Dropping off a cliff: A diver leaps from a platform on the landmark Raouche sea rock off the coast of the Lebanese capital, Beirut. Photo: AFP/Anwar Amro

Lebanon’s cabinet, faced with dwindling foreign reserves and growing public discontent, on Saturday voted unanimously not to pay a $1.2 billion Eurobond maturity due Monday, March 9.

“How can we pay foreign creditors while the Lebanese cannot access their deposits?” said Prime Minister Hassan Diab in a televised address to the nation following the vote.

The Lebanese public in the past six months has been subject to arbitrary and restrictive capital controls, stunting business and driving up inflation, even as connected individuals have been allowed to engage in massive capital flight.

Heads of 20 Lebanese banks were interrogated this week by the financial prosecutor over how they allowed more than $2 billion dollars to leave the country since the outbreak of an anti-corruption street movement last October.

Even so, the banks managed to deflect an order to have their leaderships’ assets frozen, with Lebanon’s attorney general judging it could negatively impact Lebanon as it seeks to negotiate a way out of its economic predicament.

Lebanon has one of the highest debt-to-GDP ratios in the world, at 150% debt to GDP.

The next step, Diab pledged, is to “balance the budget” and work with Lebanon’s creditors to reach a “fair” debt restructuring agreement.

Banks’ prestige shattered

The decision for default, the first in the country’s history was made despite intense lobbying by the Lebanese banks, which stand to take major hits.

“A proper debt restructuring will incur a big loss for them, which will wipe out all their equity,” a Lebanese economist told Asia Times on condition of anonymity.

The losses could reach well over $60 billion, and as high as $80 billion, he said.

“And then Mr. X will not own Bank X and he’ll have to buy his own bank again in order to sit on the board.”

Foreign funds like Ashmore, which is said to have bought up more than 25% of shares in each of the three Eurobonds maturing this year, also stand to lose.

Imminent reforms needed

The move was the right one for the country, according to Karim Bitar, who heads the civic advocacy group Kulluna Irada.

“Not paying the Eurobonds is the right decision; the one recommended by an overwhelming majority of experts and economists (at least those who are not on the payroll of any bank or politician),” he said.

This action, however, must be quickly followed up on, in the form of a major overhaul in the way Lebanon conducts its financial affairs, he said.

“The default should be immediately followed by debt restructuring and comprehensive structural reforms,” Bitar told Asia Times.

In recent weeks, Lebanon has sought advice from a number of foreign firms specializing in debt restructuring.

Diab pledged in his Saturday address to unlock the more than $11 billion dollars in funds which were pledged to Lebanon through the French-sponsored CEDRE conference in 2018.

Those funds, however, are intended to aid in long-term projects, namely infrastructure, to revitalize the Lebanese economy.

It remains to be seen if Lebanon’s allies would agree to a more urgent transfer of funds.

Hanging in the background is the question of an IMF rescue package, a path opposed not only by Hezbollah, over the interference it could bring, but also factions who believe the austerity measures would be too much for the public to bear at this juncture.

Lebanese money changers on Saturday were enforcing a government order to keep the dollar pegged at 2,000 Lebanese pounds, after rates had reached 2,700 LBP despite an official rate of 1,550.

Alison T Meuse is the Asia Times Middle East editor and correspondent.