There was a bit of a panic yesterday over the idea (or discovery) that some Lebanese banks may be trying to use their Eurobonds to raise money from foreign investors. Work through the consequences of that to understand why people felt upset.
Firstly, some may think ppl overreacted to this news. You’ll forgive us and others for this reaction. People r allowed to overreact from time to time...
...when they’ve been robbed of their life‘s work by greed &mismanagement,when they have parents & grandparents w retirement savings that may be lost,when they see how many can’t afford medical care,2 mn ppl expected deeper in poverty,& all around them they see hopelessness&misery
Back to the EB.Banks dont have to go & sell the EB in the market.They cld very well borrow money from foreign investors & pledge the Eurobonds as collateral. Same thing. The local bank gets fresh cash &, if it can’t pay it back or if the Govt defaults, the EB have a new owner.
A foreign investor cld think “sure I’ll lend u 20-30 cents for every dollar worth of EB u have.If u can’t pay me back,I’ll take the EB bc I think I can get more than 30 cents frm the Govt.I‘ll go after the gold & future oil revenue!Or use that threat to get more $ Govt”
Or Banks could try to sell EB later on if things get worse. Whatever the case or the timing or financial justification, there are reasons we don’t want the local banks to sell the EB or to borrow money using EB as collateral.
It’s the same reason we don’t want a bailout of the country without political reform. A bailout that kicks the can down the road and makes the problem bigger later on is the last thing we need. I’ll tell you why that’s the case for the EB.
Let’s say a bank sold the EB or borrowed money against it. Now the bank has raised hundreds of millions of dollars. It’s still bankrupt. The new money will just buy it a short reprieve before it’s game over. So we kick the can down the road, delay reforms, at what cost?
The cost is the ability to renegotiate the EB in a way that is optimal for the country & its people. It’s difficult to negotiate with the type of foreign investors starting to look at Lebanon and wld be interested in the EB if things get worse.
What does optimal renegotiation mean: paying the least amount of money.We’ll have to pay something,but it’s a zero sum game.Every extra $ we pay on the EB, esp to foreign investors,is one less $ for depositors.Banks are buying time using depositor $ rather than shareholder $
If the central bank has to pay out more for these EB, that money is from your deposits.The CB has none of its own $. They’re all borrowed from depositors. It’s what differentiates Lebanon’s situation from other countries who faced this sort of crisis in the past.Stakes are higher
Same w the Govt. Its broke. But it has State assets (telecom,gold,MEA,future taxes, or oil & gas revenue).That’s also your money.Every $ the Govt commits to paying a foreign investor is $ from ur pocket. It cld be $ used to give u ur deposit back or fund social services.
So yes it’s a big deal if local banks are trying to raise $ frm foreign investors using the EB in one shape or another.If selling the EB was a path to a sustainable banking sector, fine. It’s not.Our Govt is incompetent as it is, this wld further weaken its negotiating position
The Bank shareholders & execs,who profited like mad on the backs of depositors shld be the first to put $ in to save the banks.Anything that pushes the burden further onto avg depositors/taxpayer is immoral & wrong. But that’s what’s been happening.
Finally,if the default is not resolved,its unlikely Leb will be able to finance a major gas project if we do make a discovery.Certain types of foreign investors will be incentivized to hold up the restructuring bc they know it’ll be costly to Leb & push the Govt to pay them more
The cars &homes the avg depositor owns & the types bank executives & shareholders own tells a different story. The banks were responsible for risk management. Let the shareholders & executives pay up first b4 someone w $1000 in her acct can’t withdraw it.
