Lebanon needs to restructure and not reschedule its public debt

Pierre Issa

Issa said that the Euro bonds are, in short, the debt of the state in foreign currency and that the question today is whether Lebanon will pay the dues on March 9^th. Those e parties demanding payment are doing so while using Lebanon’s credibility as an alibi, this credibility has however been dragged through the mud for the past 30 years. The humiliation that citizens are experiencing at the banks in order to withdraw a few dollars out of their salaries means that credibility can only happen through serious reforms. The question is not whether or not to pay, but it is whether or not we are going to create reforms, and when? Issa added that there is a lot of talk about rescheduling the debt, now that it seems certain that the Eurobond payments will not go through, while Lebanon is in need of restructuring its public debt to lower the principal and the full value of the debt.

In order for this to happen a rescue plan is needed not for one crisis, but for 4 different crises: the first being an economic crisis that needs a plan to move from a rentier economy to a production economy creating wealth and job opportunities. The other crisis is financial in nature and that is based on the state’s continuing deficit year after year: if the government were a company and kept losing the value of the deficit yearly, the responsibility would fall on its board of directors and its general manager, however in Lebanon’s case we as a people are also responsible since we have been voting for the same board of directors and general manager for years. The third crisis, according to Issa, is the monetary crisis which manifests in the lack of hard currency in the country generally and in the government particularly. He said that these three crises are the result of a big social crisis that is only just beginning.

All of this has created and unsustainable economic model: we have a government that spends much more than it makes so we fall into deficit, we are also a country that imports much more than it exports, that means we pay more hard currency than we take in, and we fix this by loans and through money from expatriates (whose funds can also be considered loans, since they deposit funds for interest, today they cannot get those funds because of bank sanctions). Issa said that this type of economy cannot continue and should be changed to become investment and productivity based.

Issa stated that making a plan to manage crises needs decisions, and in order to make the right decisions information must be available, as well as the causes of the crises, otherwise the treatment of the crises will be incomplete. He noted that a real plan needs complete transparency yet information is not readily available because of the government and central bank’s policies of keeping the public in the dark as pertaining to the numbers of the reserves and the profit and loss of the Bank of Lebanon, as well as the share of government accounts.

As for determining the cause of the crises we must consider two factors: first our foreign policy that is contradictory with our economic system, a system that relies on exchange with the west and the GCC. The second cause is one of mismanagement and is based on the five ailments of sectarianism, quota systems, corruption, political feudalism, and allegiance to foreign states.

Issa continued by reminding of MP Jamil El Sayed’s statement: the settlement that has brought us to this point can be summarized by saying “you have your corruption and we have our weapons”. This means that our current foreign policy in addition to our current corrupt economic system cannot be foundations for building a nation, this settlement cannot solve the problem, but is rather the cause of the situation we are in today.

He stated that responsibility for the situation falls on all of us, especially on the parties that have been in power for the last 30 years, the central bank, and the banking sector.  Issa continued by saying: “the Lebanese government is in session now, and we meant to have this press conference at the same time because the parliament is supported by most of the ruling parties, and knows of the due date of March 9, yet no one presented a plan or vision to solve this issue.” He added: “It is strange how we can trust them and how they can trust each other; all the parties that support the government and all the parties that have left it are trying to portray themselves as an opposition to evade responsibility. An example is former Prime Minister Fouad El Sanyoura who says that we should not pay the due debts; does this mean that we should not pay a debt that he himself signed and agreed on with high interest rates to finance corruption and quotas? Saying that we should not pay does not absolve Sanyoura nor does it absolve his partners.  On the other hand, the Free Patriotic movement calls for a demonstration in front of the central bank: this movement appointed the governor of the bank while criticizing him, and this movement benefited from the financial engineering created by the central bank.” Issa continued by saying: “they have robbed us and taken our money through their legal games and electoral laws that were tailored to their needs, and today they are trying to rob the revolution. This will not happen because people are going hungry and see the truth, the only true opposition is the one found in the streets and it is the only opposition that represents the people.

Today we have the parties in power, the parties-sects, and the banking sector on one side, and the people on the other side. The government, the House of Representatives, and the public administrations cannot claim to be part of the opposition, and in the end everything starts with real structural reforms and not rhetoric.

Robert Fadel

Fadel explained that “Governments issue bonds when they need to borrow large amounts of money to finance the deficit in their budgets; bonds have a due date, this means that at a certain point in time the borrowing governments need to pay the value of the bonds to investors, additionally governments pay the investors periodic interest until the due date of the bond payment”. Fadel said that “Eurobonds are debt securities written in a foreign currency different than the local currency of the country that issued them."  Fadel then reminded that for the past 30 years successive Lebanese governments pursued the policy of excessive, uncalculated leverage that led the country to financial and economic collapse, a collapse that is mainly the responsibility of the political parties in power, the central bank, and commercial banks. He stressed that “this file is vital to the majority of the Lebanese since the payment of the debt benefits will come at the expense of the well-being of the Lebanese people.  The parties in power and the banking sector have lost the confidence of the public because of their procrastination and lack of transparency on this issue”.

Fadel then said that the parties in power, the government, the central bank, and the commercial banks all share the responsibility for this crisis, stating that the delaying in creating the government despite the March 9^th deadline and other crises in the country has put the Lebanese people in a dangerous situation that threatens their livelihoods.

