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Lebanon Turns to IMF After Default With Plea for $10 Billion Aid

Defaulted Lebanon Approves Rescue Plan to Lay Ground for Bailout

(Bloomberg) --

Lebanon’s government will seek a loan from the International Monetary Fund after signing off on a rescue plan to begin overhauling an economy facing its worst financial crisis in decades.

“We will ask for a loan program from the International Monetary Fund and formalize our negotiations with Eurobond holders and move forward with that,” Prime Minister Hassan Diab said in a televised speech Thursday after his cabinet approved the plan.

Lebanon will seek over $10 billion of external support and also wants to unlock another $11 billion in loans and grants that the international community had pledged in 2018, the premier said. He detailed some of the reforms laid out in the roadmap, saying the government will aim to reduce its ratio of debt to economic output below 100% from its current 178% and reform its ailing power sector.

Almost two months after Lebanon’s first-ever default on foreign debt, the government is starting to act with urgency as a public outcry over the crisis threatens to reignite a broad protest movement that had subsided with the coronavirus outbreak.

President Michel Aoun had earlier welcomed the proposals as historic, since for “the first time an economic, financial plan” had been approved that places Lebanon on the path of reform. Some of the items will require parliamentary approval.

Iran-backed Hezbollah, a key powerbroker in Lebanon that previously opposed an IMF program, has given the green light to the government to request assistance from the Washington-based lender, according to Annahar newspaper. The group, which the U.S. classifies as a terrorist organization and is represented in both parliament and government, fears IMF funds could come with conditions to squeeze its activities even further.

The German government on Wednesday banned Hezbollah from operating in the country. Its military arm has long been outlawed in Germany, though the group had been allowed to pursue political and social activities. The U.K. took similar measures last year.

Back on the Streets

As the government drew up plans after its default, people have grown angry over the sharp depreciation of the pound on the black market due to a severe dollar shortage. Demonstrations reignited particularly in the northern city of Tripoli, where clashes between rioters and the army left one dead this week and dozens of soldiers wounded.

The government is seeking billions of dollars to help one of the most indebted nations implement fiscal reforms, including the restructuring of both local and foreign debt, and an end to Lebanon’s currency peg, introduced in 1997. Politicians and ministers have argued over how and when to apply a weaker exchange rate and whether the government needs to impose losses on deposits.

Following the default in March, authorities are trying to overhaul Lebanon’s entire debt stock of $90 billion and engage in talks with bondholders, mainly local banks. Successive governments have repeatedly failed to implement changes to boost growth, reduce the budget deficit and fix the ailing power sector in return for financial aid.

Financial Engineering

The central bank has incurred losses of more than $40 billion, mainly from a program of so-called financial engineering it began conducting in 2016 to boost its reserves. Almost half of Lebanon’s bank assets are parked at the central bank as part of those operations and losses on them could reach around $62.2 billion, according to government estimates.

The plan envisages a restructuring of the financial sector, including lenders and the central bank. The government hired KPMG, Kroll and Oliver Wyman to audit the central bank’s balance sheet.

The premier said the government will distribute the losses fairly, require a bail-in for the banks and rely on the assets of the central bank and local lenders.

“We want a contribution from the unrealistic interests that were paid and from those who made profits from the engineering and those who broke the law and stole public money,” Diab said in his speech, reiterating that he would protect people’s deposits.

©2020 Bloomberg L.P.