Lebanon looks set to announce on Saturday it cannot make upcoming dollar bond payments and wants to restructure $31 billion of foreign currency debt, sources said, unless a last-minute deal with creditors is found to avoid a disorderly default.
Debt default would mark a new phase in a financial crisis which has hammered Lebanon’s economy since October, slicing around 40% off the value of the local currency and leading banks to deny savers full access to deposits.
Prime Minister Hassan Diab will announce Lebanon’s decision on the Eurobonds after government meetings on Saturday, just two days before the heavily indebted state was due to pay back holders of a $1.2 billion Eurobond due on March 9.
“Lebanon is heading tomorrow towards announcing it will halt payment, or its incapacity to pay the Eurobonds and the interest,” a senior political source involved in government discussions on the matter told Reuters.
“The Lebanese government will do all it can to reorganize its relations with its debtors and to open the door for negotiations,” the source said. “When we talk about restructuring, we are talking about all the (Eurobond) debt of $31 billion.”
Parliament Speaker Nabih Berri, one of the most influential figures in Lebanon and an ally of the powerful Hezbollah group, said on Wednesday a majority of lawmakers backed not paying back the debt.
The senior source and three others familiar with the matter told Reuters last-minute contacts continued, but all expressed doubt a breakthrough was possible. A second senior political source said these efforts had aimed to avoid a disorderly default but there was little hope of a deal.
“They are trying but I don’t think there’s any hope,” echoed a third source close to the government.
Lebanon still has the option of invoking a seven-day grace period on the March 9 bond, which would allow more time for talks with creditors before a default. But the government has not said whether this will be used.
The March Eurobond XS049354029=1M dipped 1.7 cents to 57 cents in the dollar on Friday, according to Refinitiv data. That followed three consecutive trading sessions of strong gains on hopes of avoiding a default. The bond is trading at more than half the level of some longer-dated dollar issues.
Lebanon hired U.S. investment bank Lazard and law firm Cleary Gottlieb Steen & Hamilton LLP last week as advisers on the widely expected restructuring. “Naturally the negotiations are going to be hard,” the senior political source involved in the government’s discussions said.
Lebanon’s financial crisis came to a head last year as capital inflows slowed and protests erupted over state corruption and bad governance.
Inflation has spiked higher in an economy which depends heavily on imports, adding to grievances that fueled protests.
Lebanon’s sovereign debt was estimated at around 155% of gross domestic product at the end of 2019, worth about $89.5 billion, with around 37% of that in foreign currency.
In a bid to control the price of the Lebanese pound, the central bank on Friday ordered currency dealers not to buy foreign currency at prices exceeding 30% of the official rate, effectively setting a cap of 2,000 pounds.
Shortly before the central bank announcement, a foreign exchange dealer said dollars were being bought at a price of 2,630 pounds. It marks the second attempt in less than two months to cap the dollar at 2,000 pounds.
The bulk of the March 9 Eurobond is held by foreign investors. But much of the rest of Lebanon’s sovereign debt is held by the local banking sector.
“The main immediate ramification would be to render most local banks insolvent, which will trigger a domino effect through the financial flows channel leading to sharp output contraction, unemployment, and increased poverty rates,” said Carlos Abadi, managing director of Decision Boundaries, an international financial consulting firm.