Complex Made Simple

Thinking the unthinkable: Lebanon’s sovereign debt default?

The walls are caving in on Lebanon's banking system. A total collapse is imminent

Optically, Lebanon boasts $150 bn in banking deposits, 3 times its GDP, a ratio exceeded only by banking systems in Hong Kong and Luxembourg A depositor run on the banking system has now begun and the confidence game of the central bank is over There will be no Paris III conference, no billions of Saudi, petrodollars, French foreign aid and IMF/World Bank soft loans for Lebanon any longer

The unthinkable has finally happened in a secretive central bank’s digital ledger in the heart of Beirut. The rating agency Fitch predicts imminent default on Lebanon’s sovereign debt, at $88bn, a colossal 185% of GDP, making the once “Paris of the Middle East, the fabled reve d’Orient (dream of the East) a Levantine Argentina. While central bank data often lies in the emerging markets, Fitch’s arithmetic of doom is irrefutable. Fitch estimates that the Banque du Liban, run by an ex-Merrill Lynch broker Riad Salameh as governor since 1993, owes $67 billion dollars to Lebanese banks in borrowings (liabilities) but has only $28 billion in net foreign exchange reserves.

Salameh’s high stakes juggling act of borrowing money at exorbitant rates from Lebanese banks, flush with funds from a diaspora that extends from the Swiss Alps to São Paulo, from the diamond mines of West Africa to the glass towers of Dubai’s DIFC Gate Village, to meet the state’s $5 billion annual debt service obligations, maintain the Lebanese pound currency peg to King dollar, finance imports for a population whose elite defines la dolce vita on the East Med and bankroll a bloated, warlord/sectarian fissured public finance payroll, is now over.

Optically, Lebanon boasts $150 billion in banking deposits, three times its GDP, a ratio exceeded only by the banking systems of Hong Kong and Luxembourg. Yet this banking data is a cruel illusion, a hoax perpetuated on the hapless savers of Lebanon and its vast global diaspora. Lebanese banks have recklessly invested 50% of their assets in Lebanese government’s Treasury bills, de facto post dated cheques/IOU’s on a bankrupt bank.

Read: Lebanon economy: The true face of corruption in infographics and numbers

Where did these untold billions in debt vanish? This money was looted by the state’s corrupt, cynical political elite. After all, the Lebanese government can barely provide electricity and power to my Druze friend’s village in the Chouf amid deadly winter storms, combat the brush fires in Mount Lebanon, clean up the beaches of Beirut, provide a modicum of welfare for the estimated 1 million Syrian refugees whom it now involuntarily hosts, just as it still hosts the grandchildren of the Arab refugees, who fled the British Mandate’s Palestine in terror from the Haganah and the Irgun that fateful, distant May 1948. The World Bank estimates 30% of the Lebanese population lives in poverty- how shameful!

“Follow the money” Tom Cruise advised in a famous Hollywood movie – the Lebanese people should hire Kroll Associates to track down their stolen billions. The billions of dollars they deposited in the Lebanese banking system ended up as recycled “assets” of the dynastic zaims, state insiders and militia warlords who survived (often literally) the Lebanese civil war. The assets of the Lebanese political elite have now acquired gorgeous tans in the sunshine of the Jura and the Bernese Oberland in Switzerland, in exotic Caribbean money laundromats and in the offshore black holes of global peekaboo finance.

Civil war was big business in Lebanon. A close friend from a prominent Sidon family told me about one of his father’s gardeners who morphed into a militia commander for the Mourabitoun in wartime Beirut and now lives happily after in his palatial villa compound high above Lake Como. The Lebanese I knew would gasp at the sheer resilience of their banks during the civil war, evoke the fabled Phoenician DNA that made them the most successful money changers, traders and hoteliers in the Arab world, a nation of financial middlemen and entrepreneurial wheeler dealers.

The Lebanese pound remained stable during the civil war. The banks, while looted by rival militias, remained open for business in the nightmarish 1980’s. Yet the real nightmare of Lebanese finance began in 2016, when its central bank resorted to what Salameh called “financial engineering” and what any rational analyst must will call one of history’s most reckless, state sanctioned Ponzi schemes. Since I hail from Pakistan, I know a bit about how shadowy cabals of power, what my Lebanese friends in Paris call “la puissance occulte” first captured, then loot state owned banking institutions.

