Lebanese Economic Crisis explained in less than 4 minutes

 Lebanon is one of the most indebted nations, its government debt is estimated at 155 percent of gross domestic product. The country imports vastly more goods and services than it exports, and the government budget deficit is set to increase too as a percentage of GDP this year.

Excessive government borrowing has inflated the politically well-connected banking sector that lends to the state at high interest rates. Banks prefer to lend to the government rather than finance innovative enterprises, depressing private-sector investment. The banks rely on wealthy Lebanese and especially the diaspora to deposit their money in Beirut. The enormous interest rates earned by these depositors flow into very few pockets: About 1 percent of all accounts are estimated to hold roughly half of total deposits.

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Ukraine - China to the Rescue ?

Ukraine prior to the crisis:

• Aging industrial sector, eastern Ukraine, primarily engaged in manufacturing of steel for Russia
• Elephant size debt of USD 35 billion
• A politically and ethnically divided population
• The private sector mainly or fully controlled by oligarchs
• Endemic Corruption
• Massive Inequality (the rich are too rich and the poor too poor)
• Energy Crisis
• Low foreign reserves mainly due to poor export figures

The US and IMF has offered billions of dollars, contingent on energy subsidies & opening up the economy. Ending energy subsidies is to ensure that the loan amount facilitated by the West does not end up in Russian banks as Ukraine is reliant on Russia for its energy needs. However, ending energy subsidies also means close to double increase in price of energy, which means many Ukrainians would freeze next winter and the aging industries would go out of business. The EU bloc will not do a favor buying not so competitive goods.

Ukraine was the fourth largest corn exporter in 2012-2013, behind Brazil, the US and Argentina. It is also the sixth biggest supplier of wheat and exported 7.1 million tons in 2012-2013. The financial crisis may affect the production of crops with farmers having trouble to pay for fertilizer, after the Ukraine’s currency decline against the dollar.

In the current scenario, the survival for Ukrainians lies in the production and export of grains. The country which has expressed interest in Ukraine’s grains is China. Ukraine is expected to become China’s largest overseas farmer in 3 million hectare land (i.e. 7% of Ukraine’s land). China cannot grow enough grain to feed its billion+ population. The good thing about the Chinese is that they don’t mingle with the internal affairs of the countries where they develop infrastructure. Their funding and support is not contingent on beneficiary countries engaging in the sort of austerity that the IMF, Europe and the US prefer to impose on any country who goes them for financial support. For China, food security for the future generations is critical and it will be ready to pay a premium for the same.

Ukraine has got two core issues; one is debt and the other is inequality. The West will not allow a massive restructuring on default of debt & yet rain dollars. Ukraine cannot even afford to cut its ties with the Russians as it is heavily reliant upon Russia for its energy needs. Ukraine will have to maintain friendly ties with Russia to secure gas supplies at discounted rates. Ukraine will have to turn to China and improve its productivity and head to become the biggest exporter of grains.

Let me summarize the above in a manner where it becomes easier to understand the dynamics surrounding Ukraine post Crimea annexation. Ukraine’s western back government will soon have to put more focus in diplomacy with Russia and furthering ties with China than relying on Europe and the IMF who have no history of pulling out ordinary men from unemployment and poverty.

An expensive lunch for Pakistan's Youth

A letter to Maryam Nawaz Sharif (http://youth.pmo.gov.pk)

Dear Maryam Nawaz Sharif and team,

Firstly, I want to appreciate the efforts you and your team have undertaken for the youth and the simple majority of the motherland. The prime minister's youth loan scheme is for the age group 21-45, with CNICs and are well connected to a high net worth individual or a govt employee. The govt has lots of issues which need to be tackled at priority. There are several risks which can cost our govt and our coming generations such as: indebted youth in an indebted nation funded by an indebted govt hence creating a vicious cycle. Refinancing the debt can become a huge task for the future govt and generation as it will be repaid after 8 years when possibly a different govt might be in power. Moreover, such usury driven funding will not be welcomed by many in our society and the cost of monitoring funds to the tune of billions of rupees will be an expensive task for the govt.

I do not restrict my argument to criticizing your plan but I want to add a suggestion which could be a win-win stunt for all.

