Lebanon set to default on $1.2B in loans

BEIRUT — Lebanon’s prime minister said Saturday that the government will suspend repayment of $1.2 billion in loans, marking the crisis-hit country’s first-ever default on its sovereign debt.

Hassan Diab made the announcement in a televised address to the Lebanese people, saying the country will seek to restructure its debt. The $1.2 billion Eurobond matures Monday.

The default marks a new chapter in the crisis and has the potential for severe repercussions on the tiny country, risking legal action by lenders that could further aggravate and push Lebanon’s economy toward collapse. The currency has already lost up to 60% of its value against the dollar on the black market, and banks have imposed crippling capital controls on cash withdrawals and transfers.

Diab said Lebanon’s debt has reached $90 billion, or 170% of GDP, making it one of the highest in the world. He added that the total debt and interest that the country has to pay back in 2020 is at $4.6 billion.

“Lebanon’s debt is greater than the country can handle,” he said.

By saying the country will suspend paying back the debt rather than directly saying it will not pay it, Diab’s government appeared to be keeping the door open for negotiations with creditors.

Late last month, the government appointed Cleary Gottlieb Steen & Hamilton LLP as a legal adviser on the country’s Eurobond debt, and financial advisory and asset management firm Lazard as a financial adviser.

Diab said Lebanon’s foreign currency reserves “have reached a critical stage,” leading the government to suspend its debt payment so it can continue to provide basic commodities to the Lebanese people.

“The decision to suspend payment is the only way to stop the attrition and protect our national interests, while at the same time launching a comprehensive reform program,” Diab said.

Diab’s 6-week-old government is grappling with a severe financial and economic crisis that has led to months of protests and upended trust in the Lebanese banking system. The issue of whether to make the $1.2 billion Eurobond payment was among the first decisions his Cabinet had to make.

In a 20-minute speech, Diab repeatedly pledged various measures to combat corruption and restructure Lebanon’s banking sector. He referred to measures that would need to be taken, hinting at the possibility of raising taxes, but did not announce any immediate painful measures.

He sought to calm nerves, telling the Lebanese that their deposits will be safe.

“We will work to protect deposits in the banking sector, especially those of small depositors, which make up more than 90% of all bank accounts,” he said.

“How could we pay creditors while the Lebanese people are unable to access their own money in their bank accounts,” asked Diab, referring to capital controls imposed by local banks that are limiting how much people can withdraw. “How could we pay creditors while hospitals are subject to medical supplies shortages? While we cannot provide health care services to our citizens?”

Louis Hobeika, professor of economics and finance at Notre Dame University, told The Associated Press that Lebanon “will enter crises in the near future that will not be easy to overcome because of accumulation of mismanagement and corruption over the past years.”

“We are in impasse today as we cannot pay and we did not reach an agreement with the creditors,” Hobeika said. He said that after Lebanon’s default it will be difficult for the country to borrow money in the future.

Lebanon has been suffering in recent years from a lack of economic growth, high unemployment and a drop in hard currency inflows from abroad, but the financial crisis erupted after nationwide protests over widespread corruption and decades of mismanagement by the ruling political class engulfed the country in October.