Moody's has downgraded Lebanon's issuer ratings to Caa2 from Caa1 and the ratings remain on remains on watch negative, meaning more cuts may be in store.
Lebanon’s credit rating cut to Caa2, one notch further into junk as protests roil the nation downgrade, reflects the increased likelihood of a debt rescheduling or other liability management exercise that may constitute a default under the rating agency’s definition since opening the review for downgrade of the Caa1 ratings at the start of October 2019.
Moody’s stated that widespread social protests, the resignation of the government and loss of investor confidence have further undermined Lebanon's traditional funding model based on capital inflows and bank deposit growth, threatening the viability of the peg and macroeconomic stability.
Elisa Parisi-Capone, Moody’s Analyst, said that the viability of the currency’s peg to the US dollar and macroeconomic stability are both threatened by social protests and a loss of investor confidence.
Thousands of protesters have been on the streets for weeks in Lebanon, demanding the resignation of a political class that they say has left the country on the verge of bankruptcy, leaving little for public services. In an effort to boost liquidity and stave off possible downgrades, Lebanon’s central bank instructed local lenders to raise their capital by 20 per cent by next June.
Fitch also said that the state’s ability to support banks cannot be relied on given the low sovereign rating and a further downgrade to Lebanon’s credit rating could lead to similar moves on the banks.
Banks tightened informal restrictions on money transfers that were in place prior to the unrest, in an effort to curtail possible capital flight.
Last month, S&P Global Ratings placed Lebanon’s B- grade on negative watch, adding that pressing societal demands and limitations on the country’s institutional capacity to address them could further test depositor confidence and weigh on foreign exchange reserves.