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2020-09-02 Syria-Lebanon-Iran
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For those interested in a deep dive on Lebanon's shattered economy, on August 4th, 2020, the same day of the massive explosion, economist Jim Rickards released a detailed monograph about it, Lebanon in Crisis.
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It's quite long.
[FDD.org] Lebanon is unraveling. Last year’s massive public protests over the government’s inability to collect trash or provide other key services now seem like a minor problem. The COVID-19 pandemic has all but wiped out already falling remittances from the Lebanese diaspora. With its economy in a tailspin, the government missed a payment on a $1.2 billion eurobond in March and effectively defaulted on all outstanding eurobond obligations, including an additional $2.7 billion of payments due in April and June.
The International Monetary Fund (IMF), World Bank, and others are working to assess the problem and offer solutions. But with Lebanon, it will not be easy. The Foundation for Defense of Democracies (FDD) commissioned renowned economist James Rickards to assess the challenges and damage. Mr. Rickards, who is an advisor to FDD’s Center on Economic and Financial Power and has advised governments and banks on past bailouts, spent more than four months studying Lebanon’s economic implosion. He makes it clear that this crisis will be an enduring one.
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First, Lebanon has a Hezbollah problem. Hezbollah controls the health ministry and is the majority partner in the current coalition. It is designated as a terrorist group by the United States, the United Kingdom, Germany, the Netherlands, Canada, the Arab League, the Gulf Cooperation Council, and several Latin American countries. International donors cannot in good faith bail out a government controlled by a terrorist group that answers to the Islamic Republic of Iran, the world’s leading state sponsor of terrorism, according to both Democratic and Republican administrations.
A direct consequence of Hezbollah’s political control is that Lebanon’s financial system is rife with corruption, money laundering, drug smuggling, and other illicit finance. As a result, many of Lebanon’s most important financial institutions are in the crosshairs of a lawsuit in the United States: Bartlett v. Société Générale de Banque au Liban S.A.L. (SGBL), et al. The complaint alleges that these banks provided financial services to Hezbollah and "facilitated the flow of U.S. dollar-denominated funds Hezbollah used to bankroll its operations in Iraq." These operations killed Americans. This introduces liabilities, potentially in the form of liens on bailout funds, the donor community cannot ignore. A banking sector purge and overhaul is urgently needed.
What Mr. Rickards does not note explicitly is that Hezbollah physically controls chunks of Lebanese territory — the Bekaa Valley, southern Lebanon, and a Beirut suburb known as Dahiyeh. The group maintains a missile arsenal larger than that of any European country in NATO. Iran furnished Hezbollah with more than 150,000 rockets that threaten its southern neighbor, Israel. And Hezbollah’s recent acquisition of precision-guided munitions from Iran threatens to devastate Israel’s civilian areas, prompting Jerusalem to openly mull preemptive strikes. The risk of another ruinous Lebanon war triggered by Hezbollah is an additional red flag for donors. Why finance a country that will be flattened shortly thereafter in a predictable — and avoidable — war?
There is also the question of how much cash Lebanon needs. Using an unofficial exchange rate of 4,000 Lebanese pounds to the dollar, Mr. Rickards finds that the amount of fresh money needed to stabilize Lebanon’s banking sector is a whopping $67 billion. That does not include $22 billion in losses incurred by Lebanon’s central bank, the Banque du Liban (BdL). Nor does it include anticipated net losses of $4.2 billion or more from defaulted eurobonds that are now the subject of restructuring negotiations. The total cost of a bailout would thus exceed $93 billion. But, as Mr. Rickards acknowledges, even that figure is probably a lowball, as the real exchange rate is pushing 9,000 or higher as of this writing.
Lebanon may be in a $100 billion hole. And that is without public infrastructure and other needs. For context, the IMF’s largest-ever bailout was $57 billion for Argentina in 2018.
Mr. Rickards is unambiguous about how Lebanon accrued this staggering debt. It was a Ponzi scheme. Banks took foreign currency deposits from Lebanese customers at home and the Lebanese diaspora, including from Hezbollah’s drug smuggling and other illicit operations. The banks used these deposits to make their own deposits with the BdL. The BdL used these funds for government spending, such as imports and interest payments — all at favorable exchange rates that defied the realities of a country that generates little foreign currency and has no exports to speak of. The entire financial system, led by the BdL, assured the Lebanese people that their dollar and pound deposits were safe, even as the system crumbled.
The Lebanese government knew what was happening. Those atop the system perpetuated the fraud. Today, those same people are asking for help. Mr. Rickards does not say how the political elite should be held accountable. But he does imply how Lebanon can subsidize at least part of its own bailout: gold.
Lebanon held an astonishing 286.8 metric tons of gold in its official reserve as of May 2020. This ranks Lebanon as the 20th-largest holder of gold among countries reporting to the IMF. At $1,800 per ounce (the market price as of June 30, 2020), that is approximately $16.5 billion. It is not $93 billion, but it is a start.
Where Lebanon goes from here is anyone’s guess. Under the grip of Hezbollah (and, by extension, the Islamic Republic of Iran), beset with corruption and political dysfunction, saddled with staggering debt, inundated with Syrian refugees, and struggling amidst the COVID-19 pandemic, huge challenges lie ahead. But, as Mr. Rickards warns, a simple bailout is not the answer — even if one were feasible. An overhaul of the system is needed. Anything less risks transferring billions to a global terrorist organization and perpetuating one of the largest Ponzi schemes in history. 
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Posted by Mr Obvious 2020-09-02 00:00||
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