The reality is that ATMs ran out of dollars simply because there’s excess demand for them.
by Dan Azzi -Source: Annahar
Recent reports are circulating that the shortage of dollars in the country is due to those “darn Syrians” withdrawing cash from our ATM machines and smuggling them into Syria. First the “poor ones” steal our arghile charcoal jobs and now the “damn rich” ones are causing trouble by moving their money back to their country.
So let’s reconstruct this operation for a second.
Take I: Intelligence Officer General Rustom Kanaan comes into the Achrafieh branch of TrustMe Bank and says, “Shlonak Akhi. My name is Philippe Chalu and I’d like to open an account. Here’s $10 million in cash.” OK, so what’s the likelihood that this would pass? And if it did, why would he deposit $10 million in cash, only to take it out from ATMs, at the rate of $1,000 per day, over the next 10,000 days, i.e. 27.4 years? Of course, hundreds of intelligence officers would have to do the same thing. OK, that’s not it.
Take II: He doesn’t deposit cash. He wires it from a bank in Luxembourg. But wait a minute — if he has an account in Luxembourg, it means he’s already been successful in laundering the money and can use the ATM of that bank anywhere in the world, so why transfer it to a higher risk country. OK, that’s not it either.
Take III: The accounts already existed for rich Syrians, which means these are the guys who evacuated their wealth here years ago, so their money doesn’t get stuck in a war zone. So the theory is that maybe they heard the call of President Bashar Assad who said he needs dollars, so like the good patriots that they are, heeded the Baathist slogan: “One Arab nation, with an eternal message!” They immediately withdrew their money from ATMs and took it to Syria and gave it to Mr. Assad, for free. Do you really buy this?
Take IV: Syrian Intelligence people are traveling all around the country to the Sarrafs and anyone in front of an ATM, and scooping up all the dollars in the country and smuggling it into Syria. But what did they exchange it for? Syrian Lira? Lebanese Lira? What? What would all these Lebanese that took out cash from ATMs get from this Syrian Intelligence guy in return? Clearly, another nonsensical theory.
Thus, the reality is that ATMs ran out of dollars simply because there’s excess demand for them.
The first thing to understand is the different types of dollars we have in the country. Think of dollars like water. If you freeze water, it becomes ice, a solid. If you boil it, it becomes vapor, a gas, and are all fungible (meaning easily converted or exchangeable one for the other), under the right conditions. We have three types of dollars in Lebanon. The electronic, real dollars that the Central Bank calls reserves. I call these real virtual dollars, because they can buy stuff from outside the country but can’t be transferred into physical form (easily). BDL doesn’t actually have a vault in his basement with a stack of hundred dollar bills worth $30 billion. So the central bank reserves can be transferred overseas to buy goods and services, such as a car. Then there’s the dollar at the exchange house or Sarraf. This is the piece of paper (cotton actually), with a picture of Benjamin Franklin on it. Those are called fiat notes. This is the one that you can take anywhere in the world and people will give you stuff in return. The third type of dollar is the one you have in the bank. Its value (in your mind) is what your bank statement says. A year ago these three forms of dollars were fungible.
Today, the money in your account is no longer fungible because it’s not a real dollar. The actual real value is whatever the bank has available to give you if you asked for your money. To be more precise, it’s the amount of liquidity he has divided by the aggregate demand of all the people at any moment in time. For example, say you have $100,000 and Fatmeh has $200,000 at TrustMe bank. If TrustMe bank only has $30,000 in liquidity, and you and Fatmeh want to withdraw all your money today, the practical or usable value of your account is actually $10,000, while the value of Fatmeh’s account is $20,000. This assumes life is fair. Say Fatmeh has a huge Wasta and is able to take all of the bank’s liquidity, i.e. your $10,000 as well, then the value of her account is $30,000, while the value of yours is zero. This is why you’ll hear many horror stories about people not being able to get their money, and then suddenly Ramzi jumps in and says “I withdrew money today and had no problem.” Basically, the allocation of this limited liquidity by banks is based on a lot of factors, such as the amount you’re withdrawing relative to your total assets (they wouldn’t want to piss off a big client), how loudly you yell, your Wasta, if you’re accompanied by a good lawyer, and sometimes sheer luck. The value of your account is whatever liquidity the central bank wants to release from his reserves to cover demand (for Lira exchanged to dollars or transfers).
Thus, in a time of crisis, trust dwindles, and the “realest” dollar is the one you can see, feel, and smell — the greenback with Benjamin Franklin’s picture — that’s why it’s trading at a premium of 1600-1650 Lira now, in the real world, as opposed to 1514 in the virtual world of a computer screen. Think of this difference similarly to being shot at by a pistol in a PlayStation game or a 9mm Glock in the real world. Of course, the central bank can use a billion dollars of his reserves to transfer overseas and ship in a planeload of fiat dollar bills to alleviate the crisis, so why doesn’t he? The answer is because everyone is withdrawing cash and hoarding it, which means he would use up his reserves for no productive reason and he would just “feed the beast.” Thus he has wisely opted to let market forces determine the real value of a Benjamin Franklin versus our Lira, keeping his reserves for essentials such as medicine, grain, and fuel, so we don’t end up like Venezuela.
Dan Azzi is a regular contributor to Annahar. He has recently been invited to be an Advanced Leadership Initiative Fellow at Harvard University, a program for senior executives to leverage their experience and apply it to a problem with social impact. Dan’s research focus at Harvard will be economic and political reform in a hypothetical small country riddled with corruption and negligence. Previously, he was the Chairman and CEO of Standard Chartered Bank Lebanon.