Lebanon will default on its debt for the first time ever

ebanese Prime Minister Hassan Diab announced on Saturday that Beirut will not repay a $1.2bn Eurobond due next week and will instead seek to restructure its massive debt as the country’s dollar reserves dwindle amid an acute financial crisis.

In a televised address to the nation, Diab said the “difficult decision” to default for the first time in Lebanon’s history had been made in order to “secure the basic needs for people”.

Lebanon is in the throes of an economic meltdown rooted in corruption, government mismanagement, a decrepit power sector that bleeds billions from state coffers and the civil war next door in Syria.

The Lebanese pound has devalued sharply against the US dollar on parallel markets, while banks have imposed informal capital controls limiting the amount of dollars depositors can withdraw as well as transfers abroad.

As inflation soars and confidence plummets, businesses are closing and people are being thrown out of work.

“How can we pay creditors abroad while Lebanese can’t get their money from their bank accounts? How can we pay creditors and leave hospitals with a shortage of medical supplies? How can we pay the creditors while there are people on the streets who can’t afford to buy bread?” Diab said.

The decision to default on the country’s debt – which Diab put at $90bn or 170 percent of economic output – was taken unanimously by the cabinet at a meeting earlier in the day, and was backed by the country’s political and financial establishment.

President Michel Aoun, Speaker Nabih Berri, Central Bank Governor Riad Salameh and the head of the Association of Lebanese Banks, Salim Sfeir, as well a Diab himself, met on Saturday morning and announced in a joint statement that they would stand by any decision the government makes on debt repayment – except if that decision is to pay the debt.

Lebanon is in the throes of an economic meltdown rooted in corruption, government mismanagement, a decrepit power sector that bleeds billions from state coffers and the civil war next door in Syria.

The Lebanese pound has devalued sharply against the US dollar on parallel markets, while banks have imposed informal capital controls limiting the amount of dollars depositors can withdraw as well as transfers abroad.

As inflation soars and confidence plummets, businesses are closing and people are being thrown out of work.

“How can we pay creditors abroad while Lebanese can’t get their money from their bank accounts? How can we pay creditors and leave hospitals with a shortage of medical supplies? How can we pay the creditors while there are people on the streets who can’t afford to buy bread?” Diab said.

The decision to default on the country’s debt – which Diab put at $90bn or 170 percent of economic output – was taken unanimously by the cabinet at a meeting earlier in the day, and was backed by the country’s political and financial establishment.

President Michel Aoun, Speaker Nabih Berri, Central Bank Governor Riad Salameh and the head of the Association of Lebanese Banks, Salim Sfeir, as well a Diab himself, met on Saturday morning and announced in a joint statement that they would stand by any decision the government makes on debt repayment – except if that decision is to pay the debt.

Diab said Lebanon will now look to enter into negotiations with creditors.

Lebanese banks, which hold the majority of the country’s debt, had been against default and had dumped Eurobonds to foreign buyers in recent weeks as the likelihood of default grew, weakening the government’s negotiating position.

Diab said the government also planned to restructure Lebanon’s banking sector – a former pillar of the economy which through its sheer size had discouraged investment in more productive sectors.

Lebanon produces little and imports about 80 percent of the goods it consumes.

“We do not need a banking sector that is four times the size of our economy,” he said.

He also pledged to establish a safety net for the poorest and protect the savings of small depositors amid harsh capital controls by banks that have limited withdrawals of foreign currency to just a few hundred dollars per month.

The Lebanese pound, pegged to the dollar since 1997, was previously used interchangeably with the US greenback, but has depreciated in value by more than 60 percent since November on parallel markets.

Seeking to stop the pound’s rapid downward spiral, Lebanon’s Central Bank on Friday ordered exchange shops – the backbone of the parallel market – to cap the exchange rate at 30 percent above the official rate of 1,500 Lebanese pounds to $1.

Diab said Lebanon will now look to enter into negotiations with creditors.

Lebanese banks, which hold the majority of the country’s debt, had been against default and had dumped Eurobonds to foreign buyers in recent weeks as the likelihood of default grew, weakening the government’s negotiating position.

Diab said the government also planned to restructure Lebanon’s banking sector – a former pillar of the economy which through its sheer size had discouraged investment in more productive sectors.

Lebanon produces little and imports about 80 percent of the goods it consumes.

“We do not need a banking sector that is four times the size of our economy,” he said.

He also pledged to establish a safety net for the poorest and protect the savings of small depositors amid harsh capital controls by banks that have limited withdrawals of foreign currency to just a few hundred dollars per month.

The Lebanese pound, pegged to the dollar since 1997, was previously used interchangeably with the US greenback, but has depreciated in value by more than 60 percent since November on parallel markets.

Seeking to stop the pound’s rapid downward spiral, Lebanon’s Central Bank on Friday ordered exchange shops – the backbone of the parallel market – to cap the exchange rate at 30 percent above the official rate of 1,500 Lebanese pounds to $1.

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