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. The irony is that the
Lebanese public will not be getting anything in return for that 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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6 comments:
Good post with good point there. But the main thing why Lebanon is ‘allowed’ to run such a high debt ratio is because no one cares. The risk-impact of Lebanon going under is so negligible related to the European countries you listed. The size of our GDP is not something.
As for how we are going to pay for it, may be with the revenues from the potential oil and gas! Obviously, when agree on the bloody process and laws, and guarantee the cut of the corrupted politicians.
LEBANONSPRING,
You are absolutely right about the size. There isn't enough Lebanese paper to entice speculators to make a move. In this case this smallness is an advantage. But we still need to get our house into a decent financial shape otherwise we will be in trouble.
Lebanon can take advantage of its political importance to various sides and negotiate a reduction in its debt similar to the negotiations that reduced Greek debt. Lebanon's sovereign debt needs to be cut in half.
Good post.
I always wondered why people never discuss the debt yet whine about no electricity and water.
A couple of things
1) As most debt is held by Lebanese banks, would they simply write off the loans if the Lebanese state could not pay the debt back?
2) Say a default did occur, would it really affect people on the ground? Greece and the rest of the Euro countries have a social security net in place (pensions, hospital cover etc) whereas Lebanon does not really have the same social security net.
Excellent observation Joseph. One point that I have been stressing is that Lebanon does not have the option of adopting an austerity budget since it will be difficult to have a more austere one. A few of our ministries have an annual budget of only about $10 million. That is not enough to print a brochure once the rent, salaries, ... are paid.
I am of the opinion that the effect on Lebanon, in case a default takes place , will not be very significant. But we do not need a default. Lebanon can negotiate with all the banks and other debt holders for a major reduction of the debt a al Greece.
BTW, Domestic debt, I.e. that denominated in Lebanese currency is only 54% of the net overall sovereign debt in Lebanon. Obviously it would be a slightly larger percentage if the Gross debt is to be used as a base.
What are the chances of wealthy GCC states bailing out Lebanon?
Haven't states like Saudi and Kuwait sent through money in past?
I could be wrong, but I remember reading that during the 2006 war, Saudi sent through $1 bil and Kuwait $500 mil
Joseph,
I am sure that many of the wealthy Arab states and probably some of the Western states will chip in. My point is that it would be better to arrange for a debt swap/debt reduction instead of waiting until it becomes an imperative. Actually, the sooner the debt is rationalized then the greater is the total of the funds available for domestic investment. I look at it as a win-win.
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