Lebanon, Pity the Nation That Never Was Part III

Part III: How to Send a Country to Hell, Modern Finance in the Hands of Warlords

This is the last installment of a three-part series on Lebanon. In the opening lines of part one I quote the country’s  current President Michel Aoun begging the West for a financial bailout as the country was, in his words, going to hell. In part one, I also chronicled the country’s tribal history that was full of bloodshed and mistrust under five centuries of Ottoman repression. In part II, I explored its modern history as a republic created by the French, which threw its varying tribes into an era of chaos, civil war, and subjugation to regional powers that reflected the Arab stages of development of “the warrior archetype.”  In the last part of this series, I’ll take a closer look at the forces that have been at play for the last decade in Lebanon’s politics and its economy that led to the current existential crisis. Its noteworthy to point that since I started writing part I, the Lebanese currency has devalued by another 10% plunging a greater percentage of the population into poverty and famine, while its politicians continue to refuse to meet the demands for transparency made by the international community as a condition for aid.

Hariri

As part of the post-civil war reconstruction effort, Prime Minister Rafik Hariri set a new and modern course for Lebanon as a prosperous oasis on the Mediterranean. Foreign investment in the country reached new heights and most of it was coming from rich Arab Gulf states. His private foundation, backed by the Saudis sponsored thousands of young Lebanese students to study abroad with the condition they return home and contribute to the reconstruction effort and beyond. He strengthened the judiciary that clamped down on illegal drug trade. He underwrote projects that modernized Lebanon’s infrastructure from highways and roads to public hospitals and schools. He moved freely among world leaders. He made Lebanon a very attractive target for investors from all over the globe. He sought the advice of Lee Kuan Yew, the founder of modern-day Singapore on how to make Lebanon the Singapore of the Middle East. He erased the sectarian and religious barriers through his determination to bring prosperity to the entire country.  Hariri was a modern-day Phoenician who brought peace to Lebanon through prosperity.

All these expensive projects however, saddled Lebanon with an enormous amount of national debt and with Hariri’s assassination, the road to the continued prosperity of Lebanon became a bumpy one. While the years immediately after his death saw a reduction in the rate of increase of national debt, the huge capital inflows that he had attracted in the past began to dwindle. Money flowed into the country at a slower pace, but as long as it came in, fears about the resilience of the economy and the country’s ability to service its debt were tempered. Money flowed from tourism, foreign aid and remittance from the millions of Lebanese living abroad. But the biggest capital inflows remained those that came from the goodwill of Gulf Arab states that bankrolled the country’s operations by strengthening the reserves of its central bank and kept the holders of its international debt happy.

All was well and the big can of debt was kicked down the road until 2012 when things began to change. Hezbollah began to steer sectarian tensions after the US Treasury named it as a terrorist and criminal organization effecting its free movement of capital and funding from its allies like Iran. Hezbollah had also strong armed the Lebanese Parliament to amend the constitution which lowered its veto power to one-third. Lebanon and all its official acts were now effectively at the mercy of Hezbollah or any minority parliamentarian block that can stop anything from moving forward without a supermajority vote. The US designation came after the Arab Spring that descended much of the region, including neighboring Syria into chaos. During the Syrian civil war, Hezbollah fought on the side of the Assad regime which used chemical weapons against its own people. Both Syria and Hezbollah were allied with Iran, the Sunni world’s archenemy which also sent fighters to defend Assad showing in no uncertain terms who Hezbollah’s allies were and where its loyalties lie.

Iran by default had become the mouthpiece for the Shia Arabs and through its proxies like Hezbollah and Assad and the newly empowered Shia in Iraq, it sought to shift regional loyalties away from the mostly Sunni Gulf states.  After seeing Iran’s and Syria’s power grow through Hezbollah’s political and military influence on Lebanon, the Gulf states’ hopes for the country’s continued prosperity faded and they stopped their financial support for its central bank. Soon thereafter, tourism and investment in the private sector from the Gulf came to a slow halt as well. This loss of revenue resulted in budget deficits that outpaced GDP growth almost every year since. Throughout this chaos, Lebanon was without a president for more than two years until 2016 when a candidate that was acceptable to Hezbollah was confirmed, sealing the fate of the nation. It quickly became apparent that the new President, Michel Aoun was nothing more than a puppet of Hezbollah. Under his presidency, the most important national posts such as the Ministry of Finance went to Hezbollah politicians.

