Lebanon’s private creditors face big losses: Moody’s

BEIRUT: Moody’s Investors Service warned yesterday that private creditors faced significant losses as a result of the government’s decision to defer payment of the March 2020 Eurobond.

Lebanon announced on Saturday it could not meet upcoming debt payments, saying critically low foreign currency reserves were needed to cover essential imports and calling for “fair” restructuring talks. “A sovereign default would have a significant negative impact on banks’ financial health, and further undermine the economy and the sustainability of the peg,” said Elisa Parisi-Capone, a Moody’s vice president senior analyst and the report’s author.

Lebanon’s announcement involved the halting of a payment of $1.2 billion on a Eurobond maturing on March 9. Fitch Ratings on Monday

downgraded Lebanon’s long-term foreign-currency issuer default rating to ‘C’ from ‘CC’. Fitch said a failure by Lebanon to make the principal payment during the seven day grace period will put the sovereign into ‘restricted default’ and the bond into ‘default’.

Lebanon’s balance of payments has worsened in recent years as the war in Syria has closed trade routes and led to an influx of refugees. Also, lower oil prices have dented foreign investment and remittances - particularly from the Gulf area, which hosts about a third of Lebanese expatriates.

The challenges came to a head with the outbreak of public protests against the ruling elite in October last year that led to a change in the government earlier this year. Usable foreign exchange reserves have dwindled to between $5 billion and $10 billion, Moody’s estimated. That compared with foreign currency debt service requirements of $4.7 billion in 2020 and $4 billion in 2021, it added.

The very low level of foreign exchange reserves meant the pressure on the Lebanese pound is acute, Moody’s said, adding that it pointed to a possible abrupt and very large change in the exchange rate. — Reuters