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Is Saudi Arabia the new IMF?

by Brad Setser
July 26, 2006

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.   

31 Comments

  • Posted by bsetser

    One request from me: I know the current conflict generates strong emotions all around, but I would appreciate it if the comments focused on financial/ economic issues. Many thanks. Brad

  • Posted by MCS

    I can imagine that the Lebanese GDP will take a hit from all the turmoil there. I will throw out a potentially novice question:

    Has anyone ever attempted to measure the degree to which a war impacts GDP? There are certainly a lot of goods and services still being moved around Lebanon and from what I read some things (gas for instance) will command very high prices. So is the GDP growth impact in the 10% range? The 40% range? Higher?

    Lebanon has certainly had its share of military action over the past 2 decades. It’s a wonder to me that the economy is as strong as it is.

  • Posted by Steve Waldman

    MCS — though it doesn’t speak to immediate effect of war on GDP, there’s an interesting article by Austan Goolsbee on the long-term economic effects of war in the New York Times (via Daniel Gross). A one-line summary would be that in the long-term (and from an economic perspectiive) it isn’t war itself that matters, but structural issues of which war might be a symptom, particularly ethnic strife.

  • Posted by Guest

    Thought FT summed it up rather well:

    “… Florence Eid, Middle East and North Africa economist at the bank, said that the banks were also highly liquid on the back of petrodollar flows and regional diversification strategies meant banks were more capable of absorbing local shocks than they used to be, though this all depends on how long the conflict lasts. “As such, Lebanese banks we have to talked to since the crisis began are currently more worried about the humanitarian and security dimensions of the crisis than about the solvency of the Lebanese banking system and its capacity to roll over Lebanon’s debt,” she said…” http://www.ft.com/cms/s/b011f6d4-1cc4-11db-9780-0000779e2340.html

  • Posted by psh

    Genocidal massacre is always a boost for GCC integration, which started out as collective security. Just this month they passed that revolutionary price-tag law. Monetary union is on for 2010 but starting next year monetary union means fiscal constraints, notably on public sector debt. Not so long ago Saudi was afoul of the 60% limit of the Maastricht model rules. Most likely oil prices will be nice and high next time a helpless state gets flattened. Still, if Saudi plans to pick up after each new war, they’ll need to take it easy blowing money on makework jobs and find a cheaper way to stave off Islamic revolution. Soon they’ll be proud owners of the western smithereens of Iraq.

  • Posted by MrBill

    Honest to God, a couple years ago as I visited Beirut’s rebuilt downtown core I would have swore Lebanon was back on its feet and collecting the peace dividend, mostly thanks to Hariri, and now its all gone.

    The war in Lebanon is certainly having a positive effect on the GDP of Cyprus here with all those guests transiting through its airports, ports, hotels and beaches, in the middle of the tourist season, enroute from the warzone to wherever they have their second passports. It’s got to add a few points to Cyprus’ growth this year.

  • Posted by Guest

    “…investors will need to rethink the definition of emerging markets, distinguishing between economies that have, to all intents and purposes, emerged, and those that are still works in progress…” http://www.ft.com/cms/s/1cd5abbc-1ccf-11db-9780-0000779e2340.html

  • Posted by Guest

    re: structural forces

    As already pointed out, won’t much of the outcome be determined by the range of external economic and political interests which are fueling this particular war? Not familiar with David Jonasson, but he provides another point of view on external drivers – if someone knows of a better source on this aspect, please do tell:

    “…If you thought that the latest Middle East crisis is just another in the endless war of Arabs and Jews killing each other, you’re wrong. There is a telltale sign that there is a major new development… the world’s Arab powers have not launched their customary tirades against Israel…” http://globalpolitician.com/articledes.asp?ID=1981&cid=2&sid=4

  • Posted by MrBill

    Enigmatic Syria walks a dangerous line
    “The Syrian people were angry and confused after pulling its army out of Lebanon” and Damascus lost its role in the region, said George Sabra, a leader of the banned Syrian People’s Democratic Party who was jailed for eight years by the President.

    “So the leadership is trying as hard as possible, as soon as possible, to return to the game as soon as possible — at the very least to play a strategic role in this crisis over Lebanon. And they are using Hezbollah and Iran and Hamas and the Islamic Jihad to try to increase their influence,” he said.

    They have also suddenly given Syria, once staunchly secular, a much more Muslim flavour. There is a much-discussed Islamic revival here, with Mr. Assad and his party building mosques and embracing the Koran — much as fellow Baathist Saddam Hussein did in the waning years of his rule”
    Source: http://www.theglobeandmail.com/servlet/story/LAC.20060726.MIDESYRIA26/TPStory/TPInternational/Africa/

    I think it is clear to me that tight supply & demand fundamentals in oil & gas markets as well as high prices, and the threats to disruptions from geopolitical events, are self-fulfilling, as the higher the alert the more sensitive players are to these potential disruptions, and the bolder are the forces that can effect those supply interuptions.

