The Breakdown - The Tragedy of Lebanon’s Currency Devaluation

Episode Date: February 4, 2023

This week, the Lebanese pound (or lira) was devalued from 1,500 lira per U.S. dollar to 15,000 lira per USD. At the same time, the black market price of a dollar is 64,300 lira. In this episode, NLW gives the story behind the headlines and tweets, and explains why the World Bank calls Lebanon one of the worst economic crises in the last 150 years.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26-28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass. Visit consensus.coindesk.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Swoon” by Falls. Image credit: Malcolm P Chapman/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Saturday, February 4th, and that means it's time for the weekly recap. A quick note before we dive into today's show, there are two ways to listen to the breakdown. You can hear us every day on the Coin Desk podcast network feed, which comes out in the afternoon, and is featured alongside other great coin desk shows, or you can listen on the breakdown-only feed,

which comes out a few hours later in the evening. Wherever you're listening, if you would take the time to leave a rating or a review, I would so appreciate it as it makes a huge difference in new people finding the show. All right, friends, well, if you have been on Bitcoin Twitter this week, you've probably seen some tweet like this hyper-viral message from Leah Halpern. She writes,

Lebanon Central Bank has announced it will devalue its currency by 90% as of tomorrow. Imagine waking up one day and your life savings are gone. Absolutely criminal. Now, on the surface, this is a totally understandable take, but in many ways what happened this week was not the trigger event, but instead the culmination of years of monetary and economic horror for the people of Lebanon. So today we're going to try to give all that a bit more context, and this is a story I've been following almost as long as this podcast has been around.

In April 2020, I released an episode called When Currencies Fail, a primer on the crisis in Lebanon. At that time, part of why Lebanon had exploded into consciousness for the citizens of Bitcoin Twitter were provocative headlines saying that Bitcoin was trading at $15,000 U.S. dollars per Bitcoin in Lebanon. That was more than twice the $7,000 price it had in U.S. markets. Now, when one poked and prodded, this was the classic issue of the difference between the official and the black market exchange rate.

In other words, Bitcoin wasn't trading at a 200% premium. The black market for Lebanese lira, which are also known as, Lebanese pounds, instead valued the pound at only 50% of what the official exchange rate did. Thus, the 2x premium if you priced Bitcoin in the official exchange rate. But even this is not going sufficiently far back to understand what's happening. A few important notes about the Lebanese economy, historically speaking. The 90s for Lebanon were a rebuilding decade after 15 years of civil war. From 1997, up until literally this week, Lebanon has maintained an official dollar peg of 1,000

Lebanese pounds to one U.S.D. And until the challenges a few years ago, it was successfully able to maintain that peg. Lebanon is a huge net exporter country. Even before the financial crisis that arose in 2019, Lebanon had a 150% debt to GDP ratio. Lebanon was for a long time able to maintain this position because of its role as the region's banker. The New York Times wrote, maintaining the dollar peg required continually bringing new dollars into the country, usually by enticing wealthy investors to make large dollar deposits for high interest rates, a strategy that some economists have compared to a Ponzi scheme. Now, it's true that Lebanese banks attracted huge foreign inflows for years

by offering some of the region's highest interest rates. This allowed for the country to pay for imports despite low exports. In fact, for much of the early 2000s, the deposit base of Lebanon was usually 2.5 to three times the size of the economy as a whole. The Lebanese economy was consequentially hugely dollarized. Remember, if you're a net importer, you need a lot of dollars to pay for the things that you're importing in the currency that sellers will accept. Dollars. However, in the late teens, the politics of the region started to catch up, and Lebanon's role as the region's banker began to falter.

2017, for example, saw a huge rift with Saudi Arabia, leading to big dollar outflows. 1.5% of cash deposits were withdrawn that year. However, it was 2019 when things started to get really bad. The banking system really started to get hit, and it took with it the entire economy. At that time, government bonds started trading at 40 to 50 cents on the dollar. Of the banks, 30% of loans to the private sector, 25% were non-performing, and all told, about half the assets of banks became severely impaired. At the same time, new inflows dried up because of regional turmoil. This was the situation when in September of 2019, an economic state of emergency was declared. The government announced plans to raise taxes to cover expenditures, which led, of course, to protests.

