Just how has Lebanon found itself in such an inglorious position? For years, the Lebanese government, the central bank (Banque du Liban), and savers played a game. The government spent more than it collected in taxes and financed its resulting deficits by paying sky‐high interest rates on the debt it issued. The central bank bought some of the debt and kept the official pound-U.S. dollar exchange rate pegged at 1,500. The peg was designed so that those who purchased the government’s debt would have confidence that it would retain its purchasing power in U.S. dollar terms when it matured. Banks offered relatively “high” interest rates to depositors and were also part of the game. For a surprisingly long period of time, the money poured in from domestic savers, the Lebanese diaspora, and other foreign investors. They were all chasing yield and blind to the nature of the game.
Eventually, though, it became apparent that the government’s mountain of debt had become so large that the dollar‐denominated portion could not be repaid in full. It also became clear that the government could not even repay the Lebanese pound‐denominated portion in full unless the pound was officially devalued. At that point, the government faced an investors’ strike and was forced to default on a maturing foreign bond on March 9. The default triggered a sharp depreciation of the pound in the black market and a surge in inflation.