What would you say to someone holding Lebanese government debt?
By PINCHAS LANDAUlebanon building 298(photo credit: AP)
"What would you say to someone holding Lebanese government debt" asked my friend from New York. His job is sovereign risk analysis so his interest in the current "situation" is quite understandable - but his take on the Lebanese mess requires viewing it from the other direction - from Beirut, looking out.
For anyone toying with the idea of actually having a flutter on Lebanese government bonds, just bear in mind that this market is dominated by expat Lebanese who have lots of money and probably have better sources of information and analysis than anyone in Israel - including the supposedly knowit-all army intelligence and Mossad.
On the face of it, the basic issue on assessing any government bond is really straightforward: Will the borrower, in this case the Lebanese government, be able to repay the loan on maturity date? However, answering this question - which is essentially the same one my friend posed to me - is rather difficult. There are, in fact, two distinct risks that have to be considered separately. One is political risk and the other is credit risk. In simpler terms, one is the question of whether the Lebanese government will want to repay the loan - indeed, whether there will be a Lebanese government at all - and the other is whether it will be able to, even if it wants to.
In the case of Lebanon, the political risk is the more important one, going to the heart of the Lebanese crisis and of what is happening now in the Middle East. Whether the Lebanese government will want to repay a loan maturing in five or 10 years time is not merely a function of the ethnic or religious composition of that government, let alone of its economic policy orientation. The real question is whether there will be a Lebanese government at all, indeed whether Lebanon will exist as a sovereign entity.
Most people, both inside and outside the region, are still reluctant to contemplate the possibility of the demise of nation states to whose existence they have become accustomed since their school days. This wishful thinking is becoming inexcusable.
Iraq - one of many pseudo-countries cobbled together by the British and French from the rubble of the Ottoman Empire in the wake of the First World War - is falling apart before our eyes. Lebanon actually collapsed previously, well within living memory - and was only resuscitated after enormous efforts. Kuwait nearly went and Afghanistan is going (again). So the possibility of countries falling apart is very real, despite the pretence that all national borders are sacrosanct.
The threat is especially real in the Middle East, because there is a player whose avowed aim is to completely redraw the map on the way to recreating a region-wide (and ultimately global) caliphate. Lebanon, Israel and Jordan are all high on Iran's list for dismantling; in any event, if Lebanon were to become part of the Iranian Islamic Republic (or a separate one), its government might well be unwilling - and probably would be unable - to repay loans taken by the old regime.
Once you boil the issue down to "Will Lebanon survive as a secular, multiethnic and multi-religious state?" the answer becomes easier because it is derived from the answer to another question - "Who wants Lebanon to survive?" To this, we would suggest that America, France - and by extension the EU as a whole, Israel, Saudi Arabia, Egypt and maybe even Russia - all have a strong interest in keeping Lebanon functioning. Opposing them are Iran and maybe Syria.
On that basis, Lebanese government bondholders should feel quite good. All that needs to happen for them to get their money back is for "the international community, together with Israel and an ad hoc alliance of Sunni Arab states, to beat back the threat posed by the Iranian Shi'ite theocracy and its fanatical followers throughout the region. No worries.
landaup@netvision.net.il
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