Lebanon announced this month it was defaulting on all of its outstanding debt payments for the year, including $1.2 billion in eurobonds due in March. There are another $3.4 billion worth of eurobonds coming due after that. Those, too, will go unpaid.
It's a burgeoning crisis that deserves attention — but it does not warrant the blind bailout that Beirut is trying to secure.
The defaults come as no surprise. The foreign currency reserves of Lebanon's central bank are running on fumes. Beirut must now negotiate with bondholders to restructure its debt. Desperate for cash, the government seeks billions of dollars in assistance and handouts from international donors, the International Monetary Fund, and the World Bank.
The suffering of the Lebanese people will be featured in the headlines in the coming weeks, particularly as COVID-19 continues to claim victims across the Middle East. The people of Lebanon should get the medical support they need and request. But the Lebanese government should not be granted a lifeline. Nor should any future government, without an overhaul of the existing system. The Lebanese system is built on graft. Its political class is corrupt beyond redemption. And at the center of it all is the Iran-backed terrorist group Hezbollah.
There are those who question, even challenge, this assessment. Their arguments are reminiscent of the gaggle of analysts who have advocated for the Islamic Republic of Iran since the ill-conceived interim nuclear deal of 2013. They assert that with Western funding and encouragement, "moderates" can challenge and ultimately overcome "hardliners." It didn't work then for Iran, and it won't work now for Lebanon.
The facts speak for themselves. Since October, Lebanese people from all sects and regions have taken to the streets to denounce the entire political class. As a crippling financial and economic crisis deepened, banks restricted people's access to their own cash. Citizens can withdraw only meager sums, as little as $100 weekly. The lira, Lebanon's currency, is pegged to the dollar and is steadily losing its value.
It was all foreseeable. Decades of corruption and mismanagement saddled Lebanon with insurmountable debt. It happened in slow motion, as the international community refrained from pushing for structural reform and instead indulged the corrupt politicians, who they believed were partners against Hezbollah. In fact, they were Hezbollah's junior partners.
In February, the government, formed by Hezbollah and its allies, asked the IMF for technical assistance. Lebanon's finance minister has announced a need to restructure the Lebanese banking sector, which holds a sizable chunk of the debt. Following the default, the capital of many private banks could be wiped out.
Yet the government so far has rejected the IMF's conditions for assistance. This obstinacy stems mainly (though not only) from Hezbollah. As Hezbollah's secretary-general, Hassan Nasrallah, put it, the group is not opposed to IMF assistance "in principle." However, "Lebanon must not fall under anybody's trusteeship or hand over its financial and economic administration" to outside parties. To put it another way, if Lebanon opens the books, the IMF would see how Hezbollah's illicit finance has infected the entire economy.
The Lebanese are fond of emphasizing the importance of foreign workers who send cash home from the diaspora. But it's Hezbollah's illicit finance that accounts for a significant source of foreign currency for the Lebanese economy. The Jammal Trust Bank in Lebanon that was sanctioned by the U.S. Treasury last year "facilitated hundreds of millions of dollars in transactions through the Lebanese financial system" on behalf of a Hezbollah company. And this is not new. The now-defunct Lebanese Canadian Bank was at one point laundering as much as $200 million a month in narcotics proceeds. That bank was sanctioned in 2011 — the year Lebanon's slide began, setting the stage for its current implosion.
Since then, U.S. sanctions have increasingly constrained Hezbollah's ability to launder money through Lebanon's banks, leading to a precipitous drop in the flow of foreign currency. The terrorist group initially tried to keep a lid on the crisis by pumping dollars from its reserves into the market while doing its best to continue paying employees across all of its operations, military or otherwise.
Yet the economic crisis is taking its toll. COVID-19 is exacerbating it. As is the case around the world, people are losing their livelihoods. To top it off, strict capital controls are denying Lebanese access to their savings.
Hezbollah's prominence in Lebanon's economy and politics has also led to a complete halt of cash injections from Lebanon's longtime patron, Saudi Arabia. After years of throwing good money after bad, the Saudis could simply not justify keeping Lebanon solvent when it had so clearly become an Iranian satrapy. Senior Saudi officials say this decision will not be reversed any time soon, even as Lebanon's economy craters.
Other patrons are also unable to step up. Iran, struggling under crippling U.S. sanctions and now a coronavirus crisis, continues its support to the group, but cannot fill the void. Nor can the French, who have expressed some willingness to help but lack the means.
With no one willing to foot the bill, organizations such as the IMF and the World Bank are among the few options left. But the genuine reform they require would undermine the very system on which Hezbollah and its partners depend — a fact evident in the Lebanese demand that any IMF program "not negatively affect the political situation in Lebanon."
Beyond increased taxes, any worthwhile reforms would include downsizing the bloated public sector, which Hezbollah and the other sectarian barons use for patronage. The same would apply to other nontransparent tools of patronage, including the various "councils" and "funds" (e.g., the Council for the South, the Council for Development and Reconstruction, the Higher Relief Council, and the Fund for the Displaced) that the chiefs use to dole out services and shady contracts (often financed by international grants) and to enrich themselves and their partners. This is to say nothing about public utilities and ports of entry, such as the Beirut International Airport, and the Beirut seaport, where Hezbollah smuggles in whatever it pleases.
In other words, real, structural reform would undercut the instruments through which the political elite, in partnership with Hezbollah, maintain power. More to the point, it would require Hezbollah and the political elite to commit political and financial suicide.
As the crisis worsens, Lebanon's bankers and ruling elite will be pleading for a bailout. They hope to put to the world a binary choice: saving their system or ignoring the suffering of some 6 million people. They will almost certainly cite the coronavirus as a precipitating factor, following Iran's example.
The Iranian regime, for its part, has launched a loud public campaign to extract cash from the IMF and gain sanctions relief from the international community under the pretext of combating the coronavirus. Of course, these activists tend to ignore the fact that the current sanctions already offer an exception for humanitarian goods, granting Iran continued access to medicine and medical equipment. In fact, Iran's imports of pharmaceuticals in the first half of 2019 increased compared to the year prior.
The Iranian people are undoubtedly suffering from the effects of COVID-19. But the regime is only interested in getting its hands on cash. This is why the regime rejected American offers to provide medical aid to the Iranian people. In addition, as Secretary of State Mike Pompeo has noted, regime officials have already stolen more than $1 billion the Europeans intended for medical supplies and "continue to hoard desperately needed masks, gloves, and equipment for sale on the black market."
In Lebanon's case, Iran and Hezbollah are directly responsible for the spread of the virus. The Lebanese government has allowed flights from Iran to Beirut International Airport, even after the virus began to spread like wildfire in Iran, thereby increasing Lebanon's exposure to COVID-19. In addition to personnel, these flights from coronavirus-afflicted Iran carry arms shipments. These are deadly precision weapons that neighboring Israel is now openly threatening to destroy. And a war with Israel would be far worse than anything the country is now enduring.
Lebanon's crisis, once again, is of its own doing.
Offering Lebanon help with COVID-19 testing kits and other medical gear is one thing. But a bailout without structural reform will mean perpetuating Lebanon's corrupt system, on which Hezbollah's criminal enterprise depends. Underwriting pro-Iranian political orders is not in the U.S. interest. This is as true during a public health crisis as when there is none. Washington's priority must be to maintain maximum pressure on Iran and its regional allies from Tehran to Beirut.
Tony Badran is a research fellow at the Foundation for Defense of Democracies, where Jonathan Schanzer, a former terrorism finance analyst at the U.S. Department of the Treasury, is senior vice president for research