Page 8 - MEOG Week 10

MEOG FInanCe & InVestment MEOG
Lebanon to default on debt payments as crisis deepens
LeBanon
AFTER weeks of speculation, lebanon is to default on a foreign debt payments for the first time in its history as the country struggles with a major financial crisis.
Prime Minister Hassan Diab said lebanon would not be making a bond payment of $1.2bn (£900m) due on Monday (9th).
“The debt has become bigger than lebanon can bear, and bigger than the ability of the leba- nese to meet interest payments,” Diab said.
lebanon has been struggling since the value of its currency plummeted. The lebanese pound has been losing value against the dollar for months, in part because the country’s banks have been reluctant to convert local pounds to dollars - leading to an increase in demand for the latter.
This issue with foreign exchange has led to importers having difficulty accessing goods, which have become more expensive. Those with savings have also been affected by the drop in value of the local currency.
In a live televised address on Saturday, Diab said that negotiations to restructure the coun- try’s debt, would continue “with all creditors... in a manner consistent with the national interest”.
Diab added that more than 40% of the popu- lation could soon face poverty as lebanon tack- les its worst economic crisis in decades.
The 61-year-old became prime minister in January as part of a new government formed after protests over the failure of leaders to deal with the economic crisis turned violent.
Breaking the deadlock
In October, anti-government protesters took to the streets in response to rising prices, high youth unemployment, poor public services and corruption. The crisis has severely hit public services, with electricity and water supplies fre- quently disrupted and rubbish left to pile up on the streets.
With lebanon remaining heavily in debt, economists suggest that a rescue deal with the International Monetary Fund (IMF) is the only way forward – and real reforms would be needed for that to happen.
The decision to default on the country’s debt – which Diab put at $90bn or 170 per cent of eco- nomic output – was taken unanimously by the cabinet at a meeting earlier in the day, and was backed by the country’s political and financial establishment.
President Michel Aoun, Speaker Nabih Berri, Central Bank Governor Riad Salameh and the head of the Association of lebanese Banks, Salim Sfeir, as well a Diab himself, met on Sat- urday morning and announced in a joint state- ment that they would stand by any decision the
government makes on debt repayment - except if that decision is to pay the debt.
Diab said lebanon will now look to enter into negotiations with creditors. lebanese banks, which hold the majority of the country’s debt, had been against default and had dumped Eurobonds to foreign buyers in recent weeks as the likelihood of default grew, weakening the government’s negotiating position.
Diab said the government also planned to restructure lebanon’s banking sector - a former pillar of the economy which through its sheer size had discouraged investment in more pro- ductive sectors.
lebanon produces little and imports about 80 per cent of the goods it consumes. “We do not need a banking sector that is four times the size of our economy,” he said.
He also pledged to establish a safety net for the poorest people and protect the savings of small depositors amid harsh capital controls by banks that have limited withdrawals of for- eign currency to just a few hundred dollars per month.
The country’s debt risk, measured by five year credit-default swaps, climbed above 2,500 basis points last week and is the highest glob- ally after Argentina. So far, the government has sought technical assistance from the IMF but has not moved towards accepting any official plan, which would likely include a series of unpopu- lar austerity measures like tax hikes and cuts in subsidies.
lebanon can expect tough negotiations with creditors over rescheduling its debt, some of which has been bought at deep discounts by so-called “vulture funds” that may seek to take the country to court to force it to repay the full face value.
Some commentators have warned that leba- non’s assets abroad could be threatened with sei- zure, including planes belonging to its national carrier, Middle East Airlines, and gold reserves in the United States.
A particular problem may be how to deal with local banks who hold the lion’s share of the country’s debt - debt that now is unlikely to be repaid. Capital controls - which Diab said would soon be formally regulated - could consequently be expected to remain in place for about five years.
This means that increasingly angry anti-es- tablishment demonstrations that have been going for nearly five months, and are directed increasingly against banks, will likely not cease. On Saturday, several protests took place across the country, including in Beirut, southern Sidon and Tyre, Zouk Mosbeh and northern Tripoli.™
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w w w . N E W S B A S E . c o m Week 10 11•March•2020