These same banks shut down for two weeks after Lebanon’s population revolted against its political status quo in October 2019. An chronic dollar shortage means no imported medicines in hospitals and no gasoline in petrol stations.

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A depositor run on the banking system has now begun and the confidence game of the central bank is over. It is shameful that Lebanese banks allow their non-elite clients to only withdraw $200 a week from their own life savings while their shareholders and elite clients have transferred their fortunes abroad. A total banking, currency and sovereign debt collapse is the tragic endgame of the Banque Du Liban’s financial engineering/Ponzi juggling act. Lebanon now faces its most dangerous moment in its tragic history – an existential crisis akin to June 1982 and July 2006 in its raw historical scale.

Unlike the case in the Paris I and Paris II bailouts, there is no geopolitical sugar daddy to bailout the bankrupt Lebanese state. Saudi Arabia and its GCC allies find Hezbollah’s role as political kingmaker in the Lebanese Cabinet anathema. Saad Hariri, son of the assassinated Rafik Hariri, once King Fahd and Prince Sultan’s ally in Lebanon, has resigned as the Prime Minister.

The United States, which has never forgotten or forgiven the murder of 238 Marines and the earlier destruction of its embassy/CIA station in Beirut by suicide truck bombs in 1983 has sanctioned Hezbollah as a terrorist organization. France’s “special relationship” with the Maronites of Syria and Lebanon, forged in the Crusader “kingdoms of heaven” (royanne d’outre-mer) seven centuries ago, is now dormant. In any case, Jacques Chirac’s friendship with King Fahd and Rafiq Hariri, motivated an activist Quai d’Orsay policy for Lebanon which no longer exists under Macron.

Iran, bankrupted by Trump’s “maximum pressure” sanctions has no money to bailout Lebanon. There will be no Paris III conference, no billions of Saudi, petrodollars, French foreign aid and IMF/World Bank soft loans for Lebanon any longer. The 20% slide in the Lebanese pound against the US dollar and 15% yields on Lebanese sovereign Eurobonds tell me only one thing – default is imminent. This is the death rattle of the Lebanon I first encountered and fell in love with all those decades ago in the haunted milieu of 1980’s Beirut. This Lebanon will soon be gone forever. The dream palace of the Taif Accords and Solidere has crumbled to dust.

Read: Lebanon: Ghosts, memories and monetary abyss

A Lebanese sovereign debt crisis will have a seismic impact on the capital markets and international relations of the Arab world. The IMF estimates the Lebanese pound is 50% overvalued against the US dollar so the Banque du Liban will be forced to abandon Salameh’s peg – in effect, wiping out the life savings of untold millions of domestic and diaspora depositors.

Egypt’s pound devalued by 50% after its $12 billion IMF bailout deal in November 2016. So I would not be surprised by a similar scale hit in the Lebanese pound since Lebanon’s banking balance sheets are recklessly intertwined with the central bank. Dozens of commercial banks are now de facto bankrupt. Why does a country of 6 million ever need 142 banks in the first place? Why this surreal carnival of banks – again, la puissance occulte, the power of the shadow world only the Deuxième Bureau can fathom. The grapevine tells me Lebanon’s political elite and top bankers have squirreled their wealth abroad en masse – again a very Pakistani elite modus operandi – after all, boys will be boys in the Third World.

Since October, the banking crisis has gutted the economy. Lebanese economist estimate 150,000 people have lost their jobs and one out of every ten private businesses has gone bust. Lebanon’s foreign trade, so stunted by Syria’s civil war and Israel’s economic blockade, will be strangled by a sovereign debt default. The economy would contract sharply, a potential 20 – 25% hit to GDP, a Greek style Great Depression. Yet Greece had the IMF, the EU and Berlin to bankroll its epic bailout. Who is there for Lebanon now? Since foreign creditors hold a mere $12 billion in Lebanese sovereign debt, I doubt if even the Paris Club will be vocal in a restructuring deal.

My banking career at Chase Manhattan Bank in New York/London coincided with the signing of the Taif Accords that ended the Lebanese civil war, Operation Desert Storm that liberated Kuwait from the armies of Saddam Hussein’s Baathist Iraq and the Israeli – Pakistani peace conference in Madrid and Oslo. I will remember those exhilarating moments for as long as I live.  

