By: S&P Global Ratings
The Lebanese government announced in March that it would stop paying all its commercial foreign currency debt obligations of about $31 billion, including a $1.2 billion Eurobond that matured on March 9, 2020. Lebanon also missed a Eurobond principal repayment due on April 14, along with interest due on several bonds in March and April.
Since March, the Lebanese government under Prime Minister Hasan Diab, with the support of external advisors, has made only limited progress in engaging creditors on debt-restructuring negotiations. The government unveiled a broad recovery plan to investors on March 27 covering general principles of structural economic, fiscal, banking sector, and exchange rate framework reforms. A recent draft report by Lazard, a financial consulting firm and one of the government’s advisors, provides more detailed recommendations; however, it does not set out an implementation timeline, and proposed measures lack the government’s endorsement at this stage.
In the absence of a comprehensive restructuring plan backed by all key political institutions and parties, and external support, we continue to expect the negotiation process will be drawn out beyond 2020. The challenges are compounded by the COVID-19 pandemic, which is dealing a further blow to already weakened economic activity and severe external, fiscal, and financial pressures.
Lebanon’s currency peg to the dollar is steadily faltering, with ongoing foreign exchange shortages and a widening gap in the parallel exchange markets. In a recent circular, the Banque du Liban announced it would launch a foreign exchange unit to centralize the exchange rate used by money exchange houses. Another circular announced that small depositors could withdraw up to $3,000 from their bank accounts in Lebanese pounds at market prices. These policies indicate a move toward a dual or multiple exchange rate regime.
We would likely raise the foreign currency issuer ratings from ‘SD’ once a debt exchange or restructuring agreement between Lebanon and its creditors took effect. We could also upgrade Lebanon if we don’t expect further resolution to occur and we believe a different rating better reflects our forward-looking opinion on Lebanon’s creditworthiness.
We understand the government has currently not announced any restructuring of its local currency debt obligations, which represent about 110% of GDP (63% of total debt). Our ‘CC/C’ ratings on Lebanon’s local currency debt reflects our expectation that domestic debt restructuring is inevitable if Lebanon seeks to set its public debt on a sustainable footing. The Lazard report suggests that the damaging impact on banks’ balance sheets could be addressed, to some extent, by bail-ins from bank shareholders and a portion of depositors, as well as by mergers and liquidations. However, these issues will be politically and socially contentious.
In our rating action on March 11, we lowered the foreign currency long- and short-term sovereign credit rating on Lebanon to ‘SD’ from ‘CC’. We also revised our rating on the maturing March bond issue that had defaulted to ‘D’. At the same time, we revised all other outstanding bond issues to ‘SD’, which was an error in the application of “Criteria For Assigning ‘CCC+’, ‘CCC’, ‘CCC-‘, And ‘CC’ Ratings,” published Jan. 18, 2018. Under that criteria, we should have assigned ‘CC’ issue credit ratings to those outstanding bond issues to indicate that although a default has not yet occurred, S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to default. Today’s actions correct these errors.
The negative outlook on the local currency rating reflects the risk to local currency commercial debt repayments in the context of ongoing political, financial, and monetary pressures.
We could lower the local currency issuer rating to ‘SD’ if the government signals that it will restructure local currency debt in addition to the Eurobonds.
We could raise the rating if we perceived that the likelihood of a distressed exchange of Lebanon’s local currency commercial debt had decreased. This could be the case if, for example, significant donor funding support were to materialize, allowing the government a window to implement immediate and transformative reforms, or if significant reforms led to sustained strong economic growth.