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February 21, 2020
Should Lebanon Default? A Take by Dan Azzi

If We Default, We Do It Now 

As part of its effort to build constructive dialogue on important national issues, LCPS solicited the opinion of key experts who have varying perspectives on whether Lebanon should default. We invite you to read their different views in the next few days.
 
Our public debt is $87 billion, added to it is the $112 billion worth of deposits from commercial banks at Banque du Liban (BDL). Adjusted for double counting, our total debt is approximately $165 billion. Our foreign-held debt is $5-12 billion, at face value, even lower at market rates, making it around 5% of the total. Therefore, our problem is primarily internal—circular debt among locals—which can be solved with a few strokes of a pen, by an empowered, competent authority.
 
Using our reported BDL reserves of $30 billion, we have the capacity to pay all the external debt to Euroclear (which completes our legal obligations), and then convince local holders to refund our dollar payments using an appeal to their patriotism, or, if that fails, regulatory tools at our disposal. These include unleashing a Banking Control Commission audit, requiring proper mark-to-market of their books, increasing the liquidity premium from 20% to 2000%, taxes, forced equity stakes... and Im just getting warmed up.
 
The upside of paying the Eurobonds is that, sooner or later, we will have to go back to the international markets to rebuild the carnage resulting from this crisis. The only thing we have going for us is our unblemished record of never having defaulted since 1943. We are neither Argentina nor Ukraine, for those using the flawed comparison to demonstrate that its no big deal.” For instance, Argentina was blocked from capital markets for years. None have an armed group with a foreign policy independent of the central government, sanctioned by the most powerful nation, while using its currency, making us especially vulnerable. 
 
Our clean record, with some credible reform measures, will allow us to go back to the financial markets and refinance our debt after 2020, in a way that achieves the objectives of restructuring, without the stigma of decimating our record.
 
The downside of not paying is that we have no leverage. Our legal representatives have already failed to include an enhanced collective action clause in the documentation, weakening our negotiating position. These creditors are brutally adept at twisting arms of inexperienced, weak opponents like us. The recent investors are not accidental logs who stumbled upon us through an unexpected deterioration in our credit—this type of scenario is their bread and butter. They came in gunning for a fight, to extract maximum concessions. They will almost certainly file an attachment order against our gold holdings—conveniently held in New York, in close proximity to the judge deciding the case—our MEA airplanes, and even our deposits and reserves held at custodial banks, also in New York, due to our dollarized economy.
 
There have been previous precedents, when funds for the central bank were frozen until the cases were settled. While the probability of their winning is low, it’s all about drowning us in attacks that will exhaust us and weaken our defenses, so we agree to a disadvantageous settlement.
 
The statistics on this type of thing are ugly, with 50% of defaults ending up in expensive litigation. The best case scenario would be to save a measly $200-$400 million dollars this year, out of the $783 million owed to foreigners in 2020, after racking up massive legal bills.

Regardless what is decided, one thing is certain: We should have a plan either way. If we default, we do it now. If not, we execute a plan to never default. Paying March and defaulting in April or June would be the foolish course of action.







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