In the blink of an eye, the whole world changed #4

Why did the Lebanese economy vanish? Can we help?

Aug 06, 2020

An injured man sits outside a restaurant in the Mar Mikhael area of Lebanon. Tuesday’s port blast ripped through blocks of the city for miles around © Patrick Baz/AFP/Getty.

The devastation on Beirut is truly inexplicable.

It is inexplicable that the Lebanese people have to constantly guess who wants to kill them. Can you imagine?

The impact of this detonation will be more devastating than we could even imagine. Not just in terms of a sheer number of deaths, but in terms of destruction of livelihoods, of disappearances, of infrastructure breakdown, of environmental damage, of future birth defects, of the deterioration of the already very, very fragile Lebanese social fabric.

It’s extremely hard to be optimistic here.

“In the blink of an eye, the whole world changed”

On August 4th, over 100 people were killed in a blast that rocked Beriut’s port. Over 4,000 were also injured, according to Lebanese health authorities. If the explosion had happened during the afternoon rather than around 8 pm at night, there would have been 10,000 dead.

The blast seems like the final nail in the coffin for a country pillaged and ransacked by elites who have insulated their fabulous wealth, while 1/3 of Lebanese live in poverty, up 27% since 2010. After Tuesday’s blasts, an estimated 300,000 more people will be homeless.

I kindly ask you to share this week’s article. I’ll be going over how Lebanon’s economy got so bad. Lebanon needs help, more than ever! I have attached trustworthy links for donations and information for those wanting to find out more.

Tuesday’s blast came as the county was already in the worst financial meltdown in its history. Grappling with a rising level of coronavirus infections, hospitals and ER’s are already at full capacity unable to deal with the onslaught of injuries that occurred from the blast.

Lebanon's main vulnerability is the poor state of its health infrastructure, which suffers from a lack of medical supplies and facilities. Lebanon's border with Syria (which is likely to be hard to secure) and the presence in Syria of Hizbullah, a Lebanese movement backed by Iran, could exacerbate the spread of chaos throughout Lebanon.

The economic collapse, the COVID outbreak, and the blast could not have come at a worse time for Lebanon.

Lebanon is the first financial meltdown, during the era I call, “ The Roaring 20’s 2.0”. But it didn’t collapse overnight.

The simplest explanation is rooted as early as after the Lebanese civil war. Lebanon started to raise funding from foreign grants, loans, and inflows from remittances from the Lebanese diaspora to cover its huge account deficits. The banks of Lebanon are considered the jewels in their economic crown. Beirut’s banks have long been its economic lifeblood. Anonymity for account holders and a fun-loving atmosphere in a conservative region made it an attractive place to park money. Lenders were profitable. Lebanese economist Jad Chaaban has noted the “extraordinary influence” of Beirut’s bank boardrooms over monetary, fiscal, and political affairs.

Since the early 1990s, private banks including the central bank of Lebanon, Banque du Liban (BdL), have offered high-interest rates to attract U.S dollars, especially from the exuberant Lebanese diaspora. Much of the new fundraising was headed by Riad Salameh, BdL governor since 1993. 😡

Salameh is the master of Lebanon’s financial engineering. His strategy for financial sector stability was a currency peg that has held the Lebanese pound at about 1,500 to the US dollar for more than two decades. This peg has historically bolstered investor confidence and encouraged capital inflows to Lebanon. Local banks are the government’s main creditors. Foreign emerging market investors also enjoyed the bonds’ high coupons. But drivers for Lebanon’s economic growth — foreign direct investment and growing bank deposits — have faltered.

HOW CAN A CENTRAL BANK GO BANKRUPT WHEN THEY CAN JUST PRINT MORE MONEY?

ACCOUNTING DECISIONS TO HELP THE ELITE.

It is extremely rare for a central bank to record seigniorage as an asset instead of income.

Described as the profit made from printing money, seigniorage is the difference between the amount central banks receive on issuing money and the much lower cost of producing it. In other words, the economic cost of producing a currency within a given economy or country is lower than the actual exchange value, which generally accrues to governments who mint the money.

While the definition of seigniorage is most often the difference between the cost of printing new currency and the face value of that same currency, it is also the number of goods or services a government can acquire through the printing of new notes.

Seigniorage has been a source of income for banks, both central and private, for hundreds of years.

As a central bank, you print money, which you then loan out.
Making money monthly, quarterly, or yearly from the interest of those loans + seigniorage: allows banks to earn income and re-invest it.
But BdL never loans out its money to make money. It just pays out incredible amounts of cash for individuals to park their money in their own accounts.
Since BdL’s seigniorage assets are peanuts in comparison to its debt (170% the GDP), BdL can’t properly print more money since 1) it makes no money 2) “maxed out its credit card”.

