BEIRUT (AFP) – Lebanon said last Saturday it would default on its Eurobond debt for the first time and seek out restructuring agreements due to a spiralling financial crisis that has hit foreign currency reserves.
The country, hit by a severe liquidity crunch and months of anti-establishment protests, was due today to repay a USD1.2-billion Eurobond, while another USD700 million matures in April, and a further USD600 million is due for repayment in June.
But Prime Minister Hassan Diab said that foreign currency reserves have fallen to “a worrying and dangerous level which pushes the Lebanese government to suspend payment” of the Eurobonds due today.
Foreign reserves stood at USD35.8 billion at end-February, according to the central bank.
“The Lebanese state will seek to restructure its debts, in a manner consistent with the national interest” through negotiations with creditors, Diab said in a live address.
Diab’s government was nominated in January to handle the economic crisis amid unprecedented protests that began last October demanding a complete overhaul of the political class.
He said a default – the first decision taken by his government – was the “only way” to stop reserves from depleting.
In taking this path, Diab’s administration is in effect overruling objections from banks who say it would pile added pressure on domestic lenders and compromise ties with foreign creditors.
The move also exposes the country to legal action by creditors. “How could we pay creditors while the Lebanese people are unable to access their own money in their bank accounts?” Diab said.
Lebanon’s debt burden, long among the largest in the world, is now equivalent to nearly 170 per cent of its gross domestic product (GDP).
Despite a series of crises, the country has never before defaulted, but in recent months it has grappled with its worst economic turmoil since the 1975-1990 civil war.
Foreign currency has become increasingly scarce, Lebanon’s pound has plunged in value and banks have imposed tough restrictions on dollar withdrawals and transfers.
Diab said debt restructuring is part of a wider economic rescue plan, that seeks to cut state spending and save more than USD350 million annually.
He said downsizing the banking sector is part of the reform plan.
Seeking to assuage public concern, the Prime Minister pledged to protect bank deposits, especially those of small depositors.
He assured foreign backers of Lebanon’s commitment to reforms pledged at a conference dubbed CEDRE in Paris in April 2018.
But an USD11 billion (EUR10 billion) aid package pledged at the conference has not been unlocked by donors due to a lack of commitment to reforms.
As Diab spoke, demonstrators who have stayed on the streets since last October rallied against deteriorating living conditions.
They have lobbied for a default for weeks, fearing a depletion of reserves could further limit access to their savings.
“We shouldn’t have to pay the price of government shortcomings,” said Nour, a 16-year-old demonstrator, during a rally outside the central bank’s headquarters in Beirut.
Jad Chaaban, an economics professor at the American University of Beirut, blamed the political class for Lebanon’s predicament, accusing it of decades of corruption.
The crisis “is the creation of a failed and criminal political class that has lied and robbed for more than 30 years,” he said on Facebook.
Diab said Lebanon must now enter into debt restructuring negotiations, which “will take time, effort, and will require painful measures”.
According to Head of Research at Bank Audi Marwan Barakat, Lebanese banks owned USD12.7 billion of the country’s outstanding USD30 billion Eurobonds as of the end of January.
The central bank held USD5.7 billion and the remainder was owned by foreign creditors, he said.
“Lebanon needs first and foremost an imminent debt restructuring plan within the context of a comprehensive plan for debt management,” Barakat told AFP, adding that it would be best for such a plan to be formed under the auspices of the International Monetary Fund (IMF).
Diab met last month with a delegation from the IMF to discuss how to tackle the crisis, but he has yet to request funds.