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Featured Analysis


Amer Bisat and Robert Kahn, respectively Managing director and Head of Sovereign and Emerging Markets (Alpha) at Black Rock, and Director of Global Strategy and Global Macro at Eurasia Group


March 2020
How Should Lebanon Navigate the Crisis?

A moment of truth. The constellation of shocks facing Lebanon and its new government is unprecedented. A deep economic and financial crisis and a new and profound threat from the spread of the coronavirus all threaten to destabilize the country’s already fragile economy and political situation. Looming deadlines are approaching including an imminent and large debt amortization. It would be naïve to assume the crisis will be anything but painful and prolonged.
 
A durable solution will require an all-hands-on-deck approach, involving negotiations with multiple stakeholders from whom enormous sacrifices will be asked. Recovering from the crisis will involve three separate yet complementary negotiating vectors.
 
The first set of negotiations will be with private creditors. Bondholders’ hopes for full payment are unrealistic and some form of restructuring appears inevitable. The magnitude of debt reduction that will be required, especially without a sound strategy for economic recovery, makes it likely that negotiations will be difficult, prolonged, and almost certainly litigious.
 
The banking sector will be the second negotiating vector. Many banks are already insolvent and the restructuring of their significant holdings of public (and non-performing private) debt will force hard decisions on shuttering, nationalizing, and merging of banks. Crisis managers will also have to force a recapitalization on surviving banks (including, not least, the central bank) while contemplating interim recovery schemes (“good/bad” banks). Most delicately, they will very likely have to make extremely unpopular decisions on whether, and how, to bail in depositors.
 
A third vector will be the formulation of a strong and credible economic recovery program for which, realistically, an IMF arrangement backed financially by foreign donors will be a requisite. Tough choices will have to be made. First, a new monetary framework will necessitate a depreciated and more flexible currency regime, which will have enormous social and political implications. Second, the needed radical fiscal effort will impact taxpayers, public sector employees, pensioners, and other recipients of government services. Finally, the program will likely, and appropriately in our view, prioritize addressing the chronic corruption and governance problems that have weighed on the Lebanese economy—an undertaking that will be aggressively fought by those who have long benefitted from the system.
 
A cardinal rule in managing Emerging Market crises is that the effort must proceed in parallel rather than sequentially. Managing crises is primarily about trade-offs, and decisions taken in one area will have an impact on others. The imagery we like to use is of a balloon: You push on one place and the air shows up elsewhere. We can think of two examples to illustrate the point. A larger debt reduction provides more fiscal space but, concurrently, increases the size of the bank problem and raises the chances of depositors having to be bailed in. Similarly, a larger fiscal effort will likely unlock more foreign funding but will be a severe drag on the economy. A wholistic approach to the crisis is needed. Tempting as they are, gradualist and piecemeal approaches will be counterproductive.
 
The logistics of the crisis management effort can spell the difference between success and failure. First, the recently formed Ministerial Crisis Committee is not the right vehicle for managing the crisis. It is a political body that is better suited for strategic decisions. Instead, a “National Economic Advisor” should be appointed to oversee the negotiating teams and manage the day-to-day negotiations. Second, the negotiating teams should have decision making authority. This will require an explicit brief that defines, ex ante, their mandate and the room they have for taking decisions. Having to go back to the Ministerial Committee for “rolling approvals” is inefficient. More profoundly, the teams should receive political backing including explicit public support and, at the limit, legal immunity.
 
Third, during crises, important decisions must be taken fast—analytic preparedness will therefore be key. The negotiating teams should be given enough resources to build and manage a “macro framework” that links debt, fiscal, monetary, and banking sector decisions. This is not a minor undertaking, and the creditors, as well as the IMF staff, will come to the table with such a framework. The Lebanese negotiators should have one too. Finally, “buy in” by the population (of whom great sacrifices will be asked) is crucial. Bad information will be plenty as will second-guessing by pundits, making a transparent, consistent and clear-eyed communication strategy necessary. Creating a participatory mechanism to discuss with the civil society the policy steps and to empower citizens to monitor implementation is also advisable.
 
The crisis is severe, and time is not on our side. Candidly, crisis managers today will have to overcome a severe credibility and legitimacy gap. For 30 years, the society and international community have been repeatedly frustrated by Lebanese policymakers’ unwillingness to act, and history has been disappointing. We are not condemned to repeat it.
 






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