This is due, by extension, to an intentional or unintended defect in determining risk ratios, which, by changing them up or down, increase or decrease capital requirements, provisions and additional reserves, and change the declared profit rates. If these risks were taken seriously from the beginning, the banks would have to bear on their own and without waiting for circulars and decisions, sufficient provisions, in exchange for their investments in Eurobonds, Treasury bonds and the Banque du Liban. Indeed, what banks since 2015 have considered profits In reality, they are book settlements that hide realized losses.
It goes without saying that we refer here to the neglect of the economic dimension in analyzing the crisis and its reflection on the financial sector, and this is the task of the Central Bank in the first place, which had to take into account the economic exposures of its budget and the budget of the banking sector, especially towards the potential volatility of financial flows from abroad.
Dario Castillejos – Mexico
There is therefore more than one point of view regarding the financial sector losses, even within the traditional approach adopted by the monetary authority in this field, but estimating the state’s share of losses seems easier because it is simply equal to exactly, or almost, the actual value of the debts due that it refrained from paying, plus Late receivables. The state’s position in the crisis appears stronger than others, for its ability to change the rules of the game from its foundations by modifying the accounting frameworks used and the related policies.
We will notice here that the central bank is able to bear the consequences and losses in the short term, while governments succeed in doing so in the long term. In theory, the monetary authority does not have sovereign rights similar to those of the financial authority, despite the advantages it enjoys from its monopoly right to create money and its immunity from bankruptcy. But the problem of central banks lies in what is considered one of their strengths, that is, their ability to absorb losses and “hide” them for the longest possible period. At some point, the negative net assets in their balance sheets are greater than the sum of the discounted financial flows that they may receive in the future. In this case, which is precisely the case of Lebanon, the treatment moves from the monetary field, with its “easy” accounting dimension, to another field with intertwining financial and economic dimensions. To escape from such a situation, central banks have no choice but to reduce their control on inflation or obtain fresh money through amendments to trade policy, or by resorting to taxpayers.
Our problem is deeper than that, as we rarely find a deviation in the budget like what we saw in the budget of the Banque du Liban, in which foreign assets in currencies and gold are less than 30% of its assets, while the deposits of commercial banks and their investments in it account for about 75% of its liabilities. With this, his financial pyramid was turned upside down. For comparison, external assets are not less than 70% of the total assets of central banks in most countries: 98% in Switzerland, more than two-thirds in the countries of the Middle East and North Africa (MENA), and 85% and 65%, respectively, in Jordan and Tunisia, and more than 55% in two countries. They have gone through cash crises, Egypt and Turkey.
From this loophole, the “Lebanese dollar” was born, a massive pent-up inflation bomb, and a mountain of accumulated liquidity that would continue to melt and drown the economy and society with its deluge. Let us imagine that the foreign exchange gap has turned into liquidity in five or ten years, and some of them are planning to escape from finding realistic and fair solutions to the crisis, which means doubling the money mass “zero” M0 (money in circulation) several times if not transferring tens of times and with it the exchange rates .
Starting from the last episode of the crisis
Therefore, the tracking of responsibilities for the crisis should start from its last episode, and its determination should be based on the nature of the relationship between the beneficiaries and those affected and the level of equivalence of this relationship. The focus of the problem of losses is currently concentrated in the depositors ’relationship with banks, which is essentially an unequal contractual relationship, which is compounded by the failure of the concerned institutions to carry out their duties. While banks, despite their role in the crisis, have a “recognized” seat at the discussion table on exits and solutions, and their opinions are deaf, there is no place for depositors at this table and there is no one who represents their interests that are doubly equal to that of banks, taking into account the difference between The size of their deposits estimated at more than $ 140 billion, and bank capital that does not exceed $ 20 billion.
In contrast, the relationship between the state (the government and the central bank) and the banks was marked by a great deal of parity and parity in technical, political and real terms. In fact, it was outweighed in many cases in favor of the banks. No one was deceived by anyone, the banks went out of their own will to concentrate their employment with the government at times and at the central bank at other times, and they also benefited from the facilities that the latter gave them to enhance their spread abroad, and then from the support provided by them to cover the losses they incurred in a number of countries in the region . The proportional relationship between the increase in banks’ placements at the Banque du Liban and the decline in their Treasury bonds subscriptions indicates the independence of its decision. Banks have shown great bargaining power, especially in setting interest rates that were in most cases higher than their normal rates.
