Lebanon should default on its debt right now, and here's why

Lebanon should default on its debt right now, and here's why
Comment: There are good reasons for Lebanon to default and restructure its debt, writes Nizar Hassan.
7 min read
21 Feb, 2020
'It's time we put people over profit', writes Hassan [AFP]
The big policy question haunting Lebanon's decision makers today is whether or not the country should pay international and local investors whose Eurobonds mature next month, as the country faces dramatic economic, financial and fiscal crises.

Experts and politicians are divided, with some advocating full payment, others arguing that only the debt held by foreign actors should be paid, and perhaps the biggest group of all arguing for an immediate default and a restructuring of debt.

The argument for the payment of the Eurobonds in full, including those held by Lebanese commercial banks, is very hard to defend. Indeed, very few voices seem to be pushing for such a decision, except the bankers themselves, the experts on their payroll, and their official lobby, the Association of Banks in Lebanon.

In the end, why would Lebanon pay back the local banks' debt in US dollars when the country is facing a crisis of dollar shortage, and is clearly heading to a restructuring and cancelling of a major chunk of its internal debt?

On the other hand, there is a more serious argument against defaulting on the foreign Eurobond payment championed by the former banker and economic policy commentator, Dan Azzi.

He explained his point of view on my podcast two weeks ago, and on this week's episode we hosted Joane Chakar, an economist supporting the opposite view - an immediate default. Although Azzi made his case perhaps better than anyone else could, it is clear to me that both from a fiscal and political perspective, defaulting is the right demand.

The priority should be funding people's necessities rather than the profits of international money giants

The case against defaulting has two main arguments, and they are connected. The first is a question: why should Lebanon default on its foreign debt when the amounts to be paid are minimal compared to the size of the internal debt?

In other words, the argument goes like this: Lebanon can deal with its internally-held debt through a haircut and money-printing (as Azzi suggests), without the need to default on foreign debt and suffering its consequences. This is definitely the strongest argument for payment in my opinion, but it is in fact dependent on the second argument, which is that defaulting on foreign debt today makes it more difficult to borrow in the international markets in the near future, for infrastructure projects and other needs.

If Lebanon can default today but borrow again in the future, both of these arguments fall apart. The experiences of other countries with similar situations indicate that this is indeed the realistic outcome to predict.

[Click to enlarge]

There is no eternal blacklisting that takes place when a sovereign default occurs. Global capital does not hold grudges against states. Capital is interested in constant accumulation and the mitigation of risks, not in revenge.

When default occurs, creditors will not stop lending to Lebanon forever; they will just demand higher interest rates and better guarantees when they do. So what is the real advantage of maintaining our record of paying foreign debt, if the interests on internal and external is already too high to pay back, and confidence in the Lebanese economy cannot be lower?

Let us stop the vicious cycle of borrowing and paying back, and only borrow in the future to invest in projects that ensure the structural economic transformation that all economists agree should happen.

If the concern of tapping international markets in the future is put on the side, there is little need to worry about defaulting today.

There is nothing that Lebanon needs more desperately than dollars and confidence

But even if we took the argument that the foreign debt is too small to default on as a standalone case, there is a serious question on whether Lebanon can in fact pay these amounts, as its central bank suffers from a deterioration in its foreign exchange reserve that makes it unable to control a depreciating national currency.

Estimations of how many dollars Lebanon needs for the import of basic necessities (fuel, medicine, wheat, raw materials) vary, but it is clear that the reserves would be wiped out if we used them for the next two years while paying back debt in dollars.

The most important point here is that this debate is not possible as long as Lebanon's central bank does not publish the required data for us to know which reserves are in fact usable, and how much they amount to.

As long as we do not have the numbers, we cannot claim that any amount in dollars is too small to worry about. And in such a situation, the priority should be funding people's necessities rather than the profits of international money giants.

Moreover, there is no question among experts and stakeholders that Lebanon does indeed need to restructure its public debt. Paying back the debt without the cancellation and rescheduling of major portions has become impossible.

So the first argument against defaulting that questions the reasons for it can be answered with a question as well: Why accept the debt payment when we will default and restructure soon anyway? And how can we make sure we are not taking money away from more important needs, if we do not know how much money we have?

Here comes a third argument related to the fact that Lebanon does not have a solid debt restructuring plan on which to base its negotiations with international investors. This is true, and it is the reason why the country requested assistance from the International Monetary Fund, whose team just arrived in the country to help figure out a plan.

The country might not have enough time left before Eurobonds' maturity, but there is enough time to announce the default and finalise the plan for both internal and external debt as the negotiations begin.

Beyond the technicalities of policy, there is a strong political argument for anti-establishment and opposition movements in Lebanon to demand immediate restructuring and stand against the payment of Eurobonds.

To begin with a strategic concern, it is very difficult in political mobilisation to distinguish between the debt held by local and international companies, and to call for the payment of foreign, but not local debt.

It might also be counterproductive, especially given the nationalism that it might trigger with the support of the banks. It is much safer to stand under a clear banner that says "no to the payment of Eurobonds, yes to immediate debt restructuring."

A banner reading "we demand the payment of foreign-held Eurobonds but not those owned by the local banks" is definitely less able to convey the message and create a popular coalition supporting the drastic debt restructuring that we urgently and desperately need. And carrying such a hybrid and less clear demand offers the government the room it needs to pay back all due Eurobonds, channeling hundreds of millions into the pockets of crony local bankers.

Opposing the Eurobond payments also goes well with another very important demand, which is full transparency by the central bank. As long as the authorities refuse to be transparent about our financial situation, we cannot by principle give them a green light to send any dollars to bond holders.

In other words, the two demands work together, and the demand for defaulting exerts pressure on the authorities to reveal the numbers or face even lower public confidence. There is nothing that Lebanon needs more desperately than dollars and confidence. As such, the government paying dollars to lenders without improving confidence cannot be justified.

We should demand an immediate debt restructuring without further hesitation, or else we are granting the short term profits of investors and banks a higher spot on the list of priorities, than the livelihoods of millions in Lebanon. Like most policy decisions, this one comes back to our moral compass, and it is about time we put people over profit. 

Nizar Hassan is a Lebanese organiser, researcher and podcaster based in Beirut. He is a co-founder of the progressive political movement LiHaqqi, he researches workers rights and social movements, and co-hosts The Lebanese Politics Podcast.