Lebanon safe from debt crisis fallout

Published August 10th, 2011 - 03:30 GMT
Other experts voiced a reminder that Lebanon escaped unscathed from several financial crises that gripped the U.S. and European markets in the past
Other experts voiced a reminder that Lebanon escaped unscathed from several financial crises that gripped the U.S. and European markets in the past

The steep U.S. economic and financial crisis which caused stocks around the world to tumble will have no dire effects on the Lebanese economy and capital market, economists and bankers said Tuesday. “I don’t think that Lebanon will be directly impacted by the crisis in the United States. Our stock market in Beirut is already not doing well and the fall of shares in the U.S. and Europe will not make a big difference in the bourse,” Jihad Azour, former finance minister and key executive at Booze Allen company, told The Daily Star.

The decision by Standard & Poor’s to downgrade the AAA rating of the U.S. caused a wide uproar in most stock exchanges in Europe, Asia and even the Arab countries which saw their stocks plummet to alarming levels. The last minute agreement between U.S. President Barak Obama and the Republican leadership to raise the debt ceiling was not sufficient to calm the jittery markets around the world. Azour also believes that Lebanon has already managed to get all its immediate borrowing needs for this year after the Finance Ministry successfully closed $1.2 billion in Eurobonds which was four times oversubscribed and at relatively low yields. “But in case there was an increase in the U.S. Treasury rates to lure investors then this will ultimately have an effect on Lebanon and thus increase the cost of borrowing in the country,” he added.

Azour and other experts were confident that lowering the AAA rate of the United States would not prevent Washington from raising additional funds in the future, arguing that many banks and financial institutions still view the U.S. as a AAA country. They added that the markets that were severely affected by the crisis were the markets that are directly integrated in the system and fortunately that category does not include Lebanon. Azour added that the deterioration on the fiscal side in Lebanon has nothing to do with the market abroad. “The current government must keep the budget deficit law and this means not to overspend as this would affect the deficit,” he added.

Azour cautioned the government against making commitments under the pretext of improving social and medical benefits or even increasing the minimum wage as these steps would raise the budget deficit. He also saw no need to be concerned if Washington decided to cut the size of its economic assistance to Lebanon as part of efforts to reduce spending. “The entire U.S. assistance to Lebanon represents only 0.3 percent of our country’s GDP,” Azour said. Most of the economic assistance and grants Lebanon usually receives are from the oil rich Gulf states while other aid comes from the European Union.

Joe Sarrouh, adviser to the chairman of Fransabank, told The Daily Star that the global markets are plummeting because of fear of “what will come next.” “We have a slower growth in Asia and we have a sovereign problem. All these problems created a very intense fear factor,” Sarrouh said. He added that as a result of this crisis, investors rushed to make investments in gold, treating this metal not as a commodity but as a currency. “If rating agencies downgraded the two housing companies Fannie Mae and Freddie Mac in the United States the first thing that will happen is that the mortgages in this country will become more expensive,” Sarrouh said. He stressed that the forces driving the markets around the globe are panic and fear. Sarrouh argued that the impact of the global crisis in Lebanon is minimal because most of the country’s public debt is financed locally and most notably by the Lebanese banks. Lebanese banks hold the majority of the government’s public debt through the subscription of treasury bills and Eurobonds. Sarrouh said that Lebanon succeeded in issuing a $1.2 billion Eurobond amid a deep debt problem in Europe. More than 75 percent of this bond was bought by local investors and Lebanese banks while the rest was snatched by foreign companies.

Ghassan Diebah, a professor of economics and finance at the Lebanese American University, ruled out the possibility that the U.S. Treasury would increase substantially the interest rates on the dollar in the future. “They [ the U.S.] are now more concerned with monetary policy instead of raising the interest rates on the dollar. Even if it raised the rates to attract foreign investors, I doubt that this will have an effect on Lebanon,” Diebah said. But he warned that if the financial crisis around the world persists, “this could affect the assets of Lebanese banks in Europe.”

Other experts voiced a reminder that Lebanon escaped unscathed from several financial crises that gripped the U.S. and European markets in the past thanks to the big liquidity held by Lebanese banks and to the enormous resources of the Lebanese expatriates in the Gulf states and Africa.

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