Financial Engineering in the Hands of Warlords

If there’s anyone to blame for Lebanon’s current financial mess, it’s not the head of its central bank as much as it is the Minister of finance, Hezbollah’s Ali Hassan Khalil who held the position for an unprecedented 6-year term. Before his party plunged the country into mayhem, Lebanon’s annual fiscal deficit was on a steady decline for almost a decade. This improved the country’s global credit rating and its ability to refinance its older debt at much lower rates.  Under Khalil’s care however, annual deficits grew back to near record levels, except this time the rich Arab states were not there to prop up the appearance of financial stability.

Lebanon GDP-Debt ratio

The US Treasury action that has effectively cutoff Hezbollah’s finances had become a major threat to its stability. Khalil turned his attention towards the country’s banking sector that had shown exceptional resilience since its founding.  If the country’s treasury could not be propped by Arab friends, then it will be propped by debt underwritten by the West and by deposits made by expatriates that were concealed in sexy packages that promised unimaginable returns. Surely for an institution that survived a two-decade civil war and saw Lebanon through reconstruction, selling government bonds to the world was not much of a challenge. Before Hezbollah took the over the reins, Lebanon’s bond rating was at B with a stable outlook. This allowed the head of Lebanon’s central bank, Riad Salame, the ability to issue debt and sell it on the international bond markets at reasonable rates.

Salame was well versed in the ways of modern finance. Before taking the post as central banker, he had been an investment banker with Merrill Lynch in Beirut and Paris. Since ascending to the position, he had been on the board of the IMF and many global banking organizations. He rose to global prominence in 2008 and became known as the genius banker who saved Lebanon from the effects of the 2008 financial crisis for not participating in the speculative financial instruments that brought the world to its knees. Hezbollah couldn’t have asked for a more perfect candidate to hide behind as they manipulated the country’s finances.

How the Scam Worked:

  1. Lebanon’s Ministry of Finance issued US denominated Eurobonds, which the central bank swapped for treasury bills denominated in Lebanese Pounds. The appearance of risk was muted as this move reduced the cost of debt service on old loans while alleviating the pressure on the devaluation of the Lebanese Pound which had been pegged at 1,500 to the dollar for decades.
  1. Lebanon’s banking secrecy laws allowed for impropriety behavior on the part of depositors or borrowers to be veiled behind a wall of secrecy. This provided the perfect cover for financial crimes.  Through financial engineering the methods of which are yet to be disclosed, the central bank found a new lifeline. Suddenly it empowered its member banks to offer high returns on dollar deposits. While saving accounts and CDs were returning less than 1% or 2% all over the world, dollar deposits in Lebanese banks were returning anywhere from 12 – 16%. The higher the deposit and the longer the term, the higher the return.  Rational evaluation of this phenomenon was thrown out the window as animal spirits and greed brought in Billions in hard currency to the strapped Lebanese economy and its government, and it was all justified by Salame credibility as a banking genius on the world stage.

This scam continued undetected for years until liquidity began to dry up in late 2019 when banks began to impose capital controls on their depositors. Shortly thereafter the government announced that it will be defaulting on its March 2020 Eurobond payment of $1.2 billion, the first government default of its kind in the country’s history. Efforts to renegotiate any debt required an audit of the central bank and full transparency on government spending. Hezbollah did not allow either of these things to happen. To them, this wasn’t about respecting modern institutions and the covenants that made the world economy function. It was all about revenge against the West for its actions, pure and simple. It was after this realization that the world woke up and recognize that Lebanon under Hezbollah only has the superfluous appearances of a functioning country. The Lebanese government had been running a nationally protected Ponzi scheme within its banking system for years.

This is when the modern world woke up to the fact that Lebanon cannot be held to the same standards of accountability that most sovereign nations adhere to. And under Hezbollah’s influence Lebanon’s fortunes and goodwill have been reversed. A year and half have passed since the default and the government still refuses to show its books risking the lives of its people and plunging half of its population below the poverty line. The country’s credit rating stands at D or SD which are both the lowest rating possible with only a dark outlook. Today, the Lebanese pound trades at more than 20,000 to the dollars, a 90% devaluation in purchasing power that has left many families hungry and destitute. The country has been without a government since the resignation of the last prime minister a day after the massive explosion that leveled half of Beirut. The IMF, the World Bank and Western donors are insisting on transparency from the country’s leaders, who refuse to agree to any such terms while their citizens stand in bread lines for hours only to realize that the Lebanese Pound has devalued even more just in the time they’ve been in line. As Hezbollah waits for Western bankers to blink, they continue to plunge Lebanon into a darker abyss with no workable end in sight.  Maybe this is what they and their masters in Tehran have wanted all along.

