What does the decision of the Central Council of the Banque du Liban to pay $400 in cash from customer accounts in banks and a similar amount to be disbursed based on the new platform price of 12,000 pounds mean?
The Banque du Liban says that it seeks to close about 800,000 accounts, print about 27 trillion pounds, and spend about 2.5 billion dollars, divided equally from the reserves of the Banque du Liban and from bank accounts in foreign currencies with correspondent banks. At first glance, a step of this kind appears to be “good” as it pays in cash dollars or at the market price a portion of the reserved deposits, but the matter goes beyond that, because this step came in a clear and well-known context: The Bank of Lebanon continues to implement the process of distributing losses exclusively through monetary policies and with goals it sets It is after thwarting the government’s recovery plan in the House of Representatives. It is a context in which a set of issues are also being involved, most notably the Central Bank of Lebanon’s creation of a platform for selling “Fresh Dollars”, and its decision to stop subsidies, and before that the creation of pluralism in exchange rates, and the implementation of reverse financial engineering to absorb the previous ones.
Profits continue to flow into the banking entity
It is the profit margin of banks on the Lebanese pound accounts at the end of March 2021, compared to 0.6% at the beginning of 2018. With the decline in interest on customer deposits towards zero or slightly higher, the margin began to rise because banks are still receiving income from investments in Treasury bonds and with a bank Lebanon
It is the profit margin of banks on dollar accounts at the end of March 2021, compared to 1.51% at the beginning of 2018. In fact, despite the banks’ claim that they are losing, this margin indicates beyond any doubt that profits are still flowing to the bankrupt banking entity
In light of this context, the World Bank has identified the categories that pay the largest bill for the distribution of losses: the overwhelming majority of the workforce, small enterprises, depositors. One of the consequences of this path is that it fueled price inflation amid a large discrepancy in the pricing of assets and services through multiple exchange rates, and it was hitting wages and salaries, creating poverty and unemployment and stimulating migration. Therefore, each economic segment has a heavy share of Riad Salameh’s desires. The latter determined these categories and what share they will reach. The general Lebanese, according to their consuming capabilities, were paying the price of amortizing losses through inflated prices. Depositors used to pay the price through a market hierarchy of 75% until before the decision to pay part of the deposits was issued. As for small enterprises, they can no longer continue their work in light of the shrinking of their capital and sales at the same time.
But this was not the path that the government’s recovery plan had set. Although it was not an ideal plan, two things were clear in it: recognizing the value of the losses, and holding the banks the main part of the losses, with all the value of their capital, which amounted to $22 billion at the time. The recovery plan refused to save banks through public money, noting that this pattern is inconsistent with international practices in restructuring operations.
Preliminary accounts for the distribution of losses
So, how have the losses been distributed so far, and what changes have occurred in it after the decision of the Banque du Liban to pay part of the deposits?
In the account of the Banque du Liban: between January 2020 and March 2021, the Banque du Liban spent about $12.8 billion, of which more than $6 billion went abroad, with no clear purpose, but it is estimated that they were smuggled money. Its hidden losses in the “other assets” account increased by $22.4 billion (based on the exchange rate approved by the Central Bank of Lebanon, at an average of 1507.5 pounds), knowing that there are estimates that these losses were denominated in real dollars, but they are converted into pounds.
– In the account of all the Lebanese: the value of the lira deteriorated by more than 129%, according to the calculations of the World Bank. Prices have inflated huge rates, averaging 84% in the past year, and the World Bank estimates that they will reach 100% this year. Poverty has risen to affect half of the Lebanese, and unemployment rates have reached 40%, according to unofficial estimates, while one in five employees is unemployed, and it is said that there are about a million people willing or preparing to emigrate.
– In the account of depositors, the following happened: About $22 billion of customer deposits were extinguished, and the bulk of it benefited from large borrowers who paid their debts at cheap rates, while depositors lost a deduction from their deposits at a rate of 75% currently, noting that customer deposits in dollars have shrunk by 10.9 billions of dollars.
Thus, the direct loss incurred by all the Lebanese is about 12.8 billion dollars spent by the Banque du Liban, and above it losses for bank depositors amounting to 75% of the amortized deposits, equivalent to 16.5 billion dollars, in addition to business and economic losses and inestimable prosperity opportunities.
So, how can Salameh’s latest move to pay $400 in cash deposits, and a similar amount at the platform’s exchange rate of 12,000 pounds, be evaluated?
