Public Debt: It’s Not the Size That Matters, It’s How You Use It (Part 2 of 3)
Day 30: Friday, November 15, 2019
In 1953, West Germany was offered a debt relief deal by its creditor nations. Nearly 50 percent of the debt was written off, while the repayment of the other half would be made only when West Germany was running a trade surplus. Without this debt relief, it is doubtful that West Germany could have emerged as quickly as it did as a major economic power. But those were different times, when capitalism was entering its Keynesian phase, a somewhat rational and concessionary phase in which states intervened in the economy both to help capital and to lessen inequalities and social injustice.
With the emergence of neoliberalism in the early 1980s such debt relief schemes would become anathema. Money, and consequently debt, acquired a sacred status. Today, debt has to be repaid at any cost and on time, and the mere consideration of debt relief has become a mortal sin. The recent economic devastation imposed on Greece in order to repay its debt provides the clearest example of this logic.
But Lebanon is shielded from a Greek-style crisis. For one, it still has its own currency, and therefore there is no risk of it running out of money as it can always print more. And crucially, the vast majority of holders of Lebanon’s debt are local not foreign creditors.
Debt decisions are political decisions, not just products of economic expertise that can be serviced by the so-called technocratic government we keep hearing about.
In July 2019, Lebanon’s public debt stood at $86 billion divided between LBP-denominated debt (62.3 percent of the total) and foreign currency-denominated debt (37.7 percent). Lebanese private banks’ share of the LBP-denominated debt was 32.7 percent, while 53.4 percent was held by the Lebanese central bank. The breakdown of the foreign currency-denominated debt is less clear, but it is estimated that more than 70 percent of it is held by Lebanese banks.
As mentioned in Part 1, half of government revenue in Lebanon is spent on servicing the debt, i.e. on paying debt interest, which is mostly owned by Lebanese banks. Combined with the figures above, we know that more than a third of government revenue is transferred annually to Lebanese banks. This transfer constitutes a steady and lucrative income for banks. Put bluntly, the strength of the Lebanese banking sector is based on appropriating large sums of public money. Given this reality, debt restructuring and its threat to this lucrative income source is likely to be vehemently opposed by Lebanese banks. At the same time, however, this situation does provide the Lebanese state with leverage over the banks, for the state is basically bankrolling them.
But another characteristic of neoliberalism is the tendency to forget what states can do. A state is a superstructure that controls and governs a certain territory, with the capacity to impose its will on the population and organizations of this territory. By no means a call for an authoritarian regime, this statement is simply meant to assert the power that a state can exercise. This power can take the form of excluding bankers from the decision-making process, like Franklin Roosevelt did in the Bretton Woods conference that established the post-war financial and economic system. No doubt, the situation in Lebanon is complicated by the close intertwining between the political and financial spheres. The fact that most Lebanese politicians either work or invest in the banking sector reminds us that decisions related to debt or finance in general are political (and that any attempt to depoliticize them is also a political act). Debt decisions are political decisions, not just products of economic expertise that can be serviced by the so-called technocratic government we keep hearing about.
This is the reality we should think about when assessing recent proposals to service the debt. A recent statement by economists, many of them signatories to the earlier statement discussed in Part 1, called for decreasing interest on the debt held by the Lebanese central bank (BDL), as well as negotiating with Lebanese banks to lower the interest rate on the debt held by them. This neoliberal approach to servicing the debt leaves many questions unanswered. What if the banks refuse to negotiate? By how much should these interest rates be cut? And will these cuts actually decrease the debt? Or do they just slow down its increase? And what role will the BDL play in all of this?
It is worth remembering that the BDL is not a private bank. It is a public entity, whose capital is owned by the state in its totality. In principle, there is nothing that prevents the BDL, which finances the Lebanese state and economy (mainly through printing money), and which is the initial seller of the bonds, to simply write off the part of the debt that it holds. This act alone would relieve debt servicing by at least one third. And it would reduce the debt by the same amount.
As for the suggestion to lower the interest rates on the bonds held by Lebanese banks, this seems very improbable given that it will create a situation where similar bonds have different interest rates according to who owns them. A better approach would be to impose a tax rate, say of at least 50 percent, on the interest of these bonds. Anyone who considers this figure excessive should compare it to the top marginal tax of 80–90 percent in the United States between the 1940s and 1970s.
An additional option would be to attach conditions to the holding of state debt, for instance imposing on Lebanese banks that they invest in certain sectors, such as green industries, proportionally to the amount of the debt they hold. A sensible approach would also extend the maturity period of existing bonds (i.e. the period for debt repayment) without increasing their interest, as well as stop issuing new bonds whose sole purpose is to repay previous debt by creating a new, bigger debt.
Some might argue that such measures would offset foreign investment. But most of the debt has been held by local banks for decades. Even the few international investors who in the past held Lebanese Eurobonds already exited in recent years. As for the issue of investment in general, we arrive at the issue of what the borrowing is used for, the subject of the following and final part.