A Lebanese Default Is Inevitable.

By Ghassan Karam

Some things are preordained and I do not mean only philosophically. There is often a strong rationale that predetermines an outcome once a certain sequence of events is unleashed.  Once the trigger of a loaded hand pistol is pulled then a bullet is released and if that hand pistol was directed to ones leg then that leg would be seriously wounded. It cannot be otherwise. Such logical conclusions always follow from certain actions and therefore these consequences cannot be considered to be accidental since they were designed to follow once an act is committed. To exceed the speed limit by passing a highway patrol is to expect a speeding ticket just as to fail to present a research paper on time is to earn a failing grade. This is not any different than to expect to borrow if the level of expenditures is to exceed the flow of income and this is exactly what is happening to the ability of some countries, such as Greece, to carry successfully their debt burden. The same exact logic applies to Lebanon. Lebanon has over borrowed and must face the consequences. The logic of default is just as impeccable and straight forward as that of pulling the trigger while aiming at a leg.

Historically, the Greeks were the first to develop the concept of tragedy. They even developed a particular genre where the events become totally complicated and appear to defy any solution when out of the blue a divine solution is presented through outside forces. This solution became known as Deus Ex Machina, a resolution by divine powers unrelated to the actual dynamics of the problem.  I mention this in order to stress that in the Greek current debt crisis and to a larger extent in the case of Lebanon we do not have the right to depend on such an irrational and highly unlikely solution. Deus Ex Machina just does not exist in the real world. Lebanon has borrowed beyond its capacity to service these loans and the longer we persist in our denial then the bigger the problem will become.

I am not interested in asking why we borrowed and whether the decisions were proper or not. I am obviously not interested also in whether the borrowed funds were put to good use or not. All of these are academic issues that are not significant at this phase. We need to devise a way to manage the debt problem so that it will not crush us and crush all the hopes of the next generation. We have to look at the numbers objectively and allow these numbers to tell the extent of our financial woes. The details might overwhelm some but the logic is quite simple.

A country, any country, passes an annual budget that shows its planned expenditures and its planned revenue stream. Whenever the expenditures exceed the projected revenue then the deficit represents the amount that is borrowed. The sum of these annual deficits makes up the national debt.

With that in mind let us take a look at Lebanon. Each and every year for decades to come the projected level of expenditures exceeds that of revenue. The current level of annual deficit is almost $3 billion and that figure will rise every year if for nothing else but for the fact that our national debt will have to rise and consequently the required level of interest needed to service that debt. Almost 40% of all expenditures are allocated to debt service. This means that only 60% of our expected expenditures go to pay wages and run the basic government services. This relatively small figure carries great implications, it simply means that Lebanon is already running a very austere budget, there is no room for any additional cuts, and Lebanon has already cut to the bone. But some will point out to the fact that as the level of national debt rises every year so does the GDP    and therefore the burden could stay the same. That would be true if the GDP is to grow at a faster rate than the rate of interest used to finance the debt. Lebanese debt, in general, carries an average interest rate of around 7%-7.5% although our growth rate cannot be expected to average even 4%. This growth rate might even be excessive given the potential for political instability and war in the region not to mention the lowered economic growth expectations worldwide.

So where are we and what should we expect? The Lebanese Debt/GDP ratio is approximately 137% and it is expected to grow every year for as far as the eye can see. One rather conservative scenario projects a growth of this ratio to about 163% by 2020 when the level of sovereign debt is expected to have ballooned to over $90 billion with an interest burden of about $6.7 billion or about 12 % of the GDP. That is unconscionable and is a ticket to perdition. The Lebanese people deserve better.

There is only one painless solution for those who believe in dreams; A Deus Ex Machina where a wealthy Western country and/or a group of Arabian officials ride down in the basket from the sky to write off a substantial portion of the Lebanese national debt, our Scarlet letter.