1 - The govt must establish a SME fund which must be overlooked by the Finance Ministry and the judiciary or any other independent agency which will ensure transparency for the investors

2 - A board must be set up which comprises of individuals from different circles and backgrounds.

3 - Any individual/team interested in a venture must present a business plan with a 5 years projection before the board

4 - Post review the board/jury must acknowledge the review and within 30 days it must come up with the result, whether the fund is willing to provide seed funding or not. If not, then why.

5 - If yes, then certain covenants must be placed and the amount (ranging from 50% to 70%) must be put in the form of equity.

6 - A (put/call) option must be included in the covenant which will allow the fund to liquidate its stake in the venture (post 5 years at a premium)

7 - Don't benchmark your plan with what has been done in the US, but compare it what has been done in the UAE (Khalifa Fund) and many other countries in Africa (Rwanda, Tanzania & etc) are doing it too to create self-employment. Let’s be realistic we cannot print money like US.

8 - After 5 years, the govt must allow these businesses (based on their financial performance and business scalability) to get listed on a secondary listing (like AIM in the UK) and let the locals become multinationals for tomorrow.

Sister - kindly read, reflect and act!

US default 'extremely unlikely'

Before we go deep into the mess, it is important to highlight the difference between a shutdown and debt crisis. In simple terms, in a shutdown, the government lacks the legal authority to spend money on non-essential services. In a debt crisis, the government is mandated to spend money — but doesn't have the legal authority to borrow the money to spend it.

What happens if the debt crisis occur (post 17th October) ? - A Default!

U.S. will certainly default if it does not pay its bills on time or the debt ceiling is not raised. Ahan - then the debt ceiling should be our discussion as it is the only temporary, please note, -TEMPORARY life line. If the US does not raise its USD 16.7 trillion debt ceiling "temporarily" by October 17, the country will default on its debt.

What US could potentially do:

The most extraordinary measure the government could take and that is to exhaust its cash. It is expected that the U.S. will have about $30 billion in cash, which will be short of expenditures that can reach as high as $60 billion in subsequent days. This is dangerously low level of cash in the bag.

The US government could use all their tax revenues to meet their interest payments on debt and roll-over the existing debt. They will have to take extreme measures such as cuts in public spending (healthcare programs) and defense spending. This will attract a lot of repercussion from the public, but it has to happen one day, then why not today!

President Obama is left with no option but to kill the fly

Even if the Congress decides to raise the debt limit, the republicans will be looking  for some very critical areas, prior to the approval, such as cuts in government spending, reducing the impact of Obamacare and no new taxes. They will keep their focus limited to the spending. An ice-break could prevent:

- Sliding US Dollar

- China catching the cold; biggest buyer of US debt

- America gets downgraded again!

- Banking industry getting banged
- Army pull-out

You are broke because you have overspent, and a correction is required not delay. Again, in simple words - Open the government and pay your bills.

Forgive me for using the word "Temporary" temporarily and wish not to use this again in near future.

Once upon a time in Greece

Battered Greece witnessed  its budget deficit fall to 9.1% of GDP in 2011. When George Papandreou took charge of office in 2006, the budget deficit was around 13% of GDP, way higher than the falsified figure of 5% stated by Karamanlis's government. The country currently has a debt of around USD 485 bn. There is immense pressure on the government to raise finance to pay off the debt which seems never-lasting (looking at the figure! but hope lives).

To continue to remain a member of the Euro Zone, members are required to maintain a budget deficit of no more than 3% of GDP and the debt to GDP must not exceed 60%. The current budget deficit is more than 9% of GDP and the debt is more than 120% of GDP!!! Greece is an unusual member of the Euro Zone which in the past had a two digit budget deficit and continues to have a three digit debt to GDP%.

The new coalition government, under Lucas Papademos, like the previous government plans to cut deficits, but we need to analyze how realistic these plans are fiscally and politically. The government is bound to raise taxes and cut spending on pensions, healthcare and welfare of the public. This comes at the expense of the turmoils in the form of protests and strikes campaigned by the strong labor unions in Greece. Any government in Greece is closely linked to the trade unions for political reasons and hence these unions are in a strong position to force governments to satisfy their expectations and demands. Any changes in the austerity measures will have both economic and political repercussions.

So what is the way out ? What options do we have ? Will Greece be forced out of the Euro Zone or will Greece be bailed out by the fellow EU members (mainly Germany and France). Let's analyze both the scenarios.

