Tag: Economy

Le Pays Est Comblé de Grâces

البلاد بالف خير

Photo by Ante Hamersmit on Unsplash

البلاد بالف خير

“Le pays est comblé de grâces”. Cette tournure quelque peu superlative est la formule consacrée que l’on utilise dans ce coin du monde pour signifier que le pays va bien. C’est en tout cas celle que tu utilises et qui me fait penser que tu es aveugle dans le meilleur des cas, ou alors que tu essaies de te convaincre de l’éluctabilité de l’inéluctable.

Dans cette entreprise peu louable, tu vas bien, oui, c’est clair. Le pays, lui, ne va pas bien. La crise t’a épargné semble-t-il, t’a même enrichi, ou peut-être as-tu encore accès à une certaine prospérité à défaut d’une prospérité certaine, à travers un père, une tante, un fils qui vivent et travaillent sous des cieux plus cléments. Ah, pas une famille n’est épargnée par ce fléaux dont nous semblons pourtant si fiers. C’est un fils parti étudier en France et qui ne reviendra pas. J’en sais quelque chose. Ou un père parti travailler dans les monarchies du Golfe pour payer les études du rejeton qui ne reviendra pas.

Tu vas bien, oui. Mais pas le pays. La majorité silencieuse crève de faim. Mais cette majorité, tu ne la connais pas, tu ne la vois pas, car elle et toi n’appartenez pas à la même bulle. Elle passe sous tes radars et toi au-dessus des siens. En l’absence criante de l’état de droit et des institutions, tu as quand-même les moyens d’être ton propre ministère de la défense, de l’éducation, des transports ou de l’énergie car tu es déjà ton propre ministère des finances. Les ministères publics, eux, sont aux abonnés absents. Le pays ne va pas bien je te dis!

Arrête donc ton délire, sors un peu de ta bulle à l’eau de rose. Le pays n’est comblé que de problèmes. Il est très malade, il est moribond. Mais pour élucter l’inéluctable, pour avoir un espoir de guérison, encore faut-il se rendre compte de sa maladie. Et tu n’aides pas.

N.B. : Le verbe “élucter” n’existe pas en langue française. Le mot “éluctabilité” non-plus. Mais cela n’a pas trop d’importance je crois, tu es trop comblé de grâces pour t’en rendre compte. 

Let the board sound

Rabih

Money Out of Thin Air

Promises only bind those who believe them

Photo by engin akyurt on Unsplash

The saying goes like this,

Loans create deposits

It might not sound like much, but this is how money is actually created. You’d think it would be printed as paper bills by a central bank or minted into coins. Not anymore, to a large extent. Paper money and coins are indeed “money”, but they make up only a small percentage of the reserves available in the economy. Let me try to break it down to you in a simple example.

I Promise to bay the bearer, etc.

When a bank grants you a loan, it basically credits your bank account with the loan amount, 10 000 dollars for example, and records a liability of the same amount on its balance sheet. You can withdraw this amount in cash or use it to buy a car. Or a piano. Or groceries. It is real money.

Now you might be a dreamer and believe in equilibrium, that in the grand scheme of things, banks use only the cash deposited by people, as loans to debtors. Well not really.

Banks are allowed to lend much more than the liquidity or capital at their disposal. That’s a net creation of money.

Out of thin air.

And don’t bother with the liability side, the minus amount in dollars recorded on the bank balance sheet. It cannot be used to fund anything. It cannot be withdrawn in cash. It is just an accounting entry on a balance sheet account. A reminder of the debt you own the bank. Nothing more. A promise if you will.

The bet at hand

The bet at the heart of the game is that loans will allow debtors to create enough value in due time to pay them back, through their hard work or the rise in value of their property or investments.

This bet kind of works out when the economy is fine, but not so much when banks lend money without decent credit controls, to people they know damn well cannot repay the loans.