In October of 2019, a nationwide strike began demanding to be able to pay for fuel imports in pounds rather than dollars. Basically, all over the country, petrol stations were having to shut down because they didn't have the dollars they needed to pay for fuel imports. And it wasn't just fuel importers. It was also mill owners who bought imported wheat in U.S. dollars, but then had to turn around and sell it in Lebanese pounds. While officially, the exchange rate never wavered from 1,000 Lebanese pounds to one U.S. dollar, in practical terms, the peg came undone. As it did so, it caused more demand for dollars, which further challenged the peg. With demand for dollars rising, banks started limiting U.S.D. withdrawals. This, of course,

caused utter chaos, politically, economically, and otherwise. And this was halt before COVID hit. By the next March of 2020, GDP had fallen from $55 billion to $44 billion. $220,000 jobs in a country of 5 million were lost between October and February, and in that same period, food prices rose up 58%. Again from the New York Times, importers of critical goods such as medical supplies say their request for dollars have gone almost entirely unmet since February, leaving many hospitals dangerously low on everything from heart stents to dialysis equipment. On March 7, Lebanon defaulted on $1.2 billion in foreign currency debts the first time they had done so. If you're the region's banker, guess what you can't do and stay in that role. That's

right, default on foreign currency debts. Over the next couple months, the unofficial exchange rate shot from 1,500 to 2,500 to 3,500, and just kept going. And this was three years ago. Since then, you've probably seen horrifying videos of Lebanese citizens reduced to having to use violent means to rob banks just to get their own savings. In October of 2022, PBS News Hour interviewed some of those who had taken that drastic action. One of those interviewed was Basam al-Shik Hussein, who over the summer of 2022 raided a local branch of his bank with a shotgun. He held employees hostage to take $35,000 from his own savings account. Through an interpreter, he told PBS, I went to the bank many times trying to withdraw my money and explain that I have lost my job and I needed

to live. I demanded my deposit so many times only for them to refuse, claiming they have no money. What has happened has happened, but what comes next will be much more severe. From now on, more drastic measures are going to be taken. I will forcefully take back what's rightfully mine, even if it cost me my life, even if I had to kill them all at the bank. PBS also interviewed another person caught up in the chaos, mother Clara Svirruquez, whose two-year-old daughter Martine had just been diagnosed with cancer. The type of leukemia that Martine has has a 90% survival rate if treated,

and she was in a middle-class family who could afford the treatment with their $45,000 in savings, if, of course, they were allowed to access it. By the time of the interview, their bank had limited their withdrawals to $100 a month. Clara told PBS, We spent with little savings we had trying to get her into a hospital, but they weren't enough. What can $100 a month do for us? That won't even pay for a one-night stay at the hospital.

That doesn't include surprises like tests and infections. The banks are withholding what's rightfully ours. They're making us beg for our dignity. Time is against us. Plenty of people are resorting to illicit measures, and I'm not saying I support it. But when it comes to the health of one's child, a person will do anything.

My husband might go wreak havoc at the bank, who knows. While I'm facing these challenges, she's suffering all this pain and is so afraid. She holds my hand and asks me over and over again, why, Mama, and for that, I have no answer. As a father, I can't imagine being placed in this situation. There isn't a building, a business, a bank in the world that I wouldn't burn to the ground if my daughter's safety was threatened. The madness and dignity and cruelty of your child's life or death being left to the ability for your bank to give you money that was rightfully yours is impossible to comprehend.

