of European Union ideals.

The possibility of a withdrawal from the eurozone is unpalatable to all parties, yet the risks to stronger eurozone members of being hamstrung by the fiscal inadequacies of its Mediterranean brethren are equally off-putting. The preferred option might be for all parties to wait and see how the situation plays itself out. It is interesting to note that the euro has been weakening against other world currencies in recent weeks. As a result, Greece might get some of that currency devaluation it wanted after all and the PIIGS may just get off the ground.

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