It works even less when bankers are convinced that dot com compagnies of the early 2000s or the real estate market of the late 2000s have more value in them than what they are truly worth, and end up massively lending to people who are investing in such assets.

The bet is off in this case, quite obviously, since the debtors cannot create value out of thin air, be it called dot com or sub-primes.

The promise

In the end, this is how most of the money circulating in the economy is created. Legally. A number credited on an account, which retains its value as long as the promise behind it trustworthy.

And as we say in France, in a tongue in cheek expression, promises only bind those who believe them.

Can you believe that?

Let the board sound

Rabih

The Ultimate Weapon

Thermonuclear? Think again

Photo by Oscar Ävalos on Unsplash

Non-Proliferation Treaty

August 25, 2026. The United States of America withdraws from the Treaty on the Non-Proliferation of Nuclear Weapons.

Reason? The United States of America is no longer a nuclear-weapon state. It stopped being one shortly after the conflict in Ukraine ended some years ago. The stockpile was dismantled and the fissile material was recycled into fuel rods for nuclear power plants.

The move was decided by the American administration after it had an epiphany. You see, America, land of the free, home of the brave, ended up realizing that it possessed the ultimate weapon of mass destruction and had been since 1944. And it was not nuclear […]

You can read the full story on my medium page here.

Can Martians Buy Stuff at Walmart?

With Martian currency?

Photo by Andy Hermawan on Unsplash

I have just finished reading a very interesting story about some people bidding Mother Earth farewell before a one-way voyage to Mars. Now I don’t know about you, but it makes me wonder.

The 100 Euro question

(Not Dollar because I’m writing from France, and also, because why not?)

When Mars gets colonized, will it have an economy on its own? How will people buy stuff there? You see, as soon as you start having different Martian colonies or cities, such questions will arise, whether we like it or not.

Will Martians retain their earthling bank accounts and access them through the Internet? Can we even assume the Internet will be available on Mars at some point?

The idea has the advantage of simplicity. However, it would mean a 5 to 20 minutes delay for any banking instruction sent to earth, and as much to get an answer back.

Imagine yourself paying at the local Martian Walmart with your earthling credit card. You will have to wait for 40 minutes before your transaction gets approved. A local banking landscape is thus necessary, not the least for the convenience of consumers.

Martian banks

The Martian endeavor being what we imagine it to be, it will require a financial effort unlike anything the world has known so far. This effort will need to be sustained for the first centuries of the adventure.

Independent local banks might not be able to cater for it. This means that the Martian banking landscape will have to be made of branches of well established earthling banks. These branches will be ultimately fueled by earthling taxpayers.

Fueled with Euros at least?

Nope.

Much as I would like it to be Euros, the Martian currency will be something else. For it to be stable and efficient, it will have to be backed by the economy of the mother planet, through a basket of stable currencies like Euros, US Dollars, or Pound Sterling.

It will be blockchain based. But not the vulgar Crypto on everyone’s mind. Nope, it cannot be an empty shell subject to geeky speculations. It will have a real economy behind it. The economy of a couple of planets, nothing less.

The alternative is a system of dual non-exchangeable private-sector currencies, the EloCoin and the BezzoCoin. I don’t think that would be a good idea…

Let me know what you think in the comments.

Let the board sound

Rabih

A Utopia Where Everyone’s a Winner

And the reason why no one has thought of it before

Photo by Pixabay on Pexels.com

How about a naïve but (hopefully) potent idea to shed some hope in the jungle which the corporate world has become today?

What if a major corporation pledged to give up half of its profits to charity in the broad sense, or to education or health services year in year out? Would it be too far fetched to reason that such a measure could boost its revenue and cut its tax rate enough to make up for the loss? That people are inherently good at heart and would choose it over its competitors?

It would take one big player to start playing this game and the next thing you know, everyone’s in on it and it becomes quite the norm, so much in fact that in time, not playing the game would be suicidal for any corporation.

