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Sunday, March 31, 2019

Can You Spare $11.6 Billion? Lebanon’s Loans and Luxury Car Sales Paradox

 Counterpunch


 A $350,000 Ferrari GTC4 with private United Nations (UNP) license plates, Lebanon (April 2018, Paul Cochrane)


Lebanon managed to borrow $11.6 billion at the Cedre donor conference last year, the majority from the World Bank and Europe. After a nine month wait to form a government, Beirut now has to implement the lenders’ conditionalities: economic reforms.

What do you do as, say, a European institutional lender if Lebanon renegades on its commitments? Stop funding programmes and aid, leaving the poor and the 1.5 million Syrian refugees to suffer? And if Lebanon’s economy collapses – debt has doubled over the past decade to $84 bn, over 150% of GDP – there’d be another failed state on the Mediterranean, within sailing – and capsizing – distance of Europe, so do you just keep on writing out cheques?

We should take a step back first to consider the bigger picture. Lenders have their own reasons for lending, evidenced not just in the interest to be paid, but in the conditionalities that come with the loans and development packages, which are invariably of a neo-liberal bent: privatization, austerity, and economic reforms. The Europe Bank for Reconstruction and Development (EBRD), the World Bank et al have their own agenda to push.

Then there’s aid and philanthropy, what has been called Philanthropic Colonialism, “or barging in as outsiders and forcing their solutions on other people’s problems”.  And as for humanitarian aid, the closer you are to Fortress Europe the more likely you are to get loans or aid, which is why the Syrian refugee crisis gets double the amount Yemen does.

So if one overlooks the lenders’ interests, and believes they actually care about the effectiveness of the loans and genuinely want stability and progress, how can you hold Lebanon accountable? Is the only way to withdraw the funds, as happened following the Paris II donor conference in 2002, when $4.4 billion was pledged but only half delivered as reforms were not implemented? After all, with this fourth round of donor funding since 2001, Lebanon has borrowed roughly $22 bn.

Again, we should take a step back, to before the loans were even agreed upon. Europe, the World Bank and co. knew exactly what they were doing providing loans to keep Lebanon afloat. The question should have been, does Lebanon need to borrow yet more money?

On paper yes it does, but are there not more ‘deserving’ countries? If we use a means-based assessment, Lebanon should not be going go cap in hand to lenders when there are war ravaged countries nearby – Syria, Iraq and Yemen – and plenty of countries with much higher levels of crushing poverty, nearly anywhere in Sub-Saharan Africa for instance. Because also, on paper at least, Lebanon is a middle-income country and likes to perceive itself as such (except at donor conferences). The banking sector has assets in excess of $258 bn (population 5 mn), while by comparison Bangladeshi banks’ assets are $90 bn (pop. 160 mn), and Tanzania’s $12 bn (pop. 59 mn).

How then to gauge whether a country needs loans and, moreover, be provided to corrupt governments? Corruption is a key factor to consider, as loans can be skimmed off, such as through tenders and contracts. But using Transparency International’s Corruption Perceptions Index doesn’t cut it. It is perception, and Lebanon has long had a bad ranking – 138 out of 180 countries (1 being the least corrupt). Corruption has rarely stopped institutional lenders from lending.
Instead a means-based assessment could be based on sales of luxury goods in low/middle income countries, such as the number of fancy watches, yachts, private jets and luxury cars sold each year.

Let us take automotive sales. Out of Lebanon’s $57 billion GDP, over $1 billion is spent on new cars, with 33,012 bought last year, contributing to the country having the same number of vehicles per capita as Japan. While 90% of car sales are below $15,000 there’s still a lot of expensive cars on the roads. Does a country that buys dozens of Mazeratis, Lexuses and Jaguars, hundreds of Porsches, Range Rovers and SUVs, a handful of Bentleys, a couple of Lamborghinis, several hundred BMWs and close to a 1,000 Mercedes every year really need foreign loans?



Lamborghini in Sin el Fil, Beirut (March 2019, Paul Cochrane)


After all, how are such luxury goods sales possible? A mixture of corruption, tax evasion and avoidance, oligopolistic practices, elite capture, and paying lousy wages. As a compliance officer at a bank once put it to me, if anyone has over a few million bucks in the bank, they’ve probably done something unethical, immoral, or downright criminal.

In Lebanon’s case, in addition to the above, the high interest on servicing government debt – averaging 5-7% compared to a global average of 2% – benefits the elite. Lebanese banks hold 39.6% of government debt of $84 bn, while 16,000 accounts (less than 1% of all deposit accounts) hold 50% of total deposits, and 1,600 accounts (0.1%) 20% of total deposits. Politicians own more than 30% of the banking sector. The debt, if you will excuse the pun, is in their interest. It is socialism for the rich subsidized by the Lebanese public with the stamp of approval of the World Bank, EBRD and co.

High inequality levels and luxury goods sales are a clear indicator that the system is unfair, and that money is being squandered. The number of high net worth individuals could therefore be included in the means-based assessment, and Lebanon is not short of billionaires.

If the loans were turned down because of high spending on luxury goods – which extends beyond the segment that can afford it, with personal debt doubling over the past decadethis could cause public outcry, potentially leading to demands for greater accountability and political-economic change. Although, alas, it is more likely the weak suffer what they must – to use the Thucydidean title of Varouflakis’ book– and loans and interest will keep driving luxury car sales.

But maybe I am being unfair. Politicians and the elite need top-of-the-line vehicles to be comfortable in  when they are stuck in Beirut’s gridlocked traffic, as public transport was not considered important and underfunded. They also need high quality air filters to not breathe the pollution generated by their V8 engines, the diesel fumes spewing from generators because the electricity sector is in shambles, and the burning of toxic trash because the government can’t be bothered to enforce laws. Frequent forays abroad are also necessary to cleanse the lungs, as air pollution is shortening the average lifespan of Lebanese citizens by 25%.

It is also hard, of course, to be the poor kid on the block. Lebanese political leaders have to rub shoulders with Gulf billionaires, as well as with well-suited and booted Europeans and North Americans. Although I am sure that some lenders raised eyebrows at the expensive tastes of those asking for Cedre funds – including Prime Minister Saad Hariri, the son of a billionaire.

We should also consider that this means-based assessment could be skewered by the consumption patterns of the humanitarian aid and development industry, being big buyers of champagne and luxury cars (see photo of the privately owned UN Ferrari).

So, after a high level institutional meeting at a five star hotel to discuss whether a means-based assessment could be used as lending criteria – the loans and luxury goods sales paradox – maybe the lenders’ conclusion would be it is not necessary. In a world where government debt levels hit $66 trillion in 2018, roughly 80% of global GDP, why not keep the addiction to lending and borrowing going? As the saying goes, money makes the world go round, although debt makes the world go round would be more apt.

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