Decision time: Lebanon faces significant debt crunch
The government faces three options as its debt repayment deadline looms: default, restructure or repay.
Lebanon has close to $1.5bn in public debt that it may decide to repay on Thursday. The country’s escalating financial crisis and weeks-long anti-government protests are adding more pressure to an already difficult situation.
At $86bn, Lebanon’s sovereign debt is the world’s third-highest relative to gross domestic product (GDP). The country’s beleaguered economy is expected to contract by 0.2 percent this year.
In an effort to calm protesters and to reduce the deficit from the current 11 percent to 0.6 percent by 2020, the government recently proposed a reform package. However, because talk of a tax on the internet partly fuelled the initial protests, ministers avoided tax increases on individuals and instead proposed using a bank contribution of $3.4bn to alleviate the deficit, alongside other proposals. For protesters however, many of whom want the wholesale removal of the prevailing political class, the move was too little, too late.
While anti-government protests have lowered confidence in the economy still further, the crisis was in motion well before the demonstrations began. The situation was compounded after Prime Minister Saad Hariri resigned on October 29, leaving in place a caretaker government without the bureaucratic powers to introduce the necessary economic reforms.
On Tuesday protesters gathered around the central bank, wearing masks of Central Bank governor Riad Salameh’s face and chanting “Thief, thief, Salameh is a thief!” The following day they were back, this time with a Beirut hairdresser offering free haircuts in front of the building “to show them how to give a haircut”, according to a poster advertising the event. The scene references proposals by some economists that the central bank should confiscate a certain percentage from the highest depositors’ accounts, a financial haircut on those who benefitted the most from high interest rates, in order to relieve the debt burden.
“We have to find a solution, and the solution must not be [borne by] the poor people,’ said protester Enas Sherry. “They benefitted from the interest, which was very high over the years, so they have to pay what they took from us.”
‘A regulated Ponzi scheme’
Since the end of the country’s 15-year civil war in 1990, Lebanon has depended on tourism, real estate and the country’s banks to draw foreign currency, and US dollars in particular, into the country. For its part, the banking sector offered unusually high interest rates for depositors at an average of 7 percent. Other, more extreme schemes have also been attempted: for a brief period in 2016, as the country faced a downturn in foreign currency injections, the central bank offered 20 percent interest on dollar sums deposited in local banks for as little as one year.
A report released by think-tank Triangle last week called the country’s “decrepit and untenable” financial system “a regulated Ponzi scheme which has benefitted the banking sector and left the rest of the Lebanese to foot the bill.”
Part of the problem is a dollar peg, at 1507.5 Lebanese pounds to the dollar, which has artificially protected the currency for more than two decades. Yet since September, that rate has been slipping in international markets and on the street. The International Monetary Fund estimates the pound is overvalued by up to 50 percent. While the pound is Lebanon’s official currency, dollars have been used interchangeably for decades. Many daily bills for rent and utilities are quoted in US dollars; some landlords and businesses are insisting that clients continue to pay in increasingly scarce dollars, or imposing street rates for the conversion. On Wednesday exchange traders in Beirut quoted to Al Jazeera rates of up to 2,100 pounds to the dollar.
Thanks to fears of capital flight, in recent weeks depositors have seen unofficial capital controls imposed on withdrawals, decreasing to as low as $200-300 allowed per week by some banks, with extra charges imposed on dollar withdrawals. Customers have queued for hours in some places, only to be told their withdrawals cannot be completed.
Some account holders have been told that their debit cards will see severe restrictions imposed when used abroad, others that cards in local currency cannot be used abroad at all until further notice due to “exceptional circumstances prevailing in the country.”
The effect of the crisis on the millions of Lebanese already struggling to get by will be devastating, says Sibylle Rizk of civil society organisation Kulluna Irada. “It’s not a risk any more, it’s already ongoing. We have a shrinkage of the economy … because we have been living above our means. This is going to have a huge economic and social impact because many companies will close down and many people will lose their jobs, which has already started.”
“For the moment, we don’t see at the higher authority level a clear acknowledgement of the gravity of the situation … we are in a state of denial.”
Payday on Thursday
Lebanon faces three options on Thursday: default, restructure or repay. A default, which would mark the first time the country has failed to fulfil a repayment in the country’s history, is unlikely, say experts.
“The price to pay for the first-ever default is too high,” says Rosalie Berthier, a researcher at Synaps Network. “Because once you default, everybody just expects you to default again … then they’ll never get a good rating any more.”
Lebanese banks’ creditworthiness has already been downgraded several times by ratings agencies in recent months.
Restructuring would involve a combination of renegotiating payment dates, lowering interest rates on the debt and perhaps reducing the value of the biggest depositors’ assets – a financial haircut – and putting the difference back into paying off the debt. The longer this is delayed, the less freedom the central bank has to renegotiate its remaining debt.
Nassib Ghobril, chief economist at Byblos Bank Group told Al Jazeera blaming the banks for the current crisis is unfair, and a distraction from governmental responsibility.
“The banking sector has been assuming the responsibility of public finance stability … and therefore of social stability, for years,” said Ghobril. “It’s long overdue for the executive branch to assume some of that responsibility by implementing reforms to reduce the structural deficit. [Banks] can no longer contribute on their own.”
The finance ministry says the country can and will repay the Eurobond on Thursday. But doing so will eat into the country’s dwindling dollar reserves, which Rizk says could better be used to invest in critical commodities like fuel, wheat and medicines as the country slips further into crisis.
Equally, as 37 percent of Lebanon’s sovereign debt is held locally in the country’s banking sector, activists argue repayment will put much of the dollar sum back in the pockets of the country’s elites – who own and are the highest depositors in the banks – reinforcing the unequal system protesters are railing against.
Protesters like Enas are determined that the country should default, face the music, and be forced to build a different future. “We need to start building our industry, our agriculture, our own economy, a real economy,” she says. “There are many people who are clean [uncorrupted] people, good people, smart people, who can work and work hard if they have the opportunity.”