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1/ What's the difference between the calculations of the Govt and those of Parliament? The final draft of Parliament's calculations seems to be a State secret to which nobody has access, but I have seen an early draft. There is 1 main difference which I'll explain below.
I would've liked to comment on the final draft so as to not be unfair to anyone, but I don't think I will wait any more because there is too much confusion out there already.
Firstly, Parliament shows gross losses of 115 Trillion LBP, compared to 241 Trillion LBP in the Govt Plan. The Parliament Plan shows *net* losses (i.e., after using up BDL and bank capital to absorb some losses) of 81 Trillion LBP, compared to the Govt Plan of 154 Trillion LBP.
Some have been describing the losses reduction from 241 Trillion LBP to < 81 Trillion LBP. This is not accurate. They were inflating the Government numbers by using the gross figure and deflating the Parliament number by using the net figure. Anyway...
The Govt Plan showed gross losses of $69 billion (241 T LBP / 3500). The Parliament Plan shows $33 billion (115 T LBP / 3500). The difference is $36 billion. Of that, $24 billion (about 67%) comes from lower BDL losses. How did they reduce the BDL losses?
This is a bit complicated so bear with me. In both Plans, BDL is assumed to have $50 bn of USD assets (reserves, gold, and a USD loan to the Govt--which is itself impaired but whatever) and $89 bn of USD liabilities (depositors' money that the banks have deposited in BDL).
When you devalue the LBP to 3500, that increases both the USD assets and USD liabilities when you convert them from USD to LBP. So, under the Govt Plan, BDL experiences a loss due to the devaluation because it has more USD liabilities than it has USD assets:
Govt Plan:
Change in Assets Due to Deval: $50 bn x 3500 / 1507.5 = 100.5 T LBP
Change in Liabilitiest Due o Deval: $89 bn x 3500 / 1507.5 = 178.2 T LBP
Loss due to devaluation = 100.5 - 178.2 = 77.6 T LBP
Change in Assets Due to Deval: $50 bn x 3500 / 1507.5 = 100.5 T LBP
Change in Liabilitiest Due o Deval: $89 bn x 3500 / 1507.5 = 178.2 T LBP
Loss due to devaluation = 100.5 - 178.2 = 77.6 T LBP
So the act of devaluing the currency will cause you to have a loss just because you have more USD debts than you have USD assets. Think of it on a personal level. If your house loan is in USD but your salary is in LBP, then if the LBP gets weaker, you face a loss.
Parliament took $33 bn of the $89 bn of BDL liabilities and assumed they remain at the 1507.5 LBP exchange rate. There isn't a clear justification provided for this other than to say these liabilities come due after 2027.
They also took $9 bn that the bank owed BDL and netted it off from what BDL owes the banks. This makes sense so it's fine. So you end up with $47 billion of liabilities being converted at 3500 and $42 billion ($33bn of liabilities due after 2027 + the $9bn) remaining at 1507.5.
So Parliament's calculation ends up looking like this:
Assets: $50 bn x 3500 / 1507.5 = 100.5 T LBP
Liabilities at 3500: $47 bn x 3500 / 1507.5 = 107.5 T LBP
Liabilities at 1507.5: $42 bn x 1507.5 / 1507.5 = 0
GAIN due to devaluation = 100.5 - 107.5 = 6.9 T LBP
Assets: $50 bn x 3500 / 1507.5 = 100.5 T LBP
Liabilities at 3500: $47 bn x 3500 / 1507.5 = 107.5 T LBP
Liabilities at 1507.5: $42 bn x 1507.5 / 1507.5 = 0
GAIN due to devaluation = 100.5 - 107.5 = 6.9 T LBP
So this turns the BDL devaluation loss of 77.6 T LBP into a gain of 6.9 T LBP (difference of $24 bn) by just assuming that BDL's liabilities after 2027 are converted into LBP at 1507.5. As these are people's deposits, the implicit assumption is that depositor bears the loss.
So I don't necessarily see this as a reduction of the loss, but rather shifting it to another party, whose dollars are now worth less than half as much because they remain at the 1507.5 rate while the actual exchange rate is 3500 (or more later).