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Governance that Fits

On the cultural development scale of Spiral Dynamics, what the Beirut explosion, the Coronavirus and the banking crises have done to Lebanon is expose the essence of Modern-day values of the third level psychosocial system of development.  This form of feudalism dressed in an Armani suit is tricky if not outright dangerous. It uses the tools from higher modern values such as the power of global finance and a vacuous system of democracy to manipulate power and reinforce the feudalistic systems and keep it in place for the long term. Lebanon today remains a collection of loose sectarian tribes boasting of how great it is to be Lebanese without ever knowing what true nationalism is. Sadly, even as starvation knocks at many doors, most citizens refuse to acknowledge this failed stage of cultural development.  A true nation derives its values from seeing a bright future based on collaboration and inclusion, not from its deterministic and feudalistic past. It is the belief in an abstract concept of the institutions that treat everyone equally and afford equal opportunities. It transcends loyalty to the religious sect or the tribal Za’eem. It separates religion from state, and it empowers the institutions not the charismatic warlord or head of a certain religious sect.

SD Org structure

As I described in part I of this series, the transition from the third stage of development to the next stage where democracy begins, is the toughest transition in human history. It comes after everybody lays beaten and bloodied. That’s when the culture collectively acknowledges that there must be a better way as it begins to work toward building the foundation for institutions based on the rule of law. This becomes the corner stone of nations. Unfortunately, the window to build a new national platform for Lebanon has passed. It should have been the first priority in the Taif Agreement that ended the civil war. Mutual coexistence is essentially national reconciliation which never materialized. Sadly, without the needed dialog among the different tribes about what nationalism means to all Lebanese, the country defaulted back into the old sectarian divide with loyalties to regional powers, and local sectarian leaders, not the nation. The confluence of these 3 crises has descended Lebanon to unprecedented levels of despair. Conditions are even worse than they were during the two-decade civil war, which, in my opinion, has never ended. It only transformed into an armistice of angry tribes agreeing to disagree while they carve bigger and bigger pieces of the political pie to expand their feudalistic powers.

For a culture that loves rhetoric, no Lebanese will ever acknowledge that Lebanon was never a country. Pride runs deep in the heart of every Lebanese, including me. It must be that Phoenician blood that courses through our veins. But the Phoenicians were an enterprising civilization; a loose collection of city states, each with its own commerce God (Ba’el) and issues of governance never imposed the will of one city on another. Absent true national reconciliation, what awaits Lebanon is Balkanization. It’s future points to a loose collection of city-states based on sectarianism and commerce until such time as when the various tribes outgrow such design and believe in a greater common purpose for a true republic governed by the modern tools of democracy and absent the influence of so many outsiders.

 

Lebanon, Pity the Nation that Never Was Part II

Part II of a III Part Series: Post Independence Chaos

When the colonial administrative era of Lebanon came to an end, it came to the entire region not just to Lebanon. This was a post-colonial age that saw the League of Nations give way to The United Nations where every newly established country had a voice and a seat at the world’s table. This was also the age of extreme chaos for the entire region, and Lebanon’s fate has been tied to that of the region since its independence. It felt as if the Western world had abruptly given up its drive to shape the region’s fledgling nations and hand their responsibilities back to local leaders. For the French the choice for their replacement of the rule of law was governance in the form of a republic. The British favored the handing of power to Monarchs who safeguarded their colonial interest while taking care of the needs of their constituents.

The Strongman Cometh

Based on our Functional Democracy model, a Benevolent Monarchy would have been the ideal form of governance that fits for most of the region which would have favored the British model. But the world underestimated the level of bottled-up rage the Arab street had from centuries of repression. No form of governance was going to restrict their individual expression and the right for self-determination. The 1940s and early 1950s witnessed the dawn of a new age unincumbered by five centuries of Ottomans brutality and free from the rule of the West. Arabs were experiencing personal empowerment in its rawest form. This was the ascendence of the Arab Warrior culturewide to the Third stage of development in our model and no Monarchy or Democracy was going come in their way.

Red Org structure:Startified Democracy

This became evident very quickly as military leaders and revolutionaries throughout the region rose and toppled whatever remained of Western form of rule.  Mohammed Naguib and Gamal Abdel Nasser were the first Arab revolutionaries to topple the Alawite Monarchy of Egypt and Sudan followed shortly by the toppling of the Hashemite Monarchy in Iraq and the numerous military coups that defined Syria in that period of time.

 

There was a deep desire among the people to create a unique and modern Arab state, led by warriors and pioneers who honored the evolutionary stages they were going through. A leader who spoke to the masses regionwide, one who can unite Arab tribes under one identity, but more importantly one who can fight what most Arabs considered a foreign entity on their land, the State of Israel. Into that void stepped Egypt’s new president. Nasser was a charismatic leader who introduced a series of socialist reforms in Egypt. After nationalizing the Suez Canal, and successfully fending off France, Israel and the UK from reclaiming its control back to the West, he was instantly propelled into the regional spotlight as the ideal strongman who can stand up to foreign oppression.