  • Posted by Guest

    …after reading MrBill’s and other guest’s links, I guess we are not discussing just financial and economic issues.

  • Posted by bsetser

    i agree with the most recent post — a couple of recent comments (tho not Mr. Bill’s — Cyprus benefiting economically seems on topic) veered a bit away from an economic and financial focus. Sorry to be strict on this, but … well, the broader issues are better discussed in other fora.

    Re: the FT — I would be worried about the liquidity of the banking system. the system is no more solvent (or less insolvent) than it was before. Ok, actually, it is a bit less solvent if one assumes that in the future the GoL will have to issue more debt as part of the reconstruction. The banks were relatively liquid. and more importantly, the banque du liban is quite liquid. the question is how much it is hemoraghing right now. there were some reports that the banks were rationing dollars cash at ATM machines ran dry and the like. they may just be a shortage of cash, as the BdLiban has dollars to lend out, but they are of the electronic kind and they need a cash shipment … there are interesting stories about how the Argentines filled up the belly of a 767 with cash in early 01 … i need to dig some more.

  • Posted by Guest

    Can’t see how very complex, and global, political and religous aspects can be separated from the financial/economic – especially in this case! But agreed, it is difficult to find ‘rational’ assessments.

    Wikipedia provides a snapshot comparison of GDP between regional blocs (Source: CIA World Factbook 2005, IMF WEO Database) which must be familiar to Brad: http://en.wikipedia.org/wiki/Gulf_Cooperation_Council – if this provides a quick perspective in response to previous comments.

  • Posted by Guest

    “But agreed, it is difficult to find ‘rational’ assessments.”

    That isn’t what Brad said.

    And it’s very easy to find rational assessments. Thus, the Tel Aviv market is only down around 3% over the last two weeks (yesterday, the leading indices were up just under 1%), Standard & Poor’s and Fitch have kept Israel’s credit rating the same, bond markets have been steady, HP has bought Mercury for $4.5 billion.

  • Posted by Guest

    Brad – I questioned the confidence in the FT article too, but wondered if that had anything to do with insights into to just how much money might be available to finance this, or how long it may last. But if power is knocked out, the ATMs can’t be much good – along with electronic banking records.

    The other wild card being – when I look at those GDP estimates – aren’t many people in these areas constantly prepared for a banking crisis – in many cases avoiding the banking system altogether? So it has to be difficult to know how much cash may be stashed away anywhere. Or to what extent a region might depend on well developed barter networks – just as a matter of survival.

  • Posted by Guest

    re: “Thus, the Tel Aviv market is only down around 3%…”

    Doesn’t provide much insight into drivers – exactly where money is coming from, how much, for what specific purposes, how available it may be to citizens who need it and for how long as circumstances evolve – in Lebanon.

    I was going to post: “Former American International Group Inc. chief executive Maurice “Hank” Greenberg is eyeing private equity deals in the Middle East as he prepares to take advantage of potential high returns in private companies…” http://today.reuters.com/investing/financeArticle.aspx?type=mergersNews&storyID=2006-07-25T210348Z_01_N25213487_RTRIDST_0_FINANCIAL-GREENBERG-PRIVATEEQUITY.XML

    but thought – well that sounds more like money flowing into Israel, and that’s not the topic.

  • Posted by bsetser

    p.s. the FT story is generally bearish, despite the bullish quote from a bank (and any bank has to say it is ok … doesn’t it). cds spreads blew out. and the fact that Lebanon wanted the saudi cash infusion suggests to me that they are worried that there next reserve release would have shown a sharp fall without the Saudi loan. As one would expect. Lebanese banks have @ $60b in deposits, and i think the central bank @$10-15b in reserves (need to check the reserves data). The $10-15b is very good relative to the past … but remember that Argentina started 00 with $80b or so in deposits/ cross border lines and $25b plus in reserves (including the $ the banks had to keep at the central bank as part of their reserve requirements).

  • Posted by Guest

    Mr. Bill – there were some sharp economic and financial differences on the other side of the Green Line when I was in Cyprus. Might there still be a need to distinguish between north and south?

  • Posted by Guest

    Israeli Companies Feel the Hot Breath of War: Many cope, using bomb shelters, or online links—or by allowing kids at work. Others are finding it harder to survive as the conflict rages on.