And then it would be made into law, when every major player in the economy is onboarded. Part of the French constitution. A new amendment to the constitution of the United States. Not because it is the humane thing to do, that would be too naïve, but because it would be the most successful corporate growth strategy yet discovered, while saving the state and taxpayers billions, if we consider that universal healthcare or unemployment benefits for instance qualify for such a program. And even if they do not, then alcoholic anonymous would, and that still saves the state billions in damages and loss of life and limb.

Education would qualify too. Education is the last line of defense. When the rose hits the fan, a country must be prepared to lose everything but its education system. Without it, there is no rebuilding what would have been lost, without it, no future generations would hold.

It could be a system where everyone is a winner: households, corporations and states.

It is early morning, right before dawn. I’ve been on this article for a while now and the glass of wine is empty. Yes, we are in France and the article was not supposed to go the way it went, we got lost on the road and ended up in this weird place. Now that I am sobering up, I can see hundreds of reasons for this game not to work and I can see why it is beyond naïve.

But then again, was it only the wine? Why not after all?

One thing is for sure folks, don’t drink and write.

Let the board sound

Rabih

On universal income

Or why it is not a question of yes or no but rather when.

Universal income, as in income for all regardless of employment status or activity, has been a recurrent idea in recent years. In France, Benoit Hamon, the Socialist Party candidate for the 2016 elections based his electoral program on the idea of universal income, along with a few other like legalizing cannabis. He gathered only 6.36% of votes in the first round and retired from politics. For a majority of voters, universal income seemed like a utopia at best given that so few of them voted for him. 

Photo by Reynaldo #brigworkz Brigantty

But look again.

Since the usher of the industrial age, human held jobs have been replaced through scaling and automation, whether in agriculture, the industry or services. Bank clerks have been replaced by ATMs and ATMs by online transactions and cryptocurrency. Round the corner grocery shops have given way to  supermarkets, where cashiers are now being replaced by automatic checkouts, which are fading out in favor of online stores. As a fintech professional, I am well placed to know that it took 50 or 60 people to run an operations department for a medium sized regional bank, the whole of which can now be replicated, streamlined and automated to a very high level in a software platform operated by less than 10 people including support, and I am being conservative. Even machines are being made redundant by technology evolution. 

You see where I am going with this? 

The human workforce could, and still can for now produce a given value through direct human work and retain part of it as wages. Automation on the other hand, whether through software or robotics can produce tremendously more value on the same tasks through scaling, standardization, speed, reduced error rate and other potentials yet to unravel with the advent of machine learning and artificial intelligence. Some would argue that humans who can no longer compete on the same tasks should benefit from a part of the value produced through automation. Although not specifically aimed at automation, some countries have implemented such safety nets, financed today by tax.

For instance, French workers which are made redundant benefit from a monthly unemployment allocation which amounts to a sizeable percentage of their last wages, and lasts for up to 24 months. If they are still unemployed by that time, they can still benefit from a safety net, the RSA or Revenu de Solidarité Active, which amount to 535 euros for a single person in 2021, plus other benefits on housing, medication, transportation and energy. It does not mean a care free life, far from that, but the mechanism provides shelter, food, warmth, education for kids and sustains parents in search for other means of subsistence. Dignity.

The corner stone of such a mechanism is that people can in most cases find another job or learn a new one. But what will happen when humans can no longer compete with automation on any task? Wat will happen when purely automated corporations will produce tremendous value to their shareholders without any human intervention? When people become redundant in the cycle? The logical solution seems to be that part of this value, equivalent to what would have been a payroll, should be distributed as universal income to the billions of people who are “liberated from the vicissitudes of salaried labor”, or in lay words, made redundant. The safety net of the 21st century would effectively become a universal income for the generations to come. 

If we take the reasoning to its logical conclusion and assume that nearly all economic value and innovation are ultimately created by automation (arguably if artificial intelligence and machine learning technologies hold their promises) then the shareholders become the people. All of them. The universal income will then amount to a universal dividend.

