Thinking the unthinkable: Lebanon’s sovereign debt default? – The Property Chronicle
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Thinking the unthinkable: Lebanon’s sovereign debt default?

The Macro View

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 $88 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, unlike Shakira’s hips, 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.

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.

Lebanese banks remained open while Israeli F-16 warplanes napalm bombed West Beirut and masked militia gunmen massacred women and children in Karantina, Damour, Tel el-Zaatar, Sabra and Shatila. Yet the 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.

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 and Pretorian guard for the Assad regime in Damascus, anathema. In any case, 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.

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.

The Macro View

About Matein Khalid

Matein Khalid

Matein Khalid is Chief Investment Officer of Asas Capital in the DIFC; he is responsible for global investment strategy and the development of the multi family office platform. He has worked in Wall Street money centre banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal investment offices in the Gulf for 8 years. Mr Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He is a director at the American College of Dubai and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University of Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business and Oman Economic Review.

Articles by Matein Khalid

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