In Other News: Beirut Explosion, Argentina Debt Deal & More – August 7, 2020

August 7, 2020

An explosion in Beirut this week that killed at least 135 and wounded another 5,000 appears to have resulted from gross incompetence by Lebanese officials, raising the specter of more political instability in an already troubled region. The blast, which registered on seismographs at the level of a 3.3-magnitude earthquake, destroyed commercial and residential sections of eastern Beirut and cut off electricity across vast swaths of the city. Officials say it was triggered by a warehouse fire that ignited thousands of tons of ammonium nitrate that arrived in the Beirut port in 2013 on a dilapidated Russian cargo ship and remained there, despite multiple requests for guidance from Lebanese customs officials as to how to dispose of it safely. Mass protests erupted in Lebanon last year, a reaction to a struggling economy and poor (sometimes corrupt) governance by Lebanon’s political class. The unrest led to the resignation of Prime Minister Said Hariri in October of last year, and this latest incident is sparking renewed anger at the country’s political leadership – on Wednesday, protestors reportedly attacked Hariri’s convoy. The International Monetary Fund has forecast that Lebanon’s economy could contract by as much as 12% this year as a result of Covid-19 lockdowns. That, coupled with outrage over this port tragedy, could mean more protests ahead.

Argentina restructured $65 billion in debt with creditors, including BlackRock Inc., in a deal that provides significant debt relief to the country, according to Argentina’s Ministry of Economy. Argentina’s President Alberto Fernández has made it his mission to restructure debt with private creditors as well as with the International Monetary Fund (IMF), which provided a $56 billion bailout to Argentina in 2018. Fernández defeated the market-friendly incumbent President Mauricio Macri last year in elections and took office in December 2019. He believes debt restructuring is crucial to stabilizing Argentina’s economy, which suffers from a weakened peso, inflation of around 45%, and a possible GDP contraction of 12% in 2020 due to the pandemic. The deal allows Argentina to change the payment dates for some new bonds and paves the way for Fernández to now negotiate with the IMF. Argentina has suffered nearly two decades of strife dealing with debt and the specter of default, ever since 2001, when its debt reached $160 billion and the country declared bankruptcy.

U.S. Health and Human Services Secretary Alex Azar will make an official visit to Taiwan, marking the first visit from a cabinet-level U.S. official in six years and another significant step to assert U.S. policy priorities in an already tense bilateral relationship with China. Azar’s visit was carefully calibrated by the Trump administration to send a clear signal to Beijing in support of Taiwan, but to send a cabinet member with relatively little political heft. For comparison purposes, a Taiwan visit by Secretary of State Mike Pompeo, who recently called attention to Taiwan’s “vigorous democracy” in a speech railing against China’s censorship, human rights abuses, and theft of U.S. intellectual property, would have likely crossed a red line. China will feel compelled to respond, though its response is likely to be proportional (e.g. ratcheting up threats against Taiwan or taking limited punitive action against Lockheed Martin, which recently participated in an arms sale to Taiwan). As with a number of recent small U.S-China dust-ups, we see little immediate risk of escalation from this episode alone. However, the U.S. announcement of a coming ban on popular apps TikTok and WeChat (the latter is a critical component of both communications and business for any firm operating in China) along with threats (that will likely be made good) to delist Chinese companies from U.S. exchanges and reports that the administration may sanction Hong Kong Chief Executive Carrie Lam will add fuel to the fire. Too many of these incidents – or just one that misses the mark – could tip the relationship over the edge into something more confrontational.