Default-Bound Lebanon Readies Pitch to IMF That Avoids Pain
Default-Bound Lebanon Readies Pitch to IMF That Inflicts No Pain
(Bloomberg) --
Lebanon will present what it considers a conclusive economic and financial plan to the International Monetary Fund as it prepares for talks with creditors after announcing it would freeze a Eurobond payment, according to Finance Minister Ghazi Wazni.
If there is agreement on Lebanon’s plan “that includes no suffering or harsh measures to the Lebanese and doesn’t harm any side -- whether in a political or non-political way -- then doors will be open,” Wazni told LBCI Television.
Lebanon is headed for the first default in its history as it copes with dwindling foreign-currency reserves and inflation running in double digits. Fitch Ratings downgraded the nation’s debt to C from CC, saying that failure to make payment during the seven-day grace period will put the sovereign into “restricted default” and the specific bond into default.
Negotiations with creditors will give an indication in the coming days whether Lebanon is headed for an organized or messy default, according to Wazni. Hezbollah has said it doesn’t oppose external financing, he said.
Lebanese banks, which hired Houlihan Lokey Inc to advise them on future debt-restructuring talks with the government, are in contact with foreign bondholders to see if they would be willing to engage in negotiations with authorities.
Lebanon needs to secure a lifeline from the IMF to claw back the confidence in economic reform that creditors need when forgiving debt. Hezbollah, an Iran-backed group that has a major say in government and parliament, has previously rejected the possibility of seeking a financial aid program from the fund, fearing it could hurt the poor and be used by the U.S. as a political lever.
“We think an IMF program is inevitable,” Maya Senussi and Nafez Zouk, analysts at Oxford Economics, said in a report. “Hezbollah’s resistance will evaporate once they realize the large costs required to restructure and recapitalize the banking sector and the economic pain that would be involved in meeting external financing needs without IMF loans.”
Flowing Out
The finance minister said he expected inflows to decline sharply in 2020 and 2021. The government relies on funds from the millions of Lebanese living abroad to finance its budget deficit.
Bank deposits shrank by $3.8 billion in January, including a drop of $1.8 billion for accounts denominated in foreign currency, according to Bank Audi’s Weekly Monitor.
Deposits contracted last year by a total of $15 billion, losing the bulk of it in the final quarter when the eruption of anti-government protests accelerated the country’s worst financial meltdown in decades.
The central bank’s net reserves have been negative since 1997, Wazni said. Including local lenders’ reserve requirements, its holdings currently stand at $22 billion. The government needs what’s left of the stockpile to support imports of fuel, medicine and wheat.
The central bank is also supporting the imports of medical equipment as well as raw materials. Banque Du Liban, as the central bank is known, announced the creation of a Europe-based platform on Tuesday, seeking to raise $750 million to provide small and medium-sized businesses with short term facilities.
“Geopolitical headwinds and domestic political deadlock have further hindered crucial deposit inflows, while the central bank’s measures to support financing of government debt and the economy could not compensate for delays in international financial support in the absence of credible fiscal reform,” Moody’s Investors Service said in a report.
To contact the reporters on this story: Dana Khraiche in Beirut at dkhraiche@bloomberg.net;Netty Ismail in Dubai at nismail3@bloomberg.net
To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Paul Abelsky, Constantine Courcoulas
©2020 Bloomberg L.P.