There's more.Since the BDL liabilities are money it owes to the banks, a liability to BDL is an asset to the banks. So the devaluation of the LBP is actually a gain for the bank because the value of its USD asset (ie deposit at BDL) increases in LBP terms, same as formula above
It's a bit of a mirror image. When BDL takes a loss due to the LBP devaluation (liability increases), this is partly a gain to the banks (asset at BDL increases). However, Parliament gives the banks the benefit/gain of the devaluation without giving BDL the corresponding loss.
As I showed above, the BDL liabilities after 2027 ($33 bn) are assumed to be converted into LBP at 1507.5 exchange rate. However, these same liabilities are assets on the banks balance sheets. In Parliament's Plan, these assets are converted into LBP at 3500, a gain for banks.
In reality, this "approach" should be neutral in terms of the loss calculation. If you reduce the BDL liability by converting it at 1507.5, you must also reduce the corresponding asset of the bank by converting at 1507.5 (the BDL liability IS the asset of the bank).
Parliament reduced the BDL liability and ignored the impact it would have on the banks.
What is the ultimate impact? BDL will have $24 bn higher liabilities. As is the case now, BDL cannot afford to pay the interest on these liabilities and has to create new money to do it.
What is the ultimate impact? BDL will have $24 bn higher liabilities. As is the case now, BDL cannot afford to pay the interest on these liabilities and has to create new money to do it.
Every year, BDL has a loss b/w the difference in how much interest it earns on its assets and how much interest it pays on its liabilities. I've spoken with @AndyKhalil1 extensively about this. The money supply has grown too large already b/c of this & funding the fiscal deficit.
This annual loss is made up with new money creation and the loss grows faster along with the money supply. It becomes exponential. Already, the supply is too large. It just happens to be stuck in the banks so we can't yet fully seeing the negative consequences.
In other countries, the Govt may be able to bail out the central bank and cover these losses. But Lebanon's govt has large fiscal deficits so it cannot afford to do so.
Hard to see how confidence returns if people know that the losses remain, no path to remove capital controls, and their USD in the banks aren't real but losing value. Rather than providing a path to value recovery for depositors, we keep capital controls and deal with it later.
At some point, the money supply will grow large enough and there will be low enough confidence that people will rush to get rid of their LBP by either buying USD or buying any real good. The result is high prices and a larger haircut for ever citizen.
This didn't happen before because we had a false sense of comfort from converting our deposits into USD in the banks. This allowed BDL to maintain the exchange rate peg because few demanded real USD and so BDL didn't have to provide it (which would have drained its reserves).
Similarly, ppl didn't rush to exchange their money for real goods b/c they were comforted by the fact that their money was in USD. This confidence has shattered. We need a real solution to the massive money supply problem in this country and sustainable depositor value recovery.
There are two other main differences between the two plans.
1/ Parliament assumes a smaller haircut of Govt debt (eurobonds and t-bills). This would reduce the losses by having the State pay more from its treasury (if it can even afford to do so, but if it can't, this means even more growht in the money supply).
But I've never in my life seen a parliament undermine its own negotiating position. The Govt was seeking a 75% principal haircut from foreign eurobond-holders, and Parliament comes and says no we only want 60%. It makes no sense to me.
2/ Parliament assumes lower losses at the banks from their private sector loan defaults. I don't care about this because these are all just temporary assumptions which were always going to be amended once the bank-by-bank analysis was done.
We need forecasts of BDL's annual profit & loss under the Govt Plan & Parliament Plan. Does BDL achieve positive income or continue to generate losses? We haven't seen BDL's historical P&L for more than 15 years, a major data transparency problem which contributed to the problem.
** correction to the tweet below
Liabilities at 1507.5: $42 bn x -0- = 0 (as this is ignored in the devaluation loss)
https://twitter.com/azarstweets/status/1274288068124606464?s=21 https://twitter.com/azarstweets/status/1274288068124606464
Liabilities at 1507.5: $42 bn x -0- = 0 (as this is ignored in the devaluation loss)
https://twitter.com/azarstweets/status/1274288068124606464?s=21 https://twitter.com/azarstweets/status/1274288068124606464