As to the responsibility of the Banque du Liban, Fadel said that the central bank continues with its escaping forward policies, and continues to cover up its economic and financial failings- failings are the joint responsibility of the central bank and the government- and deliberately concealing its accounts of profit and loss, the details of its budget, especially for the reserve numbers in hard currencies and external liabilities. All of this creates solid obstacles in the way of creating a rescue plan that is in line with the gravity of the current situation.

Fadel also discussed the responsibility of the commercial banks, stating that despite the fact that they made huge profits from collecting interest on the public debt for 30 years, they still act as private businesses lacking any national sense of responsibility. Some Lebanese commercial banks have sold Eurobonds in global financial markets in recent weeks, a fact that complicates negotiations for debt restructuring between the Lebanese state and creditors, and weakens Lebanon's negotiating power. He continued by saying that “The National Bloc affirms that there is no trust in the current political authority or its government, and it should be replaced with a sovereign government of free non-partisan competent ministers; this is the main condition that will guarantee the success of the reforms required to restructure the public debt.”

Fadel then listed seven reasons for abstaining from paying the Eurobonds and they are the following:

1. The Lebanese government does not have sufficient funds to pay for the Eurobonds on the due date of March 9, 2020, nor does it have the funds to pay for subsequent payments.
2. The government has previously received help from the central bank to cover its inability to pay its outstanding debts, this is no longer an option due to the dwindling reserves in foreign currencies at the central bank.
3. The solution to the crisis should not come at the expense of the depositors, especially the small depositors since the banks have invested those depositor’s funds in the central bank. The value of the “Eurobonds” dues is about $ 4.5 billion in 2020 which is equivalent to the deposits of 2 million Lebanese. It is worth noting here, that the laws reserve priority for depositors at the expense of the rights of bondholders.
4. Prioritizing the use of the Banque du Liban hard currency reserves to cover the basic needs of citizens such as wheat, fuel, medicines, etc. the value of those needs is estimated between 5 and 7 billion dollars annually.
5. The unavailability of hard currency will have catastrophic consequences on commercial, industrial and agricultural activities, leading to new wave of job losses. Nearly 220,000 Lebanese have already lost their jobs in the private sector according to "Infopro" statistics.
6. Creditors who are aware of Lebanon's financial realities expect a restructuring of the public debt, especially in light of the 30% devaluation of the Eurobonds from their nominal value. Lebanon has a limited amount of hard currencies, therefore, each bond that is paid increases the chance of non-payment for the next maturing bond. This will make Lebanon more vulnerable to fierce speculative funds and compounds the problem in the future, as it will motivates Eurobond owners to sell when their bonds mature.
7. The failure to pay, if dealt with seriously and within a reform plan, will not be an obstacle to Lebanon's restoration of its ability to borrow with low interest in the global financial markets; this has been proven in more than one country that has gone through a similar experience.

As for the practical steps that need to be taken to restructure the bonds of the public debt, Fadel stressed that “failure to pay should come within a complete reform plan, either before or after non-payment, to restructure the public debt”, he added “In order for the creditors to agree to reduce the nominal value of the loans made to Lebanon (that may reach or exceed 60%) the Lebanese government must have their trust to fulfill its financial obligations. This can be done through creating a credible reform plan that can generate a budget surplus that is in line with the ‘Emergency Financial Procedures Paper’ adopted by those present today”.

Based on this Fadel saw that three things must happen:

1. Appointing a team to lead the restructuring negotiations
2. Setting up a reform plan
3. Becoming transparent with the Lebanese public.

Pertaining to the team, Fadel said that members should be professional and trustworthy, and that it should be comprised of the best independent legal and financial advisors who are chosen through a transparent bid. This team will lead the Eurobonds restructuring negotiations within a wider plan of restricting the entire public debt in order to decrease its overall value. “This team will undertake studies of the legal ramifications of defaulting on the loans and protecting Lebanon’s internal and external assets, especially gold” added Fadel.

As for the plan, he drew attention to the necessity of creating a comprehensive reform plan that includes the monetary, financial, and economic facets of the crisis, and that it should be based on the following:

1. Putting a stop to waste and corruption through the activation of monitoring apparatus and ensuring the independence of the judiciary, as well as implementing reforms in the public sector starting with the electricity sector.
2. Promoting governmental tax revenues and distributing them in a more equitable manner through adopting a progressive taxation scheme, as well as eliminating tax exemptions, imposing an exceptional one-time tax on large depositors, and combating tax and customs evasion.
3. Creating a plan to fortify a social security network and protecting the more vulnerable strata of society from the ramification of the economic crisis.
4. Creating a plan to restructure the banking sector.
5. Creating a plan to transform the economy by supporting productive sectors to increase their competitive capacity for exports and job creation for Lebanese citizens, as well as increasing development in the country’s peripheral regions.

In conclusion, Fadel spoke about the necessity of transparency saying that underdevelopment without reforms will only lead to the same negative results. It is time for the governmental team to be honest with its citizens about the size of the crisis and the nature of the proposed reforms and procedures in order to procure social and political acceptance to go forward and implement the reforms and overcome the crisis as soon as possible.