Credit downgrades and Lebanese euphemisms

A credit rating is basically an assessment by experts of our likelihood to continue to be able to pay our debts on time.
by Dan Azzi

23 December 2018 | 13:57

Source: by Annahar

  • by Dan Azzi
  • Source: Annahar
  • Last update: 23 December 2018 | 13:57

This undated photo shows Banque Du Liban Governor Riad Salemeh (AFP)

BEIRUT: So Moody’s just changed our sovereign characterization to a negative watch, meaning they’re thinking seriously about downgrading us a notch from B3, which is already six levels within junk.

A credit rating is basically an assessment by experts of our likelihood to continue to be able to pay our debts on time. These ratings are important because they get reflected in the interest rate our government pays on its debts (and, in case you think that doesn’t concern you, the government’s rate trickles down to the interest you pay on your mortgage or car loan or credit card.).

I won’t get into the technicalities of this, so I don’t lose less technically savvy readers, but you should also know that the credit rating of our banks is capped by our government’s, so whenever it gets downgraded, so do our banks. The rating agencies don’t use the term “junk” anymore, preferring to use “below investment grade” because it’s more polite ... like “underdeveloped” countries morphed into “lesser developed” countries, and eventually into “emerging markets” today, even though many of us in that category never really emerged, and some of us actually submerged.

Last time Moody’s did something like this was in August 2017, when they downgraded us from B2 to B3. They also adjusted the negative watch to stable, which is routine, because whenever you get downgraded, the outlook becomes stable, the idea being that had you deserved a bigger downgrade they would have just done it then and there. Many in the local press missed the point, as they reported silly headlines such as “Moody’s affirms stable outlook for Lebanon.” That’s basically like saying that a patient who just had a triple bypass heart surgery is stable in the Intensive Care Unit, while neglecting to mention the tiny detail of the serious heart attack that led him to the ICU in the first place.

Of course, the foreign press and agencies are usually a couple of steps behind in diagnosing the problem, only because, in the grand scheme of things, let’s face it, notwithstanding our own narcissistic view of ourselves, we’re just not that high on their priority list. Those of us who worked on Wall Street affectionately call them a “lagging indicator” because of fiascos like Enron and WorldCom.

In Lebanon, they normally assign young kids, a couple of years out of school, to cover the country, and when these kids visit and meet our bankers, dressed in their $5,000 Ermenegildo Zegna suit, $300 Hermès tie, and 14-carat gold cufflinks ... and the Rolex watch — don’t forget the Rolex watch — you wouldn’t blame them for being a little intimidated. Then our folks, in typical grandiose Lebanese fashion, wine them and dine them at the most expensive downtown restaurants, with French names that can only be pronounced with some serious straining of your face and lips. Then they take them to Music Hall, or B018, to show them the roof which opens like a convertible car, and they just might believe that everything is fine ... or, at least, who wants to offend such magnanimous hosts?

That said, they can’t just paint everything in rosy colors, so what’s the banker likely to disclose as our only weakness? Just like they tell you to do in a job interview, when the prospective employer asks you to identify your weaknesses.

“I work so hard and such long hours that sometimes this gets in the way of my personal life.”

Great line, unless you’re applying for a position teaching Yoga or meditation in California.

So what’s the equivalent answer that our guys give to the rating agencies and foreign press? That’s right. If only a president is selected. If only elections take place. If only a government is formed (Part I, II, or III etc.). Thus, this time, the negative watch came not because they recognized the unsustainable business model, not because their own eyes are looking at the vacant unsellable towers and stupid yellow cranes dotting the skies of our capital, but because they used the bankers’ own claims against them.

Lack of formation of a government. I mean even by Lebanese standards, seven months is way too long, when there’s $11 billion allegedly waiting. So now they downgraded us and the bankers can’t exactly object — they gave them the idea, back when even they believed it was preposterous for it to take seven months — they can’t very well backtrack from that now.

Fitch is Moody’s lesser-known competitor, sort of like when people talk about the Three Tenors — everyone can name Pavarotti, and, if you’re sophisticated, you may be able to name Carreras, but most people would say “and the third guy” when they don’t remember Domingo. Anyway, Fitch also followed course, as the agencies always seem to operate in concert, because nobody wants to be caught flat-footed, albeit Domingo’s reasoning seemed much more well-thought out — he actually cited the real reasons, like the impetuous and idiotic public sector raise, AKA Silisli, as well as the debt and deficit.

Goldman Sachs, arguably the top investment bank in the world (especially if you’re a smart hedge fund client, and not a pension fund from Düsseldorf), just issued a research report about Lebanon. It was actually pretty good, surprisingly superior to past reports. Then I noticed they’d just hired the author a couple of months ago from Citibank.

The content of the report had some outstanding data and insight, which didn’t quite jive with the conclusion. Sort of like me going to the doctor and getting some tests done, which show that my cholesterol is 400, my blood pressure high, I’m 100 kilos overweight, half my family died of heart disease ... but then the doctor tells me “You’re fine. just go home.”

So I closed my eyes and projected myself to back when I was in the business. Here’s this FNG issuing a report which ruffled some feathers, especially the large fee-paying type of feathers, so maybe a last minute bit of editing was in order, to make it more palatable. Like me needing to wear a tie, except I’m still wearing the Adidas track suit.

The title of the report was “How Long Can Lebanon Finance Its Deficits?” What was the translation in most of the local press? It was “Top Investment Bank Denies Lebanon is in Trouble.”

The problem is that recently more and more attention is being directed at our little country, with more and more senior correspondents and experts looking at us, and these new guys and gals, although still enviably young, seem much sharper and more ambitious than their predecessors, and just ain’t gonna buy the usual bull##it.

We may need to buy some Brioni Vanquish $80,000 suits to pull it off this time. 

Dan Azzi is a regular contributor to Annahar. He has recently been invited to be an Advanced Leadership Initiative Fellow at Harvard University, a program for senior executives to leverage their experience and apply it to a problem with social impact. Dan’s research focus at Harvard will be economic and political reform in a hypothetical small country riddled with corruption and negligence. Previously, he was the Chairman and CEO of Standard Chartered Bank Lebanon


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