Is the haircut really gone?

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If we remove the technical bells and whistles, the problem, at its most basic, is simple. According to several ministers, there’s only $22 billion in (gross) reserves at BDL.

by Dan Azzi -Source: Annahar

A file photo of the headquarters of Lebanon’s Central Bank in Beirut (Annahar)

By now, it’s become clear to even the most ardent believers in the Lebanese miracle, which defied the gravity governing other countries for so long, that something is massively wrong. Bank deposits were squandered.

If we remove the technical bells and whistles, the problem, at its most basic, is simple. According to several ministers, there’s only $22 billion in (gross) reserves at BDL. Banks probably have an optimistic estimate of at most, an additional $4 billion in overseas cash. The total $26 billion is the “real” dollars available for distribution. Dollar deposits (or computer entries on your bank statement) have claims of almost $120 billion, all chasing BDL’s scarce dollars. Thus the hole is huge. Even assuming all dollar loans are paid off (with not one nonperforming loan), in dollars (not in Lira at the official rate of 1500, which actually increases the hole), that means that at best you’d have one out of three real dollars available. This assumes the distribution of every last penny of BDL reserves, which, of course, is impossible because you still need them to buy basic, mandatory imports, like fuel for electricity.

Thus, a haircut on deposits is unavoidable.

Let me first define what I mean by a haircut. A haircut is any action that pays you back less money than what you were promised. For example, if you deposited $100,000 at a bank, at 10% interest per annum, you expect to receive $110,000 in a year to do with as you please, including, for example, transferring it overseas upon demand, to pay your kid’s college tuition. If you get anything less than that, whether it’s $105,000 or $65,000 or in Lira at 1,500 (which is now trading at 3,000), or bank shares, or a zero-coupon bond, or whatever – any of those are haircuts. I went through the forms of haircuts in this article in January.

In an earlier article, I had suggested a haircut plan to protect small and medium depositors and exclusively focus on the subset of large depositors (average size of $15 million) who earned exorbitant rates. These are 6,000 people who were worth $90 billion (more than 50% of all deposits). Unfortunately, that’s no longer possible because circa $20 billion walked out of the banking system, via transfers overseas (through super-Wasta), or paying off loans, or buying real estate, or buying Solidere shares, etc., in the last few months. For example, 3 accounts, worth an aggregate of $1 billion, disappeared into thin air in the first two months of this year.

In the absence of a formal Capital Controls law, this continues to allow people with super-Wasta to escape, legally, while most depositors are distracted with irrelevant minutiae. So smart money is redeploying and not waiting around for a favorable resolution.

Ordinary people are holding out to get their money in dollars, which is metaphysically impossible. More sophisticated ones understand the problem and are lobbying to obtain government assets in return, like MTC, Alfa, Casino, MEA, Port, Airport, government land, etc.

There are a few problems with this. The first is a legal technicality. BDL is separate from the government, an important distinction, otherwise it opens up all BDL overseas assets (such as gold, MEA, Intra properties, and even the reserves) to claims by Eurobond holders in New York courts, by piercing the sovereign immunity protection through the alter ego argument (a fancy way of saying the government and BDL are the same). Another problem is that, technically, depositors lent the bank’s money, not the government, even though banks tangled themselves up in financial engineering transactions, effectively giving BDL most of the deposits, most of which was spent. Had depositors wanted to lend the government money, they would have done it directly by buying Lebanese government bonds. The third issue is that state assets belong to all Lebanese citizens, not just depositors. By transferring state assets to depositors, you now have 0.3% of depositors owning most state assets, creating a whole new set of oligarchs, like what happened in the Soviet Union after the collapse of Communism, basically extending the Ponzi Scheme, by gifting the Crown Jewels of the Lebanese state to these same disproportionate beneficiaries of the warped Lebanese Rentier Economy.

Another problem is that beneficiaries of exorbitant interest rates get many more shares or assets than those who earned a reasonable rate. For example, at a rate of 20%, starting with the same deposit, one person would have double the amount of another person earning 5%, within 5 years, thus gets double the state assets of the average guy with the same initial deposit.

The other problem with the suggestion of distributing government land is that every piece of land is different and unique. How does one determine who gets the expensive one with a sea view near Zaitouneh Bay versus one in the boonies? Will they negotiate with millions of depositors individually? Of course, for those who want to be compensated with land or properties, they can do that right now with their Lollars prior to the haircut instead of waiting for a random assignment from the government.

Finally, the IMF is likely to insist on bank and depositor losses, before any money is paid out, similarly to what they did in Cyprus.

While many statements by government officials have (disingenuously) ruled out a haircut, this means that the haircut is now taking shape in the form of Lirafication — printing Lira and paying out depositors at a rate which is less than the market rate, while the Lira continues to lose purchasing power. This form of haircut has already started with micro-depositors, who one would think would be protected most. By giving them a rate of 2600, with the Lira trading today at 3000-3200, that’s a 15-20% haircut, so you can imagine that it gets worse as the account sizes increase.

The natural value of the Lira is one that makes the balance of payments zero. With a haircut, this can be held at a level a bit higher than the current one. However, if you now release $100 billion in Lira, more than three times our projected GDP next year (around half of last year’s), even if done gradually, that means the Lira would shoot to over 10,000 or much worse. This means that the haircut, and make no mistake — Lirafication is a haircut — will now be subsidized by all depositors, plus retirement accounts (Daman), payments owed to contractors and hospitals, as well as every Lebanese citizen earning a Lira salary.

One of the most surprising aspects of this tragedy is that the government has hired a restructuring advisor, Lazard, and a legal advisor, Cleary-Gottlieb. So has the Association of Banks in Lebanon, hiring Houlihan Lokey. But not depositors, despite the fact that their amount at stake is larger than the government’s or ABL combined! It’s actually remarkable that depositors still haven’t united to set up an organization and hire similar experts to represent their interests.

Of course, the problem with setting up such an organization is that it’s a zero-sum game. One person’s gain is someone else’s loss. For example, it creates a conflict among depositors under any threshold, says $100,000, with those above that threshold. So how do you protect depositors’ interests without hurting other depositors or the whole rest of the country?

 

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