end. It's the type of thing that radicalizes people. The point is, for those who are just seeing these headlines of devaluation, there is a much larger story. Deputy Bureau Chief in Lebanon for Reuters Timor Ozari tweeted on January 31st. Lebanon will officially slash its currency value from 1,500 to 15,000 pounds tomorrow, a move that will hit bank balance sheets. Depositors still won't be able to freely access their money. In order to ease the impact of this shift, banks will be given five years to, quote, reconstitute the losses due to the devaluation. This seems to fly in the face of IMF demands to deal with financial sector losses up front in order to jumpstart the economy's recovery. Now, of course, if you're just hearing about this situation, that devaluation

from 1,500 to 15,000 pounds sounds insane. It produces the types of tweets that we've seen from all over Bitcoin Twitter and other parts of financial Twitter as well, about just how crazy it is to have that 90% devaluation overnight. However, if one looks at lira rate.org, which tracks the actual black market rate, the true exchange rate is not 50% percent. $15,000 lira or pounds to the U.S. dollar. It's 64,300. Join CoinDesk's Consensus 2023, the most important conversation in crypto and Web 3, happening April 26th through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web 3, and the Metaverse. Immers yourself in all that blockchain technology has to offer creators,

builders, founders, brand leaders, entrepreneurs, and more. Use code. breakdown to get 15% off your pass. Visit consensus.coindex.com or check the link in the show notes. Now, Wednesday's devaluation from 1,500 pounds per dollar, or 15.07 pounds per dollar technically to 15,000 pounds per dollar was the first official change in 25 years. However, fundamentally, because of the large disconnect between the official rates and the reality on the ground for Lebanese citizens, the devaluation isn't expected to change all that much. There are fears that the evaluation will stoke additional inflation in the nation, which already saw an annual inflation rate of 170% last year, according to official data, and sits currently at 220% per year, according to some

private data. The Financial Times cited analysts calling this move, quote, a costly stopgap in the absence of wider structural reforms. Mike Azar, a Lebanese economist, said fundamentally these measures don't meaningfully address the causes of the crisis, which are the large financial sector losses. What's been needed for the past three years is a broader economic recovery plan with a restructuring of the financial system, not another piecemeal measure. Nasser Saidi, a former economy minister and ex-deputy central bank governor, called the devaluation a continuation of the quote, failed exchange rate pegging and fixing policy that has generated the biggest financial crisis in history. Now, what about the IMF's role in all of this? Well, Lebanon's government reached a draft agreement with the IMF in April, but there have been numerous roadblocks in implementing the economic and political reforms required by the deal.

One part of that deal is unifying exchange rates across the nation. However, at the same time, broad-based political reforms are also demanded. That might be as tricky as the economy, given that the prime ministership has changed hands twice in the last three years, with the wealthiest man in Lebanon currently holding the office. The presidency has remained vacant since October, and the government is currently in caretaker mode. Last week, two independent members of the parliament began a sit-in at the parliamentary building, as the legislature again failed to elect a new president. And if you think these problems are just with the banking system, that is not the case. Currently, the electric grid is operating only for about five hours per day.

And sadly, it doesn't seem like this is even going to meet the conditions for the IMF's deal. Lebanese economists again, Mike Azar, said the measure doesn't actually unify the exchange rate. It just created another one and created uncertainty over when and how the banks will be able to cover their foreign currency losses, both contrary to the deal negotiated with the IMF. The World Bank, meanwhile, has called the situation in Lebanon one of the worst economic crises in the past 150 years. Fully three quarters of the population are now in poverty. Ray Hindi, a Lebanese-born CEO of a Zurich-based management firm

dedicated to digital assets said back in November of last year, not everyone believes that the banks are bankrupt, but the reality is that they are. The situation hasn't really changed since 2019. Banks limited withdrawals and those deposits became IOUs. You could have taken your money out with a 15% haircut, then 35%, and today were at 85%. Still, people look at their bank statements and believe

that they're going to be made whole at some point. So what really happened this week then wasn't that the savings of Lebanese citizens fell 90% overnight. This devaluation was simply an admission that the money is gone and had been gone for quite some time. I don't want to make this show about Bitcoin because it's not, at least not primarily. But it is to me exactly the type of situation that makes Bitcoin so obvious. Pull-decide all calls for hyper-bitcoinization and the triumphalism that can characterize our community. The simple fact of their existing, a digital, hard-to-conviscate,

non-sovereign store of value that allows anyone with an internet connection to move at least some portion of their wealth outside of the local monetary system that they're based in solely by an accident of birth is an absolute triumph of humanity. It's something to be revered and, moreover, to be protected. Until tomorrow, be safe and take care of each other. Peace.