Beirut: Lebanon’s banking lobby made a last-ditch appeal to the government to avoid a debt default and instead offer a swap into new notes for all bondholders.
In the clutches of its worst financial crisis in decades, Lebanon is running out of time to decide how to handle a debt burden that economists say is no longer sustainable. It faces a choice of repaying more than $1.2 billion of Eurobonds due March 9 or restructuring liabilities to preserve dwindling foreign exchange reserves.
The best solution is to repay the debt through a swap for new securities and embark on immediate reforms to clean up public finances and restore the confidence of diaspora investors, according to Salim Sfeir, head of the Association of Banks in Lebanon. Foreign bondholders could be willing to agree to such an exchange if the country can convince them of acting in good faith to carry out reforms and implement a credible plan, he said.
Government officials last week met with experts from the International Monetary Fund and hired financial advisers Lazard Ltd. and law firm Cleary Gottleib Steen & Hamilton to help it decide.
Defaulting will make the country’s efforts to recapitalize its economy much more difficult, Sfeir said.
“The Lebanon of tomorrow is being decided today,” he said. “It is not through poverty that Lebanon will regain its past glory.”
Government must show intent
“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,” said Sfeir, who is also chairman of Bank of Beirut.
Lebanon’s central bank had proposed a debt swap with local lenders in January as a way to avert default. Prospects for a swap faded, however, after local banks sold some of their Eurobond holdings at a discount to overseas funds such as Ashmore Group, a British fund that’s bet the government would pay out.
The sales mean that foreign funds now hold a larger proportion of the Eurobond series maturing in 2020, giving them more leverage in any restructuring discussion. The Justice Ministry asked the prosecutor last month to investigate the transactions on the ground that local banks might have obstructed the government’s efforts to restructure debt.
Sfeir defended banks by saying they sold their holdings to get hold of fresh dollars needed to pay outstanding liabilities of almost $9 billion and meet demand for fuel, wheat and medicine suppliers.
“This is also why many of the banks were forced in recent months to sell their own bonds at a discount, thus taking great losses just to be able not to default,” he said.
The growing acrimony reflects a breakdown in consensus between Lebanon’s authorities and its banks about the way forward. Sfeir said the government had sidelined local lenders, which hold most of the country’s Eurobonds, ever since the issue of repayment surfaced and that a positive outcome is unlikely if decisions are made under stress.
“The banks themselves have been big losers as they have been forced to deplete their equity in order to provide as much liquidity as possible to their depositors, a situation which was created by financing the constant deficit of the government,” Sfeir said.