Thinking the unthinkable: Lebanon's sovereign debt default?
Matein Khalid
January 02, 2020
The unthinkable has finally happened in a secretive central bank's digital ledger in the heart of Beirut. The rating agency Fitch predicts imminent default on Lebanon's sovereign debt, at $88bn, a colossal 185% of GDP, making the once "Paris of the Middle East, the fabled reve d'Orient (dream of the East) a Levantine Argentina. While central bank data often lies in the emerging markets, Fitch's arithmetic of doom is irrefutable. Fitch estimates that the Banque du Liban, run by an ex-Merrill Lynch broker Riad Salameh as governor since 1993, owes $67 billion dollars to Lebanese banks in borrowings (liabilities) but has only $28 billion in net foreign exchange reserves.
Salameh's high stakes juggling act of borrowing money at exorbitant rates from Lebanese banks, flush with funds from a diaspora that extends from the Swiss Alps to São Paulo, from the diamond mines of West Africa to the glass towers of Dubai's DIFC Gate Village, to meet the state's $5 billion annual debt service obligations, maintain the Lebanese pound currency peg to King dollar, finance imports for a population whose elite defines la dolce vita on the East Med and bankroll a bloated, warlord/sectarian fissured public finance payroll, is now over.
Optically, Lebanon boasts $150 billion in banking deposits, three times its GDP, a ratio exceeded only by the banking systems of Hong Kong and Luxembourg. Yet this banking data is a cruel illusion, a hoax perpetuated on the hapless savers of Lebanon and its vast global diaspora. Lebanese banks have recklessly invested 50% of their assets in Lebanese government's Treasury bills, de facto post dated cheques/IOU's on a bankrupt bank.
Where did these untold billions in debt vanish?
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