Lebanon’s Debt Restructuring Put on Ice as Government Resigns

(Bloomberg) -- The resignation of Lebanon’s government after last week’s devastating explosion in Beirut threatens to upend any prospect of a debt restructuring deal in the next few months.

Senior officials will continue in a caretaker capacity until a new administration is formed. It’s unclear how long that process will take. The Middle Eastern nation defaulted on about $30 billion of Eurobonds in March. Since then, its talks with the International Monetary Fund for a bailout have stalled.

“Bondholders don’t really know who they would be negotiating with,” said Richard Segal, a senior analyst at Manulife Investment Management in London.

The government, backed by Hezbollah and its allies, failed to make headway on an economic overhaul that was key to unlocking international financing as Lebanon grapples with its worst financial crisis in decades. Then came the explosion, which killed more than 150 people and destroyed large parts of the capital. The cost is estimated to total as much as $15 billion. Pledges of emergency assistance for Lebanon have so far yielded only about $300 million.

Protests erupted after officials said the blast was caused by 2,750 metric tons of explosive materials left for six years at the the nation’s main port, despite multiple safety warnings.

‘Dig Deep’

“Lebanon’s advisers will have to dig deep into their tool boxes to find everything they need to fix this one,” said Hans Humes, the chief executive officer of New York-based Greylock Capital Management, which holds the nation’s debt. “I wouldn’t want to be a holdout creditor suing on this one. It’s an easy way to get demonized.”

Lebanese bonds maturing next April rose 1.3 cents on the dollar to 18.67 cents as of 2:24 p.m. in London, after slumping to the lowest since May on Monday. The largest holders of Lebanon’s Eurobonds include BlackRock Inc., Ashmore Group Plc and Fidelity Investments, according to data compiled by Bloomberg.

Creditors may welcome a new government that could break the deadlock in talks. Still, some have warned that Lebanon’s debt crisis risks becoming another Venezuela, where President Nicolas Maduro’s administration has been in default for almost three years with no restructuring in sight.

Lebanon’s bondholders face the prospect of even bigger losses than the market is currently pricing, according to Mohieddine Kronfol, the Dubai-based chief investment officer for Middle Eastern and North African fixed income at Franklin Templeton.

“It’s a very difficult situation that just got more complicated with the blast and the subsequent government resignation,” he said. “The state now needs to pay for reconstruction on top of everything else. Bondholders will not get much.”

Dollar Crunch

While the Lebanese pound is fixed to the dollar, a shortage of greenbacks fueled a sharp currency decline in the black market and inflation has soared.

The economy may shrink by 24% this year, with damage from the explosion in Beirut likely to exceed $7 billion, the Institute of International Finance said. The Washington-based trade group for financial institutions had previously predicted a 15% contraction.

“In the absence of key steps toward plausible economic and fiscal policy reform, sustained official external funding support to accompany a government debt restructuring will not be forthcoming,” Elisa Parisi-Capone, a vice president at Moody’s Investors Service, said in a statement.

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