Sovereign Debt in Lebanon: Beyond the Tipping Point.

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by Ghassan Karam

All systems, irrespective of how simple or complex is their structure, have a tipping point. A point beyond which no amount of effort can avoid calamitous consequences.  If a driver who is speeding down a highway does not notice that the road is about to end then no matter how hard the brake is applied the vehicle will go into the ravine. This, in essence, is the present situation that the world confronts in adopting measures to fight climate change. Many scientific models suggest that we are past the tipping point already. Let us hope that they are wrong.

The overall financial situation in Lebanon is very similar. Greece, Ireland, Spain, Portugal, Italy among many others is busy taking all sorts of steps to try and get their financial house in order in an effort to avoid possible disastrous outcomes. But not Lebanon, although the Lebanese economy is in at least as bad of a financial imbroglio as the worst of the above mentioned countries.

One of the most common popular measures about a country’s capacity to borrow is its Debt to GDP ratio. In 2011 only Greece (160%) had a larger ratio than that of Lebanon (140%). The other common measure is the size of the fiscal deficit as a percentage of the GDP. Again when this measure is applied we find that the Lebanese deficit of almost 10% is the highest of all the countries in question ( Greece 9.32%, Spain 8.47%, Ireland 9.79%, Portugal 5.16%). In spite of all of this Lebanon does not even have a policy to deal with this potentially explosive issue? The elected officials prefer to bury their heads in the sand, which might be understandable, but what about the obligation of the press to highlight these issues?

If a country has a debt service burden that is larger than the growth in its GDP and especially if a major portion of its debt is denominated in foreign currency then that country is simply past the tipping point. That is exactly the unenviable Lebanese neighborhood. The debt burden in Lebanon will amount to over LL6000 billion during the current year when the economy is projected to grow at possibly ¼ of that. The same will be true for the foreseeable future. A simple example will illustrate the implications of the above. If one is to borrow LL1000, say at 10% per annum and if one is to borrow the interest due on the loan each year then the total debt for that individual would amount to about LL 8000 after 20 years. This is precisely the situation in Lebanon. The total net debt in Lebanon increased from LL 5149 billion in 1993 to LL 67876 billion in 2010 according to the figures of the Ministry of finance. A couple of hours sifting through all the budgets for the above time period reveals that the total interest paid on the sovereign debt during this period amounts to about LL 60000 billion. Which is practically equal to the net increase in the national debt of about LL 63000 billion ( LL 67876 billion  less   LL 5149 billion).

I hope that each of the readers will take time to reflect upon the implications of the above. It simply means that 95% of the increase in the national debt of Lebanon over a period of 17 years was due to the accumulated interest. The nation borrows every single year about 10 % of its GDP, and that will only grow as time goes on, in order to pay the interest of the previous year. Another way to look at this is to jump forward to 2035.By then the Lebanese national debt could be about LL 560000 under the most optimistic of circumstances:  a primary budget that is balanced each and every year. The irony is that the Lebanese public will not be getting anything in return for all of that interest debt payment since none of it is available for any form of domestic investment.

The above scenario is real and the time will come to pay the piper and face the music. That might be next year or ten years from now. The fact that Lebanon has not been subjected to the pressures of Greece, Spain and others is not due to its financial health but is primarily due to purely political considerations. A financial crisis in a small country in a politically unstable part of the world is not exactly what is on the mind of the political leaders. Do not count on this to last.

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16 responses to “Sovereign Debt in Lebanon: Beyond the Tipping Point.”

  1. 5thDrawer Avatar
    5thDrawer

    Nicely laid out again, Ghassan. No-one that matters listens, I’m sure. As with the overpopulation of the planet causing warming effects, probably just as unstoppable too.
    Making idealistic dreamt-up ‘defense-war’ and buying weapons, instead of attempting to attract business, have some internal viable incomes, and enjoy almost freely gotten income from tourism, is not a way to go. But ‘they’ don’t care. Education isn’t getting anywhere – and there are a lot of dead-end roads.

    1. 5thDrawe,
                   As I have stated earlier the press has to carry the responsibility for the lack of awareness in this case. Not many are aware of the uniqueness of the financial shortcomings in Lebanon. The US has a fiscal deficit that is just as large as that of Lebanon when expressed as a % of the GDP, 10%. The difference between the two, and it is gigantic, is that 80% of the US deficit is due to government expenditures on a variety of social and economic programs that are supposed to help the average citizen. In Lebanon, on the other hand, all the deficit and its consequent burden goes to pay the interest on the debt, an interest that is rolled over and over again.

