Lebanon’s bondholders are set to appoint a financial adviser as restructuring discussions resume after five years post-default. This follows a period of economic decline exacerbated by issues at the central bank and governmental instability. Recent optimism arises from meetings with IMF representatives and improvements in bond prices, yet significant challenges remain.
Lebanon’s international bondholders are poised to appoint a financial adviser as restructuring discussions with the government are set to recommence, marking an important step five years after the country defaulted. Previous negotiations stalled in 2022 when the Lebanese government declined to accept proposals from the International Monetary Fund (IMF). As a result, approximately $29 billion of defaulted Eurobonds significantly depreciated, plummeting to a mere six cents on the dollar amid escalating economic turmoil.
The economic crisis was worsened by irregularities at the central bank, which led to the resignation of long-standing governor Riad Salameh in 2023. This turmoil has resulted in the banking system entering a state of stagnation, with deposits largely frozen and banks required to undertake recapitalization as part of the restructuring process. Following a two-year caretaker government period and the recent partial collapse of Hezbollah, a new technocratic administration has emerged, showing willingness to reinitiate negotiations with the IMF and potentially with Lebanon’s creditors.
Bond prices have surged to 18 cents following a ceasefire agreement between Israel and Hezbollah in November. Recently, IMF staff visited Beirut, where Ernesto Ramirez Rigo, the mission chief, met with President Joseph Aoun and Prime Minister Nawaf Salam, among other officials. He expressed support for Lebanon’s request for a new assistance program, acknowledging the dire economic conditions.
Ramirez Rigo stated, “Lebanon’s economy remains severely depressed, and poverty and unemployment have been exceptionally high since the 2019 crisis.” He emphasized the need for a comprehensive economic rehabilitation strategy and highlighted that financial sector restructuring is critical for reviving the economy and ensuring sustainable debt management.
A financial restructuring adviser emphasized the necessity of bondholders being central to the reform process. It is yet to be determined what the future economic model will entail in a country where banking has historically played a vital role. He raised the pivotal question of how to effectively restructure the banking sector, particularly given its past ties to various political factions.
With elections scheduled for next year, there is added incentive to agree on an IMF program and debt restructuring proposals. The adviser noted that once negotiations proceed, funding pledges from Saudi Arabia and other bilateral lenders could be released, accelerating economic recovery. Six firms, including Rothschild and Morgan Stanley Investment Management, have been invited to propose financial advisory services to the ad hoc bondholders group.
Lebanon’s last IMF assessment indicated a staggering debt-to-GDP ratio of 178% in 2019, and since then, GDP has dropped by an estimated 40%, driving the debt ratio to around 300%. The World Bank projected reconstruction costs to be $14 billion, and one promising development is the significant reduction in the value of domestic government debt due to rampant inflation.
Negotiations aimed at recapitalizing banks are expected to coincide with discussions with creditors, possibly yielding quicker resolutions than the protracted impasse of previous years. However, challenges remain, particularly regarding the restructuring of the central bank, which faces an estimated shortfall of $45 billion—a figure that far exceeds other governmental liabilities.
In summary, Lebanon’s international bondholders are preparing to resume restructuring talks after a prolonged hiatus marked by economic challenges and political instability. With support from the IMF and a new government, there is cautious optimism for a revitalized economy. Nevertheless, substantial hurdles remain, particularly concerning the banking sector and the central bank’s looming deficits. The coming months will be crucial in determining Lebanon’s economic recovery trajectory.
Original Source: www.zawya.com
