Our Debt Problem

15 01 2008

rafic-and-saad-hariri.jpg

Maybe a lot of you do not understand our national debt problem in Lebanon. You hear the Majority today blaming the opposition, Syria and Hezbollah for this problem. I just like to clarify the facts here, nothing else.

Our debt problem started after the civil war ended. The Harriri government embarked on a debt adventure – even though Mr Harriri himself had been in the top 10 richest people in the world, valued at somewhere between 9 and $13.5 billion. His Finance minister had been – surprise surprise – Mr Fouad Seniora.

Let me explain the basics before I go on to the details. There are actually a few things. First, when a country borrows money, where and who does it take the money from? Countries normally borrow money from either banks or other countries, but there is only one source where money could be taken out of – a bank! You can’t borrow money from a country and expect them to ship it to you through the mail.

As we all know, banks charge transfer rates for money being transferred from one account to another, and interest rates for borrowing.

Now we move on to the second basic topic, which is Harriri himself. PM Harriri was a multi-billionaire, as I mentioned earlier on. Therefore, you could argue he was an extremely clever business mogul. Like any business guru, you can not expect them to earn the name without having at least one bank among their property pool, a bank which manages their treasures and wealth without incurring any costs.

Harriri was not an exception. At the time he had already owned two banks (now they are either 3 or 4, i have to check). Now, consider the corruption levels in Lebanon, and I think you know what I have in mind. But before I spill the beans and destroy the illusions of all those March 14 people, who actually believe they achieved and changed something in Lebanon (they actually did, make it worse – I’ll explain why later), there is one more basic point to lay out.
Even though their father was involved in politics, both Rafiq Harriri’s sons, Saad and Baha’ Harriri, were only involved in the business empire their dad had built. No political experience what so ever. Now, like any human being, business people are especially influenced by the power of incentives. This is an economic term, but proven scientifically. People will never do anything if the costs will outweigh the benefits. Yes, even when attempting suicide. This is a topic for another time, you just need to remember that people are influenced by incentives, especially business people.

Now. The civil war has just recently ended. The country is obliterated. The national annual budget in no way could stand the amount of damage made. So a young and exceptionally rich Prime Minister thought very hard how to pocket money (a benefit) from all the debt he had to control and all the damage to fix (the cost).

So, he ingeniously poured all his finances into his banks and got the state to borrow the money from there! At high interest rates! Therefore, he could get the credit for contributing with his own money to rebuild the shattered country and economy, and in the process he could hide the insane interest rates that he pockets. It’s a win-win situation. The people benefit in the short-term and the Harriri family in the long-term.

Now, there is still the odd some of 20-something billion dollars that the Harriri bank couldn’t afford to give out as a loan. Where did that come from and how could the Harriri family possibly benefit from it? Well, other countries dummies! Oh, but through the banks of Harriri. Do you realise the absurdity of Lebanon’s debt problem? The debt money was being funnelled to Lebanon from other countries through the Harriri banks – whom charged even higher transfer rates. To be fair, some money came from the World Bank (some countries must have realised this flaw and only agreed to it being taken out of the World Bank), which was a total of something like $3 billion.

Now, as I mentioned earlier. People, and especially business people, act upon the influence of incentives. This could be seen in the above argument. The incentive for Harriri to do what he did was the huge financial incentive as well as social status (people praised him when they realised a lot of the money came from him – but people are increasingly gaining grips of the largest fraud and fallacy in Lebanese history).

Today, yesterday and tomorrow, as Lebanon gets more in debt, the richer the Harriri family gets. That is why you do not see the Harriri administrations rushing into the debt schemes as soon as something happens. The Lebanon war in 2006 saw the Seniora government (controlled by Harriri – most of the ministers in government and MP’s in Parliament are from the Future Party, headed by Saad Harriri) rush into the ‘Paris 3’ conference and borrow another 6 or 7 billion dollars. During his dad’s reign, which was two terms,Rafiq Harriri attended two Paris conferences to take out money. Do you see a trend?

Making another reference to the power of incentives, I would like to note the following, and hope you could think logically and maturely; as long as the Harriri family rules Lebanon in government, where is their incentive to work to pay off the debt? What benefits, in economic terms, do they gain from doing just that? Which disincentive could possibly stop them from carrying on the vile trend the father has sparked? The answer to the first two is nothing, and the answer to the final is – when people hold them accountable, especially their own.

Earlier on, I mentioned that March 14 and their people have made Lebanon worse. Time for clarification. As long as the Harriri family has any influence over decision-making, Lebanon will never, ever repay its debts. Let me tell you something. Today, the Lebanon government claims $41 billion of national debt. That’s something like $12,000 for each citizen. Some citizens in Lebanon never make that money in their lifetimes. Most don’t pay income taxes.

