- 05
- Dec.
- 2023
This column is known for its scathing critiques but is not accustomed to delivering insults. Nevertheless, the expression in the title has a history: During Bill Clinton's 1992 presidential campaign, his campaign strategist created three slogans, including "It’s the Economy, Stupid" (addressing his rivals), meaning that everything revolves around the economy.
However, this slogan, intended to remain exclusive to the campaign team, quickly spread in the USA and elsewhere, evolving into multiple variations, including "It’s the Politics, Stupid." Since then, it has been used by countless interlocutors, leaders, reports, authors ... including our local finance reference, the rather austere Makram Sader, former Secretary-General of the Association of Banks.
But what prompted such a disclosure? A report was recently published by a group of academic specialists at Harvard on the Lebanese crisis, its roots, causes, effects and possible solutions.
Yet across 69 pages, there was no mention of the real roots of the problem: Hezbollah, its internal and external wars, its assassinations, its nitrate, the discord with Gulf countries, the repeated vacuums in governance, corruption and systematic squandering within the state. With billions of dollars lost on each of these occasions, losses ultimately absorbed by the Central Bank (BDL), banks, public treasury, businesses and citizens.
And it is only at this secondary level that the report begins its analysis, attributing the identified financial losses as "the causes of the crisis." This constitutes a significant methodological bias and error, which will echo in the conclusion, as the same causes will produce the same effects.
Let's move on to the content of the report. The authors acknowledge the scarcity of reliable figures—however, they occasionally make heavy errors on some. Nevertheless, they have pinpointed the essential aspects, inputting all into a number cruncher, the kind of software equipped with artificial intelligence, to derive complex equations.
One conclusion is that the total public debt in foreign currencies is actually $120 billion, including Eurobonds and BDL liabilities. How to reduce this deficit? The report explicitly excludes the use of state assets, "worth only $4-10 billion according to our estimates." Such a statement, made in passing, is so flimsy it could be credited to any Lebanese minister. That says a lot. How can authors 12,000 kilometers away evaluate all the assets, structures, entities and public land, including 59,353 plots?! Let's move on...
Their primary solution is to clean up BDL's balance sheet by relieving it of its obligations to banks (and depositors), totaling $76 billion, then transferring these to the State, which would carry the entire public burden.
According to the authors' scenario, the BDL would still maintain a surplus of $14 billion that it could use to lend to struggling banks. Thus, most banks could resume their normal activity, at least most of them. The rest would need to be nationalized.
However, this ideal scenario requires an almost 85% haircut on both Eurobonds and deposits. According to this scenario, only bank accounts below $100,000 or $150,000 could be fully compensated, excluding those that were converted from Lebanese pounds to dollars after the crisis.
In exchange, the State would distribute "debt certificates" to banks, with a significant portion passed on to affected depositors. This would allow the State to clear its debt at a lower cost. These certificates, initially available for sale in the market, would be worth only 10% or 15% of their nominal value at the start, as the authors are aware. And there's no guarantee of future appreciation. Hence the more than 80% haircut. It's similar to the check-cashing operations currently practiced in the banking market. But with a different way of scratching the left ear with the right hand.
Once depositors are thus dispossessed, the authors foresee that the BDL and most banks will then be solvent, with still a need for additional capital injection and a capital control law.
It's unclear why the Harvard experts made such an effort to arrive at the same practical result as the Saadeh Chami or Hassan Diab plans: dispossessing the wealthier individuals (with more than $100,000) of their money. The funniest part of this story is that the report suggests investment avenues (tourism, tech... and gas). But it doesn't wonder who will still dare to make these investments. Are they the same wealthy individuals who were plundered? Or others who witnessed the looting?
On the other hand, according to the report, the State would need nearly $8 billion to cleanse its finances, through the IMF and donors, along with tax increases and a hypothetical recovery of some ill-gotten gains transferred elsewhere.
Another key proposal, of interest, is to fully dollarize the country, based on successful experiences in Ecuador, El Salvador, or Panama. Many of our economists have already suggested this solution. The Lebanese pound would then disappear, at least for a few years. This move would reduce inflation and poverty and reassure potential entrepreneurs. Simultaneously, there would be no need for large reserves at the BDL (since there are no more Lebanese pounds to defend).
All Lebanese pounds in the market, in cash or deposited in banks, would thus be converted into dollars at market rates, amounting to $1.2 billion. Enough to frustrate those still hoping for a pound appreciation, perhaps in the event of electing a reliable president. But apparently, the Treasury bills (state debt in Lebanese pounds) were not considered in this process. The authors also did not propose a soft dollarization, which allows both currencies to coexist, but favors the dollar.
Obviously, one can oppose this scenario due to the national symbolism represented by the pound, akin to the flag or national anthem. But given the current state...
However, all these exercises will be in vain if, once again, the root causes of the problem are not eradicated. The same causes that led the country to bankruptcy and currently perpetuate this destructive work at the borders, undermining the economy again after a year of recovery, as the powerful continue with their business as usual, seemingly as undisturbed as your grandmother's icebox.
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