Thread by @sugargrizzly

[THREAD] #ThinkLikeRiad: Salameh's Salami Tactics

Faced with a legacy-defining moment, @riadsaleme is in for the fight of his life.

@riadsaleme Consistent with his calm and deliberate character, he has opted for an incrementalist, divide-and-conquer approach to deal with his main enemy: an acute dollar shortage.

@riadsaleme With the main objective of buying the maximum amount of time, he is addressing different facets of the problem separately and sequentially…

@riadsaleme …by pushing and pulling on the various levers at his disposal, while hoping something fundamental changes (e.g. outside foreign aid coming through, opportunity for new financial engineering measures...):

@riadsaleme • Slice 1 - Maintain or prevent further loss of confidence by keeping up the facade and not giving ground on messaging/narrative: “free economy”, 1,507 official rate, "no capital controls", "deposits safe"... A particularly tough slice

@riadsaleme • Slice 2 - Keep social unrest from getting out of control: Ensure dollar supply for essentials (fuel, wheat, etc.)

• Slice 3 - Stop dollars bleeding out of the banking system: Allow unofficial capital controls

@riadsaleme • Slice 4 - Increase the supply of “real” dollars: Force the banks to raise capital

• Slice 5 - Prevent the state from defaulting on dollar obligations: Pay maturing eurobonds on behalf of the MoF, plan for/attempt bond swaps

@riadsaleme • Slice 6 - Reduce the supply of new, unpayable dollars (#Lollars): Pay half of dollar deposits interest in Lebanese pounds

@riadsaleme • Slice 7 - Where unavoidable (i.e. would result in too rapid depletion of reserves and therefore time), accept losses but attempt to distribute them as gradually and slowly as possible: Allow for a floating parallel FX market

@riadsaleme Overarching all this must be deep apprehension about his place in History. His once maestro-like status now a thing of the past, he must now be hoping to be remembered as having made the best out of a very difficult situation.

@riadsaleme What he certainly doesn't want is to go down as the man who ran the country into the ground. What slice is next then, or put more simply, from whose pockets will the next round of losses come from?

@riadsaleme Despite the political fallout he might face, banks’ shareholders (especially smaller and more distressed ones) and large depositors must be an attractive target: a small group of people whom the wider public dislike.

@riadsaleme Forced mergers? Large depositor bail-ins? Perhaps that time is approaching. Besides, any additional harsh measures hitting the general population have the potential to spin out of control, and then all bets would be off.

@riadsaleme They say it’s best not to know how the sausage is made. In #Lebanon, its preparation is often public, and this year's batch is going to be both very visible and hard to swallow.

@riadsaleme Feeling full yet? More slices on the way regardless. #ThinkLikeRiad [END]

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