Lebanon’s Bondholders Resume Restructuring Talks Amid Economic Turmoil

Lebanon’s international bondholders are reinitiating talks with the government to address the country’s five-year default. Following changes in governance and a ceasefire, banks and creditors are preparing for negotiations with the IMF. The financial situation remains dire, with a debt-to-GDP ratio estimated at 300%, but recent bond price increases signal potential for recovery.

Lebanon’s international bondholders are preparing to appoint a financial adviser as negotiations with the government resume after a five-year period following the country’s default. In 2022, discussions were stalled due to the Lebanese government’s rejection of International Monetary Fund (IMF) proposals, which caused the value of the US$29 billion in defaulted Eurobonds to plummet to six cents on the dollar amid escalating economic turmoil.

Economic instability intensified by irregularities within the central bank prompted the resignation of long-time governor Riad Salameh in 2023. The banking sector faces significant challenges, including frozen deposits and the necessity for recapitalization as part of the restructuring process. A new technocratic government has emerged, led by a former military chief and a judicial figure, potentially signaling a return to negotiations with the IMF, enabling dialogue with Lebanon’s creditors.

Following the November ceasefire between Israel and Hezbollah, bond prices have significantly increased, now valued at 18 cents. Recently, IMF representatives, including mission chief Ernesto Ramirez Rigo, have visited Beirut for discussions with President Joseph Aoun, Prime Minister Nawaf Salam, and other key figures regarding a new support program. Ramirez Rigo stated, “Lebanon’s economy remains severely depressed, and poverty and unemployment have been exceptionally high since the 2019 crisis.”

He emphasized that restructuring the financial sector is critical for economic recovery and making Lebanon’s debt sustainable. A financial restructuring adviser remarked on the necessity for bondholders to ensure their integral role in the reform process. The restructuring of Lebanon’s banking sector, previously dominated by political factions, poses a unique challenge, especially with elections approaching next year.

The group of bondholders is expanding, including new firms such as Greylock, GMO, Morgan Stanley Investment Management, and Neuberger, alongside existing firms like Rothschild and Alvarez & Marsal. The legal advisory is being handled by White & Case for the bondholders, while Lazard and Cleary Gottlieb support the government. The World Bank has estimated Lebanon’s debt-to-GDP ratio has escalated to around 300% due to a 40% decline in GDP since the last IMF assessment in 2019.

The World Bank has also reported reconstruction costs around US$14 billion. As conditions evolve, there is cautious optimism that talks to recapitalize banks could progress alongside negotiations with creditors, potentially leading to a resolution sooner than anticipated. However, the restructuring of the central bank, with an estimated US$45 billion shortfall, remains a complex issue within the sovereign debt context.

In conclusion, Lebanon’s bondholders are positioning for renewed restructuring negotiations after significant delays due to governmental resistance to IMF proposals. The installation of a new technocratic government indicates a willingness to re-engage with international financial institutions, potentially stabilizing the economy. With an expanded group of advisers and increasing bond values post-ceasefire, there exists cautious optimism regarding Lebanon’s financial recovery despite the fundamental challenges that lie ahead.

Original Source: www.zawya.com