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Thread on @BDL_Lebanon

HOW HOW HOW

Does an entity pay excessive rates on astronomical sums of money (nearly $ 150 billion) & yet not record costs of such an operation anywhere in the system?

Based on countless hours of research, set below is a possible explanation 👇
2-Remember BdL publishes a balance sheet (well sort of) but is yet to put out an income statement for over 15y

It is stunning that country’s politicians have demanded no such statement from a man who has been at the job since Aug 93 & who now mangers $142 billion in liabilities
3-When crisis unfolded, many analysts & observers pointed out difference between gross & net reserves. In effect, while BdL pointed to its assets (reserves), it wanted you to ignore its much larger liabilities (loans from banks). This issue has already been covered

But now...>
4-Our curiosity was raised when we noticed an item on BdL balance sheet (BS) that was experiencing a rather dramatic rise of late & as the crisis deepened

“Other Assets”

now accounts for $26.5 billion & is up 100% in a single year. Just this month alone it jumped $3.3 billion
5-That a line item now accounting for 19% of BdL’s total assets has doubled in size as the crisis deepens ought to raise a flag

Indeed, at December’s pace “Other Assets” are likely to pass the much talked about Gross Reserves number by Feb

What is going on here?
6-First hint came by observing how doubling of “Other Assets” came while bank deposit rates rates rose substantially over same period.

When one considers that bank lending to BdL is $151 billion, such explosive jump in rates start to add up to a very large interest expense
7-BdL does offer a footnote on its balance sheet that states Other Assets “includes open market operations & seigniorage”

If Other assets are increasing due to seigniorage, then BdL is creating new liras to cover the interest it owes to banks

Ps google seigniorage definition
8-Another possible explanation for the increase in “Other Assets” is that BdL is covering some of the Govt’s expenses. But, BdL could have increased its “loans to public sector” as by law it must cover Govt deficits. But doing above will show much larger effective Govt liability
9-Other Assets may also include part of the Govt’s dollar deficit which it can’t fully pay using Eurobond proceeds. Rather than allowing Dollar demand to finance imports deplete its reserves, BdL increases “other assets” by the same amount
10-Back to interest expenses on the massive borrowing from banks. Remember BdL earns way less from its assets than what it pays the banks on thee loans. To fund this negative carry, BdL needs to suck more & more of these loans from banks

Here is what happens on the process
11-Suppose that net cost of borrowing from banks is $100. BdL must draw down on its gross reserves to make this $ expense payment. But as reserve assets are drawn down by $100, it must draw down its equity capital by same amount

BUT & Stunningly, BdL capital hardly ever changes
11-Instead of decreasing its capital to reflect costs associated with what is clearly Massive interest expenses and/or funding Govt expenses

It is our “suspicion / hypothesis” that BdL has been crediting those combined losses into “Other Assets”

Creating An Accounting Mirage
12-STRONG STATEMENT 👇

Conclusion one draws from analyzing the data is that BdL suffers from insolvency as its capital is not the $3.7 reported on its balance sheet but that it has a negative network in excess of $20 billion
13-to be sure, suggesting BdL is insolvent to tune of $20 billion or more is not a statement that one can make lightly.

Weeks & multiple hours of discussions & data crunching have been carried out with @AndyKhalil1 in particular

Readers are encouraged to poke holes in above
14-Some May argue that Central Banks can’t be insolvent as they can print their own money

That is true if your liabilities were in your own currency

What is unique about @BDL_Lebanon is its exposure to dollar liabilities

Sadly, it has no $ printing machine
15-Consider this

Resident & Non resident dollar deposits in the banking system amount to $123 billion while 44 billion are in LBP

Here 👇is the breakdown of the number of accounts

Note how a small number of depositors dominate the total
16-Over past year, depositors moved over 10 b from LBP to dollar accounts as concerns mounted. This took percentage of $ total deposits to 73% of the total

Most thought they weee protecting themselves by reducing their exposure to LBP

Few, if any, predicted

Capital Controls
17-To be sure, while the banks break down their deposits into $ and LBP, @BDL_Lebanon doesn’t not spell out the currency breakdown of the money it sucks from the banks.

Of the 167 billion in Resident & Non resident deposits (73% in $), banks have deposited 151 billion at BdL
18-Why doesn’t BdL break down currency composition of 151 billion that banks deposited with it?

Because it doesn’t want anyone to know how much it borrowed in dollars that it cannot print to pay back

It is this number that goes against its minuscule reserves he 👇boasts about
19-When bank have made over $20 billion over the past two decades (since peg was established) and when banks now have 70% of their business tied in loans to BdL / Govt,

Who Do You Think is on Other Side of this Business?

It’s #Lebanon ‘s citizens through BdL
20-But why now?

We have all heard slowdown in new inflows as culprit

Consider this

In spite of almost doubling the premium over $ rates paid outside #Lebanon , banks were not able to increase the size of the deposits this past year

Yes, Ponzis needs NEW inflows to survive
21-On lack of transparency, this past Aug, BdL reportedly “secured” $1.4 billion from “private non resident institutions”. Major US firm was supposedly involved

What were Terms? What is the Collateral? Why did they lend at 11% when EB rates were much higher?

Only he 👇knows
22- Where do we go from here?

Understanding #Lebanon ‘s current financial predicament requires educating oneself on

How to handle the $85 billion sovereign debt (warning: it’s a lot more complicated than you think)

What to do about the massively impaired (insolvent) banks
23-What this thread introduced is additional risk that BdL itself could be insolvent due to massive losses it incurred which means not only its dollar liabilities (loans from banks) is larger than its gross reserves but that its equity capital is significantly impaired (>-$20b)
24-Just today, the new blank checks in #Lebanon will only come with & Co. sign printed on them

Such checks cannot be exchanged for cash

Before the crisis, banks exchanged checks without & co sign for cash

This is no longer the case

& Co. is @dan_azzi Lollar equivalent
25-Thus far, it is depositors that took the brunt of this crisis

Riad Salameh is still at his job

Banks are still pretending to be alive

Eurobond holders seem to have the upper hand in potential debt negotiations thanks to incompetent & negligent officials
26-BdL / Govt were in such desperate demand for funding or

FEEDING THE PONZI as @AndyKhalil1 calls it

That ridiculous deals & terms were offered to anyone who was willing to extend dollars to those in charge

#Lebanon ‘s depositors & future generation will sadly pay the price
@AndyKhalil1 27-Contents in the thread are based on countless private discussions & input by this fine group of smart & interesting individuals

@lebfinance @AndyKhalil1 @AzarsTweets @Mohdfaour89 @nafezouk @wael_atallah @AdibChristian @HuseinNourdin @dgheim
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