By Ilias Bantekas, Professor of International Law and Arbitration, College of Law at Hamad Bin Khalifa University
The nature and causes of sovereign debt differ from one country to another. Yet, the popular or engineered narrative of debt usually conceals its true origin or cause.
In the case of Lebanon, currently facing a financial and economic crisis ranked by the World Bank as possibly among the top three most severe global crises episodes since the mid-19th century, one of the key lessons from the Greek experience is the importance of understanding the cause. The truth about how and why Lebanon reached the current debt crisis, including its suspension of a $1.2 billion Eurobond payment in March 2020, must precede any step toward recovery and restructuring under current solvency conditions.
At the time of Greece’s sovereign debt crisis, the popular narrative was that successive Greek governments had augmented the public sector and had exceeded their finances. This further supports the popular myth that people in the South of Europe are lazy, take long siestas, aspire to be civil servants, and that their governments are corrupt. Even so, an independent parliamentary committee set up in 2015 disproved this narrative.
The committee’s extensive findings clearly showed that the Greek public sector was the lowest spender among its then 27 European Union counterparts (apart from defence-related expenditures). In fact, until the beginning of the global financial crisis in 2008, Greece’s debt-to-GDP ratio was one of the lowest in Europe and certainly sustainable. So, why did it shoot through the roof the following year? This is because Greek banks had accumulated private debt (in the form of loans) to the tune of about 100 billion euros.
At the time, Greek banks had largely been acquired by French and German banks and hence the private (and now unsustainable) debt of Greek banks was about to become a Franco-German problem. Instead of this happening, the then Greek Prime Minister was ‘convinced’ to nationalize Greek banks and thus transform a purely private debt into a public one. By so doing, it was now the Greek taxpayer that was saddled with the debt and the ensuing austerity this entailed, while Greek banks were restructured (effectively re-financed) and France and Germany were relieved.
As a result of this incredible nationalization, which is irrational both financially as well as politically, Greece’s debt-to-GDP ratio skyrocketed and its creditworthiness declined to the depths of the Aegean Sea. It now had a newly discovered debt of 100 billion euros, no access to financial markets, and the prospect of high interest borrowing rates. Even so, these facts were buried under the popular narrative and the committee was discredited even in Greece.
At the time of the default in March 2020, Lebanon’s public debt had reached over $90 billion, equivalent to around 170% of its gross domestic product (GDP), with close to 37% of the debt in foreign currency.
In order to fully understand Lebanon’s debt crisis, it is not sufficient to simply examine the remedial measures suggested by the International Monetary Fund (IMF). The origins of a country’s debt are far more important, because it tells us how the debt was accumulated and by whom. The people of a country whose debt was fully or partially illegal and illegitimate may choose to repudiate such debt, or hold accountable persons and institutions responsible.
Hence, Lebanon needs an independent committee on the truth of its debt. This is an obligation on the State. Since such a committee is not forthcoming, I can only speculate as to the origins of the Lebanese public debt.
According to the Committee on the Abolition of Debt (CADTM), two key reasons are put forward. First, Lebanon’s commercial banks are allowed to speculate (with hard currency remitted by the overseas diaspora) on sovereign debt instruments denominated in Lebanese pounds at interest rates much higher than those granted by the Lebanese Central Bank. These high rates on government bonds and bank deposits severely restrict investments of capital in the productive economy. Unsurprisingly, Lebanon imports 80% of its food. The second reason is corruption through existing financial channels. CADTM reports that from 2005 to 2014, the richest 1% of Lebanon’s population captured 23% of income and 40% of the total personal assets, while the poorest 50% had to share half of the income of the top 1%. It further confirms that key policy decisions have to do with the broader structure of powers in the country.
It must also be stated that the burden of the debt restructuring is highly regressive, hurting smaller depositors, the bulk of the labor force, and smaller businesses.
If anyone looks solely at Lebanon’s default and its restructuring process, one misses the true picture, and the entitlement of the Lebanese people, which is an integral part of fiscal self-determination. People have the right to be free from all kinds of illegal, illegitimate, and odious debt, even if incurred under the banner of the State.
No restructuring process should commence before the truth about the debt takes place. No person of sound mind would mortgage their house simply because a bank told the owner he had incurred a debt of which he was unaware. The owner would first inquire about this debt and if he found that it was wrongly or unjustly incurred, he would refuse to pay it. This is the very least the Lebanese people can demand.
This article is submitted on behalf of the author by the HBKU Communications Directorate. The views expressed are the author’s own and do not necessarily reflect the University’s official stance.