Lebanon’s bondholders are nearing the appointment of a financial adviser as restructuring talks resume after five years. Stalled negotiations and economic decline followed a government rejection of IMF proposals. With a new government in power and recent improvements in bond values, a comprehensive strategy is necessary for economic recovery along with financial sector restructuring and bank recapitalization.
Lebanon’s bondholders are on the verge of appointing a financial adviser to facilitate the resumption of restructuring talks, nearly five years post-default. These negotiations stalled in 2022 after the Lebanese government rebuffed proposals from the International Monetary Fund (IMF), resulting in a drastic drop in cash prices for US$29 billion of defaulted Eurobonds to just six cents on the dollar amid economic turmoil.
The Lebanese central bank faced crisis due to management irregularities, leading to the resignation of governor Riad Salameh in 2023. This set off a stasis in the banking system, freezing most deposits and necessitating recapitalization efforts. Nevertheless, a new technocratic government is now in place, following the previous administration’s two years of caretaker status and the partial collapse of Hezbollah, indicating potential for renewed negotiations with the IMF and creditors.
The ceasefire between Israel and Hezbollah in November has seen bond prices recover to 18 cents. In recent visits to Beirut, IMF mission chief Ernesto Ramirez Rigo met with key Lebanese leaders to discuss the country’s economic challenges and welcomed the request for a new support programme from the IMF. He emphasized the need for a comprehensive strategy for economic rehabilitation alongside measures to ensure sustainable debt.
A restructuring adviser noted that it is crucial for bondholders to engage actively in the reform process. With the banking sector’s past significance uncertain, the adviser questioned what a new economic model might entail, particularly concerning the banking sector restructuring. The politicized nature of Lebanon’s banking landscape adds complexity to these discussions.
Pressure mounts as elections approach next year, incentivizing consensus on an IMF programme and debt restructuring strategies. Various firms, including Rothschild and Morgan Stanley Investment Management, have been invited to join the ad hoc bondholders group, while law firms White & Case, Lazard, and Cleary Gottlieb provide advisory services.
Lebanon’s debt-to-GDP ratio was reported at 178% before default in 2019, with subsequent GDP losses of about 40%, raising the debt ratio to approximately 300%. The World Bank has estimated reconstruction costs to be around US$14 billion, although the exact figures remain elusive due to rapid inflation affecting domestic government debt.
Negotiations to recapitalize banks are expected to proceed concurrently with creditor discussions, significantly reducing the timeframe needed to arrive at a resolution. However, restructuring Lebanon’s central bank poses unique challenges due to its massive shortfall, estimated at US$45 billion, surpassing other government liabilities.
Lebanon is on the cusp of restarting bondholder negotiations with a new technocratic government and potential IMF collaboration. The financial sector’s restructuring is critical amidst an economy in dire need of rehabilitation, with significant implications for the banking system. As various firms position themselves for advisory roles, the timeline for resolution could shorten, yet challenges remain, particularly around the central bank’s shortfall and debt sustainability.
Original Source: www.zawya.com
