In a solemn press conference over the weekend, the relatively new Lebanese Prime Minister Hassan Diab delivered a speech that will go down in history.
Conceding that the country was paying for mistakes made in the past, Diab announced to the world that Lebanon would not be rendering whole the bond payment due on Monday and that the country would kickstart a process of debt restructuring with its creditors to re-profile the roughly $32 billion in outstanding eurobonds: The first ever default for the tiny Middle Eastern country off the coast of the Mediterranean.
People not following the story might assume that Lebanon, with one of the highest debt to GDP ratios in the world, had become the first country to fall victim to a slowdown in global growth, one that only looks like it's going to get exacerbated with the onset of the new coronavirus.
That is not the case. The situation Lebanon found itself in economically is one that has been almost entirely homegrown, due to unsustainable imbalances and twin deficits: The country has been running a negative balance of payment for the better part of the last 10 years while simultaneously running ballooning budget deficits (2018's budget topped 10%): Debt servicing alone accounts for about half of the spending while an inefficient and costly electricity sector consumes another third. (After the Civil War ended in 1990, Lebanon has not had 24-hour electricity and most people supplement government provided electricity with costly private generators). This has left little room for productive investment.
Furthermore, the central bank has been leaning heavily on the local banking system. Customers' dollar deposits have been primarily placed at the central bank, reimbursed with above market interest rates in return. The interest alone has made many wealthy depositors a lot of money.
After the Syrian War commenced in 2011, foreign deposits started to dry up and the economy's growth dipped followed by a long period of political paralysis. Things came to a head last fall when demonstrations gripped the country as protesters took to the streets raging at years of inept leadership and rampant corruption, eventually bringing down the government.
The currency, the Lebanese lira, which had been pegged to the dollar since the 1990s, started trading in parallel markets at a near 30% discount to the official rate. Locals rushed to withdraw their dollars from the banks, perpetuating the dollar shortage in the country.
All which led to Saturday's decision. In his speech, Diab pledged to tackle tax evasion, corruption, bring down the costs of the electricity sector, work toward a balanced budget and restructure the bloated banking system. A long list of reforms that urgently need to be undertaken especially as the country has had preliminary talks with the International Monetary Fund and is faced with ever dwindling foreign reserves.
It will be a long road ahead. Many countries have defaulted and recovered (Argentina has defaulted eight times), but what is more important is learning the lessons from the past so as to protect the less fortunate and not repeat them again.