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Lebanon’s first default expected Friday or Saturday: bankers, economists

The Central Bank in Beirut, May 13, 2019. (The Daily Star/Mohamad Azakir)

BEIRUT: Lebanon’s first debt default is expected to be announced Friday or Saturday as the embattled government of Hassan Diab will attempt to persuade foreign bond holders not to sue the state, bankers and economists said Wednesday.

“I think the government will tell the Lebanese bankers and foreign vulture companies holding the $1.2 billion Eurobond due on March 9 that it will not pay for these bonds and this will be a signal that the state has embarked on a restructuring program,” the chairman of a medium-size bank told The Daily Star on condition of anonymity.

Diab and his team of financial advisers have been holding several talks with the Association of Banks in Lebanon and the Governor of the Central Bank Riad Salameh to work out a solution for all the outstanding Eurobonds for 2020 that are valued over $4.7 billion with the interest rates.

There were reports that Diab and Finance Minister Ghazi Wazni have asked the Lebanese banks to buy back all or most of the Lebanese sovereign Eurobonds from the foreign investment companies that bought these bonds from the local lenders.

The purpose of this proposal was to allow Lebanese banks to hold 75 percent of the Eurobond issues in order to avoid a lawsuit from the foreign investors.

Basically, the holders of the 75 percent bonds have the right to negotiate with the government without the approval of the foreign bond holders.

“Anyone who holds 75 percent of these bonds can negotiate with the state on debt default and restructuring of these bonds. But the lawyers of ABL advised them not to buy back these bonds from Ashmore and other foreign vulture companies as this may be considered insider trading and this is against the law. This is an illegal practice, according to the lawyer,” the banker explained.

Parliament Speaker Nabih Berri rejected the payment of maturities on Lebanon’s foreign-currency debt, MP Ali Bazzi said Wednesday.

"The majority of the Lebanese people, as well as Parliament, absolutely reject the payment of debt maturities. Everyone should support the government in this, even if it leads to default,” Bazzi cited Berri as saying.

Berri emphasized the importance of “national unity in confronting this crisis” and reprimanded Lebanese banks for selling local Eurobond holdings to foreign investors. This has made it harder for the government to hammer out a favorable deal with investors when the government likely restructures or defaults on the debt.

The government appointed a foreign law firm to negotiate with the foreign bond holders to persuade them that the state has no choice but to default on the payment of the Eurobonds, stressing that Lebanon has no financial means to keep financing the public debt.

President of the Association Banks in Lebanon Saleim Sfeir told Diab and his team of advisers that the lenders prefer to see the introduction of reforms before discussing the possibility of debt default.

“We still believe that a wise approach to the economic crisis and the financial obligations toward the international community is feasible if there is goodwill by the government to adopt the necessary reform plans and restructuring policies for our economy,” Sfeir told Bloomberg News last week.

The banker said Salameh revealed to President Michael Aoun the actual amount of BDL’s assets and foreign currency reserves.

“What is certain is that the foreign currency reserves of BDL can hardly finance Lebanon’s basic needs for one year only,” he added.

The banker stressed that Diab told the bankers he was not willing to take the decision of the default all by himself and for this reason he would discuss this issue with Aoun and the main political parties in the Parliament, namely Hezbollah, Amal and the Free Patriotic Movement.

All of these parties strongly favor debt default and even debt restructuring.

Last week, Lebanon paid $71 million in coupons due on Eurobonds maturing in 2025 and 2030, a source familiar with the matter said, according to Reuters, a day after appointing legal and financial advisers for a widely expected debt restructuring.

Ghassan Ayash, a former vice governor of the Central Bank, told The Daily Star that one of the options of the government was to apply a haircut on 70 percent of the Eurobonds held by Lebanese banks and the Finance Ministry should write off a big part of the Treasury bills.

“This way the government can reduce the public debt by more than 20 percent. Our debt is unsustainable and we can’t continue on this path,” Ayash said.

He added that the Cabinet should tell its foreign creditors that Lebanon does not have any money but it has an economic program to exit the crisis.

The government has also sought the technical advice of the International Monetary Fund but fell short of asking financial assistance.

However, Hezbollah was quite clear that it would oppose any conditional financial assistance from the IMF, claiming that the organization would demand unpopular conditions such as raising the value added tax, taxing gasoline, removing EDL subsidies and trimming the size of the public sector.

 

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