Lebanon deferred debt payment will likely lead to significant losses for creditors

A default by the country, the first in its history, will have serious implications for the banking sector which underpins the economy

A woman walks past a bank, with windows damaged by anti-government protesters, in the capital Beirut on March 6, 2020. Lebanon's central bank today ordered money changers to cap their exchange rate at no more than 30 percent above the official peg to contain the pound's devaluation on the parallel market.
Debt-ridden Lebanon is facing its most serious economic crisis since the end of its 1975-1990 civil war.
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Lebanon's deferred payment of a $1.2 billion (Dh4.4bn) eurobond yesterday will likely lead to significant losses for creditors, Moody's Investors Service said on Tuesday.

A decision to defer payment "reflects the country's extreme financial and economic pressures and the move will likely lead to significant losses for private creditors", Moody's said, adding that the country's funding model, which sustained its economy for three decades, is no longer sustainable due to a weak balance of payments and the impact of a nine-year war in neighbouring Syria.

Lebanon traditionally relied on its economy growing at a faster pace than the growth of its debt, while the country attracted foreign investment and deposits from a large Lebanese diaspora because of high interest rates, which helped the government fund its fiscal and current account deficits. The country notably escaped the 2008 global credit crisis unscathed due to a high interest rate regime, which lured more than $1 billion a month in capital flows. However, with civil war breaking out in neighbouring Syria in 2011, internal political problems followed by the collapse of oil, investment and deposit flows to the country plunged and the economy stalled.

"A government default will have a significant negative impact on banks' financial health, which will in turn further undermine the economy and the government's balance sheet. We expect the unraveling of this leveraged funding model to result in comparatively high losses for private creditors in light of the public sector's weak loss absorption capacity," Moody's said.

Lebanon, which is now in a grace period until March 16 as it tries to negotiate repayment terms with its creditors, has another $700 million due in April and $600m in June. In total it has about $31bn in bond maturities. The bulk of the debt is held by Lebanese financial institutions (banks 33.4 per cent and the central bank 43 per cent).

A disorderly default may provide legal recourse for holders of other eurobonds to request Lebanon to pay them in advance of their respective maturity dates. The Lebanese pound, pegged to the dollar since 1991, has lost about 40 per cent of its value against the greenback on the black market.

"A sovereign default would have a significant negative impact on banks' financial health, and further undermine the economy and the sustainability of the peg," said Elisa Parisi-Capone, a vice president and senior analyst with Moody's.

Fitch Ratings downgraded Lebanon’s long-term issuer default rating to C from CC yesterday after the government said it plans not to pay the $1.2bn March 9 eurobond. The agency said “failure to make the payment during the grace period" constitutes a "restricted default”.

Lebanon has one of the highest debt-to-gross domestic product ratios (166 per cent) in the world, according to the Institute of International Finance (IIF). Its public debt increased 7.6 per cent to $91.64bn year-on-year as of the end of December 2019.