Or will it. If humans do not produce economic value, do not produce innovation and only benefit from the value and innovation created by automation, the logical conclusion of the argument is that the world will have become a farm and automation its farmer. Universal income will be a given: feeding the cattle. That is assuming Automation with a capital A is benevolent or whatever is equivalent in the machine readable sense.

But apologies dear reader, I tend to forget myself. This last idea sounded like a T-800 promoting a not so bright future to mankind. Things do not have to be so bleak, and if humans do not produce economic value anymore, they are free to produce other kinds of value, perhaps beyond the reach of automation, and yet to be discovered. 

If you ask me, I would bet on the spiritual. Or music. Something not of interest to Automation (with a capital A). 

And don’t go reading Answer by Fredric Brown. 

Let the board sound

Rabih

On Lebanon reaching an all-time low and a pinch of hope. Or not…

Or how on earth has Lebanon managed to fall short of the podium on the Misery Index.

Yes dear readers, there is a misery index which classifies countries based on a misery score. Without getting into the details of how the score is computed, top of the list is the most miserable country in the world. Lebanon made it to number 4 in 2020, out of 156 nations covered by the index. Only Venezuela, Zimbabwe and Sudan are faring better as numbers 1, 2 and 3. 

Photo by djedj


It must sound surreal to most Lebanese people who are still trying to fathom what hit them: The first default on Lebanese sovereign debt in history, the mass destruction and losses stemming from the sixth largest artificial non-nuclear explosion in history, the COVID-19 pandemic, the ongoing Syrian conflict and its ramifications taking their toll on the country, all on top of the structural weaknesses of the Lebanese economy and political system. It takes less than that to bring a country to its knees.
From all the causes above, there is one which could explain at least two others: the structural weaknesses of the Lebanese economy and political system. And the corruption within.

The solution on paper seems straightforward. And very unattainable, like only a straightforward solution can be: a new political system and social contract to restore confidence in the Lebanese economy and currency, which would encourage foreign investment, unblock international aid and allow some leverage in the debt restructuring negotiations with creditors. Although this statement is true in essence, it does not sound like a plan. It sounds more like a slogan. A Manifest at best. I mean, where would you even start… 

We could spend countless hours debating on the abysmal trade deficit, the record debt to GDP ratio and the huge toll that debt servicing is taking on the country revenue, the artificial peg of the Lebanese Pound to the US Dollar and the opaque policies of the central bank, or the decline of the remittance share in the GDP as Lebanese expatriates are struggling  with the COVID-19 pandemic and other crisis.

We could also debate on the political system in Lebanon which consists roughly of two sides, each backed by different international players with conflicting interests and how this will not change in the near future, or the far one for that matters, because the people who can make it change are too busy surviving to vote a majority of the 128 MPs out of parliament. 

Hope as far as I am concerned, lies in some of the economic forces at large and with the Lebanese diaspora. The latter is obvious. Lebanese living abroad have always sent remittance back to Lebanon, either to invest in real estate, benefit from artificially attractive interest rates on deposits or to support their families, and they will keep sending remittance. Not for the same reasons perhaps but it will still amount to something.

Economic forces at large are successful companies with ties to Lebanon or which could have a presence in the country, and which make most of their revenue abroad and hence are less sensitive, if at all, to the Lebanese economic situation. If such companies operated part of their processes from Lebanon, they would provide great benefits to the local economy by creating jobs and value and still benefit from an offshore legal status provided by law, which offers tremendous flexibility from a legal standpoint and many tax incentives. They would also benefit from a less expensive and highly skilled workforce. They will obviously have to put up with the unstable political situation, the run-down economy and the challenges which come with them but I still believe a business case can be made, especially if the company has ties to Lebanon: a Lebanese founder or shareholder, a historic presence in the country, etc.
Some examples I can think of:

  • A software editor which operates its quality department from Lebanon, with minimal requirements to run production: A bit of electricity and an internet link. Servers can be hosted anywhere in the world, revenue is made abroad for the most part and there are no stocks to worry about.
  • IT consultancies which operate on IT projects in the Gulf region, Turkey, Greece, etc. and which can base their client support activities in Lebanon. Similar business case, all they needs is electricity, internet connections and brains.
  • Companies in any field externalizing their call centers to Lebanon. They need people who speak foreign languages and Lebanon is in no shortage of them. So far.

