Summary: with a US$1.2bn Eurobond payment coming due 9 March, Lebanon faces stark choices and little room to manoeuvre.
We are again grateful to Alastair Newton for the article below. He worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service.
The Lebanese authorities seem finally to be getting serious about staving off an imminent default on foreign debt repayments; but major barriers remain and, at best, any immediate ‘solution’ is likely to be no more than sticking plaster.
Our 21 January newsletter reflected in some detail on the profound economic crisis in Lebanon and Beirut’s urgent need for assistance if the country is to avoid a default on external debt repayments. In a subsequent comment on the article, I questioned whether support from the IMF, which many ‘interested parties’ in the investment community believe to be pretty much essential if default is to be avoided, would be forthcoming.
Since then, one of the barriers to assistance from the IMF has eased a little at least with the formation of a technocrat government on 21 January, charged with defusing the related economic and political crises which have beset the country. The new government reluctantly turned to the Fund last month and an initial round of talks was held on 20 February, albeit focused on technical assistance rather than a bail-out which would likely only come with reform-related conditions which would be hard for the real (and all-too-familiar) power-brokers behind the new administration to accept.
In a second potentially important step, announced on 25 February, the government appointed the asset management company Lazard and law firm Cleary Gottlieb Steen & Hamilton as its financial and legal advisors respectively. However, time is now very short. By most reckonings, the government, which reportedly remains divided on the issue with some of its members pressing for a negotiated restructuring of debt, needs to decide within literally a handful of days whether it will honour a US$1.2bn Eurobond payment due on 9 March.
One possible ‘compromise’, flagged by the ratings agency Fitch , would be for the government to prioritise the Eurobond payment and vital imports such as food, rather than the central bank’s other, already onerous, obligations. But this would soak up already scarce dollars and force local banks to tighten still further the de facto capital controls which have been in place for many weeks now (and which currently limit depositors to withdrawing no more than US$500 per month). At best, it would therefore do no more than buy the government a little time. At worst, it could foreshadow the phasing out of the US dollar as Lebanon’s dominant currency , begging the question as to whether dollar deposits would be converted at the official exchange rate or at the parallel rate which is already over 50% lower. As David Gardner opines in the 25 February edition of the Financial Times (subscriber access only): “The wrong answer will detonate a social explosion”.
As if all this were not bad enough, a further complication is the involvement of the Ashmore Group, an investment manager specialising in emerging markets. The group has reportedly bought up over 25% of the US$1.2bn of bonds, giving it a blocking stake in the event of an attempted restructuring, as well as notes due to mature (and, therefore, pay out) in April and June. This action is similar to Ashmore’s earlier purchasing of defaulted Venezuelan bonds on which it has been pressing for a full pay-out. Recognising (albeit belatedly) that Ashmore’s move stands to narrow the government’s options , Lebanese President Michel Aoun has ordered an investigation into the bonds’ sale to the group; but this does nothing to stop the clock running down on the 9 March payment.
Arguably worse still, if Ashmore is indeed betting on an IMF bail-out to enable a timely and full pay out on its holdings it may not just be the Lebanese authorities which stand in the way. The US government, which has a blocking vote in the IMF, has reportedly been pressing both France and the UK not to come to Lebanon’s assistance. France, at least, seems ready to defy Washington, even bilaterally if necessary, putting wider regional political considerations to one side; but any aid which Paris alone can give may amount to little more than delaying the inevitable.
Furthermore, it could possibly trigger a backlash against France by the Trump Administration, which has already shown itself more than willing to use the US’s economic muscle to pressure even its allies — and especially on issues relating to Iran. A recent (members’ access only) paper by the authoritative Institute of International Finance has highlighted increasing US focus on the use of sovereign debt-related sanctions; although the principal target appears to be Russia at present, it would be very unwise, in my view, to rule out wider application of such, including secondary sanctions.
All this being said, what if there is an IMF bail-out imminently? By way of at least a partial answer, Arab Digest subscribers with access to The Economist may wish to read in full the article in the magazine’s 22 February edition looking at Arab states which have recently opted for an IMF programme. It makes dismal reading when it comes to long-term crisis alleviation, concluding as follows:
“If Lebanon strikes its own IMF deal, there is plenty of fat to trim. The state wastes billions on electricity subsidies and make-work jobs. A currency peg, in effect since the 1990s, is costly and makes exports artificially expensive. But austerity will hit hard in a country where one-third of the population is poor. And it will not fix the underlying problems that impoverished Lebanon in the first place.”
Given the persistence and intensity of the protests on the streets which we have seen in recent months (and echoing Mr Gardner), I would personally add to The Economist’s list of likely downsides to an IMF programme a non-negligible risk of wholesale political destabilisation of the country with potentially disastrous consequences. Meanwhile Lebanon together with virtually every other Middle East country has been hit with coronavirus. On Saturday three more cases were reported bringing the number to eight. In a country whose finances are already stretched to breaking point, the coronavirus piles on the worry.