Adonis Diaries

I’m trying to understand the mess we’re currently in and I have a rough sketch of a story.

As I understand it, when the WhatsApp revolt sparked, Lebanon was already entangled in a twin-deficit problem: budget and foreign, with significant current account imbalance and dwindling foreign reserves.

Before the 17th of October, banks were already pushing for the conversion of loans in local currencies into US denominated loans:  they were restricting capital outflows and enticing new deposits in US dollars at abnormally high interest rates

At the same time, bank insiders were transferring their funds abroad and removing their cash in dollars from the banks.

When the protests erupted on October 17, banks suddenly closed for two weeks without good reason, triggering when they reopened a generalized bank run.

As a result, banks froze all accounts, suspended the convertibility of bank deposits and imposed an extensive and arbitrary capital control.

These measures led to the creation of two types of dollars: one, inside the banking system, being tied to the Lebanese Lira at a rate of one dollar equal to 1515 Lebanese Lira while the other, outside the banking system, floating and averaging today 2500 Lebanese Lira.

The discount value of inconvertible deposits is the cost depositors are willing to incur to get their money out of the banking system, in light of the impeding risks and the political ineptness and ranges now from 25% to 50%.

In his latest rigged TV interview, the governor of the BDL (Riad Salami) opened the door for the “Lirafication” of bank deposits, measure that will be plausibly followed by the devaluation of the lira.

The post-devaluation exchange rate will depend on the ability of the BDL to defend the local currency at a new level of exchange, i.e., the assessment of the amount of net foreign reserve it holds.

Such an exercise is close to an Enron-style audit with fake holdings, hidden losses and off-the-book accounting.

As the country descends irrevocably into anarchy, Lebanon seems to be abandoned by the international community and the economy is grounded to a virtual halt, a shut down, which led to the breakdown of the system.

This breakdown has been a slow-motion collapse that marched for exactly 29 years, inexorably towards its current catastrophic demise.

The date of its symbolic death goes back to October 13, 2019, when wildfire broke out across Lebanon.

At the cornerstone of the Lebanese economy, was its currency system, known as the “convertibility” policy, which kept the value of one dollar fixed equal to about 1507 lira and allowed Lebanese to use both currencies interchangeably.

It was the basis of a system of legalized corruption for so long and is partly responsible of the impressive meltdown.

In 2001, Argentina defaulted on its public debt while Lebanon was saved by the international community during the Conference of Paris I.

We should have learned at that time lessons from the Argentina experience, but unfortunately, we didn’t.