Last week I was beginning to think the IMF might be back in business. A couple of press reports hinted that Lebanon’s central bank was facing real pressure. Folks fleeing the country wanted dollars. Dollars cash. Not dollar, or Lebanese pound, bank accounts.
And Lebanon’s tenuous financial stability hinged on growing deposits – not shrinking deposits. Lebanese banks take in dollar deposits by offering a slightly higher interest rate than you can elsewhere (and take in pound deposits by offering a higher interest rate than they offer on their dollar deposits). And then they lend those dollars to the government for a profit, financing the country’s fiscal and current account deficit in the process.
Right now, though, Lebanon’s reserves are shrinking. That usually means a call to the IMF.
Unless you can call the Saudis instead. Saudi Arabia’s central bank now has about as much hard currency as the IMF (SAMA now has around $190b in foreign assets). And it tends to lend it out to its friends in the region on somewhat more generous terms. Lebanon got $1b in cash (along with a commitment of $500 million for future rebuilding).
I suspect it will need a bit more. To prevent an old fashioned bank run as well as to rebuild (eventually).
Lebanon was effectively bankrupt even before the current conflict. Its debt to GDP ratios are obscene – the government’s $40b of total debt doesn’t seem like much, but it is around 150% of Lebanon’s GDP (See the IMF’s Staff Report). Lebanon has long been the country that should have had a crisis but didn’t. Largely because bank depositors never ran, in part because Lebanon has a history of paying its debts. But it is all a bit circular. Lebanon only could pay its debts so long as depositors didn’t run. A bit of Saudi help at crucial points in time also helped a lot.
Back in 2002, when Lebanon was in a bit of trouble, Lebanon got a French/ Saudi bailout. The so-called Paris II deal provided Lebanon with $4b in financing, in return for Lebanese pledges to reduce its fiscal deficit. The IMF’s terms would have been a bit more onerous. At the time – it was just after Argentina – the IMF was rather concerned about injecting tons of money into countries with way too much debt. It was supposed to bail out the illiquid, not the insolvent. Lebanon got its banks to pledge to help out by deferring a few payments, but it wasn’t much.
Today, though, I bet if Lebanon wants a bit of IMF cash in a few weeks the IMF won’t insist on a debt restructuring. Lebanon doesn’t want to be forced to teach its bond holders a lesson. Not when the biggest holders of its bonds are its own banks – and its own citizens. And I doubt the US wants a Lebanese financial crisis on top of everything else.
Incidentally, while the Saudis may be able to finance Lebanon, they will be hard pressed to match the IMF's analysis of the sources of Lebanon's financial vulnerability. The selected issues paper – particularly the first two sections by Juan Sole, Julian di Giovanni, Edward Gardner and Tushar Poddar -- is really excellent. I may be biased, though. The first section builds the 2004 work of Christian Keller and Christoph Rosenberg (my friends and co-authors). Fans of balance sheet analysis will appreciate the description of how Lebanon’s central bank helps the banks manage fluctuations in demand for dollars and pounds.