Last March 10, Lebanon declared the default.
In other words, the Beirut government has informed all its creditors that it will not be able to pay its debts.
The figures in question are not small. In fact, on March 9, Eurobonds for $1.2 billion expired.
A further $700 million is due on April 14 and the third tranche of $600 million is due in June.
The problem is the current public debt, in fact, it reaches about 120 billion dollars. This figure corresponds to 170% of the gross national product.
The amount of debt is among the highest in the world, but unlike other high debt countries like Italy or Japan, it also has a current account deficit that reaches about 27% of what the country produces each year.
This is the first default in Lebanon’s history since its independence (1943), such economic gravity did not even occur during the civil war years (1975 and 1990).
The financial and economic crisis in Lebanon has distant roots. All the debt has accumulated over the years, in fact, it had already reached a peak of 183% of GDP in 2006.
The crisis is linked to political uncertainty, high youth unemployment, corruption (which last October forced the resignation of Prime Minister Saad al-Hariri) and, above all, the management of the country.
Since the end of the civil war in 1990, the country has been run by the connivance of political leaders of all factions, private bankers and large real estate investors. Sometimes, the three functions were in the same person.
Lebanese politics is divided into parties, even armed ones. Each party has a more or less religious alibi and must maintain its patronage.
There are Sunnis, divided into clans; Shiites divided between Amal or Hezbollah; Christians even more divided among them; Druze and others.
Each of these groups has always participated, directly or indirectly, in the government of Lebanon and has used its political position to distribute benefits to its leaders and followers.
The state institutions responsible for providing services to the public have always been inefficient. Each party, therefore, compensated them through direct distributions, at its own discretion, when considered useful for the purposes of consensus.
The Lebanese crisis followed the downturn in the oil market.
In 2018 the price of oil began to fall and Saudi Arabia decided to withdraw its support for Lebanese institutions. Lebanese institutions were then forced to raise taxes.
Since 2018 the country has faced an internal protest movement that denounces the incompetence of the entire political class.
In Lebanon, it was no longer a secret, that the foreign exchange reserves needed to repay external debtors were being reduced, even after the protests in the streets in recent months.
Moreover, since October, the banks had refused to convert the Lebanese lira into dollars (officially pegged to the dollar since 1997), and the Lebanese citizens were imposed big limits on withdrawals from their account (maximum $100 per week).
This has further complicated the country’s ability to import goods from abroad.
An explosive mix for a rather small country with one and a half million Syrian refugees and a population of 6 million.
As I explained earlier, the Lebanese economy is characterized by a dual-link between the banking sector – divided between institutions close to the various political potentates – and the real estate and services sectors, also closely linked to the traditional parties.
This has led to:
– the growth of an economic structure increasingly unbalanced towards non-productive sectors. Balanced, until a few years ago, by the huge foreign investments made attractive by the high-interest rates guaranteed by Lebanese banks and the exchange rate of the national currency against the dollar.
– in the absence of a developed industrial sector, the political system has guaranteed employment through the creation and distribution of jobs on a client-friendly basis. These jobs have slowly but surely worsened the state budget. They have therefore increased public debt enormously.
Before the default was officially declared, all banks, probably pre-informed, drastically reduced their bond holdings by selling them to foreign investors or ingenuous local savers.
The UK’s Ashmore Fund, a well-known hedge fund specializing in acquiring debt from emerging economies, was the largest buyer.
Of course, Ashmore has already expressed his opposition to default and has joined with those Lebanese creditors and politicians who would like to turn to the International Monetary Fund to resolve the situation.
In order to preserve its foreign exchange reserves, Lebanon is currently ceasing to repay its debts, but at the same time, it is foreclosing all access to the financial markets.
The government led by Prime Minister Hassan Diab will, therefore, have to turn to the International Monetary Fund (IMF) or hope to obtain support from friendly countries.
However, this will require austerity measures and restrictive reforms that the Lebanese people will have to pay for. Furthermore, it will be necessary to convince the Shiite Hezbollah party, which at the moment is opposed to any assistance from the IMF, as it considers it an instrument of US imperialism.
Hezbollah, however, to date, has not offered any alternative to resolve the problem of the public debt, now also orphaned of aid from Iran, a country which is fighting against the COVID-19.
This dramatic economic situation has been compounded by the COVID-19 and the lockdown imposed throughout the country is affecting the most vulnerable segments of the population.
The disproportionate increase in prices, skyrocketing inflation, the devaluation of the Lebanese Lira, are strangling an important slice of society.
Not to mention that the forced suspension of activities in many cases will lead to the definitive closure of companies already suffering from the economic crisis.
The population, for the most part, is complying with government directives.
The most vulnerable part, on the other hand, especially in certain suburban or rural areas, is still working (taxis, fruit markets, various shops…), forcing blocks and closures. People belonging to this group say that if they do not work daily they cannot feed their families and children.
At the social level, Lebanon has for months been hostage to the tensions between government forces and opponents that led to the resignation of Prime Minister Saad Hariri in October 2019.
To date, some outbreaks of dissent continue to persist, demonstrations that are difficult to quell, especially in Tripoli due to the cost of living and corruption.
These demonstrations could threaten to undermine measures taken against the contagion such as lockdown and the curfew from 7 pm to 5 am.
The fear is that the virus will take root where there are fewer controls and lack of facilities.
Just to give an example in the refugee camps in southern Lebanon on the border with Syria. This could cause a massacre.
By: Michele Brunori