Complex Made Simple

Lebanon to not pay $1.2 billion Eurobond debt

This historic move comes in the backdrop of the country’s worst financial and economic crisis deepened by protests over corruption that began in October last year

This payment is only the first of a series of deadlines and makes up the country’s total debt of $90 billion The spotlight is now on the government’s negotiations with London-based asset manager Ashmore For Lebanon to actually come out of its current crisis, a complete overhaul of its banking sector must take place

In a big blow to Lebanon’s banking sector, it has decided not to pay a Eurobond debt of $1.2 billion which is due tomorrow (Monday) and instead try and negotiate new payment terms with its creditors. This historic move comes in the backdrop of the country’s worst financial and economic crisis deepened by protests over corruption that began in October last year. According to data compiled by Bloomberg: “the country’s debt risk, measured by five year credit-default swaps, climbed above 2,500 basis points last week and is the highest globally after Argentina.”

This payment is only the first in a series of deadlines and makes up the country’s total debt of $90 billion at the end of 2019-comprising around 150% of Lebanon’s GDP. In a country that is already struggling with serious socio-economic woes and double digit inflation, this could mean it is heading for a default.

Read: Time to buy the March 2020 Lebanon Eurobond at a 175% yield to maturity windfall?

Lebanon default.png

The crux of the matter

In an address to the nation, Prime Minister Hassan Diab said: “How can we pay foreign creditors when the Lebanese can’t access their deposits?” 

“Our debt has become greater than Lebanon can bear, and greater than the ability of the Lebanese to meet interest payments…How can we pay creditors and there are people in the streets who do not have the money to buy a loaf of bread? This decision is, today, the only way to stop the bleeding and protect the national interest.”

Indeed, with the banks stripped of cash and the Lebanese public unable to withdraw more than $200 dollars every two weeks, the question of paying a Eurobond has become an extremely sensitive subject. 

The spotlight is now on the government’s negotiations with London-based asset manager Ashmore, which could obstruct Lebanon’s efforts to seek easier payment terms. In December, Ashmore held over 25% of the bond, above the minimum required to block a revision, Bloomerg said. 

Read: Thinking the unthinkable: Lebanon’s sovereign debt default?

What it could mean

Financial experts say the socioeconomic effects of the restructuring would be profound and long lasting. They say that for Lebanon to actually survive its current crisis, a complete overhaul of its banking sector must take place along with political reforms and strengthening of its exports sector, shifting its heavy dependence on imports. “However, in the short-term, a restructuring deal or a default would result in further devaluation of the Lebanese pound, continued price increases and further diminished standards of living, exacting a heavy toll in a country where a social safety net does not exist to mitigate such effects,” said a report on the Al Monitor website. 

The website quotes Dan Azzi, a Lebanese analyst and former advanced leadership fellow at Harvard, as saying that there is a strategy to repay the Eurobond debt. “There’s a way for [Lebanon] to pay everything and it’s good for the country to pay everything,” Al-Monitor quotes him as saying. 

“In his view, it would be possible for the Central Bank to use its reserves to pay off foreign debt holders and then write off the local debt by asking several thousand depositors to take a haircut. This, he said, would leave the door open for refinancing down the line instead of restructuring if the need to do so presented itself,” the report adds. 

Read: Lebanon economy: The true face of corruption in infographics and numbers

The other side

However, there are those who say that the best option would be to ask for a rollover of the debt and then seek the IMF’s help to recommend reducing the government deficit and lowering the value of the Lebanese Pound. Some experts also say that whichever way the negotiations play out, the Lebanese Pound would be devalued anyway, which would in turn, destabilize the country’s economy. 

As the default drama unfolds, one thing is clear: Lebanon is all set for major changes to its socioeconomic fabric in the coming days. Exactly how, only time will tell.