Nasser, Arafat, Assad

Arab pride was real and it was expressing itself through the strongman archetype regionwide. It was empowering the peasant class as equally the intellectual class and Nassar’s rhetoric made it reach fever pitch. No sooner than the Hashemite monarchy was toppled, Nasser announced that any retributions against the Iraqi revolutionaries will be considered an attack on Arab sovereignty. In 1958 Syrian revolutionaries steered by the socialist ideologies of the Pan-Arabian Ba’ath party, proposed a union with Egypt and Nasser welcomed the Syrians into the newly formed United Arab Republic. The union only lasted for a few short years, but behind the scenes, Nasser continued to influence Arab leaders in the region to unite behind the Arab cause. The power structure was clear; at the top of the new Arab leadership structure was Nasser, the big strong man, and below him were the satellite Arab countries led by smaller strongmen who will make the dream of the new Arab nation a reality. Anyone who didn’t fall in line was considered weak an unpatriotic to the new cause.

No Country for Weak Men

Two years after Lebanon’s independence, major existential crisis began to define this country that by then was a haphazard band of tribes forced to coexist under one flag. These types of crises would have challenged mature democracies due to their existential nature that continue to challenge the notion that a one person one vote democracy can survive in a sea of nothing but strongmen who wish to hold on to power to themselves. First came the Palestinian refugee crisis in 1948, which immediately tested the strength of the national government. There was little to be tested. Instead of the country’s political leaders working together to design a system for the refugees to assimilate into the culture, or engage in a regional or global dialogue on the Palestinian issue, they found themselves at the mercy of the much bigger cultural wave led by Nasser. The ideologies that defined Nasser’s brand of pan-Arabism were called Nasserism and they had taken the world by storm. They formed a foundation for how the nations of the Third World can liberate themselves from their colonial past and institute socialist or communist programs to help them reach freedom. This was how the Middle East fell into the divide of the Cold War, and most of the Arab street fell for Nasserism.

The Lebanese street, however, was divided in its support for Nasser. The Maronites, and by extension all Christians thought of it as an extension of communism while the Muslim factions, including the Druze supported it wholeheartedly.  When Lebanese president Camile Chamoun, a Maronite and an advocate of a strong independent Lebanon, resisted Nasser’s invitation to join the greater Arab cause, he began to destabilize the country from behind the scenes. He sent financial and military aid to his supporters in an attempt to weaken Chamoun’s leadership and further divide the country. No room for weak men, and to Nasser, any Arab leader who resisted Nasserism was to be made into a weak pariah. After Lebanon refused to take an active role in the 1967 war against Israel, Nasser looked to punish those who were responsible for the loss in the war and he looked to Lebanon. If Lebanese leaders were too weak to fight Israel, then there needed to be a stronger Arab presence to its north that could. Nasser put pressure on his Lebanese allies and brokered the 1969 Cairo Agreement which prevented Lebanese authorities from intervening in how Palestinian refugee camps were being operated throughout Lebanon. Suddenly a new strongman, Yasser Arafat rose to power and began to create a state within a state.  Within a few short years the political calculus in Lebanon shifted to favor those who supported the PLO and the greater Arab struggle against Israel.

Chammoun Shehab, Helou

For the few short decades that followed, Lebanon’s Maronite leaders walked the tight rope between supporting a strong independent Lebanon, and playing the moderate role in being passive supporters of the greater Arab cause. As long as no one questioned the movement of Palestinians inside Lebanon, all was well. During this period the country experienced the greatest economic growth that came to define modern day Lebanon. Beirut became the Paris of the East, and Lebanon the Switzerland of the Levant. The Lebanese banking system, which in later years became the country’s downfall, was only rivaled by that of Switzerland due to its banking secrecy laws. Every wealthy investor who couldn’t hide his money in Swiss banks, was able to do it in Lebanese banks. With oil revenues flooding the region, Lebanon quickly became the modern financial capital of the Middle East. But eventually the tensions between Christians who fought against the idea of a strong Palestinian presence in Lebanon reached a breaking point with the non-Christians who supported it. This resulted in Lebanon’s civil war that started in 1975 and lasted till 1990.

