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‘No default’: Lebanon ready to settle $1.5B Eurobond

The Central Bank in Beirut. (The Daily Star/Mohamad Azakir)

BEIRUT: Lebanon will settle Thursday a maturing $1.5 billion Eurobond, sending a signal to the market that the country has not defaulted despite the political crisis and economic slowdown, a banking source said Wednesday.

“The Central Bank will pay the $1.5 billion Eurobond Thursday. This shows that the country has not defaulted despite all the events around us,” the source told The Daily Star.

A source at the Finance Ministry confirmed the move.

“Indeed. No default. It will be paid in full tomorrow [Thursday],” the source at the ministry said.

The eight-year Eurobond has a coupon rate of 5.45 percent.

But the question that lingers in the minds of investors and rating agencies is whether Lebanon, which does not yet have a Cabinet, can finance the outstanding Eurobonds in 2020.

Lebanon has to refinance around $4 billion to $5 billion in Eurobonds and around LL15 trillion in Treasury bills in Lebanese-dominated currency.

Some investment banks have argued that the next Cabinet may be obliged to apply a haircut or reschedule the debt due to the severe liquidity crunch and the failure of the last government to implement reforms and cut the budget deficit.

The banking source said that Banque du Liban was still keen to see commercial banks raise their capitals by 20 percent by the end of 2019 and 2020.

“BDL will not change its position regarding its request for banks to increase the total capitals by $4 billion in 2019 and 2020. BDL has already received assurances that some of the banks have made commitments to raise the capitals and will talk to their shareholders about this issue,” the source said.

They added that BDL would seek to assist banks that might have difficulty raising the capital.

“We will find a way to solve this problem. BDL will take all the necessary steps to allow the banks to raise the capital on time,” the source said.

The main purpose of Central Bank Gov. Riad Salameh’s request is to repatriate part of bank deposits abroad, as this would ultimately reduce the lenders’ exposure to the public debt, improve their capital adequacy ratio and, above all, inject some badly needed dollar liquidity into the market.

Some bankers admitted that they were not too happy with BDL’s circular on raising the capital by 20 percent. “One reason for the circular was to repatriate the funds that left Lebanon, and the other reason was to weather the negative repercussions of downgrade by rating agencies,” one banker said. Asked about the dollar liquidity crunch in the market and the sharp devaluation of the lira in exchange market, the banking source said the situation would be back to normal once a “credible” government was formed, as this would restore confidence in the country and the national currency.

The price of the U.S. dollar exceeded LL2,100 Wednesday among some exchange dealers. Commercial banks still comply with BDL’s official rate, which is LL1,507 to LL1,515, but refuse to exchange the lira into dollars even for their customers, unless they have dollar accounts.

“The most important thing for the new Cabinet is to present a fiscal reform, and once this happens the situation will improve. We need a dose of confidence,” the source said.

He added that the new Cabinet would tell the Lebanese people that “this is my program and you can hold me accountable in five or six months.”

“The important thing is to bring a Cabinet that does not defy the people in the street,” the source said.

But some bankers said Lebanese consumers might find empty supermarkets shelves in two to three months because most lenders were not issuing letters of credit to their customers to import certain commodities.

“Banks are hardly financing the import of commodities that are not considered basic items. We are trying to apply capital control so that the funds will not vanish in a few months. I expect the balance of trade deficit to drop to $10 billion at the end of 2019 compared to more than $17 billion last year,” the chairman of one of the banks told The Daily Star.

He warned that if the banks complied with customer requests, many lenders would go bankrupt.

His comments coincided with a decision by the Association of Banks in Lebanon to remain open despite calls by the Economic Committees for a three-day strike starting Thursday.

The Economic Committees, a group that represents business owners and private sector leaders, also suspended its strike call in order to give politicians more time to form a new Cabinet.

Some bankers and economists have proposed that all transactions inside Lebanon be conducted in Lebanese pounds only, as this would reduce the run on the dollar and restore confidence in the national currency.

The bankers interviewed by The Daily Star said BDL could change the rules by insisting that all checks and all invoices inside Lebanon be paid exclusively in the local currency.

Meguerditch Hagop Bouldoukian, former BDL vice governor, said dealing with the Lebanese pound was the natural solution.

“If every professional, doctor, insurance company, hospital, car dealer, acquisition of homes, travel agency and other services and products suppliers’ invoices [are] in Lebanese pounds, the actual currency crisis will fade away and the run to exchange dealers will stop,” Bouldoukian said.

 
A version of this article appeared in the print edition of The Daily Star on November 28, 2019, on page 1.

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