  • Posted by MrBill

    Correct. There are large differences in relative development between southern Cyprus and The Republic of Northern Cyprus. However, both are growing very quickly due to an influx of foreigners buying retirement, vacation and second homes.

    The EU wants Turkey to complete their customs union with all new EU states including Cyprus, but Turkey also wants all trade sanctions and travel embargos against Northern Cyprus ended as well. That is the problem at the moment.

    Legally, I cannot enter or leave Cyprus from Northern Cyprus although there are direct flights in and out of Northern Cyprus. I have to use the ports and airports in southern Cyprus. But the border is open and one can cross it easily on foot or by auto.

    The US and other foreigners fleeing Lebanon are landing in southern Cyprus, not Northern Cyprus. Mostly in Limassol by ship or Larnaca by air. I think the last large group arrived yesterday according to some volunteers I spoke to last night.

    Some Lebanese families are staying in local hotels and not just transiting through Cyprus, so this will push up occupancy rates and translate into stronger summer growth in the south. Certainly a fill-up for the local economy, as I assume those who can afford to came to Cyprus, whereas those who might not be able to afford it went more likely to Syria who are struggling to keep up with the influx fleeing Lebanon. Many Lebanese have long used cross-border trips into Syria for shopping as in general prices there are much lower than in Lebanon due to price controls.

  • Posted by MrBill

    “The other wild card being – when I look at those GDP estimates – aren’t many people in these areas constantly prepared for a banking crisis – in many cases avoiding the banking system altogether? So it has to be difficult to know how much cash may be stashed away anywhere. Or to what extent a region might depend on well developed barter networks – just as a matter of survival.”

    Not to mention that Lebanese based banks, not just Lebanese banks, have benefited from ties to oil producing countries like Iran, and this war will have disrupted those operations as well causing losses. The Bank of Beirut in Cyprus is across the hall from my office, so I will have to ask the Manager what the situation is at the moment?

  • Posted by MrBill

    Syria’s Lebanese refugees remain defiant….

    “UNDERCLASS

    Most of the refuges needing housing, food and medicine are Shi’ite, from the Lebanese underclass, from which Hizbollah and Amal, a smaller Shi’ite party, draw their support.”
    Source: http://www.washingtonpost.com/wp-dyn/content/article/2006/07/27/AR2006072700689.html

    … for example.

  • Posted by Guest

    And the next chapter to Jonasson’s piece is already being written, no matter what anyone’s position is on these developments, which look like alarming instability for everyone:

    “…The Saudi royal family and King Abdullah II of Jordan, who were initially more worried about the rising power of Shiite Iran, Hezbollah’s main sponsor, are scrambling to distance themselves from Washington…” http://www.nytimes.com/2006/07/28/world/middleeast/28arabs.html?hp&ex=1154145600&en=00302b87a267fb0d&ei=5094&partner=homepage

    The ‘Arab system’ is dying in Lebanon, http://commentisfree.guardian.co.uk/david_hirst/2006/07/post_259.html

  • Posted by bsetser

    Mr. Bill — isn’t the huge oil windfall (no disrption of production yet, higher prices) the one potential source of support for Lebanon. The Gulf’s current account surplus is $200-300b. Lebanon only needs to attract a small fraction of that into its $60b (deposit base) banking system and its financials work. more deposits in banks = more capacity to finance the government and its ongoing deficits.

  • Posted by HK

    Brad–Lebanon had recovered from a long, severe civil war, and had started to regain its status as a financial center of Middle East, just before it was devastated phisically as well as financially by the recent attack. In this situation, it would be very difficult for either the IMF or Saudis to prevent a financial crisis unless they are prepared to provide tens of billions of dollars to Lebanon. I am less optomostic than you.

  • Posted by Guest

    re: is Saudi Arabia the new IMF?

    “What areas of special interest can join Arab and Canadian bankers and involve them in doing business together[?] First, I would like to refer to the ongoing or potential economic reconstruction and development in our region, basically in some countries of the region. Surely, these reconstruction or development activities require huge financing requirements to infrastructure and productive projects. Arab banks cannot meet alone these financing requirements. As some Arab banks have significant financing agreements with some regional and international financial institutions, Canadian banks could follow a similar path. They can involve together with Arab banks, through syndicated lending schemes, in financing reconstruction and development projects in the region. This will be beneficial to both parties, especially if we take into consideration the existence of excess liquid funds in the Canadian banking and financial system…Canadian and Arab banks need to come closer together and work jointly in the filed of correspondent banking…. the Arab and Canadians banks could involve together in setting tailored or specialized products and services, best suited for repatriates in both the Arab countries and Canada. Such products and services could include residential loans, car loans…portfolio and wealth management, designing deposit-taking products and services to suit Arabs residing in Canada and Canadians residing in the Arab region…[and] domestic banks to transfer money and funds to their home country… Canada is a close friend to the Arab region and a strategic economic partner, and banking should be a major platform to strengthen these ties…” — Mr. Georges Zard ABOU JAOUDE, Chairman and General Manager, The Lebanese Canadian Bank, International-Arab Banking Summit, Montreal, 25-26 June ‏2003
    ‏‏

  • Posted by psh

    The coalition can apply its unique experience in financial-sector restructuring.

