Range Rovers, Penthouses, Rolexes & a Financial crisis
Opinion piece by Sandro Joseph Azzam, Contributor
April 3rd, 2020
Ever since the beginning of the economic, financial and political meltdown in Lebanon, many have been pinching their pennies, hoping that they would not lose their jobs or their savings. A minority on the other hand, has done the exact opposite and has gone on a spending spree like never seen before.
Upon realizing that their millions were stuck in a bank with no way of transferring them out of the country to make investments abroad, Lebanon’s chic urbanites have decided to spend their money, rather than lose it in a bank bankruptcy or haircut. The asset-class of choice was quite obviously real estate, with Beirut’s high-rise apartments being sold at a discount. Yet “Buy in Greece, pay in Lebanon” was an advertisement that many of us were completely baffled at upon reading. How could that make sense? If a property developer wants to make money, why would he tie it up in a Lebanese bank?!
The simple answer is that he wouldn’t.
When going out to build a large-scale project on the shores of Larnaca or Mykonos, Lebanese real estate developers took out loans from their local Lebanese banks. Let’s say developer A took out a loan for 20 million dollars for a development in Protaras. Banks seized the opportunity to loan out the money for high interest rates under the reasonable assumption that developer A would successfully sell all of the villas and turn a profit, thereby allowing him to pay back the bank for his loan.
Developer A would then send the entirety of the loan principal to a bank based in Cyprus so as to have the capital needed to begin constructing villas.
Fast forward 2 or 3 years and the developer has only been able to sell about 20% of the villas he had initially built, barring him from being able to return the 20-million-dollar loan to the bank. What he still does have however is 80% of a real estate development but most importantly, is 20 million dollars in debt.
When the crisis struck and people were locked out of their accounts, Lebanese citizens needed to find a way to get their money out of the country. The only trick was that their money would not really have to leave the country at all…
Under the “Buy in Cyprus, pay in Lebanon” deal, Developer A would go to Mr. X and sell him a 500.000 dollar villa across the Mediterranean. Now, Developer A has some cash. But remember, he still has a 20-million-dollar loan to pay back to a Lebanese bank. Now, stay with me. Developer A now holds a banker’s cheque from Mr. X for half a million dollars. He gives it to his bank and now “only” has 19.5 million dollars left to repay. He has also sold part of his Cypriot real estate development.
By allowing Mr. X to pay in Lebanon for a property in Cyprus, Developer A has been able to repay his debt, the bank he has taken out the loan from has seen its money back and the circle of liabilities has finally closed. It is also worth noting that many real estate developers used the same scheme to be able to pay back loans they took out for developments within Lebanon that eventually went unsold. By selling you a property in Cyprus, the developers are now strapped with cash to pay back the loan they took out to build a Sursock high-rise.
Now, do the same for all real estate developers, all banks and many foreign countries and you have a liabilities cycle that is closing itself off, injecting much-needed liquidity to banks.
This process doesn’t only work for foreign investments. Many Lebanese have also decided to use their “Lollars”, a term coined by the brilliant Dan Azzi, in order to buy up real estate in Lebanon, essentially turning what was nothing but numbers on a computer screen into stone at a hefty discount – remember, real estate developers are dying to pay back their banks! This led to a so-called “Real Estate Boom” in a time where such a feat would seem utterly inconceivable.
The spending spree doesn’t limit itself to real estate. Jewelry and watch stores have completely dried up too! They gave you the possibility to pay them by banker’s cheque because they were also riddled by debt and had to repay their banks. Others have opted for consumer durables like cars. Look around Beirut. If you think it looks like there are more new cars on the street, you’re exactly right. People have opted to put their “Lollars” to use, rather than risk losing them in the bank. By buying a new Range Rover or Maserati and of course using the new payment method of choice; a bankers cheque, Lebanon’s urbanites are helping companies close off their debts with respect to their banks, giving the latter the cash they desperately need to give you your weekly 1000 dollar ration.
The mobilization of Lebanon’s rich-but-not-rich-enough-to-own-a-bank social class has allowed the circle of liabilities to close off. It’s like me loaning you 100$ and then you loaning the 100$ to someone else and them him loaning it to someone else and so on. You essentially have 300$ worth of debt that can be settled with only 100$ if you were to close off the circle.
Anyone familiar with the theory of financial crises knows that the first step towards one is debt build-up, the reduction of which will inevitably alleviate the financial crisis as a whole. Instead of spending the money we don’t have to get ourselves out of the current crisis, we should mobilize the liquidity that we currently hold.