Lebanon's debt restructuring concerns rattle Eurobond market

The plan, which Hassan Khalil said is still under wraps, includes a bevy of fiscal reforms such as a "restructuring of the public debt and an increase in tax collection."
by Georgi Azar

10 January 2019 | 00:00

Source: by Annahar

  • by Georgi Azar
  • Source: Annahar
  • Last update: 10 January 2019 | 00:00

BEIRUT: Lebanon's bond yields jumped Thursday following news of a debt restructuring plan that triggered a heavy sell-off of the country's dollar-denominated debt.

Lebanese awoke Thursday morning to the unsuspecting comments of caretaker Finance Minister Ali Hassan Khalil who was quoted in the local daily Al-Akhbar as saying that a debt restructuring plan was currently being examined.

As his comments gained traction, the yield in the 2019 bond spiked to as much as 16 percent while the yield on bonds maturing in 2028 jumped to 56 bps to trade at 11.1 percent at one point, reflecting a "higher risk and more sensitive market," leading senior debt specialist Jamil Hallak told Annahar.

Credit default swaps with a five-year maturity also took a hit, jumping from 800 bps to 900 bps at the height of the distortion, the "highest of any of the emerging markets including Africa."

Given Lebanon's delicate financial and economic conditions, Hallak called for a more "measured and controlled form of communication" to avoid further volatility in the markets.

Hassan Khalil's "ill-advised comments" brought about wide-ranging consequences, Hallak said, from the yield increase - which reflects risk perception, to an "international selling of bonds."

Speaking to Al-Akhbar, Hassan Khalil said that his ministry was preparing a "financial correction plan" to avoid "dramatic developments" which would strike Lebanon if it continues treading the same unsustainable path.

The plan, which he said is still under wraps, includes a bevy of fiscal reforms such as a "restructuring of the public debt and an increase in tax collection."

"This matter requires decisions in Cabinet, the involvement of parliamentary blocs and the central bank, ... and other parties who are concerned with the solutions that we will propose to spare Lebanon from dramatic developments," he told Al-Akhbar.

Lebanon's public debt has soared to more than 150 percent of GDP, constituting the world's third largest public debt-to-GDP ratio, while the servicing cost on this debt is expected to absorb 44 percent of the government’s revenues this year.

“The public debt cannot continue in this way,” Hassan Khalil said.

These comments prompted caretaker Economy Minister Raed Khoury to deny Hassan Khalil's claims, telling Bloomberg that no such plan is currently being considered.

“There’s definitely no restructuring for debt,” Khoury said, maintaining that "bondholders and depositors are extremely safe.”

Caretaker Deputy Prime Minister Ghassan Hasbani also dispelled these assertions, telling Bloomberg that "these are merely thoughts" which require a Cabinet discussion and an agreement around Lebanon's budget.

The almost eight-month long Cabinet formation crisis coupled with a severe economic slump has stirred tension among both local and international investors, leading Goldman Sachs to warn of foreign investors recovering a mere 35 cents on the dollar in case of a debt restructuring.

In the case of a restructuring taking place in the context of a sharp devaluation in the Lira, the leading Goldman Sachs economist who penned the report noted a sharper negative impact on the expected recovery value, lowering it from 35 cents to 27 cents on the dollar.

The contradictory statements by Lebanese officials reflect deeper divisions among the country's major parties over how to tackle Lebanon's fiscal and economic woes particularly when it comes to its soaring debt, increasingly negative balance of payment, and mounting pressure to maintain the Lira peg against the dollar.

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