Beirut on the brink: Eurobonds are just the tip of the iceberg

Lebanon has announced it will default payment for the first time, but the current crisis has been a long time coming

epa08277030 A handout photo made available by Lebanese official agency Dalati and Nohra shows Lebanese Prime Minister Hassan Diab speaks during a news conference at the government palace in downtown Beirut, Lebanon, 07 March 2020. Diab said, Lebanon will negotiate with creditors to reach a fair debt restructuring and the government will work to protect depositors' money. Lebanese leaders decided on 07 March not to pay the outstanding Eurobonds despite the reservations of holders of the bonds. Lebanon must decide whether to repay 1.2 billion USD in Eurobonds due on 09 March 2020.  EPA/DALATI AND NOHRA / HANDOUT  HANDOUT EDITORIAL USE ONLY/NO SALES
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Since October, the streets of Lebanon’s capital have been overwhelmed by protests against political disarray, economic crisis and – most recently – the government’s handling of coronavirus. It has become a country on the brink. In the words of its own Prime Minister, Hasan Diab, the country is “drowning in debt,” too. On Saturday, Mr Diab formally announced that Lebanon will default on a Eurobond payment of $1.2 billion worth of Eurobonds, due today.

The news marks the first time in Lebanon’s history that the once-booming seaside nation, now the third-most indebted country in the world, has failed to pay back its creditors. Yet in a country where half of all government expenditure is driven towards debt repayment, Mr Diab’s announcement has caught few by surprise.

Lebanon’s economy continues to reach unprecedented levels of crisis each week, and since November, a shortage of foreign currency has devalued the Lebanese pound on the black market by more than 60 per cent. It is estimated, moreover, that poverty could rise to 50 per cent, should the country continue on its present course.

Lebanon’s so-called “national rescue” government – backed by the militant party Hezbollah – has framed the failure to pay the debt as a defiant measure to save the Lebanese people.

In reality, it is the failure of responsible leadership from Hezbollah that has contributed more than anything else in backing Lebanon into the corner in which it now finds itself. Beirut has no choice but to default. But it has had made many choices that led to this point, including over-borrowing, failures to crack down on rampant corruption, acceptance of Hezbollah’s hegemony and incompetence. The latter decision is especially grievous, as Hezbollah – even when it is in power – continues to compete with the state for authority, and a reluctance to support the party any further is the primary reason for Western nations’ hesitation to provide Lebanon with any additional aid.

Meanwhile, very little effort has been put into diversifying a shrinking economy that is highly dependent on services and remittances.

The default will also tarnish Lebanon’s reputation as a borrower even further.

It is the failure of responsible leadership from Hezbollah that has contributed more than anything else in backing Lebanon into the corner in which it now finds itself

As the crises continue, popular anger is mounting, with people taking to the streets to express their deep dissatisfaction. The prime minister and his new government have proven themselves to be nonplussed by the mess its backers have created. While Mr Diab did promise to launch a wide-ranging programme of reforms to put Lebanon on the path to economic recovery, his Cabinet failed to include any measures to address the crisis in its annual budget or to seek a bailout from the International Monetary Fund – an option that Hezbollah rejects.

Lebanon needs sweeping reforms, as well as non-corrupt and competent leaders that can stand up to Hezbollah and others in order to save the country. Mr Diab has yet to prove that he and his Cabinet can fit those criteria. The prime minister himself admitted last week that the state has “lost the trust of the Lebanese people” and is “no longer capable of protecting them”. These are dispiriting words for citizens to hear from their own leaders. What they fail to capture, however, is that for as long as Lebanon’s system is held hostage by a force as damaging as Hezbollah, the state itself is under threat and incapable of moving forward.