Why Lebanon’s March 9 eurobonds matter

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. The country's public debt increased 7.6 per cent to $91.64 billion (Dh336.5bn) year-on-year as of the end of December 2019. Lebanon has traditionally relied on the economy growing at a faster pace than the growth of its debt. However, with civil war breaking out in neighbouring Syria in 2011, the influx of more than a million refugees and a political paralysis, Lebanon’s economy has stalled. Even though the country has never defaulted on servicing its debt, the bulk of which is held by Lebanese financial institutions (banks 33.4 per cent and the central bank 43 per cent), the country has important fiscal decisions to make with eurobonds maturing this year and next. The country has $1.2bn of eurobonds that hit maturity on March 9. It has another $700 million due in April and $600m in June. Critics of the government and ruling elite say the state should not pay the upcoming eurobond. Some have proposed that Lebanese lenders that hold government bonds swap them for longer-dated ones. That arrangement would give the government a buffer to come up with a solution, with or without the help of the International Monetary Fund, who it reached out to for advice this month. The government said debt servicing obligations should be honoured otherwise it will negatively impact the Lebanon's credit standing and make it harder to raise sovereign debt in the future. That means limited access to capital markets and foreign currency. The Association of Banks of Lebanon has urged the government to honour its commitments and settle its upcoming debt obligations, as not doing so risks further eroding investor confidence and affects the relationship Lebanese lenders have with correspondent banks, who will take stricter measures with them. “The worst thing to happen is a disorderly default without telling the creditors, or having a plan for after the default. That is the worst outcome and would downgrade us to the lowest rating,” says Nassib Ghobril, chief economist at Lebanon's Byblos Bank. The country and its currency ratings, an indicator of its financial strength to creditors, are currently under review by Moody’s Investors Service, while S&P Global and Capital Intelligence have a negative outlook on the country. If Lebanon defaults on its upcoming obligations, Moody’s, Fitch Ratings, S&P Global and Capital Intelligence could downgrade Lebanon’s sovereign ratings further or change the outlook on the country and its currency. That would push the country further to the cliff edge and it could have dire consequences for Lebanon’s banks, which have traditionally underpinned the economy and allowed the government to finance fiscal and current account deficits. A default would also provide legal recourse for holders of other eurobonds to request Lebanon to pay them in advance of their respective maturity dates. The Lebanese pound, which has lost more than a third of its value against the US dollar on the black market, could come under more pressure. If there is a debt restructuring, creditors may not recover all their money and the biggest creditors, local Lebanese banks, would have priority over other creditors. But even then it is unlikely lenders will emerge unscathed in such a scenario. Goldman Sachs has estimated foreign investors would recover 35 cents on the dollar. On February 12, Lebanon formally asked the IMF for help to overcome its worst economic crisis since the end of a 15-year civil war, but stopped short of requesting a bailout package. Lebanon’s longtime parliamentary Speaker, Nabih Berri, said citizens, who have been protesting since October, would reject an IMF bailout programme that would most likely require the country to float its currency, forcing a major devaluation, in addition to the implementation of higher taxes and austerity measures. Mr Berri said the country should seek IMF technical help to draw up an emergency plan but should not “surrender”. The consensus is the country and politicians waited too long and should have addressed the hardest problems immediately and not waited until the last minute. The IMF’s statement last week was telling: the country has to help itself first before others can help it. “We stand ready to assist the authorities … Any decisions on debt are the authorities’ to be made in consultation with their own legal and financial advisers,” Gerry Rice, the IMF’s director of communications and spokesman said. Lebanon already secured pledges for $11bn from international donors at the 2018 Cedre conference in Paris, which hinge on the country pushing through a string of reforms. The biggest impediment has been lack of political will and a sense of urgency among the country’s political class, which led Saad Hariri to resign as prime minister last year. “We haven’t shown a discipline to reform and are in a state of ambiguity,” says Mr Ghobril. “A moratorium, where you tell creditors that you will postpone payment on a maturing debt, it’s too late for that. It’s too short of a window now for the government to get advisers and iron out an agreement.” Lebanon needs to restructure its debt, says Dino Kronfol, chief investment officer, global sukuk and MENA fixed income, at Franklin Templeton. “We still think the right course of actions is to default, restructure and enter into talks with creditors and bring in the IMF,” he says. For negotiations to be successful, they need to include “a medium [term] plan that has credibility in the eyes of the creditors, [and] the IMF’s involvement brings confidence to these reform plans,” says Mr Kronfol. For the government’s credibility and to address valid concerns of protestors, it “must try and claw back some of the money that has been paid over the years, that will send an important signal that they are serious about reforms and addressing corruption”, he adds. Mr Ghobril proposes the government pay the eurobond and as part of a wider framework, lenders agree to a proposal put forward by the central bank where holders of eurobonds swap them for bonds with 15-year maturities. “I think this is an acceptable solution given the circumstances,” he says, adding, “but we can’t pay the March eurobond and then procrastinate". "This has to be the last time we go through this dilemma and immediately produce a rescue plan and implement it.” The government should take its reform plan to the IMF, request financial assistance and negotiate the terms of a bailout programme. “If they reach an agreement then it will bring credibility and unlock support from the IMF and funds from other sources,” Mr Ghobril says. “There is light at the end of the tunnel, but the light is purely in the hands of the government.”

Why Lebanon’s March 9 eurobonds matter

The country has skilfully balanced wars and crises but time is running out as it faces its greatest economic crisis in three decades