Lebanon’s wealth destroyed as country defaults on Eurobond

The Lebanese government defaulted on its debt on Monday, failing to make a $1.2 billion Eurobond payment. With no clear restructuring plan in sight, Lebanon’s economy and people are set to pay a heavy price, with the destruction of over 50 percent of the country’s wealth, experts say.

Faced with $90 billion in debt, the Lebanese government made the decision to protect its dwindling foreign currency reserves, estimated at around $35.8 billion, according to figures provided by Byblos Bank. Lebanon needs its foreign currency reserves to finance imports ranging from food, to medication or construction material amounting at around $20 billion annually.

Experts believe that the economy will now significantly contract. Estimated at 4 percent last year, the recession will reach double-digit figures this year, predicts Nassib Ghobril, chief economist at Byblos Bank. Inflation, which was estimated at 10 percent for January is also expected to double, reaching around 20 percent, explains the economist, with people losing at least 50 percent of their purchasing power.

Businesses, already struggling, could decide to divest or close their doors. Research firm InfoPro estimated that since last October when nation-wide protests began, around 220,000 people have lost their jobs. Employees are seeing their salaries either slashed by pay cuts or as a result of the devaluation of the Lebanese lira, which lost over 60 percent of its value against the American dollar.

Lebanese government members have previously estimated that unemployment stood at 25 percent, although the official number remains unmoved at 11.4 percent. Others such as Lebanese banker Dan Azzi put this figure at over 30 percent among the general population and 40 percent among the youth.

Banks, heavily exposed to the Lebanese debt will have to adjust their balance sheets downward as they write off their losses. The banking sector carries about $30 billion in Lebanese debt, as well as $50 billion lent to the private sector, much of which is now distressed. Banks will be forced to recapitalize, merge or consolidate.

“The sovereign default means that bank assets have taken a hit but it’s difficult to estimate how much the losses will be, without a clear restructuring plan,” points out Ghobril. This situation will lead to a haircut on deposits, experts say.

Anti-government protesters chant slogans, during ongoing protests against the Lebanese government in front of the Central Bank in Beirut on Feb. 1, 2020. (AP)

For Azzi, the Lebanese default and the excesses of the past have essentially wiped out people and businesses’ balance sheets, resulting in a direct destruction of wealth of over 50 percent.

With the banking sector’s downgrade to Ca by Moody and other rating agencies, banks have lost their credit lines and now have to settle in cash any international payment with correspondent banks.

“The Lebanese Central Bank will keep on financing necessities, such as hydrocarbon products, medication and wheat,” says Ghobril. Austerity measures will make complementary goods become scarcer, with international brands and franchises slowly disappearing from the Lebanese market, highlights Azzi.

A massive economic showdown, combined with inflation and wealth destruction, will lead to increased poverty. The World Bank already warned last year that the poverty rate could rise to 50 percent of the population from 1/3 in 2018, with youth unemployment rising sharply, if the situation continues to worsen.

Desperate, more and more Lebanese are either in the streets or are seeking to leave the country.