Rafiq Hariri’s reconstruction of downtown Beirut via Solidiere was the biggest urban renewal project in the Arab world, our generation’s historic milestone, akin to the Abbasid Caliph Abu Jaffer Al Mansour’s founding of Baghdad, a Madinat Salaam that never knew peace or the Fatimid Caliph Al-Mu’izz’s fateful settlement of Al Qahira just north of Fustat, now the megapolis Cairo, the Umm al-Duniya (mother of the world).  

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I am stunned at Washington’s nonchalance about the horrific risks of a Lebanese sovereign default. The Trump White House green lighted a $17.5 billion IMF bailout of Ukraine, a $12 billion bailout of Egypt and $6.5 billion bailout of Pakistan – but Foggy Bottom, Langley, the Quai d’Orsay, the Élysée Palace and Downing Street have done nothing for Lebanon, a nation that has been their political football for generations.

The US airstrikes in Iraq and Baghdad embassy siege marks an escalation in US-Iran tensions, whose collateral damage has been invariably Lebanon in the past. Meanwhile, soldiers with M-16 rifles guard bank branches in Beirut. Riad Salameh is demonized by the street protestors of the Place de l’étoile and lionized in the City of London and Wall Street for the “genius” of borrowing from commercial banks at 20%, then paying them back with their own money to generate phony profits for their shareholders ($12.6 billion profits in 2018 alone), who just happen to include some of the richest warlords/political bosses of Lebanon. The big money has long gone offshore at the speed of light. The enraged little people have to beg and plead for access to their own money. This is genius?

Lebanon has a new Prime Minister Hassan Diab who is a computer science professor with zero political gravitas.  Moodys and S&P have downgraded Lebanon’s sovereign debt and banking system multiple times since last October revolt, an index that the Banque due Liban’s game of financial chicken with its creditors in finally over. Lebanon was once a laissez-faire entrepôt on Mare Nostrum, the Cayman Islands/Zurich of the Middle East – it is now mired in de facto capital controls.

The flow of Gulf petrodollars and diaspora dollars has died in Lebanon. These dollars were the lifeblood of the Lebanese economy, a financial lifeline for its 6 million people. Lebanon’s banks have been exposed for their greed, their recklessness, their collective faith in the central bank’s surreal financial engineering/Ponzi merry go around. The money changers in their marble temples on Bank Street have betrayed t4he faith of the Lebanese people.

The Lebanese state uses 50% of its revenues for debt service and rest for public wages, pensions, an Army the Saudis no longer subsidize and assorted political projects to enrich the ruling class. Where are the productive assets or public infrastructure that $88 billion in sovereign debt should have created? Sadly, these billions have vanished into money heaven, into the Levant’s most sordid example of state sanctioned financial voodoo and capital flight. Game, set, match over, habibi and habibti – now you pay the price, all 6 million of you. Haraam.

I once read a memoir of a Palestinian author, later one of the top PLO Fedayeen commanders, who wrote about selling chewing gum on the Corniche in Raouche – only now it is tittle Syrian children, the new dispossessed of the Arab world. Who will take care of the most fragile, the most vulnerable people in Lebanon? These people never partied in Rue Monnot or drove their Merc convertibles in the streets of Achrafieh or apres-skied in Faraya? Who will feed them, school them, shelter them from the winter storms, enable them to grow up to be human? Robert Fisk/Khalil Gibran was right – pity the nation but also pity the leaders with no conscience, who in every sense but the biological, are really dead.

So marhaba Carlos Ghosn – hopefully, the disgraced Nissan boss comes to Beirut with a sackful of dollars. I cannot even envision an IMF funding program in my own mind. Can the Lebanese state, run by “confessional” warlords, politicians and militia powerbrokers slash public spending, double electricity and power tariffs, fire a 100,000 civil servants, boost tax revenues (a WhatsApp tax perhaps?) combat a post-peg spiral in inflation? Absolutely not. Does Lebanon have a social safety net to accommodate 1 million unemployed people and millions impoverished by a tsunami of bank failures headed for Europe in the east Med? No.

This West and the GCC need to design an urgent Marshall Plan for Lebanon, to reconstitute the Lebanese states, to liberate it from a political elite stripped of the last shred of legitimacy (“You stink” was the apt verdict of a nation betrayed). The Arab world’s financiers and scholars, captains and kings are desperately needed in Baabda and West Beirut, not in Davos and Monte Carlo in 2020. Please, please do not abandon Lebanon to a grim, unknown fate. The game of nations is suffused with sorrow and this nation has witnessed enough sorrow in the last four decades since the nightmare first began in 1975.