Spread the love 29 tweets, 9 min read Let’s start with the evolution of Banque du Liban’s Net Foreign Currency (FX) Reserves over time Net Reserves are basically what the…
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A role play to understand Net Reserves depletion
Now imagine a $50 bottle of whiskey, crafted by Baal’s French mistress, catches
Mr Phoenicia’s eye:
- He rushes to buy it, grasping onto his last LBP75,000.
- He arrives at Bank A, out of breath, hands his liras to his favorite teller begging him to transfer them to Baal’s mistress in Bank B.
- Unfortunately, the mistress and Bank B won’t accept the liras.
- The teller tells him about Bank A’s kindest service: exchanging his liras for $. Mr Phoenicia quickly accepts the offer, thanking Bank A and the stability of the lira, and asks to transfer $50 to France (cause **** the euro).
- What the hell does Bank A with LBP and how does it get the $50 back that actually belong to Mr Phoenicia‘s responsible sister?
- They run to their favorite Central Bank that promised Bank A it would always buy its liras in exchange for $ at a fixed rate.
- The Central Bank dips into its gross reserves, credits Bank As account $50 & reduces the Lira account by LBP75,000
- Bank A then transfers the $50 to France, through the Central Bank.
The Central Bank Currently has $50 in its current account abroad, while it still owes $100 to Bank A.
What happens now in the role play?
Now imagine
Mr Phoenicia‘s responsible sister decides to transfer $50 from her account to her son studying in Sorbonne:
- Bank A asks the Central Bank to transfer $50 from its account to France (the kid likes dollars too).
- The Central Bank dips into its gross FX reserves again and transfer $50 to the kid’s bank account.
No problem, it’s not like there’s nothing left as long as Bank A keeps its other $50.
Then
Mr Badde Mosriyyete asks to transfer $50 from his account at Bank A to his account in Cyprus, where he likes to spend his lira salary, after exchanging them for dollars, every two weeks.
- Bank A rushes back to the Central Bank asking for the transfer, the Central Bank flips it off.
- Mr Badde Mosriyyete rages at Bank A demanding to transfer his money, Bank A flips him off.
- Then Mr Bade Mosriyyete and his cousins rush the streets asking for their money, Bank A and its colleagues flip them off.
All they have is hope they’d accept those useless liras instead, at the same rate they could buy the dollar in the good old yesterday.
That’s negative net reserves. The only way for them to turn positive again is if its FX debt disappears or if it’s exchanged for liras.
The above are only simple ways of how it depletes.
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