Before the civil war however, the regional dynamics began to change. After the sudden death of Nasser in 1970, the role of keeping Lebanon weak and divided shifted to a less diplomatic and more brutal Pan Arabist, Hafez Assad in Syria. Assad rose to power as a Ba’athist and by the time he became president in 1971, had appointed himself as the sole defender of Arabs against Israel.  Years before ascending to the Syrian presidency, as a commander in the Syrian Army, Assad offered protection to a Lebanese fugitive by the name of Suleiman Frangieh, who was wanted in Lebanon for murdering several people. Frangieh, being a Maronite and a member of a political family who himself had high ambitions, had returned to Lebanon after the country issued a general amnesty. After a decade or so in Parliament Frangieh ran for President, and with pressure from Syria’s Pan Arabists, he won the presidency and presided over the early years of Lebanon’s civil war.  It was time to pay back the piper. Frangieh called on Assad to send in a few army units to stop advances by the Palestinians and their allies.

With the blessings of Saudi Arabia, Assad’s army moved into Lebanon as peacemakers, but ended up being occupiers who changed loyalties on the two sides of the conflict for no other purpose than to keep Lebanon divided and under its control.  Assad crushed the Palestinians and their allies as well as the Christians whenever he felt that the power of one was becoming a challenge to Syria’s presence in Lebanon. The Syrians became occupiers in every sense of the word. The peacemaker who was invited in became the occupier who never left. Syrian soldiers robbed Lebanon of everything from wholesale supplies and merchandise at their checkpoints to nice cars driven by Lebanese citizens. The Kleptocracy was eye opening. The Syrians pillaged everything in sight and no one could stop them. They ripped out the entire infrastructure of train tracks and stations that were built by the Ottomans and sold them to the Pakistanis. Their generals penetrated the banking system and forced bankers to cash checks from accounts that had no funds, which forced several banks into insolvency. The joke around Syrian families with a large number of children was that half of them were conceived to go into the army. That is the same army that claimed to defend the Arab world without firing a single shot into Israel or the Golan Heights after losing the territory in the 1967 war and failing to reclaim it in the 1973 war. The Syrian army’s sole focus became the constant intimidation and subjugation of its much smaller neighbor through any means possible.

Lebanon became Syria’s cash-cow, and Assad moved to formalized his country’s domination of it by giving it a “special relationship” designation through the 1989 Taif Agreement which brought an end the civil war. It made Lebanon officially into an Arab state with a special orientation towards Syria. It called for the disarming of all militias, except for Hezbollah, the Shia group that appointed itself the “resistance force” against Israel. The accord also expanded the number of parliamentary seats from 99 to 128, and reordered the Christian majority from a 6:5 ratio to a an even 1:1 ratio with majority of the added seats going to the historically underrepresented Shias. The agreement also moved some of the executive responsibilities from the office of the president to the office of the Prime Minister. The Saudi’s appointed Rafik Hariri, A Sunni Lebanese self-made Billionaire who accumulated most of his wealth through Saudi construction projects.

In later years Hariri became Lebanon’s Prime Minister who undertook the project of reconstruction. Hariri quickly became a nationally beloved figure who was admired by Christians, Druze and Sunnis, but was regarded with suspicion by the Shia who were now allied with the Syrians.  There were two essential parts of the Taif Agreement that Hariri sought to fulfil during his many terms as Prime Minister.

  1. The negotiated withdrawal of the Syrian army.
  2. The implementation of national reconciliations measures among the feuding tribes called “mutual coexistence.”

It was the failure of both of these measures that brought Lebanon closer to where it is today. Hariri walked a tight rope between keeping the Syrians happy and attempting to negotiate their withdrawal. Hafez Assad’s attention during this period shifted from physical occupation of the country, to controlling part of its resources, business activities and its intelligence apparatus. Corrupt business practices are part of doing business anywhere in the Middle East and Assad and his kleptocrats became a permanent part of the tapestry.

However, after the death of Hafez Assad in 2000, things took a turn for the worse for Lebanon, Assad was succeeded by his son Bashar who lacked the political savvy and the long-term vision of his father. The son immediately began to make unreasonable demands on Hariri and the Lebanese government. Any move by Hariri to reclaim Lebanese sovereignty was met by disdain and contempt.  Assad the son took the army withdrawal off the table as his henchmen began to intimidate Hariri. All this came to a deadly head when Hariri’s motorcade was blown up in downtown Beirut killing him and many of his aids and a past minister. Years later, a report by a special UN tribunal found Hezbollah responsible for the massacre, but the brutal act immediately brought demands from the majority of Lebanese for the Syrian army to withdrawal. A few months later, the Syrian army ended its 3-decade occupation and began to empower its proxy Hezbollah to extend its reign of terror.

In part III I will examine Lebanon’s fall into the hands of Hezbollah and its proxies, Syria and Iran and the current economic and debt crisis that seems to have no end in sight.