In the case of BdL, seigniorage is a hemorrhage instead of a white blood cell.

While the BdL was raising billions through its high-yield saving and investment accounts (financial engineering) for the past 20 years, almost 70% of the money deposited into these accounts was lent to an insolvent state built on sectarian spoils systems. The money raised and deposited into the BdL was estimated to be 2 times the size of the Lebanese economy ($160bn). These funds were never used by the Lebanese government for capital improvements, went undocumented, unaccounted, and included in the shadow financial system used by the world’s best money launderers.

SINCE 70% of over $160bn raised was not properly accounted for, BdL purposefully propped up its assets and paid out billions to elite businessmen.

Yet in matters relating to financial risks, it has been customary in the media and official pronouncements in Lebanon to focus on the negative role of the budget deficit and government debt, while highlighting the positive role of BDL in countering such risks. That’s how much power the banks have in Lebanon.

Did I mention the BdL is considered the crown jewel of Lebanon’s economy?

How did BdL ruin the economy, technically speaking?

The essence of BdL’s monetary policy has consisted of accumulating FX reserves to defend the fixed exchange rate (currency peg), which is a logical and understandable policy in a fixed-exchange-rate regime.
However, especially with its announced “financial engineering” operations, BDL started borrowing large US dollar amounts from local banks at unnecessarily generous and gradually higher rates. The spreads, or margins paid by BdL over international reference rates such as the 6-month $-Libor, was more than 5% and now exceeds 9%! This is a remarkable cost to pay by a central bank instead of paying a margin of a fraction of 1%.
Moreover, none of BdL’s “financial engineering” declared objectives were achieved. On the contrary, its FX reserves have been in decline, the balance of payments has deteriorated since 2011, and the banks’ balance sheet has become vulnerable due to non-transparency.
BdL’s debt (the $-component only, excluding Lebanese Lira), which is estimated at more than $87 billion, is totally separate from government debt and now exceeds it. More seriously, BdL currently pays in US dollar , interest costs on its US dollar bank borrowings at an annual sum estimated at around $6 billion, far exceeding the budget’s interest cost. In other words, the main drain on the country’s FX reserves is originating from BdL and independently of the government budget.
Illiquid seigniorage assets coupled with high-interest rates that BDL pays to borrow from banks have forced credit freezes on all major private banks consequently increasing failures and further slowed down economic activity. You also would have trouble going to a central bank and demanding your money back.. (OOPS)

How did the Lebanese government ruin the economy, technically speaking?

Lebanese governments since the early 1990s have been implementing budgets, often without due legal process. However, the main problem in the fiscal deficits and rising government debt does not reside in the deficit and debt themselves but in the fact that these have been mostly financing current rather than capital expenditures. Of total budget expenditures of around $244 billion during 1993-2018, only about 8% went on capital expenditures, while more than two-thirds were allocated equally to interest on debt and wages and related benefits.
In parallel, the public sector has become bloated with political appointments, becoming a private domain for boosting political power and personal enrichment, with most public servants now owing to their allegiance to politicians rather than serving the public.
Government spending on road construction in, and water and wastewater works in 2019, decreased from LBP 172 billion to LBP 11 billion, a 90% drop compared to last year’s figures.
Lebanon’s elites have so often defied gravity in the past and remain insulated by their fabulous wealth. Perhaps that explains their otherwise inexplicable insouciance amid this deadly drama. It resembles a scrabble for deckchairs on the Titanic, enlivened only by occasional outbursts ordering the iceberg to get out of the way.

Further sustained depreciation of the Lebanese Lira would be devastating to most Lebanese whose incomes, pensions, and often savings are in Lebanese Liras, with perilous economic, social, and political repercussions. I went through this entire article and only mentioned Hizballah only once. This wasn’t to downplay their role in the demise of Lebanon’s economy & security but to highlight how corrupt Lebanese officials are by themselves.

Lebanese officials, political and monetary, are totally at fault, yet helpless in the face of these developments, with no sign of any existing policies or plans to counteract these risks.

🇱🇧 Ways to Help 🇱🇧

This resource list is community-driven. Beware of shady organizations that are raising money and avoid providing aid to any Lebanese government or UN-based program during this time. As you just read, all the money raised through the Lebanese or UN-backed programs always go straight to the elite.

👇🏼 Donate to Disaster Relief Initiatives 👇🏼