A few thoughts to follow up an earlier conversation on ABL’s “contribution” to the gov’t plan. The ABL plan is definitely NOT an alternative plan. It largely sticks to the government’s projections and figures, with deviations almost minor (except in a few instances). The ABL plan makes the state the main culprit and absolves itself of responsibility, demanding treatment the way a lender using utmost due diligence would of a borrower having liquidity issues. Well, neither was due diligence used nor is this a mere liquidity issue

Some questions/comments that sprang to mind while reading Lebanon’s leaked govt reform plan today. In no particular order, but points which I think we need more debate and clarity on: 1. Is the expected additional increase in debt (IMF, CEDRE, other IFI) being factored into the debt sustainability analysis? IMF will not lend unless the cumulative is considered sustainable. Not clear from plan if that the extra borrowing is being factored in.

Initial thoughts on gov't presentation: It did what it was supposed to. Gov't signalling its intentions clearly and professionally. Good delivery. Nothing new in terms of prognosis, but good to acknowledge the basics at least. Reasonable estimates for growth/inflation But obviously lots of vagueness that needs to be worked out. What's a "tolerable" primary surplus. What's the actual plan for the banking sector? Most imp: acknowledging that financing model is dead is admission of need for external financing. From what sources?

Lebanon's debt restructuring negotiations will largely involve three parties: the sovereign (seeking relief), the foreign creditors (seeking to maximize recovery values), and the local banks (seeking to preserve capital). But who represents the fourth stakeholder - the depositor?

https://twitter.com/AzarsTweets/status/1243476906143625217

No matter how you do the DSA or how you tackle the maths, its inescapable that local-currency debt will also have to be restructured. So if haircuts on EBs, USD CDs and adding in NPLs doesn’t wipe out banks’ capital, then haircuts on the LBP-held notes portion surely will

We can’t talk about a way out of Lebanon’s crisis w/o knowing how deep of a hole we’re in. Depending on how we measure this, the consolidated balance sheets of the gov’t, the banks, and BdL point to a gap of anywhere between $40 & 80 bn (w/ various assumptions given opaque data) The dark blue bar nets resident FX deposits from the consolidated net foreign asset position banks (nonresidents) and BdL. This is essentially a measure of the lollarisation rate and shows the lack of FX in the system to satisfy FX resident deposits. see @AndyKhalil1 below

Restructuring Lebanon's FX debt (eurobonds) is a necessary, but not sufficient, condition for putting debt on a sustainable footing. Negotiations with bondholders is just one piece of the puzzle – even an aggressive haircut (principal+interest) won’t create a big enough dent For the debt ratio (160% of GDP, o/w 60% in USD and 100% in LBP) to actually budge, a plan needs to encompass restructuring the massive internal (LBP) debt, restructuring the BdL’s CDs, and, by extension, recapitalising the banks.

How much foreign reserves does Lebanon’s central bank actually have? And how much of those can be used? There is surprisingly little clarity on this figure. Estimates vary widely, but by some measures (below), out of a gross of ~$30bn, only $7bn-18bn are "usable" 👇 We cannot be talking about whether Lebanon should default or not without knowing how much dollars BdL has. The gross reported figure is around $30bn in hard-currency liquid reserves, which exclude the $13.9bn in Gold and the $5.7bn that BdL currently holds on its balance sheet

It cannot be understated how short-termist #Lebanon's policy response is. The authorities are opting to delay the inevitable by burning reserves to buy time. That could get us through this year and next. But the moment of truth is 2022 when the FE-generated liabilities come due I've put this chart up before, for different reasons. But in 2022 alone, the BdL owes $3.8bn to banks in the form of USD CDs and an additional $1.3 billion of interest payments on outstanding CDs. $5.1 bn in total, without even considering EB amortization.

Yes, very informative interview with @camilleasleiman . Addition to @lebfinance 's points, other key takeaways: Lebanon's negotiating position is comfortable b/c Gold is safe given that it's ascribed to BdL, not sovereign & state's foreign assets are insignificant

https://twitter.com/lebfinance/status/1217814636986277888

@camilleasleiman @lebfinance Says lack of CAC isn't a major issue. 75% voter threshold on series-by-series basis is surmountable he thinks. Large domestic ownership of those bonds helps. Confirms that older bonds lack that threshold (point @M_PaulMcNamara made already)

Staying on the subject of #Lebanon's BoP, how is the current account deficit (25% of GDP) financed? Well, not surprisingly, the $ outflows have traditionally been covered by nonresident FX deposit inflows, portfolio inflows, and banking flows. All of which have dried up now. More importantly, the composition of that financing has changed drastically since 2010. Steady, stable, long-term flows like FDI, which used to finance a large chunk of the C/A deficit, are now insignificant (unsurprising given the unfavourable investment climate)

Despite capital controls in #Lebanon, there is a large amount of FX leakage going on. Looking at sources of remaining real hard $ suggests the FX outflow accelerated from $1bn in Oct to more than $3bn in Nov (the month when banks were closed or capital controls were in place) This is worrying because a) the controls aren’t preventing seepage, as is widely suspected. @AndyKhalil1 this point in his thread on banks’ balance sheets. Capital controls on resident FX deposits are working, but not all nonresident FX deposit withdrawals are necessarily exiting

Despite capital controls and the likely compression of imports, Lebanon’s external financing needs will remain high at $9-10bn per year. This assumes imports fall by 30%, LL at 2000, capital controls on FX deposits remain in place, no new inflows. That’s still around 18% of GDP. At first glance, the BdL’s headline reserves figures seems sufficient to cover current account deficit financing and repayments of Eurobonds and BdL's USD CDs (principal and interest) coming due in 2020-21.

Could #Lebanon benefit from #Jamaica's experience in reducing its debt burden? Initial conditions are similar: public debt=140% of GDP; int. payments=52% of revenues; more than under half of public debt in FX; no history of default and cautious about its reputation (1)

https://twitter.com/o_ghida/status/1202829922705825792

Importantly, banks held 65% of debt (and 40% of eurobonds); sector profits tied to high interest on govt debt —> so vulnerable to restructuring involving FV haircut, and concern over stability and solvency of banks (2)

A thread on the “sweeping economic reforms” announced in #Lebanon today:
Let’s start with some simple math. Lebanon needs to run a primary surplus of 4-5% just to keep its debt ratio stable (not even to bring it down sustainably). That is a tall order for any country. Interest payments run at around 9.5% of GDP. Interestingly, that’s almost exactly how much Hariri has pledged to cut the deficit by next year. So a nominal deficit target of 0.6% of GDP in 2020 (from around 10% now), would bring the primary surplus well within the comfort zone