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24 March 2020

Lebanon to cease payment of Eurobonds in foreign currency

Even with a decision to restructure debt, an agreement with bondholders may be complicated by political bickering and rampant corruption

The remaining debts are denominated in Lebanese pounds and are largely held domestically/Bloomberg

by Kudakwashe Muzoriwa

The Lebanese government has decided to cease payment of all dollar-denominated Eurobond and will take all necessary measures to manage the limited reserves in foreign currencies, as the country tries to restore stability and preserve its foreign exchange reserves.

The decision comes weeks after Lebanon suspended the payment of its $1.2 billion Eurobond which was due on 9 March 2020 and announced plans to talks with creditors to restructure its entire $90 billion debt pile, the first step in a broader plan to stabilise an economy in crisis.

The Finance Minister stated that the government will take all measures it deems necessary to prudently manage Lebanon’s limited foreign currency reserves.

The government said that it remains committed to its three-pronged economic reform initiative and is developing a sustainable macroeconomic plan to redress the Lebanese economy.

Prime Minister Hassan Diab said that Lebanon’s economic reform initiative is aimed at restoring the sustainability of government public finances through the restructuring of its public debt and a series of fiscal measures.

The Lebanese government also seeks the creation of a conducive environment for growth through a comprehensive structural reform agenda, including measures to improve governance and fight corruption.

According to the ministry of finance, the government intends to engage in good faith discussions with its creditors as early as practicable.

The premier, who only formed his government two months ago amid months of nationwide protests, said that Lebanon is seeking to stabilise and reform its financial system through the restructuring of the banking sector.

Negotiations will be complicated by political divides that have held up previous efforts to turn around the economy and high foreign ownership of bonds maturing this year. Lebanese banks and the central bank hold most of the rest of the government’s Eurobonds.

Additionally, negotiations follow weeks of political wrangling on how to place the country’s finances back on a sustainable path, after foreign remittances—the main source of hard-currency revenue—slowed to a trickle as confidence fell and the banks imposed restrictions on the transfer and withdrawal of dollars.

In October 2019, protests erupted in several parts of the country including Beirut over the severe economic slowdown and a sharp depreciation of the local currency on the parallel market.

Local lenders, who hold almost $14 billion of the notes, had lobbied against a disorderly default that would force hefty losses on creditors, warning that it could do irreparable harm to the reputation of the banking sector and its capital.

Similarly, Banque du Liban which itself owns about $5.5 billion of the debt, has proposed swapping the March bond for longer-dated instruments.

Bond investors are more sceptical about the prospects for an easy fix. The notes have mostly traded below 30 cents on the dollar, suggesting the market expects the country to wipe roughly 70 per cent off their value.

The ministry of minance plans to hold an investor presentation on 27 March 2020 and the government hired Lazard and Cleary Gottlieb Steen & Hamilton as advisers.

RELATED STORIES: Eurobond Prime Minister Hassan Diab Lebanon





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