  • Posted by Guest

    Was close to adding the NYT story yesterday, but thought, well that’s Iraq. So I checked The Daily Star:

    “…The Finance Ministry quickly created accounts in Lebanese, dollar- and euro-denominated currencies to raise urgent funds for the victims of the war which, it is estimated, has so far left over 600 civilians killed, thousands wounded and billions of dollars worth of destroyed properties and infrastructure…”
    http://www.dailystar.com.lb/article.asp?edition_id=1&categ_id=3&article_id=74336

  • Posted by bsetser

    Iraq continues to amaze me. I think it cannot get worse, and then it does. The whole ecnomic strategy (shock therapy imposed by an occupying power) never made sense to me — initially, it undermined the security situation, and now, well, it ain’t being implemented because there is no functioning state because of the security situation. Not on topic, i know.

    re: Lebanon, if anyone has good data on how deposits in the banking system have evolved, do let me know. that strikes me as the financial key. Rebuilding is an important issue. but the near-term risk is a bank run. Luckily, others in the region have so much cash right now that it obviously can help to finance reconstruction and supply the liquidity needed to avert a run.

  • Posted by MrBill

    “Mr. Bill — isn’t the huge oil windfall (no disrption of production yet, higher prices) the one potential source of support for Lebanon. The Gulf’s current account surplus is $200-300b. Lebanon only needs to attract a small fraction of that into its $60b (deposit base) banking system and its financials work. more deposits in banks = more capacity to finance the government and its ongoing deficits.”

    Written by bsetser on 2006-07-28 11:01:13

    “Brad–Lebanon had recovered from a long, severe civil war, and had started to regain its status as a financial center of Middle East, just before it was devastated phisically as well as financially by the recent attack. In this situation, it would be very difficult for either the IMF or Saudis to prevent a financial crisis unless they are prepared to provide tens of billions of dollars to Lebanon. I am less optomostic than you.”

    Lebanon due to its geography and history plays an interesting role in banking in the ME because there were Arabs, non-Arabs, moderates, etc. If it is too unstable that business will flow to other banking centers in the region and that will be a net loss to Lebanon.

    For example, many Arabs were taking vacations in Lebanon in the wake of stricter visa policies for the USA, and as oil wealth flowed into Lebanon’s summer and winter resorts.

    Anecdotally, I think Lebanon was acting as a conduit for a lot of Iranian money given various economic sanctions or restrictions on Iran and the sale of its oil in dollars.

    However, much of Beirut’s renaissance after its civil war was spearheaded and funded by Hariri, but he was assinated, most likely with the help of pro-Syrian forces in Lebanon. Unfortunately, due to the lack of strong political institutions, one man or one party can often make the difference between a country moving forwards and developing or regressing.

    Without Hariri, but with the help of Hizbollah, I am also less optimistic. Externally propping up the country financially is not the same as developing the infrastructure where tourists and visitors feel like spending their holidays or investing their money.

  • Posted by Guest

    “…Another result of the war is that despite international efforts last year to end Syrian hegemony over Lebanon, Israeli bombing is driving the two countries together again. “Lebanon needs Syria more than ever,” Mr Landis wrote. “It needs Syria to be kind to the many refugees who have found protection and safety in Syria. The Lebanese economy will be increasingly vulnerable to Syrian pressure.”…” http://www.guardian.co.uk/syria/story/0,,1834114,00.html

  • Posted by psh

    Look on the bright side. Two billion in Lebanon reconstruction. Who’s gonna get it? Europe, I bet. ICB makes it tough to throw it to Skanska or ABB absent a clear cost advantage. If you were an extremely resentful executing agency for a multilateral reconstruction procurement, how would you keep it away from Zionist pigdogs Bechtel, Fluor, et al? Iraq is the key: prequalification based on performance on similar contracts. Put transparency and internal-control factors in the capability criteria. Or hold your fire till post-qualification: SIGIR or GAO reports on Iraq will suggest fruitful topics for clarification requests. Or let your local sources do the dirty work with domestic preference — a foreigner with no partners could face a 15% cost handicap.