Lebanon’s Debt Plan Delays Day of Reckoning, But for How Long?

(Bloomberg) -- Lebanon’s government announced a long list of measures on Monday it hopes will fix the nation’s finances and appease the tens of thousands of people who’ve taken to the streets in the past week.

Along with a proposal to halve the salaries of ministers and lawmakers, Prime Minister Saad Hariri said he’d slash next year’s budget deficit to 0.6% of gross domestic output, from almost 10% in 2019. One of his senior advisers also said the central bank will waive coupons on local-currency government debt, but Eurobonds won’t be affected.

Lebanon’s dollar notes, already in distressed territory, have fallen further since the start of nationwide demonstrations against corruption and worsening economic conditions. Yields on $2.1 billion of soveregign bonds maturing in April 2021 have climbed more than 600 basis points since Thursday to 24.5%.

Here’s what investors think of Hariri’s plan and whether it’ll be enough to prevent Lebanon defaulting:

Ksenia Mishankina, senior credit analyst at Union Bancaire Privee in London:

  • “We are heading for a restructuring. The outflow trend will increase and as a result, banks’ liquidity will continue to dry up. The central bank essentially put more pressure on the banking sector”
  • “Eventually, we can be in a situation in which the banks will be forced to sell Eurobonds to service liabilities in the form of deposit outflows. This should create further pressure on bond prices”

Ray Jian, London-based emerging-market portfolio manager Amundi Asset Management:

  • There will be a restructuring “eventually, but not until Lebanon is running out of liquidity”
  • It helps that most of the Eurobonds are held by local banks, which will be less inclined to sell them
  • “The real challenge is how they can address the 20%-plus current-account deficit and at the same time roll over debt in a backdrop of slowing deposit growth”

Richard Segal, senior analyst at Manulife Asset Management in London:

  • The plan is “good news for investors, but just confirms what was expected, that their interests would be preserved”
  • Lebanon will restructure its debts “eventually, but I think it can be postponed for another 3-4 years”

Anders Faergemann, senior portfolio manager at Pinebridge Investments in London:

  • “The government has assured investors that the recent announcement of a debt plan will not affect existing international debt and we fully expect the government to adhere to that”
  • “Bond prices have already corrected in a meaningful way since the summer and have been showing signs of distress”

©2019 Bloomberg L.P.

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