Lebanon defaults – A new stage of the country’s economic crisis

Lebanon's Finance Minister, Ghazi Wazni (photo: creative commons)

A new stage of the economic crisis in Lebanon was reached on Monday 9 March, as the state defaulted on a £1.2bn euro-bond – the first default in the country’s history.

This debt will prove difficult to restructure given two-thirds of this debt is held by local banks, although some were able to sell to high-risk foreign investors. But both groups have vested interests in limiting any haircut of a size necessary to give the government sufficient room to manoeuvre.

But the bigger brewing crisis remains in the central bank, which has propped up the economy and US dollar currency peg by relying on sourcing ever more deposits. However, as the Economist (14 January) explained: “The central bank does not have enough dollars to pay what it owes. At the end of January, it had a healthy $37bn in gross foreign-currency reserves – but an eye-watering $52.5bn in liabilities, mostly owed to local banks…”

It goes on to state, “If the central bank defaulted on deposits, it would be a death blow to the financial sector, which has 55% of its assets tied up there. A haircut of just 18% would leave commercial banks insolvent and require a recapitalization worth at least 25% of GDP…”

Thus the new Lebanese government has been in talks with the IMF over assistance for the past month. The new finance minister, Ghazi Wazni, a former finance advisor to the government, said in an interview with Reuters, “Lebanon welcomes all international financial assistance without exceptions. But when it comes to the IMF, this depends on several matters: that the understanding with the IMF – if Lebanon resorts to it – … does not negatively affect the political situation in Lebanon.”

But such a combination, of IMF aid without the conditions of that aid sparking further upheaval, is a pipe dream. The recent 2020 budget included a reduction in the salaries of presidents and ministers by 50% and will be welcomed by those who have joined the protests. However, the limits of how far the new government is prepared to tackle the corruption and profiteering of the capitalist class were shown in its failure to pass a proposed one-off tax on the banks to generate $400m.

Instead, measures are likely to further hit the interests of workers. According to a report by Robert Fisk, in The Independent (London) newspaper, “New taxes on fuel and electricity plus a rise in VAT to 15 per cent – a rate still below EU nations, but likely to rise to 20 per cent – will probably hit first.”

But the revolution may well return among government employees who receive their salaries in Lebanese pounds, and whose income has already fallen by up to 40 per cent. Compared to price increases by 50 per cent.”

Unofficial trade unions

Trade union density in Lebanon is only 11%, a result of the deliberate weakening by successive governments by granting official status to numerous new unions that are mostly organised on a sectarian basis. However, unofficial unions have been established in recent years among public sector employees (for whom joining a union is illegal) and have been the lynch-pin of the strikes and general strikes in recent months and years.

Protests – through reports talk of hundreds rather than thousands taking part – still continue across the country against the government. A new form of protest that has emerged this year is the chasing of MPs and former government ministers out of public places like restaurants and theatres, aided by information on their locations spread on social media.

But the security services are now trying to infiltrate WhatsApp encrypted chats to target leading activists. When parliament passed the 2020 budget, the building was surrounded by police with the surrounding streets shut down (Although this same police and the army are among government employees who will be affected by the squeeze on their wages).

The economy ground to a halt as people have to queue at banks to obtain dollars because paying by ‘plastic’ is becoming a hit and miss. Reports suggest that increasing numbers of refugees from the Syrian conflict are returning to Syria, not out of choice, but desperation at escalating prices of food in Lebanon, whilst others have protested outside UN offices in the country demanding resettlement.

‘Luxury’ goods can still be purchased. The Economist reports that “Khoury Home”, a household-goods store, advertises new washing machines as a way to “survive the haircut”. A housing boom has been taking place as well. An article in the Financial Times website on 12 March commented, “Property sales in January jumped 27 per cent year on year, with a total of 4,668 real estate transactions executed, according to the finance ministry. In December, there were 6,000 transactions in Lebanon totalling $1.1bn.” This property bubble comes become yet another source of instability in time.

The protests may have slowed, and due to the shutting down of society now that coronavirus has spread to Lebanon, may do so for a while. But the ingredients for a new upsurge are present in the situation. To take the movement forward it must go beyond just angry protests at the powers that be and move to build its own organisations, including a mass workers’ party, and demand the convening of a constituent assembly, to challenge the sectarian parties and the sectarian constitution they rely upon. 

 

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