In a politically charged atmosphere, making a bond payment should be less of a priority than having funds for imports, according to some Lebanese politicians. File picture of a demonstrator from last month's protests.. Image Credit: Reuters

Beirut (Agencies): Lebanon’s government has approved a rescue plan to pull the country’s from its worst financial crisis in decades. This includes interest rate cuts, recapitalisation of banks and other “painful steps”, according to a copy seen by Reuters.

The 17-page plan - which also includes appeals for help from foreign donors - will be presented to parliament next week for a vote of confidence.

The policy plan said banks must use their reserves and sell their investments abroad to help restore the sector’s stability. It envisaged foreign donors providing soft loans, though it did not name any institutions or say how much was required.

Foreign donors say they stand ready to help only if Lebanon implements long-stalled reforms. Prime Minister Hassan Diab’s new government is facing a liquidity crunch, shattered confidence in banks which have imposed informal controls, a weakened Lebanese pound and soaring inflation. The cabinet was formed last month.

Emergency measures

In its statement, Diab’s government pledged to come up with an emergency plan by the end of February that addresses people’s needs and the country’s debt maturities. It said some “painful steps” would be necessary while vowing to curb the impact on those with limited income.

Diab urged European states to open a credit line and provide aid. “Lebanon needs urgent help today at various levels, power, food supplies, raw materials,” he told a meeting of European ambassadors.

The UN Special Coordinator for Lebanon, Jan Kubis, said this week that a clear and transparent action plan was needed. “If you don’t help yourselves, why do you expect assistance from the outside world?” he said.

Support buids up

Some foreign holders of Lebanon’s Eurobonds are expressing support for a government debt restructuring as clamor grows among local politicians to skip a payment due in weeks.

At a private meeting days ago with government representatives, a number of foreign funds that own Lebanese sovereign bonds, including a $1.2 billion note due March 9, argued that the crisis-ridden country would be better off restructuring rather than paying its debt. In a suggestion that the fallout can be contained, they said Lebanon’s bonds were already discounted on their balance-sheets.

Most of Lebanon’s bonds maturing beyond this year trade at between 35 and 40 cents on the dollar.

Central bank Governor Riad Salameh has told officials including the new prime minister, Hassan Diab, that he is willing to pay the debt if instructed by the government. He’s already helped repay nearly $5 billion of bonds in the past year.

While Diab is in favor of meeting Lebanon’s debt obligations this year, according to a local media report, he hasn’t yet made a final decision.

The decision will come down to a choice of who should bear the cost of easing one of the world’s biggest debt burdens, estimated at over 150 per cent of gross domestic product last year, as hardships mount after months of protests.

Lebanon is enduring its worst financial crisis in decades, with the central bank rationing dollars and nation-wide unrest over what many fear could be an imminent collapse. Despite a spotless record of servicing international debt, consensus is fraying in Lebanon as almost $3.5 billion in Eurobond principal and interest payments come due by June.

Lebanon's central bank governor Riad Salameh has some hard decisions to take ahead of March 9, when a bond payment is due. Image Credit: Reuters

Payment options

Bankers say local lenders, which hold most of the country’s Eurobonds, favor a repayment to avoid blowing a hole in their balance-sheets. The most recent payment of $1.5 billion, made by the central bank in November, was criticized by some local politicians who said Lebanon should instead use what’s left of its reserves on buying much-needed imports.

A group of lawmakers aligned with a majority in parliament is lobbying the government to seek technical assistance from international institutions before making a final decision. They’re trying to convince the premier and others that Lebanon risks a crisis and violence similar to Venezuela, which defaulted on its debts in 2017.

Legislators present at a committee meeting last week almost unanimously agreed - albeit in private conversation - that the government shouldn’t pay. The debate is playing out against a dire backdrop, with Lebanon’s reserves stretched thin and the economy succumbing to a recession as currency shortages worsen.

Balacing debt and reserves
A former minister, Nasser Saidi, has called for a restructuring of public debt, while also saying Lebanon would need a bailout of as much as $25 billion that could require support of the International Monetary Fund.
The central bank’s net foreign-currency holdings are sufficient to pay for the near-term import bill and debt redemptions, while local lenders have enough in reserve to cover deposit outflows, according to Morgan Stanley.
“What is more important to watch is the political sentiment on the trade-off of using reserves to cover debt servicing versus imports,” Jaiparan Khurana, a strategist at Morgan Stanley, said in a report. “Market focus should remain on the cabinet decision.”
A repayment of Eurobonds may entail a controversial proposal by the central bank to get local holders of the March notes to swap into longer-dated instruments and pay foreign creditors.
Around a third of Lebanon’s roughly $30 billion of Eurobonds are held by outside investors, with the rest owned by the central bank and local lenders. Lebanese banks also have billions of dollars of foreign-currency deposits tied up at the central bank.