The word “Crisis” is almost the title of all issues related to the state in Lebanon, including public administrations and services. Public administration crises comprise civil registries, real estate departments, the Car and Vehicles Registration Department, and others. Public services include, but are not limited to, electricity, road maintenance, drinking water service, waste treatment, sewage, and many other crises.
However, the most prominent crisis remains in public finance and debt, affecting all state departments and public services. In this context, issuing Lebanese treasury bonds in foreign currencies (Eurobonds) expresses the public debt crisis and makes it one of its more apparent manifestations.
The Lebanese government has resorted to borrowing US dollars since 1994, following the growth in public debt due to the continued deficit in the 1993 budget. One reason for resorting to Eurobonds is the decline in the concern of local capital holders to subscribe to bonds issued in national currency despite its high interest rates.
Banque du Liban (The Central Bank) considered the issuance an achievement for Lebanon in its 1994 report, as it was the first Arab Country to resort to borrowing from international financial markets. The report’s author overlooked that the state’s borrowing in a foreign currency that does not have a fixed income is risky, as any increase in the value of this currency against the national currency will increase the public debt and make the state unable to pay its duties.
The first Eurobonds package issued by the Lebanese government was on October 14, 1994, with a value of $400 Million. It matured in 1997, three years after its issuance. Bonds were divided into three denominations: one thousand, ten thousand, and one hundred thousand US dollars. Eurobond issuances continued annually and with longer terms than previous ones, with some having terms reaching ten years instead of three. Their interest rates ranged between 7.4 and 10.89 percent.
Eurobonds were adopted because their interest rates were lower than those denominated in Lebanese pounds. Eurobonds aimed to reduce the cost of public debt and free the local financial market from state borrowing pressures.
The issuance of Eurobonds allows the extension of the maturities of public debt, while the maturities of bonds in the national currency are limited to one year. On the one hand, it reduced the cost of borrowing, which in some issuances approached 35%.
Most Eurobonds were issued to purchase outstanding debts and their interest. On the eve of stopping payment of installments due in March 2020, Eurobonds’ nominal value is approximately $31.31 billion, and their terms extend until 2036. The trading value of Lebanese Eurobonds declined to less than 38% of their nominal value at maturity.
Stopping payments of Eurobonds, due on March 7, 2020, was a new crisis that added to Lebanon’s total crisis but was not a cause of the financial crisis still ravaging the country.
The aggravation of the public debt and its ratio to the gross domestic product (GDP) increased doubts among local and foreign creditors about the Lebanese state’s solvency and ability to repay. This situation has prevented Lebanon from selling its bonds in global financial markets since 2017.
It should be noted that Lebanon’s obligations in foreign currencies do not include only Eurobonds but also include the soft loans it obtained according to the Paris Conferences 1, 2, and 3 decisions. Knowing that at the end of 2000, before the Paris 1 conference, the ratio of Lebanese public debt to GDP had reached 151%, while the percentage of the cost of serving the public debt reached 89% of total state revenues.
Neither the Eurobonds, soft loans, nor grants provided by the successive Paris conferences since 2001 have helped reduce the public budget deficit. The CEDRE conference’s attempts to urge the Lebanese government to undertake structural reforms capable of increasing state revenues and raising their proportion to the GDP were also unsuccessful.
The conference also requested expenditure rationalization, management, and containment of public debt through implementing policies that contribute to reducing the budget deficit, but this request was brushed aside.
Stopping the payment of Eurobonds due on the eve of the decision was justified, mainly since the price of Eurobonds in the financial markets amounted to approximately 38% of their nominal price. Therefore, there was no justification for paying their dues at its nominal price.
Today, the government must purchase Eurobonds from foreign holders. Purchase is essential since the price of the Eurobonds today, along with the accumulated interest, is close to 7 cents, the lowest price recorded for sovereign bonds. One billion dollars is more than sufficient to extinguish a debt worth 10 billion dollars.
Based on the above, procrastination in addressing the Eurobonds crisis causes Lebanon to risk losing the opportunity to benefit from the low price that the Eurobonds have reached. Consequently, any positive development on the internal level, such as the election of a credible President of the Republic, will inevitably lead to an increase in the price.
Procrastination may also cause hedge funds, which specialize in buying distressed debts at low prices when they collapse, to acquire Lebanese Eurobonds and then file lawsuits to obtain the best possible price and achieve high profits.
The state acquisition of Lebanese Eurobonds at the current low price is no less important than finding a solution that ensures that depositors receive the bulk of their deposits in the Lebanese bank. The more the Lebanese government gets rid of its external obligations at an appropriate cost, the more its ability to meet its capacity for its internal duties increases.
Otherwise, the Lebanese will pay their future and the future of their children as a price for the inaction and hesitation of officials. Knowing that Lebanese have paid with their lives the price for officials’ neglect of their responsibilities and their tampering with the country’s capabilities.
