Focus should be on reforms

The case for paying the maturing eurobonds

The case for paying the maturing eurobonds

Lebanon is due to make a $1.2 billion principal eurobond payment on March 9, with opinions divided on whether to pay or put in place a plan to restructure the debt. As part of our coverage, EXECUTIVE spoke via telephone with Nassib Ghobril, chief economist of the Byblos Bank Group, to find out why he is in favor of Lebanon paying the dollar eurobonds due this year.

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There has been a fierce public debate on the issue of whether or not Lebanon should pay or default on its upcoming eurobond dollar payments in March. Is it correct you are part of a minority who believe it should be paid?

I’m a part of the silent majority who believes it should be paid. E What is your reasoning behind that?

First of all, we have very little time left between now and the date the eurobond is due. And we have taken too little time to address this issue. From the experience of other countries, when you have a situation like this you start setting things in motion at least six months in advance, not two weeks in advance.

Second, the authorities should have known this was coming long before even six months ago, because at the end of 2018 the Ministry of Finance, on behalf of the government, asked the central bank to cover all the maturing eurobonds and the interest payments accrued on them in 2019, which the central bank did. So they knew at the beginning of 2019 that they had an issue to deal with, which is the inability of the government to pay its eurobonds back then—because it’s not the responsibility of the central bank to do this.

Third, when the national protests started on October 17 the government simply disappeared. Instead of forming a crisis cell to address this and other urgent issues—it just disappeared. [Even] when the government resigned it did not form a crisis cell. [Then] the political procrastination to designate a prime minister and the formation of the government took all this time—it’s only two weeks ago that the new government received its vote of confidence—so we are very late in the game for not paying or considering other options.

Fourth, it’s not true that we don’t have the resources, and [there is] this misleading notion that we have to choose between financing the imports of basic goods and paying the eurobonds. This is misleading because the central bank already has declared several months ago that it has liquidity for the importers of basic goods.

Fifth, we have enough resources, contrary to what is being said, to pay the eurobonds. For instance, last week Fitch Ratings issued a detailed report saying that the central bank has enough foreign currency reserves to cover all the maturing eurobonds between now and the end of 2021.

But, the report added that because of political pressures this option is highly unlikely and is unrealistic.

The central bank also has a lot of resources nobody is talking about. The central bank has $15 billion in gold reserves and we have been saying we cannot touch the gold reserves because these are assets to use in crisis—what more do we need than the current crisis to consider, not selling the gold, but at least utilizing those assets through securitization, or collateral, or through other means. The central bank also has a portfolio of real estate at about $2.5-3 billion conservatively, and that could also be considered to cover, not the eurobond payment, but at least to inject liquidity in the market. The Lebanese state also has a huge portfolio of real estate assets, just to name one of the state’s multiple assets.

“We are very late in the game for not paying or considering other options.”

Between the gold and real estate at the central bank you have around $18 billion in sitting assets, non-performing assets, that can be used to help—whether to inject liquidity into the market or to cover the payments of the eurobonds.

I’m advocating the payment [of the March eurobond]. We have to choose the least costly option for the economy, the financial system, and depositors, and the least costly option for me is paying. I hope they realize what a debt restructuring, or a disorderly default, or even an orderly default means for the country. And I hope this is being studied carefully, otherwise we are jumping into the unknown. If you think we are in an ambiguous situation now, the alternative could be much worse.

At this stage, so late in the game, paying the maturing eurobond is the least costly option.

You cannot go that route because you cannot go back. Whether you have an orderly default, or a disorderly default, or suspension of payment, you are jeopardizing the reputation, credibility, and historic track record of the state meeting its obligations. Unfortunately, I see this has been taken lightly because I believe that this rush toward the other option is a way to avoid in-depth structural reforms.

The main three international ratings agencies, S&P, Moodys, and Fitch all came out in February and said to some extent that restructuring or non-payment is virtually certain, so is there not a degree to which the reputation has already taken a hit and most actors are thinking that this is something that is inevitable down the line?

They are saying it is inevitable and they downgraded because we have senior politicians who have publicly declared that this is the best option. But this is a very risky road that we are taking, especially since such a decision could have been avoided—the whole crisis could have been avoided. The decision to default can and should still be avoided. We are taking the easy road, we are not even trying to see the alternatives.

I came up with the gold reserves and the real estate portfolio of the central bank as examples, I am sure there are other ways to cover the shortage of liquidity in the market until structural reforms are in place. My concern is that this rush toward debt restructuring or defaulting is a way to avoid the deep structural reforms that the economy needs. Usually countries start with structural reforms and when there is no other alternative they move to debt rescheduling or restructuring. We are going directly to the riskiest possible solution and we haven’t even tried reforms. We have a track record of not implementing reforms.

