Dan Azzi
September 2019


The Dollar Crisis

Dan AzziDan Azzi

[This article was originally published in An-Nahar September 22, 2019]

It’s pretty clear that we’re now in an urgent race, like being on a treadmill, whose speed keeps accelerating, but has no off-switch. No matter how tough and fit you are, eventually you’ll have to stop running … unlike the treadmill, which keeps going.

You can see this in the acute shortage of dollars in the market, the tightening of dollar withdrawals, stoppages of online currency exchange, slow slippage in the Lira black market rate, and more and more merchants refusing Lira payments.

This is putting pressure on some essentials in the country, like the fuel strike this week. I’m told that grain supplies, which by law are supposed to stay above 4 months of supply, are now down to less than half that.

Someone described it as “The Dollar Crisis. Let’s start by setting the record straight. The dollar doesn’t have a crisis — it’s doing fine. A more accurate term is “The Lira Crisis.”

Gibran Khalil Gibran described our situation accurately over a century ago:

            Pity the nation that wears cloth it does not weave,

            and eats bread it does not harvest.

            Pity the nation that acclaims the bully as hero,

            and that deems the glittering conqueror bountiful.”

Even the comedian Naim Halawi gets it, through his revised current version, “Pity the nation that earns Lira and spends dollars.”

So what’s happening?

Capital flight, since the beginning of the year, has picked up and deposits are now being transferred outside the country at a rate of around $1 billion per month. Add to that the balance of payment deficit (our addiction to imports that I’ve written about before). Add to that the dollarization rate which has now crossed 73%. This is the percentage of bank deposits that are in dollars — it was many billions lower, only last year. The official reported rate is 71%, with the 2% discrepancy coming from the fact that for some of you who transferred Lira to dollars, you got a piece of paper from the cashier saying it was done, while they wait days, maybe weeks, before executing, until they get their quota from the central bank. This is because the central bank is limiting the supply of dollars to banks. In the business, we call that “keeping the risk on their books.”

The average Youssef has figured out an arbitrage opportunity that I tweeted about a month ago [LINK HERE https://twitter.com/danifromic/status/1164174571060301824?s=21]. He buys dollars from the banks at 1519 or so and sells it to the Sarraf at 1550. Earns a risk-free 30-40 Liras — call it Financial Engineering for the Proletariat. As a result, banks have all but stopped all kinds of transfers and ATM withdrawals, which has aggravated the situation and escalated the panic.

There’s a lot of additional risk that we’re taking recently. For example, some of my friends used to be asked 20 questions when they deposited $10,000 in cash — not so much anymore — banks have more important things to worry about now. Desperation leads to reckless behavior.

Meanwhile, I hear that market players are negotiating hard with another billionaire, to get a new deposit like the $1.5 billion that was done a few weeks ago. News reports are also circulating that negotiations are ongoing with Saudi Arabia for an off-market $2 billion eurobond issuance with below market interest rates. So $3 billion total. What does that buy us? At best 3 months, most probably less. Depends if the outbound traffic of capital flow keeps accelerating.

If the Saudis, or someone else does an off market eurobond transaction, it guarantees them a front-row seat to any future restructuring.

The billionaire would want to negotiate a similar material adverse clause (MAC) “comme l’autre.”

Think of yourself wanting to go see a really good movie that only plays in this one old movie theatre. You know there’s a fire hazard, but you still want to go, so how do you mitigate the risks? You might pay extra to get yourself a seat right next to the exit. So the second billionaire would want the same thing, but the best seat is taken — he might have to settle for the second best seat, behind the other guy, or maybe right next to him, but one thing is certain, they will run out of those seats very soon, because not everyone can fit next to the exit.  A real eurobond issuance may want to understand this seating arrangement, like where they are in the pecking order for the Reserves, which are the only source for any eurobond payments.

Of course, there’s another issue — LIFO — Last In First Out. In these latest transactions, the new guys are getting more flexible exit terms, and taking less risk, than the ones who were riding the bull the whole time, for the last 5 or 10 years. It’s counterintuitive — like standing in a queue waiting for something, but somehow you’re better off by being the last guy to get there.

The advantages to this new game in town is obvious — we’re getting urgent funds to keep the country going, and at rates way less than market, but what are the disadvantages? Assuming these guys have some sort of MAC, giving them effective seniority, which is almost certainly true, that means they can pull their money out very quickly. So if the new $1 billion comes in, that’s $2.5 billion that can pull out very quickly, maybe with 30 days notice. So if a first shock occurs that triggers the MAC, we immediately get another shock of consuming $2.5 billon of the reserves — that’s 8% of the reserves in one shot.

That would be one hell of a double-shock to the system.

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