Lebanon’s international bondholders are set to appoint a financial adviser as restructuring talks with the government resume after years of economic decline and default. A new technocratic government has emerged, indicating readiness for negotiations with the IMF, which may facilitate further discussions with creditors. Bond prices have recently increased, although the economic situation remains critical with a substantial debt-to-GDP ratio and banking sector challenges.
Lebanon’s international bondholders are in the process of selecting a financial adviser as restructuring negotiations with the government appear poised to recommence, following the country’s default five years ago. Initial talks collapsed in 2022 when the Lebanese government rejected proposals from the International Monetary Fund, leading to the diminished value of US$29 billion in defaulted Eurobonds, which dropped to approximately six cents on the dollar amid escalating economic turmoil.
The economic situation deteriorated further due to irregularities at the central bank, resulting in the resignation of long-standing governor Riad Salameh in 2023. The banking sector has since faced a standstill, characterized by frozen deposits and a clear necessity for banks to be recapitalised as part of any restructuring agreement. Following a prolonged period under a caretaker government, a new technocratic administration, led by a former military chief and a judicial member, is reportedly ready to resume negotiations with the IMF, potentially facilitating discussions with Lebanon’s creditors.
Notably, bond prices have significantly increased, tripling to 18 cents following a ceasefire between Israel and Hezbollah in November. Recent engagements have seen IMF officials visiting Beirut, with mission chief Ernesto Ramirez Rigo meeting with President Joseph Aoun, Prime Minister Nawaf Salam, cabinet members, and Banque du Liban representatives. Rigo emphasised the dire state of Lebanon’s economy, marked by acute poverty and unemployment since the onset of the 2019 crisis, advocating for a comprehensive economic recovery strategy to foster growth and elevate social conditions.
He underlined that revitalising the banking sector is critical alongside establishing sustainable debt. One financial restructuring adviser highlighted the necessity for bondholders to be pivotal in the reform process, questioning what the new economic model would entail, particularly in view of the diminished role of banks in holding government bonds compared to the past. Given that major banks in Lebanon are traditionally influenced by various political factions, the restructuring process is likely to be sensitive.
With upcoming elections next year, there is a motivating factor for finalising an IMF program and related debt restructuring proposals in a timely manner. This, in turn, could unlock pledges of financial assistance from Saudi Arabia and other bilateral lenders. The adviser noted that a slightly stabilised situation could lead to a swift economic recovery.
To reinforce their position, six firms, including Rothschild and Morgan Stanley Investment Management, have been solicited to submit proposals to the ad hoc bondholders group, which has expanded its membership. Legal counsel for the bondholders is being provided by the law firm White & Case, with additional advisement offered by Lazard and Cleary Gottlieb for the government.
Lebanon’s last debt assessment by the IMF in 2019 revealed an astounding debt-to-GDP ratio of 178%, a figure that has since soared as GDP experienced an estimated decline of 40%, pushing the debt ratio closer to 300%. Consequently, the financial consequences for creditors are likely to be severe. One adviser remarked on the inconsistency of current GDP estimations, underscoring the challenges posed by the lack of reliable data, stating that nominal GDP could range from US$18 billion to US$33 billion, complicating the situation further.
The latest report from the World Bank projects reconstruction expenses at US$14 billion, yet there is a slight prospect for optimism due to the considerable reduction in the value of domestic government debt held by banks, primarily caused by rampant inflation over recent years. This adviser anticipates that discussions to recapitalise banks will occur concurrently with creditor negotiations, allowing for a potential resolution more swiftly than the five-year impasse might suggest. The crux of the challenge will lie in restructuring the central bank itself, which faces a staggering estimated shortfall of US$45 billion, overshadowing other government debts.
In summary, Lebanon’s bondholders are actively seeking a financial adviser as they prepare for long-awaited restructuring talks with the government. Following years of economic instability and failed negotiations with the IMF, a new technocratic government is poised to engage in meaningful discussions. Key challenges will include addressing the banking sector’s future and the central bank’s significant shortfall, underscoring the complexities of Lebanon’s financial recovery.
Original Source: www.zawya.com