The matter is different for depositors. It is their right to demand the banks ’deposits, and it is their duty to respond. A lack of consideration by the depositor (especially small and medium depositors) cannot be used. Banking and financial intermediation is found originally for the agency on behalf of the depositor in assessing risks and limiting them, reducing the cost of relevant information and reducing its costs. Rather, the reason for the existence of financial institutions lies in avoiding families and implicit depositors the losses or costs that could result from them in a world without banking intermediation. On the contrary, the costs and risks of financial intermediation were increasing in Lebanon steadily and commensurate with the increase in the size of the banking sector that did not play the role of mediation and did not exercise its role as an agent for depositors in employing their money, reducing risks and providing liquidity.
In short, banks bear a more technical and moral responsibility for the crisis than that of others, from their own funds and the additional capital that they must build up again, regardless of what others do. Its responsibility does not stop at the limits of deposits, but rather it must contribute to securing foreign currencies that cover part of the balance of payments deficit in the next five years. Why is she responsible for that too? Because it distinctively facilitated the escape of money at the height of the crisis, and because it also preferred the easy and high gains pouring outside the production cycle over the gains that would have come from within it, and this was a major reason for the growing deficit in the current account over two decades, and caused a gradual depletion. And dangerous for foreign assets.
Abandonment of state assets
But what about the state’s debt and with it the central bank’s obligations? These debts and liabilities can be approached differently compared to banks, through a combination of sovereign measures such as abstaining from payment, imposing a wealth tax, and economic measures such as correcting the trade balance deficit and the current account balance, whose success contributes to increasing the value of assets and non-tradable values and improving their attractiveness. For non-residents, this would open the way again for money inflows from abroad.
There remains the proposal that the state give up its productive assets, in the interest of the Banque du Liban and implicitly for the commercial banks. We will override here intended technical mistakes such as inflating the debts of the central bank on the state to make it parallel to the state’s assets by adopting a reduced exchange rate, and if we also go beyond the initial debate about whether it is permissible for the state to give up its assets, especially at a moment like this, and in the interest of who that will be (for less than A thousand deposited?) And what are the implications of this for the solvency of the country and its ability to withstand future shocks and to reach a lasting recovery? And how does the sale of state investment assets and profitable institutions differ from selling gold? What are the implications for the interests of consumers and producers and the role of the state?
Banks bear a more technical and moral responsibility for the crisis than others bear, from their own funds and the additional capital that they must build up again, regardless of what others do. Its responsibility does not stop at the limits of deposits, but rather it must contribute to securing foreign currencies that cover part of the balance of payments deficit in the next five years.
If we ignore all these questions, can we turn a blind eye to the fact that the transfer of ownership of state assets at home from hand to hand does not bring any benefit to the economy or to depositors, but rather fuels weak hopes of restoring confidence and moving the cycle of flows again without serious guarantees that this will happen. .
In other words, the state’s assets, which are made up of facilities and institutions of a commercial nature, real estate and various properties, are considered non-international assets, and they will remain so as long as Lebanon is mired in its crisis and has not recovered yet. In this way, its situation resembles that of the so-called “Lebanese dollar”, and the maximum that the depositor will receive in exchange for those assets if the state abandons them for the banking sector is more Lebanese pounds. Whether the assets of the banks corresponding to their liabilities are additional reserves with the Banque du Liban, or subscriptions to certificates of deposit with it, or in government Eurobonds, or real estate assets or facilities, institutions and companies owned by the state, they are not subject to liquidation except in exchange for similar local assets. It can be used to obtain foreign currency inflows from abroad. Note that the price movement of the aforementioned assets is similar in the current crisis conditions, in both ups and downs.
In conclusion, the debate over the size and distribution of losses is not only technical, legal and ethical, but also includes long-term economic dimensions that cannot be overlooked. Starting from a correct starting point in bearing losses does not only determine the winners and losers, or if you wish, the losers and the least losers, but rather leads us either towards moving the wheel of the economy and accelerating the pace of recovery and recovery, or towards being satisfied with temporary, short-term and ineffective breakthroughs that quickly disappear under the weight of a crisis New. At that time, our foreign debt would have doubled, and the state lost its last salable assets, unless Lebanon’s geopolitical position was seen as a new source of rents and liquid wealth in the regional auction open to bitter bargains between sovereignty and food!
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