Last week, Lebanon's Prime Minister Hassan Diab officially confirmed that Lebanon would not pay a $1.2 billion Eurobond due to mature on March 9th. Lebanon’s default comes after an unprecedented wave of protests has caused growing political instability and economic uncertainty since last October. However, to understand the root causes and possible scenarios of the current crisis, an in depth analysis of the role and governance of Lebanon's post-civil war political and economic institutions is necessary. Where and how did this crisis start?
Lebanon’s sovereign default comes at a heavy price for Hezbollah. This is not simply because of Hezbollah’s powerful role within the government that failed to repay a $1.2 bn bond on 10 March 2020. This is mainly because Hezbollah’s rivals are likely to use the current financial crisis to impose an external authority over Lebanon and increase pressure on the ‘Party of God’ to disband its armed wing.
Mourad Ayyash, a Lebanese citizen living in the Northern city of Tripoli, entered his bank on March 6, spilled gasoline over himself and threatened to self-immolate. A video of Mourad at the bank went viral across different social media platforms, but more importantly on WhatsApp – Lebanon’s most popular messaging app and the straw that broke the camel’s back. Apparently, Mr. Ayyash had been visiting the bank for 2 weeks straight, demanding to withdraw money from his own savings account.
Lebanon defaulted on its debt for the first time in the country’s history.
Since October 17, 2019, unprecedented popular protests have erupted in Lebanon motivated by demands for socio-economic rights and the reform of a highly corrupted and sectarian political system. The deterioration of economic and social conditions in Lebanon has also affected the 1.5 million Syrian refugees as well as the Palestinians and other communities of displaced people living in the country.
Economically speaking, Lebanon is an interesting case study in many respects. Like several Mediterranean countries such as Italy or Greece, it is characterized by huge public debt (151% of GDP). At the same time, like several northern liberal and service-based economies – and unlike most Mediterranean economies except for Turkey – it shows low levels of household savings.
Following the parliamentary election in May 2018 and after 9 months of negotiations, designated Prime Minister Saad Hariri was able to form a government in Lebanon. Although it appears to be a national unity government, bringing together almost all political factions in the country, the formation process received a lot of criticism, as it was considered a break from custom and was eventually perceived as Hezbollah's government in many Western circles.
The discovery and targeting of four Hezbollah tunnels that crossed from southern Lebanon into northern Israel by the IDF has brought back the attention to the sensitive situation in the Levantine nation. Since 2006, following the brief war between Israel and Hezbollah, the area has experienced a condition of delicate peace. While the southern portion of the country has been able to reconstruct and has lived in relative tranquility, the threat of a new war has never completely vanished.
Foreign analysts often call it "magic". The remarkable capability of the Lebanese economic system to remain afloat despite domestic instability, regional turmoil, and deep structural imbalances astonishes journalists and investors. Sometimes they "lose faith" and predict its "inevitable" collapse. So far, however, only to be proven wrong.