Lebanon Creditors to Lose 75% of Holdings in New Debt Reform

Bond investors in Lebanon could see a cut of 75% to their holdings if the new government fixes the financial system and implements credible reforms to unlock funding from the International Monetary Fund IMF.

In March 2020, the country defaulted on its international debt as a result of multiple years of political unrest and mismanagement. The current debt is estimated to be approximately 300% of GDP according to current market exchange rates.

Sunni Muslim tycoon, Najib Mikati, formed the new government for Lebanon after a year of political deadlock which left more than half of the population in poverty.

Goldman Sachs said, “The ratification by parliament of the Mikati government on Monday represents the first step on a long and narrow path to Lebanese economic recovery that is likely to be fraught with difficulty and risk.”

The debt recovery projections can only be achieved if the country strengthens it Lebanese pound to 8,000 against the USD from 14,500. It will also have to apply a negative or low real interest rate on the public debt along with adjustments being made to fiscal balance and economic growth.

The first challenge faced by the government is reviewing and fixing its financial system which has foreign exchange liabilities in the banking sector. Goldman said, “Given our view that an IMF program is necessary for Lebanon, early engagement with the fund is an important pre-requisite for discussion with creditors and an eventual resolution of the default.”