Debt restructuring is ‘absolutely not’ on the card

Players of international financial market check out the Lebanese debt scenario while the government reveals its plans on public debt reformation.

lebanon beirut barthelemy leyconie downtown centre-ville parlement horloge parliament
Questions arise as the country continues to face political turmoil amid “sluggish economic growth”. Lebanon needs a new government as soon as possible. © Barthelemy Leyconie

Introducing a restructured debt wasn’t an imminent future in Lebanon, thought Goldman Sachs. However, the country has turned its focus on investors’ recovery while financial crisis stands knocking at the country’s door.

The “base scenario”, presented by the U.S. bank, shows that 35% debt could be recovered through “foreign investors” but if there were any “debt overhaul”, said Goldman Sachs’ economist Farouk Soussa, “the actual recovery value” would be “significantly different”. The local lenders are among the biggest debt holders in Lebanon.

Questions arise as the country continues to face political turmoil amid “sluggish economic growth”. Over the period of last year, the country’s debt risk rose by “280 basis points”. In Soussa’s words: “In the continued absence of significant improvements in the political, economic and financial prospects of the country, the possibility of a financial crisis and sovereign default is growing”.

Soussa thinks that Lebanon will turn to “fiscal adjustment” for making “its debt sustainable”, whereby triggering either “a sharp decline in interest rates or substantial economic growth”. Although, he added that both “are largely outside the control of policymakers, and are highly dependent on regional economic and political developments”.

Paul Abelsky, however, enumerates some of the key challenges that have come Lebanon’s way. Enlisting the same, he writes:

  • “Economic growth averaged about 1.6 percent between 2011 and 2018, IMF data show, compared with 7 percent in the preceding seven years.
  • “Political disputes between a pro-Saudi bloc and the Iranian-backed Hezbollah have prevented the formation of a government since May.
  • “The temporary resignation of Prime Minister Saad al-Hariri in 2017, widely blamed on Saudi Arabia, has further undermined investor confidence in the economy.
  • “Deposit growth, key for local banks to buy government debt, has slowed”.

Furthermore, Soussa also added that: “Any possible restructuring is likely to be designed in such a way as to minimize the fallout for the local banks”.

However, last month, the “Caretaker Finance Minister”, Ali Hassan Khalil warned saying: “The crisis today has started to transform into a financial crisis from an economic crisis.” While, Paul Abelsky reported: “Goldman Sachs puts the exposure of local lenders to the government’s local debt and Eurobonds at some 55 trillion Lebanese pounds ($36.5 billion) almost double the capital base of the whole banking system”. And in Soussa’s words: “The most important factor that will determine the outcome of any debt restructuring is the relationship between the sovereign and the banking sector”.

On Sunday, Ali Hassan Khalil confirmed that the public debt restructuring is something that the government is “absolutely not proposing”, while the government will keep is commitment of “paying all maturing debt and interest payments on the predetermined dates”. Khalil, further informed that the government will be “safeguarding rights of depositors, banks and holders of sovereign debt instruments”.

Khalil attended a meeting with the “Lebanon’s president, prime minister and central bank governor” which marks a “top-level effort” made to “reassure investors” for Khalil’s previous comments on public debt had initiated a “sell-off in Lebanese dollar-denominated bonds”.

Following the meeting, Khalil informed that currently the government is planning to reforming spending, besides reducing “the budget deficit” and activating the economy for securing “financial balance”. Khalil’s statement on Lebanon’s commitments on payment includes “maturities and interest at the predetermined dates without any other measure”.

The IMF has advised the country for “an immediate and substantial fiscal adjustment” for improving debt sustainability. However, the country still awaits the formation of “a new government” capable of essaying much needed reformation.