Lebanon may have saved itself the debacle of going into a kind of default-lite this week, but it’s hard to see how it’s going to wiggle out of a real default. And, when it comes, it will spell the end of Lebanon as we know it – a country that somehow managed to be both an outpost of hip Western culture and well as the home to Hezbollah, refugee camps and a dysfunctional government.
What will remain after default is the second bit of Lebanon. But before we get to the results, let’s start with the cause.
Lebanon’s deep problem is a government that basically serves as a spoils system for the country’s leaders. That has been the source for the anger that has led to months of protests and, just as importantly, why the government has refused to give in. The elite have too much to lose by reform.
It’s a standoff that the country cannot afford. Lebanon is deep in the red: its debt is 155% or more of gross domestic product, one of the highest ratios in the world. It has been able to stay afloat financially in recent years only by coaxing Lebanese expatriates to deposit dollars in local banks by paying exorbitantly high rates of interest. But the system has collapsed in the face of protests, government paralysis and fears that the country will not be able to service its debt for much longer.
That is why the central bank was planning to ask local investors to “voluntarily” agree to swap their share of $1.2 billion in Eurobonds coming due March 9 for longer-term notes. It was to be a win-win solution: Investors would get an even higher rate than the stellar 6.375% they are getting now and Lebanon would save itself having to repay hundreds of millions of dollars it doesn’t have.
On Wednesday, however, the Finance Ministry urged the central bank to hold off on the plan. The swap, it warned, isn’t quite the win-win it was supposed to be because credit rating agencies have said they will deem it a “selective default,” a default where a borrower has failed to repay some (but not all) of its obligations. That would have done untold damage to Lebanon’s credit rating and perhaps rapidly driven a real default.
The ministry’s advice makes sense, but the alternative it proposes seems to come out of the same la-la land playbook the government has used throughout the crisis: Somehow everything will be okay, the government will tackle the problem, help will emerge from somewhere and in the end nobody will pay any price.
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It was in this spirit that caretaker Finance Minister Ali Hassan Khalil told the central bank the government needs to first decide how it would finance all of its bonds maturing in 2020, not just the one ones due in March.
But, as his title “caretaker finance minister” tells you, there is no government and hasn’t been one since Prime Minister Saad Hariri stepped down at the end of October. The protestors want a government of disinterested technocrats, which is the last thing the country’s political leadership plans to give them. Meanwhile, the politicians are dickering over the spoils and they haven’t been able to form the kind of government they want either.
Barring a miraculous turn of events, in which a government is formed very soon and comes up with a plan for the country’s dismal financial situation in very short order, it seems like Lebanon is destined for default. Contrary to what the politicians say, no one who has the money to bail out Lebanon has any desire to do it for now.
The Greek precedent
Lebanon has shown remarkable resilience until now. It not only recovered economically from a 15-year civil war, it has survived foreign interference on a grand scale, wars with Israel and a flood of refugees from Syria. In the 1990s and the early 2000s, the economy was growing strongly, despite everything. Even the Lebanese who left during the civil war contributed to Lebanon’s prosperity by sending money back home.
Default threatens to do more fundamental damage than war. Already many middle class Lebanese have begun packing their bags in despair of any economic opportunities and default is bound to exacerbate the outflow. Just look at the impact the debt crisis Greek suffered over the last decade: In a country of 11.1 million, between 350,000 and 400,000 people, mostly in their 20s and 30s, two-thirds of them university graduates, emigrated after 2010.
It’s no surprise that the best and brightest emigrate – they are the ones who are most likely to find a welcome and a job overseas. But they were exactly the people Greece needs to claw its way back from the brink economically and their absence is now hampering recovery.
In the case of Lebanon, the blow will be two-fold. It not only stands to lose the people it needs if it is to have any hope of recovering, but it will change its socioeconomic character. The most thoroughly Westernized Lebanese will go, leaving the country with less of a skills base and the kind of globally-oriented population that can compete in the world economy. That would deliver a mortal blow to civil society.
That kind of Lebanon will make Beirut more like the Damascus than the Paris of the Middle East it was once famous for being. Hezbollah and Iran might find that attractive, but for the Lebanese people, it’s a dead end.