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24 February 2020

Moody’s, S&P Global downgrade Lebanon as bond default looms

The downgrades come as officials in Beirut hold technical negotiations with the International Monetary Fund (IMF) on how to fix an economy suffering an acute shortage of dollars

Lebanon is in the process of hiring legal and financial advisers to help manage its liabilities/Bloomberg

by Kudakwashe Muzoriwa

Moody’s and S&P Global Lebanon, two of the three biggest credit rating agencies, have downgraded Lebanon deeper into junk as the nation’s bondholders braced for a potential default in March 2020.

S&P Global lowered its long-term foreign and local currency sovereign credit ratings on Lebanon to ‘CC’ from ‘CCC’ with a negative outlook following a similar reduction by Moody’s to Ca from Caa2 with a stable outlook.

Moody’s stated that the Ca rating reflects its expectation that domestic and external private creditors will likely incur substantial losses in near-term government debt restructuring in light of rapidly deteriorating economic and financial conditions that increasingly threaten the sustainability of the government's debt and currency peg.

Additionally, Moody’s said that Lebanon’s plans for an economic overhaul will probably include bond write-downs in the range of 35 to 65 per cent of face value.

S&P said, “We are lowering our ratings because we believe restructuring or non-payment of Lebanon's government debt is virtually certain, regardless of the specific time to default.” 

Bloomberg reported that the most immediate question for Prime Minister Hassan Diab is whether to repay a $1.2 billion Eurobond maturing on 9 March 2020.

Diab’s administration has been in place for a month, after protesters forced Saad al Hariri to step down in October 2019.

An IMF delegation arrived in Lebanon this week to assess the sustainability of a government-debt load that exceeds 150 per cent of economic output. The country is in the process of hiring legal and financial advisers to help manage its liabilities, including $30 billion of international bonds.

Lebanese banks are rationing dollars, resulting in the local currency’s black-market rate plunging 40 per cent from its official, pegged price.

While Lebanon has never defaulted on its debt, some lawmakers and officials have called on the government to skip Eurobond payments and use remaining reserves to finance imports of food and medicine.

Due to severe fiscal, external and political pressures, S&P Global said that a distressed exchange or unilateral default on Lebanon's commercial debt is virtually certain at this point.

Furthermore, the haircut forecast by Moody’s is smaller than the losses priced by most bond traders. Lebanon’s sovereign bonds with maturities of more than two years trade near 30 cents on the dollar, implying holders being hit to the tune of about 70 per cent.

RELATED STORIES: Moody’s S&P Global Lebanon Prime Minister Hassan Diab





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