June 19, 2006
Hariri's Clever Scheme
Or, where the Lebanon debt crisis came from in the first place.
So I see that Executive magazine finally has their web edition up (disclaimer: they give me money, but not to blog), which means I can point to this Nick Photidiates article on the Lebanese national debt and how the banking sector is tied up in it. According to him, it all came down to decisions Rafik Hariri made when he originally took power.
Back then the country was in tatters. Not only was there an urgent need to rebuild, but the Lebanese pound, which by the fall of 1992 nearly hit LL3,000 to US dollar, also had to be saved. Rafik Hariri was quick to realize that the only way to obtain fast financing was to resort to debt via the issuance of domestic, Lebanese pound denominated Treasury bills. Loans from international banking institutions or supranational organizations such as the World Bank or the IMF would have been too slow to come in, too expensive and insufficient in terms of amount. On the other hand, Treasury bills in local currency, provided they carried a very attractive yield, would be easy to print, issue and place in a large domestic banking sector, which, although under-developed, lacking in significant human resources and strategic guidance, did have sufficient funding that needed optimization.
The banking sector at the time had succeeded in attracting around $6 billion in deposits from expatriate Lebanese but did not have the human resources or managerial quality to employ these new funds efficiently. Banks urgently needed to allocate their funds in such a manner as to boost their stagnating profitability and hence increase their capital base, which at the time was extremely insufficient and well below the international capital adequacy ratio of 8%. By subscribing to high yielding Treasury bills, the banks would not only help finance the government and the reconstruction program, but also buy themselves valuable time for the development of their own banking activities.
So, essenitally, the banking sector became Lebanon's government-supported industry. Which, in the end, seems to be working out about as well as such schemes do anywhere.
Elsewhere in the magazine, Photidiates argues that Lebanon should sell off its gold reserves to help pay off the debt; EXECUTIVE's mysteriously-named "Washington Correspondent" looks at the state of things in Kazakhstan; and Gareth Smythe talks about Iran's troubles with its far eastern partners.
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Well, just tackling the part I find fascinating:
Lebanon would do well to both privatize its public sector to the extent possible and repeal restrictions on using its gold reserves, simultaneously. Both are part of the same package, of a government that is involved in more than it should be (a quintessentially American perspective, I realize).
Selling the gold reserves without doing anything in the direction of privatization would just be a band-aid approach. Best to do both together, and sell only half of the gold. Even better would be to sell half, and use the proceeds to figure out a way to get capital in the hands of people who will start businesses and thereby expand the economy. I'm no financial engineer, so I wouldn't know how. We do have others around here who might have an idea or two, though.
Posted by: pantom at June 24, 2006 03:31 PM
Yeah, yeah. Sorry have been and am busy trying to ramp up for a return to real life (presuming I stop being Cancer Boy next week).
The Leb situ is an interesting if bizare one.
Posted by: The Lounsbury at June 24, 2006 03:34 PM