The Lebanese state, for years having defied economic gravity, over the past week has been scrambling to reassure the public that the country is not facing imminent crisis.

Goldman Sachs on Monday predicted that global agency Standard & Poor’s would on Friday downgrade Lebanon’s credit rating from B- to CCC+, pushing it down to distress levels, which would raise the potential for default and block out almost all potential investment.

“This threat of a downgrade is a message from Washington,” a Hong Kong-based analyst told Asia Times on condition of anonymity.

“Lebanon can continue using its peg to the dollar to generate funds, so long as no sanctioned currency or entity is benefiting and getting clean cash,” he said, referring to Iran and its Lebanese ally Hezbollah.

Lebanese Prime Minister Saad Hariri is fresh off a trip to the United States, where he met with US Secretary of State Mike Pompeo twice, including at his ranch outside the capital.

Hariri emphasized to reporters he was working to shield the state from American sanctions against Hezbollah, which is part of the government of Lebanon but considered a terrorist organization by the US.

“It is my duty as prime minister to spare the Lebanese state these sanctions and to avoid any impact on the Lebanese economy. Hence, we are keen to maintain constant communications with the US administration,” he said.

Lebanese Parliament Speaker Nabih Berri, an ally of Hezbollah who meets regularly with US officials, on Wednesday expressed confidence the New York-based ratings agency would not downgrade Lebanon so long as the US was supporting the Lebanese army.

Quoting “informed sources,” Lebanese daily Al Joumhouria reported that S&P would maintain the B- rating for at least the coming six months to give the country time to get its act together.

“Maintaining the current credit rating for six months is intended to give the government the opportunity to implement a series of projects and reforms to revive the economic and financial situation in the country,” it said.

Lebanon, which sunk into CCC territory just over a decade ago, has never defaulted on its obligations.

But the distress signal comes as Lebanon struggles, more than one year on, to unlock $11 billion worth of funds meant to put its economy back on track.

Police clash with retired army personnel in Lebanon on May 20 as they try to force their way into the Grand Serail, the office of Prime Minister Saad Hariri in Beirut, where the cabinet was meeting to discuss an austerity budget. Photo: Marwan Naamani / DPA

Lights out

S&P in March downgraded its B outlook on Lebanon to negative, advising it could be brought back to stable if the country moves to implement necessary reforms.

Among the most critical targets for overhaul was the electricity sector, which runs a $1.5-2 billion deficit annually and is still unable to offer households 24-hour power.

Those reforms have largely gone unfulfilled.

Lebanon continues to rely on temporary electricity stations in the form of ships docked off its coast to make up for inadequate power generation. Those vessels are run on low-quality fuel, adding to the pollution emitted by ubiquitous, costly diesel generators, which Lebanese households depend on for three to six hours of electricity per day in the capital and 12 hours per day in the rest of the country.

A visitor driving along the country’s main north-south highway by night will quickly notice the street lights are permanently shut off, forcing drivers to turn on their brights, blinding oncoming traffic.

The lack of tangible progress on the electricity front is not the exception but the rule in an economy which has had 0% growth this year.

“Technically, we’re defying gravity,” said Mohammad Al Akkaoui, an economist at Kulluna Irada, a civic organization focused on political reform.

“You have a fixed amount of dollars in the Lebanese economy. It demands $15 billion a year in terms of imports and the rest. These have to be balanced out with $15 billion in inflows, and when we don’t get them, the central bank has to pay the bill or the exchange rate has to move,” he said.

The Lebanese pound is pegged at 1,500 to the US dollar. Less than a year ago, Lebanese reportedly shifted over half a billion dollars worth of local currency deposits into dollar accounts, over fears the near-sacrosanct peg would not hold.

In recent days, Lebanon’s vaunted central bank chief Riad Salameh was compelled to defend the peg, insisting the bank had taken precautionary measures to shield the financial sector from any fallout resulting from a potential S&P downgrade.

Until now, a triangle of mutually assured destruction between the Banque du Liban, the banking sector, and the political and business elite has kept the economy afloat. Using a mechanism known as “financial engineering,” private banks provide Banque du Liban with foreign currencies in exchange for immediate profits in Lebanese pounds.

“Technically, the music should not stop until we’re almost out of dollars, because if the music stops, then every single player would cease to exist,” said economist Akkaoui. 

“Everyone has skin in the game and is certain the central bank will save them from being skinned alive,” he added.

The key question is not “if” the government will default, but the sustainability of the system.

“There’s an idea running around that these dollars belong to the central bank,” Akkaoui said. “No – these are your dollars, my dollars, my dad’s dollars, and they’re being wasted to maintain a system that has expired.” 

Lebanon’s Prime Minister Saad Hariri (L) speaks with French Minister for Europe and Foreign Affairs Jean-Yves Le Drian (R) during the Lebanon International Support Group meeting in Paris, on December 8, 2017. Photo: Alain Jocard / AFP

Help from my friends

Lebanon has never failed, and many believe it never will, due to political and other factors. Key partners do not want to see the country fail.

“We’ve always had this assistance from a foreign sovereign: Paris II, Paris III, the European debt crisis brought a lot of money into Lebanon. We’ve always had something to help us,” said Akkaoui.

In April 2018, Paris hosted the CEDRE conference, aimed at drumming up support for its beleaguered Mediterranean ally.

Kulluna Irada was present at the table representing civil society, and its speaker issued a warning to Lebanese politicians present: namely that time was of the essence to get the economy back on track.

Lebanon has yet to implement the reforms desired by donors.

Nassib Ghobril, chief economist at Lebanon’s Bank Byblos, emphasizes that Banque du Liban has taken preemptive measures to maintain confidence in the financial sector, such as imposing a capital adequacy ratio of 15%, which he says has been exceeded by 1%. 

“Even if S&P downgrades to CCC, we’re still above the international standard by 200 basis points,” he told Asia Times. 

The central bank also paid its maturing Eurobonds in April and May, plus interest, Ghobril adds: “This is the first time we pay maturing Eurobonds without issuing Eurobonds in parallel. That indicates we have the capability to service our debt irrespective of the prevailing conditions,” he said. 

In the longer term, however, Lebanon’s underlying issues remain.

“The numbers tell me there’s a credit event in two to three years,” said a Lebanese economist, who declined to be named due to the sensitivity of the subject.

In layman’s terms, a credit event is when a country cannot make a payment on its debt obligations. Should that day come, Lebanon could default, restructure, push back its obligations … or go back to Paris.

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