The recent protests in Lebanon highlight that it is politically impossible to push through the fiscal austerity needed to stabilise the government’s debt-to-GDP ratio. A debt restructuring is inevitable. There are lots of ways that this could play out. But one important point to make is that the combination of an overvalued currency and widespread holdings of government FX debt in the local financial sector means that there’s the risk of a messy default accompanied by currency and banking crises.
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