Lebanon’s bondholders are close to appointing a financial adviser as restructuring talks with the government resume after five years post-default. Significant challenges persist, including a depressed economy, the need for financial sector restructuring, and ongoing political sensitivities as a new government takes shape and engages with the IMF.
Lebanon’s international bondholders are nearing the appointment of a financial adviser as negotiations with the government are set to resume five years after the country defaulted. The Lebanese government had previously rejected proposals from the International Monetary Fund (IMF), resulting in a significant fall in the value of the US$29 billion defaulted Eurobonds to merely six cents on the dollar amid economic turmoil.
The crisis intensified due to issues within the central bank, leading to the resignation of long-serving governor Riad Salameh in 2023. Consequently, the banking sector is in a state of standstill, with deposits frozen and the need for recapitalization identified as part of the restructuring process. Following two years of caretaker governance and the partial collapse of Hezbollah, a new technocratic government has been established, seemingly ready to resume discussions with the IMF and creditors.
Since the Israel-Hezbollah ceasefire in November, bond prices have rebounded to 18 cents. Recent visits from IMF staff, including mission chief Ernesto Ramirez Rigo, resulted in meetings with Lebanese president Joseph Aoun and prime minister Nawaf Salam. Ramirez Rigo emphasized, “Lebanon’s economy remains severely depressed… A comprehensive strategy for economic rehabilitation is critical to restore growth…” He added that restructuring the financial sector is vital for economic recovery.
A financial restructuring adviser noted the necessity of involving bondholders in the reform process, reflecting on the historical significance of banking in Lebanon’s economy. He asked, “What is the new economic model?” The sensitive nature of restructuring within a politically fragmented banking sector poses additional challenges. With elections approaching next year, there is optimism that an IMF program and debt restructuring could be finalized soon, potentially unlocking financial support from Saudi Arabia and others.
The ad hoc bondholders group has recently welcomed four new members, increasing its ranks to nine firms, with notable names including Morgan Stanley Investment Management and Rothschild. Current estimates place Lebanon’s debt-to-GDP ratio around 300%, following a sharp decline in GDP. This raises concerns regarding significant losses for creditors, as indicated by one adviser stating, “The numbers are all over the place… no one has any serious number to base things on.”
The World Bank estimates reconstruction costs at US$14 billion. However, inflation has reduced domestic government debt value, fostering some cautious optimism. As negotiations with creditors and bank recapitalization discussions proceed, there may be potential for quicker resolutions than previously anticipated. Nevertheless, the restructuring of the central bank remains a complex and unprecedented challenge, with an estimated shortfall of US$45 billion.
Source: IFR
In conclusion, Lebanon’s bondholders are preparing to re-engage with the government, marking a crucial step in the long-overdue restructuring process post-default. The entry of a new technocratic government provides a glimmer of hope, as does the involvement of the IMF and the increase in bond prices following geopolitical developments. However, significant economic challenges, including the need for recapitalization and political sensitivities, continue to complicate the path forward for Lebanon’s recovery.
Original Source: www.zawya.com
