Journal of Sustainable Economies

Introduction

Lebanon is currently experiencing one of the most severe financial and economic crises in modern history, comparable to the Great Depression in terms of depth and duration (World Bank, 2021). The country’s banking sector has collapsed, public debt has spiraled to unsustainable levels, and business confidence has eroded. Against this backdrop, the Lebanon Recovery Financial Plan proposes a structured approach to stabilizing the economy, restoring liquidity in the economy, and gradually reducing the state’s debt burden in relation to GDP.

This commentary critically evaluates the plan’s feasibility, using financial projections and comparative case studies. The proposed framework, which includes the issuance of Eurobonds, restructuring of the banking sector, monetization, and profit generation from State’s assets, is compared with similar financial recovery models implemented in Argentina, Greece, and Iceland.

Key Assumptions of the Recovery Plan

The Lebanon Recovery Financial Plan is built on a series of macro-fiscal assumptions that determine its feasibility and trajectory. First, the total debt owed by the Banque du Liban (BDL) to commercial banks is estimated at approximately 80 billion USD. In addition to this, the Lebanese state carries an independent debt burden of around 30 billion USD, excluding BDL liabilities. The plan assumes that both the State and BDL will honor all of their obligations without resorting to default, preserving the integrity of sovereign and financial sector commitments. Lebanon’s potential GDP is estimated at 60 billion USD, which presupposes significant economic stabilization and structural reform to reach this output level. A target debt-to-GDP ratio of 100 percent has been set, intended to restore fiscal sustainability over the long term. During the recovery period, the State’s operational budget will be tightly constrained between 2 and 5 billion USD annually, until GDP reaches its potential. To avoid overburdening the economy, the tax burden is capped at 20 percent of GDP. Finally, a critical assumption underpinning the plan is that Lebanon’s State-owned assets are valued at over 100 billion USD, offering a significant potential revenue source for debt reduction through monetization or strategic privatization.

These assumptions are undoubtedly ambitious, yet they align with fiscal restructuring strategies observed in prior sovereign debt crises, particularly in Greece and Argentina. However, their viability is contingent on effective governance, transparent fiscal management, and a credible reform agenda—factors that have historically been weak or inconsistent in Lebanon’s political and economic landscape (Naimy & Obegi, 2023).

The Financial Recovery Proposal

The core component of the Lebanon Recovery Financial Plan is a debt restructuring and liquidity restoration strategy. The State will issue 80 billion USD in Eurobonds with a 20-year maturity and a 5 percent interest rate, transferring these bonds to BDL to cover its financial losses. This restructuring approach is similar to the Argentine sovereign debt restructuring of 2001, which also relied on longer-term debt issuance to delay obligations and restore market confidence (López & Nahón, 2017).

To stabilize the banking sector, BDL will compensate banks with 10 billion USD in cash and 70 billion USD in Eurobonds. This two-year window allows banks to adjust their capital adequacy ratios through capital increases, mergers, or depositor bailouts, following a model similar to Iceland’s post-2008 banking reform, where the banking system was recapitalized with a combination of government-backed securities and private sector participation (Zoega, 2018).

BDL will also play a critical role in generating financial revenues for the State through several strategic measures. It is expected to purchase discounted Eurobonds from secondary markets, thereby injecting liquidity and contributing to the stabilization of sovereign debt yields. In addition, BDL may leverage its gold reserves to raise liquidity, following a precedent set by Greece during its 2012 debt restructuring (Zettelmeyer et al., 2013). Another key avenue for revenue generation involves the transparent sale of BDL’s commercial and real estate assets, a process that must be carefully insulated from the political patronage networks that have historically compromised the integrity of state asset transactions in Lebanon.

In addition to restructuring existing debt, Lebanon will issue 10 billion USD in tax rebate bonds, 10 billion USD in revenue-sharing notes on state assets, and 10 billion USD in GDP-linked bonds. These financial instruments will provide flexibility, allowing the State to offer alternatives to traditional Eurobonds and ensure market-driven debt servicing mechanisms.

Furthermore, Lebanon should negotiate with the current Eurobond holders, with the assistance of the International Monetary Fund (IMF), to reschedule the existing Eurobond obligations over 20 years while reducing the interest rate to 5 percent. This step would ease Lebanon’s immediate debt burden and provide the state with greater fiscal flexibility. Similar debt restructuring agreements have been successfully brokered by the IMF in sovereign debt crises, such as Argentina (2005) and Ecuador (2020), where interest rates were lowered, and maturities extended to facilitate sustainable economic recovery (Force & Vonessen, 2021).

Advantages of the Recovery Plan

One of the strongest advantages of the plan is its ability to restore trust in Lebanon’s financial system, as it reaffirms the Rule of Law and financial responsibility. A key issue in Lebanon’s economic crisis has been the collapse of public and investor confidence, similar to what was observed in Argentina’s 2001 default (Fanelli, 2002). By honoring financial commitments and restructuring debt in an orderly fashion, the plan sends a strong signal to investors, banks, and international lenders that Lebanon is committed to stability and Rule of Law.

A second advantage is that financial assets become liquid again, allowing the Lebanese economy to quickly accelerate toward its full productive capacity. Argentina’s post-default recovery showed that once financial markets regained liquidity, economic growth rebounded sharply. From a political perspective, the plan avoids the severe austerity measures imposed in Greece’s debt restructuring, which led to public protests and economic stagnation (López-Castellano et al., 2022). Instead, the plan provides clear guidelines for state intervention, minimizing external financial dependence. Finally, the plan ensures that Lebanon’s economic recovery creates a positive feedback loop, where liquidity improvements drive investment, strengthen the banking sector, and generate additional tax revenues.

Financial Simulation

A financial simulation was conducted to determine whether Lebanon can meet its debt obligations under the proposed plan. The key findings depicted in Table 1 suggest a gradual improvement in debt sustainability metrics, provided that economic growth projections hold. It is important to note that the table is only indicative of a trend rather than an exact forecast, as precise financial and economic data remain limited due to the absence of comprehensive and updated national statistics. Given the current gaps in available economic data, the projections should be interpreted with caution and understood as an approximate trajectory based on reasonable assumptions rather than definitive outcomes.