Lebanon on verge of debt default as economic plight deepens

Lebanon decided on Saturday not to pay foreign currency debt, said official sources .

The move sets the heavily indebted Middle Eastern state on course for a sovereign default and restructuring negotiations as it grapples with a corrosive fiscal crisis.

The decision not to pay maturing Eurobonds and to launch negotiations with creditors was taken unanimously at a cabinet meeting, according to ministerial sources and a senior politician.

Prime minister Hassan Diab is set to announce the decision, which was taken unanimously at a cabinet meeting, in a speech to the nation at 4.30pm Irish time on Saturday.

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A default on Lebanon’s foreign currency debt will mark a new phase in a crisis that has hammered the economy since October, slicing about 40 per cent off the value of the local currency, denying savers full access to their deposits and fuelling unrest.

The crisis is seen as the biggest risk to Lebanon’s stability since the end of the 1975-’90 civil war.

Lebanon has a $1.2 billion Eurobond due on March 9th, part of a portfolio of some $31 billion in dollar bonds that sources on Friday said the government would seek to restructure in negotiations with creditors.

The cabinet session followed a meeting between the prime minister, president, parliament speaker and central bank governor during which the attendees opposed paying the debt, said the presidency.

“The attendees decided unanimously to stand by the government in any choice it makes in terms of managing the debt, except paying the debt maturities,” said the presidency.

Sources also indicated that Lebanon cannot make upcoming dollar bond payments and wants to restructure $31 billion of foreign currency debt unless a last-minute deal with creditors could be found to avoid a disorderly default.

Lebanon hired US investment bank Lazard and law firm Cleary Gottlieb Steen & Hamilton LLP last week as advisers.

Corruption and unrest

The financial crisis came to a head last year as capital inflows slowed and protests erupted over decades of state corruption and bad governance – the root causes of the crisis.

The import-dependent economy has shed jobs, with inflation rising as the pound has slumped, adding to grievances that have fuelled protests.

Lebanon has never before defaulted on its sovereign debt.

“This unprecedented event is the result of an accumulation of policies, crimes and choices that exhausted the public finances,” said MP Alain Aoun, a senior figure in the Free Patriotic Movement party founded by President Michel Aoun.

“There is no use in crying over the ruins. What is helpful now is starting a rescue plan to get out of the bottom of the abyss as Greece did,” he added, writing on Twitter.

Lebanon’s sovereign debt was estimated at about 155 per cent of gross domestic product at the end of 2019, worth about $89.5 billion, with about 37 per cent of that in foreign currency.

“It looks very likely they will default,” said Nick Eisinger, principal, fixed income emerging markets at Vanguard, which holds some Lebanese debt but has been underweight in the market for a long time.

“Watch now if bondholders can block any deal,” he said. “It’s unclear how quick they can go down the restructuring route or get a deal because they need reforms first or at the same time,” he said.

A set of Lebanon’s bond holders are to step up efforts to form a creditor group in the coming days, one of the members of the group said. – Reuters