All the examples above are real and are still operating in Lebanon. The software editor has been assessing the quality of its software in Lebanon for 25 years and has since put in place a consultancy department in the country serving the region and moved part of its production chain there. It still makes the bulk of its revenue abroad but caters for around 600 Lebanese families. The IT consultancies have been around for about 10 years now and still make the bulk of their revenues abroad. The externalized call center was set up in January 2021 and this last example brings a lot of hope to me: companies with no specific ties to Lebanon still choose to invest in the country and sees value in it and its workforce even after its economy has fell apart.

In conclusion, the idea here is to call out on men and women (and companies) of good will who can still see value in Lebanon, who can identify win-win business cases in operating part of their cost centers from Lebanon and who are willing to take a chance on this country, knowing they have a cheat code to enhance their chances of success in the game: they are part of the solution.

Let the board sound

Rabih

On basic economic education

I am not an economist by any stretch of the word. And for a long time, I had no clue about basic economic subjects, everyday stuff really. Like where do banks get the money to remunerate my saving account. Or what is backing up the currency I use everyday, what is it that gives it value. Gold in a vault somewhere at the central bank would it seem. Or would it? I actually had no clue that I had no clue, things were working the way they were and there was no need to ask questions. Until I started asking myself questions. And I found out that understanding these concepts is important. I should have been taught that at school, very early on. Would you not agree?