      1. 5thDrawer Avatar
        5thDrawer

        Moody’s reassessments were interesting Ghassan. Although Leb banks held more in reserve than American banks, and thus escaped a lot of the ‘bubble-burst’, they rarely invest in the citizens for longer-term interest repayments. Don’t even fund medical needs. Not counting results of bullets, people dying on hospital doors does not mean much for future potential, when their problems are curable and they could be productive again. Poverty-potential after cure does not make for an uplifting of societal feelings either, when there are so many stresses that health-issues from them is common. As vicious a cycle as that debt-servicing problem. And seemingly as ignored.
        Hmmm .. the country is sick.

        From a Tripoli Star report on graduation: From one who wishes to stay……
        In a country with hundreds of years of established family and political connections, wasta often determines who gets picked for an interview – and who doesn’t.
        “It’s frustrating,” says 24-year-old Myrna Hammazi, a graduating Haigazian University student who has begun her job search in the country. “I believe in each person’s opportunity to prove to themselves and the rest of the world that they are good enough for the job.
        “I don’t believe in [using] wasta, but it really affects everyone,” she says.
        Despite the challenges, Hammazi is still optimistic about the results.
        “I have a little hope in this country,” she says.

  2. 5thDrawer Avatar
    5thDrawer

    Nicely laid out again, Ghassan. No-one that matters listens, I’m sure. As with the overpopulation of the planet causing warming effects, probably just as unstoppable too.
    Making idealistic dreamt-up ‘defense-war’ and buying weapons, instead of attempting to attract business, have some internal viable incomes, and enjoy almost freely gotten income from tourism, is not a way to go. But ‘they’ don’t care. Education isn’t getting anywhere – and there are a lot of dead-end roads.

    1. 5thDrawe,
                   As I have stated earlier the press has to carry the responsibility for the lack of awareness in this case. Not many are aware of the uniqueness of the financial shortcomings in Lebanon. The US has a fiscal deficit that is just as large as that of Lebanon when expressed as a % of the GDP, 10%. The difference between the two, and it is gigantic, is that 80% of the US deficit is due to government expenditures on a variety of social and economic programs that are supposed to help the average citizen. In Lebanon, on the other hand, all the deficit and its consequent burden goes to pay the interest on the debt, an interest that is rolled over and over again.

      1. 5thDrawer Avatar
        5thDrawer

        Moody’s reassessments were interesting Ghassan. Although Leb banks held more in reserve than American banks, and thus escaped a lot of the ‘bubble-burst’, they rarely invest in the citizens for longer-term interest repayments. Don’t even fund medical needs. Not counting results of bullets, people dying on hospital doors does not mean much for future potential, when their problems are curable and they could be productive again. Poverty-potential after cure does not make for an uplifting of societal feelings either, when there are so many stresses that health-issues from them is common. As vicious a cycle as that debt-servicing problem. And seemingly as ignored.
        Hmmm .. the country is sick.

  3. MeYosemite Avatar
    MeYosemite

    So who is lending Lebanon now? US banks?

  4. MeYosemite Avatar
    MeYosemite

    So who is lending Lebanon now? US banks?

  5. Sebouh80 Avatar
    Sebouh80

    The highlight of this article is that Lebanon is beyond the tipping point, and serving the debt service of 10% or more indefinitely is highly unsustainable as this will exhaust all the resources of the state.

    Moreover, I would also like to add another crucial Macroeconomic risk factor that not many Lebanese take it into consideration.
    Today the bulk of the national debt which is being financed by the Lebanese banks and the central bank exposes them to long term risks especially when the debt level is very high in respect to GDP.
    Also as we all know, the Lebanese banking industry is highly concentrated and is believed to be the backbone of the country’s economy.

    Now allow me to reveal some interesting numbers in order to prove my point in this regards.
    The figures below highlights the total assets of top 4 banks in Lebanon.
    1. Bank Audi: 28.7 billion dollars
    2. Blom Bank: 23.8 billion dollars
    3. Byblos Bank: 22 Billion dollars
    4. Fransabank: 11.8 billion dollars.

    These numbers I obtained from the websites of these banks. (Please Check them out)

    What does this mean?
    This means that the Lebanese economy is too small in comparison to the banks in question to handle any possibility of systemic debt crisis in the future.
    The term “Too big too fail” in Lebanon is much serious than the one that is applied in the United States.
    Let us take for example, Bank Audi which has a total assets equivalent to 28.7 billion dollars which represents almost 76 percent of the GDP.
    This is the same as saying Bank of America has a total assets of 12 trillion dollars versus the US real GDP which is believed to be close to 15 trillion dollars.

