Lebanon will not pay a $1.2bn debt due on Monday and will seek new payment terms with its creditors, marking a new phase for one of the world’s most heavily-indebted countries as it struggles to cope with its worst financial and economic crisis for decades.
This is the first time that Beirut has defaulted on its nearly $90bn debt pile, on which it was spending around half of government revenues just to pay interest. It has around $30bn of foreign currency dominated debt.
The cabinet’s decision came after crunch talks between senior politicians and banking representatives on Saturday, following weeks of fierce debate over whether to conserve dwindling foreign currency reserves by defaulting, or maintain Lebanon’s spotless borrowing record.
“How can we pay foreign creditors when the Lebanese can’t access their deposits,” said prime minister Hassan Diab as he announced the default in an address to the nation, adding that foreign reserves had reached “danger level”.
With Lebanese citizens able to withdraw as little of their own money as $200 every two weeks from liquidity-starved local banks, the politics of paying a $1.2bn Eurobond maturing this Monday had become toxic.
Meanwhile a hard currency shortage has put pressure on imports, which Lebanon depends on.
The country’s economic slump has been exacerbated by protests over political corruption since mid-October, which toppled the previous government and led to the appointment of Mr Diab, who heads a cabinet portrayed as technocratic rather than political.
The default is a blow to Lebanon’s large banking sector, which has become a focus for public anger, and Mr Diab said the government would prepare a plan to overhaul it.
Local banks will have to writedown the value of their large holdings of hard currency-denominated government debt.
The banks had previously rejected proposals to swap the imminently maturing notes for longer-dated ones, although they earn a high proportion of their revenues from the interest accrued by the government bonds.
Attention will now turn to the government’s negotiations with foreign bondholders, particularly London-based asset manager Ashmore, which has bought enough of the March Eurobond that it could block Beirut’s attempts to negotiate easier repayment terms.
At the end of December the emerging markets specialist held just over 25 per cent of the March bond, above the threshold required to block a restructuring, according to filings compiled by Bloomberg.
The government recently engaged legal and financial advisers to help it thrash out a deal with its creditors.
The March 2020 bond was trading at 57 cents on the dollar on Friday. While that level indicates investors foresaw a high chance the bond would not be repaid, hope lingered that the government might pay now and delay a sovereign default until later.
Lebanese debt that must be paid off in full at later dates has been trading at around 25 cents on the dollar for the past few weeks — meaning investors expected a higher likelihood of default in the long-term.
Lebanon’s presidency had earlier on Saturday hinted that the default was coming, saying it would support any decision made by the government to manage the debt, “except for the payment of the debt maturities”.
The IMF is advising the Lebanese government over its multiple crises, but has not yet been asked to help the government pay its bills. These include the de facto devaluation of its local currency, which has been pegged to the dollar for nearly two decades but whose black market value has plunged to around half the official rate.