The last round of reforms that Lebanon agreed to undertake was at the CEDRE investment conference in April 2018, in exchange for which the country would have unlocked $11 billion in loans/grant from the international community. These reforms have not materialized in the almost two years since, do you think that the political will for reform exists?

No I don’t think it exists seriously. Despite all the good will of the current ministers and the team they have formed, I don’t think there is real will for in-depth structural reforms. But I sincerely hope that they prove me wrong.

So isn’t there a risk that if we do what you are saying and pay to maintain Lebanon’s reputation and use gold reserves or other avenues that we are just delaying a default along the line because these structural reforms won’t happen?

Defaulting would—from the optic of the political class or most of it— prevent or avoid in-depth structural reforms that would affect their base.

But what I am saying first of all is that reaching that decision should be the very last resort. We need to have a

comprehensive, credible reform plan with clear priorities that includes a medium-term fiscal framework, whose goal is to reduce public finance imbalances and therefore reduce the deficit-to-GDP ratio and the public debit-to-GDP ratio for the medium term. Before getting into debt restructuring, we need to put together this plan and I don’t think there is enough time to start implementing it prior to the March 9 deadline.

Second, after we start implementing reforms and we show credibility, and all options are exhausted on the reform front, then we can see if we can continue to afford the debt or not.

Many of the comments pieces that are circulating are engaging with the eurobonds issue from a purely economic lens, with no acknowledgement of the political nature of the bond decision. In your opinion, how much can this be a question of pure economics and much it is by necessity a political game with lots of divergent international interests involved?

International interests are an excuse. The best way to prevent international or foreign interference in Lebanon is to have a strong economy, public finances that are healthy, and an economy that is functioning properly—and this can only happen through reforms.

Since 2002, there hasn’t been real political will across the board to implement reforms because reforms are viewed as a zero-sum game in political terms by political parties. If the authorities are serious about reforms they shouldn’t spend their energy blaming the banking sector for all the problems we are facing today—they are avoiding taking responsibility.

One way to avoid a worsening of the situation is to try to reach an agreement with the IMF through its various programs. It doesn’t have to be a standby agreement it could be a precautionary credit line that the government can use if it needs to.

Because of the track record of not implementing reforms, today the current authorities do not have the credibility. I’m not taking about international credibility, I’m taking about local credibility. The people don’t believe them, the private sector doesn’t believe them—until they see concrete things happen. So in order to put in discipline and show a sense of urgency in the implementation of reforms—and more importantly to show there is political will to implement reforms—the option should be there on the table to take our reform plans and submit it to the IMF and try to negotiate a package that can be satisfactory for both sides.

If we discover that the conditions or the requests of the IMF are detrimental to the Lebanese citizen, then we should say no, we should pull out. If we find out that there is a hidden political agenda as some parties are concerned about, then we should pull out.

Do you think there are any lessons to be learned for Lebanon from the recent experience of Argentina with the IMF?

No, I don’t compare with Argentina. But I would say that overall that if a country defaults and goes to the IMF and has international support, the Argentina experience shows that you need domestic political will and leadership to implement reforms, you need domestic buy-in.

We should be worried about the lack of a sense of urgency from the political class, the sense of denial about the gravity of the crisis and measures needed to get out of it that we have been seeing, at least since October 17. [Despite] all the speeches, all the promises, the formation of the new government, the committees, there hasn’t been a single measure taken yet.

Regardless of where analysts seem to fall on issue of whether to pay the eurobonds or not there seems to be an agreement that a haircut on deposits is inevitable, and by and large a consensus that such a haircut should be targeted to larger deposit holders. What is your view on the inevitability of a haircut and how to distribute it across depositors?

They are taking the easy way out. They want the banking sector and the depositors to pay the price of their errors and lack of urgency and lack of political will to implement reforms. The priority should be to protect depositors, regardless of the size of their deposits. Large depositors who earned their money legitimately and through hard work deserve to have their money protected, just like every small depositor.

My opinion is that we need to pay the eurobonds now, which is a less costly road, not continue to procrastinate. It should be the last time we get so close to a maturing bond and be in this confusing situation and indecision. It should be an incentive to put together a clear, comprehensive, credible program and rescue plan and start implementing it immediately.

We have a maturity in April and a maturity in June and I believe we should pay those as well because the next maturity is in April 2021, a $2 billion maturing bond in 2021. So we have time to show we are serious about implementing reforms and we want to salvage the economy.