    Finally, let me briefly comment on the austerity measures that is being imposed on the periphery countries of Europe like Greece, Italy, Ireland, Portugal and Spain is having disastrous consequences to the whole European working class population, and is destroying the already weak aggregate demand not only in Europe but to the entire world. It is even effecting countries like China and India due to their dependence on the European markets.

    1. Sebouh,
                 Yes the Lebanese banking system is one of the largest in the world relative to the size of its domestic economy. Lebanese Banks are about 3 times the size of the Lebanese economy when they all the US banks are less than the size of the US economy.
                As bad as austerity could become in many of these countries , it is already in Lebanon. It is the standard budget. There is no room to cut anything. That is one reason why the sovereign debt is such a huge problem. Contractually it has to be paid but the Lebanese government cannot afford it. This is identical to an individual whose income is $10,000 but spens a5,000 by borrowing the difference the first year and every year after that the interest. There ww=ill be a point when the new interest will be larger than the income.

  6. Sebouh80 Avatar
    Sebouh80

    The highlight of this article is that Lebanon is beyond the tipping point, and serving the debt service of 10% or more indefinitely is highly unsustainable as this will exhaust all the resources of the state.

    Moreover, I would also like to add another crucial Macroeconomic risk factor that not many Lebanese take it into consideration.
    Today the bulk of the national debt which is being financed by the Lebanese banks and the central bank exposes them to long term risks especially when the debt level is very high in respect to GDP.
    Also as we all know, the Lebanese banking industry is highly concentrated and is believed to be the backbone of the country’s economy.

    Now allow me to reveal some interesting numbers in order to prove my point in this regards.
    The figures below highlights the total assets of top 4 banks in Lebanon.
    1. Bank Audi: 28.7 billion dollars
    2. Blom Bank: 23.8 billion dollars
    3. Byblos Bank: 22 Billion dollars
    4. Fransabank: 11.8 billion dollars.

    These numbers I obtained from the websites of these banks. (Please Check them out)

    What does this mean?
    This means that the Lebanese economy is too small in comparison to the banks in question to handle any possibility of systemic debt crisis in the future.
    The term “Too big too fail” in Lebanon is much serious than the one that is applied in the United States.
    Let us take for example, Bank Audi which has a total assets equivalent to 28.7 billion dollars which represents almost 76 percent of the GDP.
    This is the same as saying Bank of America has a total assets of 12 trillion dollars versus the US real GDP which is believed to be close to 15 trillion dollars.

    Finally, let me briefly comment on the austerity measures that is being imposed on the periphery countries of Europe like Greece, Italy, Ireland, Portugal and Spain is having disastrous consequences to the whole European working class population, and is destroying the already weak aggregate demand not only in Europe but to the entire world. It is even effecting countries like China and India due to their dependence on the European markets.

    1. Sebouh,
                 Yes the Lebanese banking system is one of the largest in the world relative to the size of its domestic economy. Lebanese Banks are about 3 times the size of the Lebanese economy when they all the US banks are less than the size of the US economy.
                As bad as austerity could become in many of these countries , it is already in Lebanon. It is the standard budget. There is no room to cut anything. That is one reason why the sovereign debt is such a huge problem. Contractually it has to be paid but the Lebanese government cannot afford it. This is identical to an individual whose income is $10,000 but spens a5,000 by borrowing the difference the first year and every year after that the interest. There ww=ill be a point when the new interest will be larger than the income.

  7. Based on Ghassan’s article and Sebouh’s comment we can safely say: “In Lebanon the banks did not sink the country. The country sank the banks”
    Quoted from Michael Lewis’ book on the financial crisis when explaining the Greece crisis.

    Can I assume that if worse comes to worst and the government defaults then our banks will pay the bill?

    1. 5thDrawer Avatar
      5thDrawer

      Yah Charbel … like Americans are being paid back by their banks?

  8. Based on Ghassan’s article and Sebouh’s comment we can safely say: “In Lebanon the banks did not sink the country. The country sank the banks”
    Quoted from Michael Lewis’ book on the financial crisis when explaining the Greece crisis.

    Can I assume that if worse comes to worst and the government defaults then our banks will pay the bill?

    1. 5thDrawer Avatar
      5thDrawer

      Yah Charbel … like American’s are being paid back by the banks?

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