In the first case, we need to understand that there was no exit clause at the time of setting/joining the Euro Zone. Greece might approach the IMF like Hungary, but additional austerity measures will be required. The costs involved in switching back to the drachma from the Euro will be excessively high. The drachma would depreciate and the debt would surge as it is denominated in Euros. Hence, this is not a feasible option. Now, we are left with the second option, i.e. Plan: Bailout Greece!. It can be depicted from the chart above that France and Germany (the two leading Euro Zone countries) are most exposed to the Greek debt, hence if Greece falls, it will definitely have a knock-on effect and these countries will use all their muscles to save it. We have observed the significance of the Greek debt issue in the politics of France and Germany. The French and German banks have held significant amounts of the Greek debt and hence are a big support to its survival. 

Conclusively, I believe that the Greeks will be bailed out by their fellow EU members. We have to wait for the elections to get over in France and see the approach of the newly elected government towards this highly critical issue.

Iceland: Fish and Investment Banking

In 2003, Iceland's three biggest banks had assets of only a few billion dollars, about 100% of the nation's GDP. By the mid of 2006, the banking assets grew over USD 140 billion and were so much greater than Iceland's GDP, that there was no purpose in calculating the percentage. Many bankers, economists and authors believe that this was a phase when the banking system achieved rapid expansion. The harsh truth is that Iceland was no more a country, but a hedge fund.
The three major banks were pumping money into the Icelandic economy, driving the value of stocks and real estate crazy. Students in universities were fleeing from the economics of fishing to the economics of money.

This materialistic ambition turned out to have a downside. The collapse of the three major banks resulted in banking losses of more than USD 100 billion. For a country with a population of 300,000 the losses per person works out to around USD 330,000. The losses do not end here. Moreover, there were personal losses incurred through foreign currency speculation and collapses in the stock market. In 2011, the public debt per person stood at USD 42,714 more than USA's USD 33,555.

Learning points:

- Too much banking not good for the economic health. Do not create fake capital by trading in assets at inflated values. For example, I own apples and you own oranges. We agree that each fruit is worth millions. You sell me oranges and I sell you apples for millions. Now, we are no more fruitsellers but banks with assets worth millions.

- Give fish a chance. It will work again!

- Do not buy a Range Rover or Bentley if you cannot afford it. In the end, you are left with two options, either you burn it to get insurance money or ship it to a customer to earn in foreign currency.

Does debt really matter?

A lot of people believe or rather assume that debt does not matter as governments around the world owe money to the public, and not the aliens.

However, it matters for two main reasons. Firstly, if the debt grows at a faster rate than the economic output, it implies higher interference of the government in the price mechanism/free market economy. This results in higher taxes being levied (strict fiscal policy) to finance the deficits and we all know that taxes are bad in the current scenario as they discourage spending.

Secondly, the issues faced by current and succeeding governments. No sane government would like to lay an impression on the public that the debt per citizen is on an increasing trend. This comes with political repercussions.

This is indeed a vicious cycle and I am still figuring out the start and end points of the cycle. Kindly, assist!

The blind eye

Back in 2004, the biggest wall street banks had created the instrument for the self-destruction. The credit default swap enabled investors to bet against the price of any given bond. In simple terms, it was an insurance policy, but with a crack: the buyer did not need to own the insured asset (i.e. the risks incidental to the ownership were never transferred in actual). Consider the credit swaps the titanic and the recession the ice berg. The collision being caused by the so called sane people residents of the insane world.

We all observed the the false boom in the first world developed economies, post 2002. The economic growth was super heated and fueled by borrowing. The US national debt, alone is more than USD 15.5 trillions, and the average debt per citizen is more than USD 50,000. For a moment, imagine the global debt and the consequences that will follow up in the coming times (hope it does not). Human kind has never, for sure, witnessed this kind of accumulation of debt in world history.

Private enterprises, majorly banks, were bailed out by the local and federal governments, after all the financial institutions were big credit lenders to the governments and local bodies. The governments plunged themselves into debt and any increase in interest rates means a greater proportion of the budget being consumed to meet the interest payments on debts.

In my coming blogs, I will be analyzing the blunders in Greece and Iceland in particular.