Lebanon will default on its debt for the first time | Business and economy
Beirut, Lebanon – Lebanese Prime Minister Hassan Diab announced on Saturday that Beirut would not repay a $1.2 billion eurobond due next week and would instead seek to restructure its massive debt as the country’s dollar reserves dwindle amid an acute financial crisis.
In a televised address to the nation, Diab said the “difficult decision” to default for the first time in Lebanon’s history was taken in order to “guarantee the basic needs of the people”.
Lebanon is in the throes of an economic collapse rooted in corruption, government mismanagement, a decrepit electricity sector that is bleeding billions from state coffers, and the neighboring civil war in Syria.
The Lebanese pound devalued sharply against the US dollar in parallel markets, while banks imposed informal capital controls limiting the amount of dollars depositors can withdraw as well as transfers abroad.
As inflation soars and confidence plummets, businesses close and people are laid off.
“How can we pay creditors abroad when the Lebanese cannot withdraw their money from their bank accounts? How can we pay creditors and leave hospitals with a shortage of medical supplies? How can we pay creditors when there are people on the streets who cannot afford bread? Diab said.
The decision to default on the country’s debt — which Diab estimated at $90 billion or 170% of economic output — was made unanimously by the cabinet at a meeting earlier today, and was backed by the country’s political and financial establishment.
President Michel Aoun, President Nabih Berri, Central Bank Governor Riad Salameh and the President of the Association of Lebanese Banks, Salim Sfeir, as well as a Diab himself, met on Saturday morning and announced in a joint statement that they would stand by any decision the government makes on debt repayment – unless that decision is to pay the debt.
Diab said Lebanon would now seek to enter into negotiations with its creditors.
Lebanese banks, which hold the majority of the country’s debt, had opposed the default and sold Eurobonds to foreign buyers in recent weeks as the likelihood of default rose, weakening the position of government negotiation.
Diab said the government also planned to restructure Lebanon’s banking sector – a former pillar of the economy which, by its sheer size, had discouraged investment in more productive sectors.
Lebanon produces little and imports around 80% of the goods it consumes.
“We don’t need a banking sector that is four times the size of our economy,” he said.
He also pledged to establish a safety net for the poorest and to protect the savings of small depositors amid tight capital controls by banks that limit currency withdrawals to a few hundred dollars a month.
The Lebanese pound, pegged to the dollar since 1997, was previously used interchangeably with the US greenback, but its value has depreciated by more than 60% since November on parallel markets.
Seeking to halt the pound’s rapid downward spiral, the Central Bank of Lebanon on Friday ordered foreign exchange bureaus – the backbone of the parallel market – to cap the exchange rate at 30% above the official rate of 1,500 Lebanese pounds to 1 dollar.
Mohammad Faour, a commentator on the Lebanese economy and a postdoctoral research fellow in finance at the Michael Smurfit Graduate Business School in Ireland, said the decision to restructure Lebanon’s debt was “inevitable”.
“It was only a matter of time since we are paying down the declining reserve debt while barely pumping new dollars into the system,” Faour told Al Jazeera. “The sooner you recognize this reality and work from it, the better. All the options are really bad, but this is the least bad option available.
Lebanon is looking down the barrel of about $4.6 billion in debt repayments this year, while central bank reserves are estimated at around $30 billion.
Debt servicing has eaten up 30% of recent budgets, amounting to $68 billion over the past 20 years, according to a study by Wael Atallah, a Lebanese economics commentator.
Now, Faour said the government must commit to a comprehensive and credible economic plan that can assure both the general population and creditors of the way forward.
From the perspective of creditors, Faour said such a plan would benefit from the involvement of the International Monetary Fund (IMF). However, there is strong opposition to the IMF’s involvement in Lebanon, both from the general public and from Hezbollah, the dominant force in the country’s politics.
So far, the government has requested technical assistance from the IMF but has not agreed to an official plan, which would likely include a series of unpopular austerity measures like tax hikes and subsidy cuts.
Lebanon can expect tough negotiations with its creditors over the rescheduling of its debt, some of which was bought at steep discounts by so-called “vulture funds” that may seek to take the country to court over the force to repay its full face value.
Some commentators have warned that Lebanon’s assets abroad could be at risk of seizure, including planes belonging to its national airline, Middle East Airlines, and gold reserves in the United States.
Faour said the latter case was unlikely.
Instead, he said, the hardest part would be how to deal with the local banks that hold the lion’s share of the country’s debt – debt that now has little chance of being repaid. . “We should prepare for some banks, or most banks, to close for a while because a lot of their assets could be wiped out if they default, and they have to readjust.”
Capital controls – which Diab said would soon be officially regulated – could therefore remain in place for around five years in a process that banks and large depositors can expect to be a “painful exercise”, Faour added. .
That means the increasingly angry anti-establishment protests that have been going on for nearly five months and are increasingly directed against the banks are unlikely to end.
On Saturday, several protests took place across the country, including in Beirut, southern Sidon and Tyre, Zouk Mosbeh and northern Tripoli.
“There is no more money, there is no more work,” a protester who took part in a rally north of Beirut told a report by local news channel Al Jadeed. “There are no more countries.”