Lebanon nearing day of reckoning

In the midst of economic turmoil, President Michel Aoun further rattled international allies earlier this week with his comments over Lebanon's national defense strategy.
by Georgi Azar

21 August 2019 | 19:24

Source: by Annahar

  • by Georgi Azar
  • Source: Annahar
  • Last update: 21 August 2019 | 19:24

A file photo of Lebanon's Grand Serail (AP)

BEIRUT: As a possible credit rating downgrade and the threat of increased U.S sanctions loom over Lebanon, the Cabinet is set to meet Thursday in the lead up to what is shaping up to be a monumental day for the small Mediterranean country. 

On Friday, S&P Global Ratings is set to issue its long-awaited sovereign ranking for Lebanon, which has been hovering around junk status for almost a year. It currently rates Lebanon B- with a negative outlook, on par with Fitch Ratings. Moody’s Investors Service, however, already slashed Lebanon's rating down to Caa1 earlier this year. 

"Realistically, the situation deserves a downgrade given what is happening, although Lebanon's political class and Central Bank have been lobbying to avoid such a scenario," Jamil Hallak, a leading senior debt specialist, told Annahar. 

Even if Lebanon manages to avert a downgrade on Friday, Hallak predicts a "refuge period of six months during which officials must deliver improvements to avoid an inevitable downgrade."

A triple C downgrade will force increased selling of Lebanon's dollar-denominated Eurobonds, with the yield on bonds maturing in 2022 trading at 15 percent while the CDS jumped to 1151 bps, a ten year high only surpassed by Argentina and Zambia in the emerging markets. 

Similar crises around the world are also adding pressure on Lebanon, with the timing and consequences of the Argentina emergency affecting the valuation of Lebanon's Eurobonds, he said.  

"These levels are rarely sustained," Hallak argued, adding that "something has to happen for good or for worse."

In the midst of the economic turmoil, President Michel Aoun further rattled international allies earlier this week with his comments over Lebanon's national defense strategy. 

Speaking from his summer residence in Beiteddine on Monday, Aoun seemingly backtracked on his previous commitment to reel in Hezbollah's wide arsenal as part of a national defense strategy, citing changing regional circumstances. 

"All the measures of the defense strategy that we have to set have now changed, even the spheres of influence are changing," he said, prompting his office to issue a statement the next day clarifying his earlier comments. 

Aoun's comments were “a description of the situation that arose 10 years after this issue was brought up at the national dialogue conference sessions, particularly the military developments that occurred in Lebanon’s neighboring country [Syria] in past years, which required a new approach to the defense strategy issue, taking into account these developments, especially after major powers and terrorist organizations had joined the wars witnessed by several countries neighboring Lebanon,” the statement read. 

The blunder ostensibly rattled the international community, which has been courting Lebanese officials in an attempt to pave the way for the potential integration of Hezbollah’s arsenal within the framework of a national defense strategy. Lebanon relies heavily on international aid for both its armed forces and economic stability, receiving billions over the years for numerous investments in infrastructure, health and security. 

The latest CEDRE $11 billion soft loan package has yet to be released, pending the implementation of hard-hitting budgetary and sectoral reforms as well as filling current vacancies in the sectoral regulatory authorities in telecommunications, energy, and civil aviation.

“The steady deterioration in Lebanon’s FX liquidity position indicates a likely downgrade to CCC,” Goldman analysts including Farouk Soussa said in a note last week, as the Central Bank's foreign reserves dropped to around $31 billion as of June 2019. Although it has never defaulted on its obligations, Lebanon is currently struggling with one of the world’s heaviest public debt burdens, estimated at 150 percent of GDP. 

Last week, Prime Minister Saad Hariri embarked on a five-day visit to the U.S, during which he seemingly courted U.S officials to spare Christian allies of Hezbollah from sanctions. Talks also centered around alleviating concerns over Lebanon's ability to follow through on its debt obligations, viewed as an attempt to lobby against a potential credit rating downgrade. 

Speaking upon his return to Lebanon, Hariri labeled Lebanon’s ties with the U.S treasury as “good" while asserting that "the government will work hard in the coming days" to make up for lost time after the month-long Cabinet paralysis. He also vowed to "complete the 2020 state budget within the constitutional deadlines."

U.S sanctions, which have gone as far as targetting two Hezbollah MPs, are the latest attempt to pile pressure on Lebanon to establish a state with a single government and a single military. 

Despite the urgency to settle the issue, talks have failed to materialize in recent years, with the debate around the adoption of a national defense strategy resurfacing intermittently before slipping back into the shadows. Aoun, along with his ally and Defense Minister Elias Bou Saab, has recently tied the issue to the threat of an Israeli attack. 

"So as long as there are Israeli ambitions to take our land and waters, we can’t talk about a national defense strategy or a strong Army as the sole possessor of weapons," Bou Saab said in April. 

Critics have labeled the Israeli caveat as an attempt to delay talks and impede serious efforts for the national defense strategy to come to fruition. 

Speaking Wednesday from his party's headquarters in Saifi, Kataeb leader Sami Gemayel blasted Hezbollah's grip on Lebanon's state of affairs, describing it as an "abduction of our national sovereignty."

He also blasted Hezbollah leader Hassan Nasrallah's latest remarks, which in essence placed Lebanon at the center of a possible Israeli-Iranian conflict. 

In a speech on August 16, Nasrallah argued that a "war with Iran means war with all the axis of resistance." Given that Hezbollah is the main proxy of the Islamic Republic, receiving billions of dollars in aid, Lebanon will inevitably be dragged into another confrontation, similarly to the month-long conflict in the summer of 2006. 

Gemayel then cautioned against Lebanon being yanked into the broader conflict between the U.S and Iran. 

"The issue has nothing to do with defending Lebanon, and Nasrallah's words have nothing to do with defending Lebanon neither," he said. 

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