The Lebanese government has gained a $7 billion boost to it’s budget for two years now through Paris 3. Two years later, where is the change? Where are the new homes? Nothing has happened. Where has the money gone? Let me tell you something that might make you have goose-bumps. Lebanon’s debt is so bad that it accounts for 185% of GDP. In 2007, like any other year, the State’s revenues stood at $5.3 billion. 48% of that money went to servicing the debt. Not pay it off, to service the debt. That’s $2.5 billion into the pocket of Mr Harriri scum-bag and off Lebanon. The cost of debt service in Lebanon is the biggest cost to the country, followed by the payment to government employees – standing at $1.3 billion, and followed by the costs of EDL (national electricity company) at just under $1 billion.

If the Harriri family wanted to give the Lebanese people a tax break, they would fast-forward Lebanon’s economic growth by two times each year. This has to be the greatest fraudulent act by any family in a single country in history.

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9 responses

15 01 2008
ali hammoud

Very original and straight forward.. niceeeeeeeeee

15 01 2008
Unimolecular

clearly written, thanks.

16 01 2008
Fawzan

If your people would pay taxes, pay for electricity and utilities and not build on land owned by the governement or others, there would be no debt

16 01 2008
Fawzan

Servicing the debt Ya 7mar means paying the interest on it. Since you can’t pay it off without the tax base the only thing you can do is service it or default on it, The fact that the Harriris are rich has nothing to do with all this except in the small minds of people like you, The man built the country and your Sayyid distroyed it Ma Sha’ Allah. You want to talk about who f^&ked the country???

16 01 2008
MM

Hey kiddo, Your piece shows a basic ignorance about how the capital markets work and how countries borrow money. Furthermore, your misguided propaganda (or perhaps ignorance) about Paris 3 does not help your credibility. I suggest you finish tacking more than one Economics course in college (or perhaps you are still in High School) before you attempt to tackle an economics related issue.

16 01 2008
slickleb

So every country who has people evading tax or not paying their electricity bills lands them in $41 billion debt?

What is meant by ‘you people’? Was that a slip of the tongue to reflect your racism? And please, MM – if you know any better go ahead and teach me.

PS Fawzan, please just go die seriously. I know what servicing means. And if you got anything in this article, you would know.

16 01 2008
Fawzan

You need to grow up if you want people to take you seriously. To your first question, the answer is yes. This is not a country that has a revenue base other than taxation. So when YOUR people decide that they can circumvent the country by STEALING services and land backed by Iranian weapons so no one can inforce the law, when the country needs rebuilding every few years from scratch becuase YOUR master wants to avange his son, a 41 Billion bill is what you get.

By “your people” is meant exactly that. Your March 8 followers. If you decide to see it as racism, then so be it. That is your problem. If you mean that one is attacking Sh’ism, then think again. Not all Shi’tes are leaches on this country sucking the life out of it. Many are important contributors to society and are looking for the betterment of Lebanon. So racism? Only in your silly mind thatcan’t see an argument without finding a mold to fit it in to nullify it without facing it.

Obviously you don’t know what servicing a debt means otherwise you wouldn’t be expecting to DOWN the debt before servicing it. When you start paying taxes, maybe the country can service the debt and have enough revenues to pay down the debt. Until then go string an electric wire to an illegal house in Iwza’i.

21 01 2008
Samer Darwiche

What you say about the power of incentives is spot on in business. Charles Munger, the partner of Warren Buffet, always talks about this point all the time.

If I were in the shoes of Harriri at the time, I would have instructed my banks to lend to lend to Brasil in dollars rather than lend to the state of Lebanon as Brasilian debt at the time was paying higher interest rates and had a much stronger economic base.

The Harriri family took a risk at the time when they lent Lebanon. Lebanon was a fragile country politically and economically and had no infrastructure. Harriri made a bet that Lebanon would become a New Dubai of the Middle East. It was a win/win situation for Harriri and Lebanon. If the country prospered, Lebanon would be able to pay back its debt and the new infrastructure the country built would pay itself fast.

Unfortunately Harriri’s plan did not work as he expected. He under estimated the Syrian influence on the country. Today I would definitely not want to be in the shoes of the Harriri family as I would be very worried that Lebanon will default on its debt.

In any case mixing government and business is always a recipe for conflicts of interest. Yes there were conflicts of interest in the case of Harriri’s business and government. Guess Berlusconi might have inspired himself from Harrir’is example of mixing business with government. I would not be to harsh on Harriri father for his investment in Lebanese debt, but rather on his concept of mixing business and government.

Bring us real peace, a project that unites all people living in Lebanon and we will pay this debt much faster than you expect. In any case the Lebanon always has the option to default on its foreign debt if the political and economic climate doesn’t improve. And yes there is a conflict of interest if Hariri’s men are in government and decide not to default on the debt even if it would be the best interest of the country to do that.

Its a pity that most people in Lebanon are still in love with their religious leaders the way Europeans lived 500 years ago. We need more atheists like you in Lebanon to change the system from within.

森美戴華之 (Samer Darwiche)

10 04 2008
Mariana Eftimie Kabbout

You have totally right, Samer…
Good work! Just keep it up!

Greetings from Romania…

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