Just when Lebanon thought it had suffered enough …
Lebanon, with its $90 billion dollars in debt equivalent to about 170 per cent of its gross domestic product, has defaulted on a $1.2 billion eurobond. Its dollar bonds are now trading at 16 cents on the dollar and its credit rating is now in junk territory.
Negotiations with creditors to restructure the debt will probably not have any resolution for at least nine months, and probably longer considering the oil price plunge and the current havoc in the financial markets. The country’s options are severely limited.
The repercussions, of course, are massive as Lebanon faces pressure from all sides in an increasingly bleak global economic reality, with little in the way of foreign exchange reserves, and an import-dependent economy. Any planned reforms that Lebanon announced so far will now have to be paused until at least $90 billion is restructured to give Beirut room to breathe. That is no easy feat, given the global economic picture and Lebanon’s fragile political state.
As the limited options become clearer and desperation sets in, Lebanon has very few paths it can explore. One of the most important is of course seeking the help of the International Monetary Fund; the second is an aggressive campaign to slash government spending, raise taxes and seek aid from other countries willing to spare some cash in this very tight global financial environment and the enormous strains on governments everywhere in the face of the COVID-19 pandemic. The final option is to take the risky route of Argentina and lock any bondholders’ funds in the country.
The problem with the first option is that some powerful political forces inside Lebanon, namely Hezbollah, are resisting the idea of seeking help from the IMF. However, even if that option were open, the IMF would need a credible economic plan that will demand some serious sacrifices, as in the case of Greece’s debt crises, and which in the already fragile Lebanese context could trigger even more political and social upheaval in a very unstable region and with a weak international order.
The second option has been termed “Beg, steal and borrow” — to beg for help from the outside, for example the Gulf states, which are now in no position to be as generous as before, given the collapse in the oil markets, their own high fiscal debts and obligations, and their need to allocate substantial funds to reduce the economic impact of the pandemic on their own economies.
The real issue here is the Lebanese people, who are already suffering and were forced to come out on to the streets over the past few months demanding change in an unprecedented anti-establishment revolution that brought in a new government — only to find itself in this total mess.
Credit rating agency Fitch has said the Lebanese government may even raid the deposits and savings held in the country’s banks, as Cyprus did at the height of its crisis, though the government is saying that won’t happen. That means, in effect stealing and canalizing its people’s savings.
To follow the example of Argentina and try to force a settlement on its bondholders, the government would risk dragging the country into an endless legal battle for years, and being locked out of the international debt market, as happened with Argentina.
This bleak picture extends, of course, to some major investment houses outside Lebanon. The Financial Times reported that London-based Ashmore held 25 percent of Lebanon’s bonds. Financial analysts expect that long and hard negotiations between Lebanon and creditors may result in the best of circumstances being 30 to 35 cents on the dollar.
Beyond all these numbers and fancy speculations, the real issue here is the Lebanese people, who are already suffering and were forced to come out on to the streets over the past few months demanding change in an unprecedented anti-establishment revolution that brought in a new government — only to find itself in this total mess. Citizens are already facing severe restrictions on their bank accounts, with tough limits on withdraws and transfers; now they are also facing the real possibility that some of their account balances will be frozen and raided by their government in a desperate move to pay its bills.
This economic crisis is one the worst Lebanon has faced since its independence in 1943. The economy has lost more than 200,000 jobs since last October, its worst drop since the civil war. Importers of critical products such as food and medicines are having a tough time finding hard currency, and many have shut down. Other businesses have also been forced to reduce or stop their activities since banks are no longer willing to cash checks, make transfers and allow large withdrawals. Many consumer venues have now also been ordered to shut down because of the pandemic.
Shops, companies, food and medical importers, hotels, services are all being forced to shut down because of lack of hard currency in a country that depends heavily on imports and is dependent on a global supply chain. On top of all that, the COVID-19 pandemic has just added salt to Lebanon’s wounds. It is a “perfect storm” that has hit the country from all sides.
The only way out, painful as it will be, is for Lebanon to seek help from the IMF and accept its stringent requirements — and for the Lebanese people, who have sacrificed so much in their history, to sadly accept pain and even more sacrifices again.
- Hafed Al-Ghwell is a non-resident senior fellow with the Foreign Policy Institute at the John Hopkins University School of Advanced International Studies. He is also senior adviser at the international economic consultancy Maxwell Stamp and at the geopolitical risk advisory firm Oxford Analytica, a member of the Strategic Advisory Solutions International Group in Washington DC and a former adviser to the board of the World Bank Group. Twitter: @HafedAlGhwell