Sovereign Debt in Lebanon: Beyond the Tipping Point.

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.

Lebanese Sovereign Debt Default: An Inevitability.

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.