A run on the Lebanese pound?

Roula Khalaf and Kim Ghattas report in the Financial Times that the Lebanese pound could be in trouble: Lebanon’s central bank on Thursday sought to calm nervous local markets and contain the fallout from the assassination of Rafiq Hariri, the former prime minister who had led the country’s reconstruction efforts after its civil war. After ...

By Daniel W. Drezner, a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast.

February 18, 2005, 3:34 AM

Roula Khalaf and Kim Ghattas report in the Financial Times that the Lebanese pound could be in trouble:

Lebanon’s central bank on Thursday sought to calm nervous local markets and contain the fallout from the assassination of Rafiq Hariri, the former prime minister who had led the country’s reconstruction efforts after its civil war. After meeting senior bankers, Riad Salame, the central bank governor, stressed his institution would support the Lebanese pound amid fears there might be a rush to convert local currency into dollars on Friday, when markets reopen after a three-day shutdown. “The central bank is present in the markets to ensure liquidity in all currencies,” Mr Salame said…. Mr Hariri, who led the country for 10 of the past 15 years but resigned his post in October, had been instrumental in providing confidence to currency markets and attracting investment into Lebanon, though his governments had also built up a $35bn (€27bn, £18.6bn) debt. In November 2002 he pulled the economy from the brink of collapse when he agreed a financial rescue package with western and Arab creditors. Bankers said his resignation last year forced the central bank to intervene in the markets, spending $2bn of its foreign exchange reserves between October and November. But since then reserves have been replenished and now stand at $11.7bn, around 20 months of imports. Yesterday’s central bank statement followed a report from Credit Suisse First Boston warning that the risk of political instability in Lebanon would hurt investor confidence, at least in the short term. The report said the likely decline in tourist receipts, higher conversions of the Lebanese pound into foreign exchange and other capital outflows would “very likely” put renewed pressure on foreign exchange reserves.

What’s historically intriguing about this is that if memory serves, the Lebanese pound managed to retain its value throughout the 1975-1991 civil war. UPDATE: Daniel Davies points out in the comments that my memory is faulty, and that the Lebanese pound suffered hyperinflation during the civil war. As it turns out, the historical data says we are both correct. The pound did a decent job holding its value in the first stage of the civil war, from 1975 to 1983. After the Israeli incursion, however, hyperinflation did kick in.

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner

Tag: Theory