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Lebanon

Lebanon to default and restructure, but announcement light on detail

  • Bond payment due on Monday will not be made

  • Government wants to restructure its debt through negotiation

  • Government will need to provide more detail and clarity in coming days

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

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Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
8 March 2020
Published byTellimer Research

Lebanon announced on Saturday that it will not make the US$1.2bn principal payment on the eurobond due on Monday (9 March) and will seek to restructure its debt. The decision follows the well-advertised cabinet meeting held earlier on Saturday to determine whether or not the payment will be made and was announced by Prime Minister Hassan Diab in a televised address. 

The decision is not much of a surprise. With the March bond indicated at 57 (mid) as of cob on Friday, the market was already pricing in a high probability of default. However, the government might also have sought to make the payment, either on the due date or during the 7-day grace period on principal, and delay the decision. 

According to reports, the government has decided to prioritise its declining reserves over debt payments in order to meet basic needs. The PM reported that public debt was US$90bn, standing at 170% of GDP (we estimated 158% in 2019). Eurobonds are about a third of this. The PM said that total public debt service (principal and interest) was US$4.6bn this year. With echos of Argentina, the PM said the country cannot grow under the burden of debt. 

The government also said it will come up with a broader economic stabilisation plan, including restructuring the loss-making electricity company and the banking sector, while creating a social safety net. It would seek to protect small depositors, who account for over 90% of total bank accounts according to the PM; suggesting losses for the largest depositors. There was no mention of the exchange rate however. 

But otherwise, the PM's announcement was short on specifics and lacking in detail. There were no further details on the government's restructuring plans. Investors may have wanted to see more. In any case, we don't think it will be an easy process, and a big haircut seems likely in our view (we assume a 50% principal haircut). That the government said it wanted to restructure its debt through negotiations with bondholders may be seen as positive. A cooperative solution may lead to a better outcome all round. However, the nature of the bonded debt, given the extent of local holdings, high foreign ownership of front end bonds, and presence of collective action clauses (without aggregation) mean restructuring may not be straightforward. 

It is not even clear to us what the perimeter of the debt to be restructured is - all the eurobonds, sure, although some reports refer to the entire public debt. We don't think a restructuring focused only on the eurobonds will be enough. Nor is there any mention of IMF involvement in the restructuring and economic stabilisation plan (over and above the technical advice from the Fund that Beirut has already requested), presumably because of domestic political opposition to a Fund programme, but we think the Fund's absence greatly reduces the chances of the economic stabilisation plan's success and could hinder the debt negotiations. 

With the decision to default and restructure made, the hard work is now going to start. It will be important for the government to provide more detail and clarity in coming days.