Lebanon may have spared the debacle of getting into some kind of default lite this week, but it’s hard to see how it will get out of a real default. And when it does, it will mean the end of Lebanon as we know it – a country that somehow managed to be both an outpost of hip western culture and the home of Hezbollah, refugee camps, and a malfunctioning government ,
What remains after the default is the second piece of Lebanon. But before we get to the results, let’s start with the cause.
The deep problem of Lebanon is a government that basically serves as a spoil for the country’s leaders. That was the cause of the anger that led to months of protests, and, equally important, why the government refused to give in. The elite has too much to lose through reform.
It is a stalemate that the country cannot afford. Lebanon has deep red numbers: its debts make up 155% or more of gross domestic product, one of the highest rates in the world. In recent years, it has only been possible to stay financially afloat by persuading Lebanese expatriates to deposit dollars with local banks by paying excessively high interest rates. But the system has collapsed amid protests, government paralysis, and fears that the country will no longer be able to service its debts.
For this reason, the central bank planned to “voluntarily” ask local investors to exchange their $ 1.2 billion stake in Eurobonds, due on March 9, for longer-term debt securities. It should be a win-win solution: investors would get an even higher quota than the current 6.375%, and Lebanon would save themselves the hundreds of millions of dollars that it doesn’t have to repay.
On Wednesday, however, the Treasury Department asked the central bank to withhold the plan. The swap, it warned, is not quite the win-win situation it should be since rating agencies have indicated that they consider it a “selective default”, a default in which a borrower has some (but not all) could not repay. of his obligations. This would have caused immeasurable damage to Lebanon’s creditworthiness and possibly quickly led to a real default.
The ministry’s advice makes sense, but the proposed alternative seems to come from the same a la land playbook that the government used during the crisis: somehow everything will be fine, the government will address the problem, aid will be provided come from somewhere and in the end nobody will pay a price.
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With this in mind, Finance Minister Ali Hassan Khalil told the central bank that the government must first decide how to finance all of its bonds due in 2020, not just those due in March.
But as its title “Caretaker Finance Minister” says, there has been no government and there has been no government since Prime Minister Saad Hariri resigned in late October. The demonstrators want a government of disinterested technocrats, which is the last thing the country’s political leaders are up to. In the meantime, politicians are arguing over the loot and have not been able to form the kind of government they want.
Apart from a wonderful turnaround in which a government is formed very soon and a plan for the country’s dire financial situation is drawn up in a very short space of time, Lebanon appears to be in default. Contrary to what the politicians have said, nobody who has the money to save Lebanon initially wants to do so.
The Greek precedent
Lebanon has so far shown remarkable resilience. Not only has it recovered economically from a 15-year civil war, it has also survived foreign interference on a grand scale, wars with Israel and a flood of refugees from Syria. In spite of everything, the economy grew strongly in the 1990s and early 2000s. Even the Lebanese who left during the civil war contributed to Lebanon’s prosperity by sending money home.
Default threatens more base damage than war. Many middle-class Lebanese have already started packing their bags without taking advantage of the economic opportunities, and insolvency will inevitably exacerbate the outflow. Just look at the effects of the debt crisis that Greece has suffered in the last decade: in a country with 11.1 million inhabitants, between 350,000 and 400,000 people emigrated after 2010, mostly in the twenties and thirties, two thirds of university graduates.
It is no surprise that the best and brightest emigrate – they are the ones who will most likely find reception and work overseas. But they were exactly the people that Greece needs to economically withdraw from the margins, and their absence is now hampering the recovery.
In the case of Lebanon, the blow will be twofold. Not only does it mean losing the people it takes to recover, it will also change its socio-economic character. The most thoroughly westernized Lebanese will emigrate and leave the country with a lower qualification base and a global population that can keep up with the global economy. That would be a fatal blow to civil society.
This type of Lebanon will resemble Beirut more like Damascus than the Middle East Paris for which it was once famous. Hezbollah and Iran may find this attractive, but it is a dead end for the Lebanese people.