Zugzwang

We’re borrowing to fund a lifestyle we no longer can afford.
by Dan Azzi

10 January 2019 | 22:54

Source: by Annahar

  • by Dan Azzi
  • Source: Annahar
  • Last update: 10 January 2019 | 22:54

In this Monday Aug. 20, 2018 photo, a building is offered for rent in downtown Beirut, Lebanon. (AP Photo/Hussein Malla)

Have you ever been on an airplane waiting to taxi from the gate, and you’re engrossed in your thoughts and daydreams, and then you’re abruptly jolted as you look out the window to see the whole world moving around you? So you invoke your experiences, get your bearings straight, and your mind reorients itself, and you realize that the world is standing still, and you’re the one moving, or, more precisely, the plane you’re in.

Perspective. Relativity.

If you want to understand the Lebanese economic and monetary situation imagine yourself in a movie theatre. Someone yells fire. In cases like this, people panic, as everyone rushes to the exit. If you’re sitting next to an exit, or you’re good at pushing other people and trampling little kids, you’ll probably make it out alive, but if you’re far from the exit, while the stampede ensues, you’ll get squashed by the crowd, most of whom may not make it.

Our situation in Lebanon now is similar, except that we have a trustworthy leader in front of us, keeping us calm, telling us it’s a false alarm and there’s not a fire. We believe him, because we want to, we need to, as the alternative possibility is so unfathomable, so petrifying, so brutal, that we have to believe his assurances. But something different happened today to break this, when other officials issued a different prognosis.

If you put some cursory thought into it, I think it’s quite clear that the Lebanese economy is pretty much all functioning on imports, like the device you’re using to read this, the car you drive, the clothes you wear, the chair you’re sitting on right now. Look around you, almost everything you consume requires hard currency, dollars, to purchase them. To get dollars, we don’t manufacture and sell the Libanini sports car, or the LPhone mobile, or LiBus airplane. We finance our lifestyle with dollars we get from outside. In the good old days, it was from GCC nationals, expats, and some sales of our government bonds. We also sold our mountains shipped from kissarat and converted them into these multi-million dollar shiny new towers. But no longer. As our economy grew, and GCC and expat money dried up, where are we getting dollars today?

We’re getting them from the future. We’re borrowing to fund a lifestyle we no longer can afford. Before the war, the ratio of private to public sector employees was something like seven to one. In other words, the taxes on seven people financed one government employee. Today, especially after the raises last year, AKA Silisli, every two people support one public sector employee. Many public sector employees are necessary and good people that we need, but, as anyone knows, there are also many who get paid and don’t show up to work, and other sectors that have too many people doing unnecessary jobs. If we ever ask the International Monetary Fund to help us out, and sooner or later, we will, the first thing they’ll require us to do is something called “austerity measures.” This is a fancy way of saying that we need to cut those public sector costs, as a prerequisite to receiving funds from them. The CEDRE conference also placed some requirements on us to receive the $11 billion — if you read between the lines, that’s also what the donors are saying, which is maybe another reason that our political leadership is taking its sweet time to form a government — I mean who wants to be the politician who breaks the bad news to the affected constituency?

The irony is that every time we postpone the problem through financial engineering transactions, seemingly creating money out of thin air, all we’re doing is encouraging more of these detrimental imports, increasing our debt and liability in the future. So if by some miracle, the economy starts growing again, what also starts growing with it? That’s right, our imports, and thus our requirement for more dollars to fund our Economic Cocaine habit.

In between bickering over splitting the cheese, our political leadership has realized this too. That’s why they’ve started to issue statements that are rocking the market, like the one today by our finance minister about restructuring the bonds. Restructuring is a fancy, euphemistic way of saying “we ain’t gonna pay the bondholders.”

Then other ministers jumped in later to contradict his statement. But not before damaging confidence in Lebanese government bonds, whose price dropped massively, especially the one maturing this year, at one point reaching a yield to maturity of 16%. The stock price of one of our largest banks took a hit too, and its global deposit receipts (GDR) — those are the shares trading on foreign exchanges — dropped 5.6%, making its price to book ratio 0.6. That’s around 38% of the ratio our banks demanded a few years ago to be acquired by larger banks.

There’s really a limited number of ways to deal with this problem eventually: Devalue the currency, execute haircuts on deposits, or default on our debt (or the softer “restructuring” version). Whatever path is decided, the key will be a discussion of the equitable distribution of losses — and this is where the various political factions will start to plant their stakes — with, as usual, each group trying to shield their own constituency. This can only lead to the damage being worse than had everyone worked together, altruistically, as a team.

Chess players are familiar with the German term “Zugzwang.” That’s when one of the players reaches such a disadvantageous position that whatever move he makes, he gets hurt.

If we ever got our bearings straight like in the airplane scenario, we’d realize that we’re running on a treadmill, in place, still in the movie theatre on fire, with the flames about to engulf us.

Zugzwang. That’s where we are now.

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Dan Azzi is a regular contributor to Annahar. He has recently been invited to be an Advanced Leadership Initiative Fellow at Harvard University, a program for senior executives to leverage their experience and apply it to a problem with social impact. Dan’s research focus at Harvard will be economic and political reform in a hypothetical small country riddled with corruption and negligence. Previously, he was the Chairman and CEO of Standard Chartered Bank Lebanon


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