Lebanon debt talks “on hiatus” after government resigns

Lebanon updates

The resignation Lebanese government following last week’s devastating explosion in Beirut has pushed back the prospect of a deal to restructure the country’s debt, investors said.

Lebanon in default over $ 30 billion in foreign currency bonds in March during its worst economic crisis in decades. Since then, discussions with the IMF have made little progress towards releasing financial aid due to disagreements over economic reforms and the scale of losses to be borne by local banks. Support from the fund is widely seen as a prerequisite for an agreement on restructuring the debt held by Lebanon’s foreign creditors.

The Departure government on Monday further complicated the process. The resignations came in the wake of anger at the country’s leaders after last Tuesday’s explosion, which killed more than 160 people and devastated the country’s main port. Some investors say the country will now have even less ability to repay foreign creditors.

“It was always going to take a long time,” said Uday Patnaik, head of emerging markets at Legal & General Investment Management, which owns small amounts of Lebanese bonds. “The problem now is, who are you going to negotiate with? You need a government with some kind of credibility. I think there probably won’t be any restructuring until next year at some point. “

After last week’s explosion, “everything is on hold,” said a person familiar with bond-side negotiations.

Asset managers who massively bought Lebanese debt before the country’s crisis intensified last year are facing heavy losses on their holdings. Most notably, London-based emerging market investor Ashmore acquired a 25% stake in a bond due to mature in March, as part of a bet of more than $ 1 billion on Lebanese debt short term.

Lebanese foreign currency bonds are trading at around 17.5 cents to the dollar. They were between half a cent and a cent higher before the explosion – a sign that bondholders already believed they would only get a small fraction of the face value of the bonds back.

Lebanese government circulated a draft restructuring plan in April, drawn up with the help of advisers including Lazard. As part of the plan, the state aimed to halve its borrowing – over 175% of economic output – by the end of the year and move to a flexible exchange rate.

The plan involved losses of around 70 percent for holders of Lebanese dollar bonds, a figure that is expected to rise as the explosion deepens the country’s economic decline, according to Nafez Zouk of Oxford Economics.

The IMF on Sunday called for “urgent humanitarian aid” for Lebanon, but reiterated several of its previous demands, including the introduction of capital controls and the imposition of losses on the shareholders of Lebanese banks, who are themselves among the largest holders of public debt.

Some analysts believe the aftermath of the explosion could make it harder for bondholders to take a hard line in restructuring talks by becoming so-called recalcitrant – those who refuse to accept government terms in the hope of winning a bigger win in court.

“The reputation risk of being a recalcitrant creditor or suing the government has increased dramatically as a result of this humanitarian tragedy,” Zouk said.

“I can’t imagine what sane fund would consider trying this strategy. It could be the only silver lining for Lebanon at the moment. “

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