In fact, the calculation of the distribution of losses will be added to it:
Banks’ account: Banks’ capital decreased by $3.7 billion in exchange for their losses estimated by the Banque du Liban as follows: 45% of their investments in Eurobonds, 1.89% of their investments in the Banque du Liban, in addition to non-performing debts at 33% of the total value of their loans portfolio. The amount in March 2021 is about $34 billion. If we add that it will pay half of what the Banque du Liban will pay for deposits, the cost will reach $1.2 billion, but not all of what the banks pay from their own capital and assets.
– The Banque du Liban account: Within 12 months, an amount of 27 trillion pounds will be printed, which is more than the amount printed by the Banque du Liban between January 2020 and March 2021, which will have a negative impact on the losses of the Banque du Liban. These losses increase with the depletion of the foreign currencies that he owns, because he will pay half of what the banks paid (assuming that they will agree to this offering and will abide by it), meaning that the foreign currency reserves will be reduced by an additional 1.2 billion dollars, above what the Banque du Liban will pay to finance the support. This time, the support may not be direct, meaning that the bank will announce the cessation of support, but it will lend the Ministry of Finance money in pounds, and it will buy from it the dollars that it uses to finance the support. These amounts are estimated to be $3 billion.
Depositors’ account: Of the $135 billion they own in banks, depositors will receive about $2.4 billion in cash and a similar amount to be paid in Lebanese pounds, according to the platform’s exchange rate of 12,000 pounds.
What did the banks pay?
As a result of these calculations, the banks are supposed to pay about $4.9 billion, but in fact they will pay much less because the majority of these losses were financed by the banks from the revenues they obtain from their investments in treasury bonds, certificates of deposit and deposits with the Banque du Liban, while market bank debts are dealt with. The method of appropriating real estate and assets owned by defaulters, and these real estate can be relatively used to increase capital. It suffices for them that no single bank has yet been subjected to bankruptcy, or to a referral to the higher banking authority, when they should have been tried for squandering people’s savings and seizing all their personal and banking assets to pay their obligations to people.
As for the accounts of all Lebanese and depositors, the losses are very huge. In addition to the economic losses that cannot be counted, and the losses resulting from the lack of purchasing power, as well as the rates of inflation, poverty, unemployment and negligence, out of deposits worth 135 billion dollars, depositors will recover only 2.4 billion dollars in cash and the same on the platform price, and the rest will be left to the previous fate, Any market hacks. However, there are higher risks than that printing 27 trillion pounds and pumping them into the market will fuel an additional deterioration in the value of the pound, which means that losses in purchasing power, poverty and unemployment will be greater.
The general public bore an exorbitant share of the distribution of losses, and the Banque du Liban promises more
Therefore, it is not possible to bet that pumping dollar liquidity into the market by paying a portion of deposits imposes a kind of circumstantial stability in the exchange rate and compensates for some of the losses incurred by depositors, especially the small ones (who have accounts less than 500 thousand dollars), and it cannot be Never think that steps of this kind come outside the context of the negative monetary policies pursued by the Banque du Liban since the first day. When the support stops and prices inflate like crazy, as expected, two-thirds of the deposits he paid in the market will be used to finance the free market and will not return to the platform. Rather, the banks will see in these funds an opportunity to buy them with bank checks and export them abroad to cover their obligations. Benefiting from these funds in the broad sense will not be available for the sake of circumstantial control of the exchange rate. On the contrary, we may see that the price, as it is currently steadily deteriorating, will witness further deterioration.
So, paying the deposits, as Salameh suggests, is a process of buying more time and allowing the revival of the capabilities of the corrupt political system, and distributing the losses as it decides, aiming to impoverish and displace people and turn them into social hot spots. Later, this type of distribution of losses will include gold after the reserves are exhausted, while the task of controlling the exchange rate seems almost impossible in light of the plurality of prices. It is not possible to take effective steps in this field without unifying the exchange rate, which is an essential factor in order to establish a kind of stability in the structure of markets and contracts. Stimulating the entire economy depends on this, and people’s economic relations are based on a clear exchange rate, although it is not fixed in the classical concept that we are accustomed to, but it must be within a clear equation and relatively narrow margins. Issuing an effective and acceptable budget must be built on this basis as well, because the state’s expenditures will be affected by the market price tremendously, and its revenues will double if a unified price is adopted.
Towards a long and hard stagnation
The World Bank says that for each 1% shock in the expansion of the money supply in circulation, there is a 0.8 point increase in inflation over a 12-month period. Therefore, continuing the process of amortizing deposits by converting them into the lira, and converting the fiscal deficit into cash as well, is an essential axis in what can be called the inflationary environment. “Assuming that the exchange rate deteriorated in 2021 at the same rate that it witnessed in the previous year, we expect that inflation will remain high in 2021 and may exceed the rates recorded in the previous year… The recession is difficult and long-term due to the lack of policies, decision-making and reforms.”