Photo by Karolina Grabowska

So where do banks get the money to remunerate saving account? If you deposit money at the bank and the bank pays you interest on it, it must be getting the money somewhere else to pay you. It is in fact lending the money you deposited to people or institutions who need financing and making them pay interest on the loan. Car loan, housing loan, personal loan, you name it. The difference between the rate at which the bank remunerate your deposit and the rate it charges on the loans makes out its profit. Pretty simple right?
Here’s a mind twister then. Where does the bank store its money? In a vault you could argue, and you would be right to a certain extent. After all, automatic teller machines at any given branch of the bank dispense cash out of a secure mini vault. But the bulk of money at the bank disposal at any given time is digital. A number on an account in a given currency, and treated exactly as you would treat your money: most of it is sitting on an account at the bank, and very little in your pockets. Realizing this opens up a whole new dimension of questions you could ask yourself. If the accounts under your name are sitting at your local bank, then where are the accounts holding your local bank’s money? “At your local bank” sounds like a reasonable enough answer, but think again. If you want to check your balance, you would log into your bank online page, enter a username and password and access your account. It is not in an Excel file on your laptop. It is quite similar for a bank, its accounts are held at another bank, the correspondent bank. For instance, a European bank which domestic currency is the Euro has Euro accounts opened at the central bank, which are remunerated just like any other interest baring account. It may also have US Dollars accounts held at US correspondent banks or Pound Sterling accounts at a UK correspondent bank. 
At this point, you might start to suspect how the United States can enforce fiscal policies like the Foreign Account Tax Compliance Act (FATCA) to actors who do not fall under US authority. Given that any bank in the world accesses US Dollars through a US correspondent bank, barring US financial institutions from engaging in business with a European bank for instance practically prevents the European bank from engaging in any economic activity which basis is the US Dollar. It cannot initiate payment instructions in USD to its US correspondent bank and cannot receive USD amounts on its account. Given the prominence of the US Dollar on international markets, such a bank is essentially prevented from operating all along.
But then, why do banks want access to foreign currencies like the US Dollar or the Euro in the first place? Another way of putting it is why do central banks keep foreign currencies reserves? One of the main reasons is to allow themselves the means to protect the local domestic currency. Here’s an example: the central bank of Lebanon was keeping the Lebanese Pound in a strict peg to the US Dollar since 1997, maintaining an FX rate of 1507.5 LBP per USD. To achieve this, whenever the FX rate moved out of the peg target rate in favor of the USD, the bank would pump US Dollars in the markets, providing a higher supply of this currency, thus reducing its price and bringing the FX rate back to the target peg value. A pure supply versus demand mechanism to make it simple.
If foreign currency reserves get scarce, the central bank can always try to scrub Lebanese Pounds out of the market in an effort to decrease supply of LBP, since it cannot increase the USD supply anymore. It does so by increasing the remuneration rate on LBP accounts it is holding. This incentivizes commercial banks operating in the Lebanese markets to put more Lebanese Pounds in their accounts at the central bank, and to trickle this policy down to their individual customers by increasing the rates at which they remunerate customer accounts in LBP. The difference between this rate and the rate at which the central bank remunerates the banks accounts in LBP makes the operation very profitable to commercial banks at the expense of minimal risk it would seem.
The downside of such a policy is that it does not provide incentives for commercial banks to finance the real economy. Instead of lending money deposited with them to entrepreneurs, potential house owners, or students in need of financing, they deposit it at the central bank and gets “free” remuneration on it.What actually happened in Lebanon was that commercial banks started offering remuneration rates of  up to 18% on Lebanese Pound denominated accounts. This means that the central bank of Lebanon was offering commercial banks an even higher remuneration on their accounts. Obviously, no company or business yields net margins of 18%, and no individual can sustain a loan with such high interest rates, which meant that the banks did not have any incentive to finance businesses or sell mortgages, freezing the Lebanese economy in effect. 
The Lebanese economy of the 2020s is a large topic which I will probably tackle in a separate post. One last question though: How is money created? Some say it is “printed”, which is also true to a certain extent. We do use bank notes and they have to be printed somewhere. But the bulk of created money is actually digital: the central bank being the sole actor in a country’s economy to have the privilege to create money, it does so by buying financial assets like sovereign bonds from commercial banks, and crediting their accounts with an amount of money coming out of thin air. As simple as that.
The takeaway of this story is to run whenever someone offers you interest rates which are too good to be true: they are not. Had Lebanese people learnt the mechanisms behind some of the facts above as kids and understood a bit better how an economy works, they would have probably avoided stacking all their net worth in LBP saving accounts to get 18% returns. Too good to be true. 
In conclusion, I would like to make a case for basic economic education at schools, starting at a relatively young age because it would seem that many if not most people do not understand many of the economic concepts behind many aspects of every day life. Like the nature of money and interest rates or the basic operating model of a bank. And knowing that is of paramount importance, there’s just too much at stake. 

You know how a car works, so why would you not know how a bank works?

Let the board sound

Rabih

A proxy to the rather opaque USD/LBP unofficial rate

In the aftermath of the default of the Lebanese government on its debt on March 19th in 2020, the Lebanese pound reached abysmal lows versus the US dollar. Up to that point, the Lebanese government, or more precisely the Banque du Liban, had always followed a policy of strict pegging of the local currency to the US dollar, at a rate of 1507.5 LBP for a Dollar, to instill confidence that investments, typically in bonds, will retain their purchasing power in US dollars when they mature. This rate had been constant since 1997. The Lebanese pound intrinsic weaknesses started to unravel around October 2019 and the peg to the US dollar started to fall apart.

The unofficial FX rates on the local market have surged in the past months, reaching values as high as 15000 LBP per USD according to sources. These sources rely on polls from exchange houses and currency changers on the local market. Given the relatively small size of the Lebanese money market and its opacity, the local unofficial FX rate could benefit from a proxy on international marketplaces with a high enough correlation to allow a coarse evaluation of the fairness of the unofficial FX rate, and identify under or over valuations of the Lebanese Pound.

