Lebanon’s bondholders are considering appointing a financial adviser as restructuring talks are set to resume after five years of default. The situation deteriorated in 2022 following government refusals of IMF proposals. Under new governmental leadership, IMF collaboration is anticipated to revitalize the economy, despite several financial challenges including a significantly inflated debt-to-GDP ratio.
International bondholders of Lebanon are actively considering appointing a financial adviser as discussions regarding the country’s debt restructuring are poised to restart following a five-year default. The Lebanese government previously stalled negotiations in 2022 by rejecting proposals from the International Monetary Fund (IMF). Consequently, about $29 billion worth of Eurobonds drastically decreased in value to approximately six cents on the dollar amid severe economic instability.
The economic situation worsened due to irregularities within the central bank, leading Riad Salameh to resign in 2023. Consequently, the banking sector faced a standstill, with deposits largely frozen. Currently, firms acknowledge the need for recapitalization during the restructuring process. Following a prolonged caretaker government and the partial collapse of Hezbollah, a new technocratic government led by a former army chief is now prepared to resume talks with the IMF, potentially facilitating discussions with Lebanon’s creditors.
Bond prices have notably increased to 18 cents since the ceasefire between Israel and Hezbollah in November. Recent visits from IMF staff to Beirut indicate renewed interest in collaboration, with IMF mission chief Ernesto Ramirez Rigo meeting with President Joseph Aoun and Prime Minister Nawaf Salam, expressing support for a new economic program. He emphasized the critical need for an economic rehabilitation strategy to alleviate poverty, rampant unemployment, and to revive the banking sector, which has been severely disrupted.
Amid shifts in Lebanon’s economic landscape, one restructuring adviser underscored the importance of bondholders’ integration into the reform processes. Traditionally, the banking sector played a vital role; however, uncertainty remains regarding future economic focus. As elections approach next year, there is notable motivation to finalize an IMF program and restructuring initiatives, potentially unlocking financial assistance from Saudi Arabia and other bilateral lenders.
A total of six financial firms, including Rothschild and Morgan Stanley Investment Management, are vying to support the ad hoc bondholder group, which is growing from five to nine members. Legal guidance for the bondholders is being provided by White & Case, with governmental advice coming from Lazard and Cleary Gottlieb. The World Bank’s previous assessment indicated Lebanon’s debt-to-GDP ratio reached 178% in 2019, while current estimates suggest a decline in GDP by 40%, raising the debt-to-GDP ratio closer to 300%.
Concerns about Lebanon’s fluctuating economic metrics have been highlighted, revealing estimations of nominal GDP ranging significantly. Reconstruction costs are pegged at $14 billion according to a recent World Bank report. Despite inflation reducing domestic government debt’s value, there are apprehensions regarding the central bank’s restructuring amid a projected $45 billion shortfall that remains unresolved in sovereign debt reform discussions.
In summary, Lebanon’s international bondholders are nearing a pivotal moment with potential restructuring talks set to resume. The emergence of a new technocratic government alongside significant support from international financial institutions could herald a new phase for the economy. However, key challenges remain, notably the restructuring of the central bank and the urgent need for economic rehabilitation amidst high debt levels and severe unemployment. Stakeholders anticipate that upcoming negotiations may swiftly progress, marking a departure from the stagnation of previous years.
Original Source: www.zawya.com
