Lebanon said it would default on its Eurobond debt this week as the country verged on becoming one of the most indebted states in the world.

On 7 March, Prime Minister Hassan Diab said in a televised address that Lebanon, suffering a severe liquidity crunch, was due to repay a $1.2 Eurobond debt on 9 March.

But the country’s foreign-currency reserves had fallen to “a worrying and dangerous level” pushing the Lebanese government to suspend payment of the 9 March Eurobond because of a lack of funds, he said.

“The Lebanese state will seek to restructure its debts in a manner consistent with the national interest by entering into fair negotiations... with all its creditors,” Diab added. “Suspending the payment is the only way to go in tandem with the launch of a comprehensive reform programme,” he stated.

“How can we pay our creditors when the Lebanese people are unable to access their own money in their own bank accounts?... We will protect bank deposits, especially those of small depositors,” Diab said.

He added that he trusted in the “ability of the Lebanese people to wage a new battle for independence and to be liberated from an enemy stealing their present and future” by insisting on the repayment of the country’s debts.

“Lebanon is at a crossroads, and the government has devoted itself to studying the financial conditions of the state and the options available to address the deep crisis of public debt,” Diab said.

“Today we are paying the price of wrong policies, and the debt has become greater than Lebanon’s ability to bear it. The Lebanese economy has become the prisoner of these wrong policies,” he said.

The Lebanese people “have long suffered from unemployment, high prices and deteriorating infrastructure,” he added, saying that Lebanon’s “public debt exceeds $90 billion, and the low reserves have added more pressure.”

“According to World Bank estimates, more than 40 per cent of the population may find themselves under the poverty line because the economic model established by previous policies has proven wrong,” Diab said, noting that 50 per cent of state revenues went to debt-servicing, which was “not a sustainable approach.”

“The balance sheets of the banks and the central bank have become inflated, and this is unfair since only a minority benefits and the majority is negatively affected,” Diab stated, pointing out that 30 per cent of bank deposits were invested “while we continue to spend more dollars than we can attract.”

“Corruption has exhausted every aspect of the country and become a key component of the state and community. It is not possible to continue borrowing to fund corruption. War, conflict and displacement have also suffocated Lebanon’s economy,” Diab said.

“Lebanon is supposed to repay $4.6 billion in debt in 2020, the first tranche of which is due in two days. But we must protect the interests of the nation and our hard currency reserves, which is why we will default on the 9 March Eurobond debt,” the prime minister added.

“Rebalancing the budget is our priority, and we cannot spend more than we earn. The economic reform programme, targeting the reduction of expenditure, will secure additional resources that will benefit the healthcare, education and infrastructure sectors.”

“I have asked government ministers to propose reforms. We pledge to stand up against tax evasion, and we will establish a social safety net to protect the poorer classes. We have started a national strategy to fight corruption.”

“Because transparency is the best way to combat corruption, the government has submitted a draft law aimed at exposing the bank secrecy of former and present officials. Reforming the judicial system has also begun. These measures will help us to move from a rentier economy to becoming a producer, and the Lebanon of tomorrow will focus more on industry, agriculture, technology, tourism and services, and we will work to develop our banking sector,” he said.

He criticised the banking sector, the most important economic sector in Lebanon. “We do not need a banking sector that is four times the size of the economy. We have to restructure the banking sector, and we will work to protect deposits, especially those of small depositors who form more than 90 per cent of accounts. We will also make the relationship between banks and their clients become fairer.”

Addressing those countries that have supported Lebanon economically, Diab said that “we are committed to the vision of stability and growth proposed at the Cedar Conference in France, and the reforms agreed upon at the conference will be implemented because they are essential.”

“These reforms are important to restore the confidence and support of our Arab brothers and the international community… Restructuring debt and bold reforms needs time and effort, however. It will require solidarity and patience to implement such reforms in order to preserve Lebanon and the future of the Lebanese.”

Diab warned that if the current crisis were to linger on, Lebanon would go bankrupt. If it were late in paying its foreign debts on time, the repercussions would be painful for the country and affect its economy and credit rating.

The current economic crunch is the most dangerous threat to Lebanon since the civil war between 1975 and 1990.

Lebanon has debts in foreign currencies totalling about $31 billion. Sources told Reuters that the Lebanese government would seek to restructure its debts in negotiations with its creditors, and holders of Lebanese bonds would intensify efforts to protect their interests in the coming days.

“What we understand is that the government wants to be reasonable and so do most of its creditors. They understand that the country is in a difficult situation,” one bondholder said.

Reuters reported that the Association of Lebanese Banks was ready to engage with foreign creditors in talks to restructure the debt, stating that US investment bank Houlihan Lokey had been appointed as financial adviser to the association as the state sought to restructure government debt.

Lebanon is seeking to acquire technical, not financial, help from the International Monetary Fund (IMF), although many analysts said that the only way for the government to secure financial support would also be through the IMF.

“It is not clear how quickly Lebanon can restructure its debts or secure a deal, because it needs accompanying reforms,” ​​said Nick Eisinger, co-head of fixed-income emerging markets at US investment adviser Vanguard.

Although Diab’s criticisms of the financial and political system in Lebanon was well-received, he did not offer clear alternatives. He did not clarify how Lebanon’s economy, which depends on financial services and tourism, would be able to transform itself and place a new emphasis on industry since the country has scarce natural resources and it will be unlikely to be able to tap significant investment.

Diab did not explain how the country would fight corruption, which Lebanon’s political figures are accused of, including the 8 March Movement which supports the government.

The prime minister spoke of the negative repercussions of conflict and war on the country’s economy, even as the biggest supporter of his government is the Lebanese Shia group Hizbullah that has entrenched the country in the crises it is enduring. Its positions have also attracted the animosity of regional and international powers towards Lebanon.

Lebanon’s situation and Diab’s speech show the country’s dependence on Arab and international support, which will require political and financial reforms that Hizbullah and Lebanon’s political circles will likely reject.

Diab did not mention the floating of the Lebanese currency, which were it to happen would lead to significant depreciation, affecting the purchasing power of the Lebanese people. The current value of the Lebanese lira favours imported products and has created a significant parallel market for the currency.

Lebanon’s economic crisis is now larger than Diab’s solutions, and it will be difficult to solve its economic and political crises through regional and international support in the light of Hizbullah’s hegemony over the country.

*A version of this article appears in print in the  12 March, 2020 edition of Al-Ahram Weekly