Lebanese sovereign Eurobonds (Bonds issued by the Lebanese government in a foreign currency, in this case USD instead of LBP) might be a good proxy for the specific case at hand with the following assumptions:

  •      The currency had been successfully pegged to the US dollar for decades  before a first default and an economic downturn.
  •      The country has successfully issued Eurobonds in the past decades, until a first default

When investors buy such a Eurobond at par (at 100% of the face value of the bond, quoted as 100 on fixed income markets), they are expecting full repayment of the principal amount at maturity. In the case of the Lebanese Eurobonds, the investors are expecting full repayment of the principal in USD from an issuer whose domestic currency is the LBP. In other words, they trust the central bank to keep the Lebanese Pound pegged to the US Dollar on a rate close or equal to the current peg rate, allowing the Lebanese government to easily finance itself in USD to repay the principal at maturity.

If the Eurobond is bought at a heavy discount, for example 20% or 30% of the bond face value, it means that the investors foresee a higher risk of default, which in the case of sovereign Eurobonds is due in part to the weakness of the domestic currency. In other words, the investor does not expect the central bank to have the means of enforcing a peg of the Lebanese pound to the USD and hence, the Lebanese government of easily financing itself in USD to repay the principal.

At the time these lines are being written, the Lebanese Eurobonds being considered are quoting at around 12 or 13. One could argue that this price can be seen as a “recovery rate”: the investor accepts to pay 12% of the face value of a Eurobond because it does not expect a scenario worse than a 12% repayment of the principal. The value of every dollar of principal must be reduced by 88% for the investor to incur a loss, having bought the Eurobond at 12% of its face value.  For an issuer like Lebanon which had successfully pegged the domestic currency to USD for decades at 1507.5 LBP per USD, it can be said that the value of every 1507.5 LBP of principal (one US dollar at the time the bond was issued) must be reduced by 88% for the investor to incur a loss, or that the central bank has to sustain an 88% downturn of the USD/LBP rate for the investor to incur a loss, at which point 1507.5 LBP is worth 0.12 USD.

Hence the proxy: USD/LBP black market = USD/LBP peg * 1/Eurobond price = 1507.5 * 1/0.12 = 12562.5. This value is very close to the unofficial FX rate quoted by different sources on the local Lebanese market.

To ensure the soundness of the idea, I have back tested the values of the black-market FX rate for the past year against the price of a Lebanese Eurobond, ISIN XS0250882478, as quoted on the Luxembourg exchange. It is an eight-year Eurobond maturing on April 12, 2021, which makes it old enough to have been issued at a time when the USD/LBP peg was effective and maturing around a year after the first bond default following the economic downturn of the Lebanese republic. This ISIN was suspended on the Luxembourg exchange where the values were taken shortly before its maturity.

USD/LBP rate computed from Eurobond prices versus USD/LBP unofficial rates

In the figure above, on the day of the bond default in March 2020, the bond price used as a proxy gives a USD/LBP rate much higher than the black-market value. This is probably due to the fact that an economy has a given inertia due in part to capital restrictions and other measures imposed by commercial banks and the central bank of Lebanon on depositors to avoid a bank rush and to try to control the FX rate to a certain extent.

Starting July 2020, the curves seem to be much more correlated. In fact, the correlation (Pearson) is computed as 0.771 on the values of both curves between July 29 and March 31. The gap towards the end of October 2020 could be explained by rumors on the formation of a new government by the nominated prime minister, which drove the local unofficial rate down through a relative increase of the confidence in the Lebanese Pound. This gap has persisted until right before the bond maturity, where we see a correction. It could also be due to other biases linked of the exchange where the Eurobond prices were sourced.

Further steps are planned, to refine the findings on this proposed proxy. They include running a back testing exercise on another Lebanese Eurobond and using quotes from a different exchange, for example, USD/LBP rate based on Eurobond XS0471737444 maturing in 2024 and quoted on the Frankfurt exchange.


Let the board sound

Rabih