BEIRUT (Reuters) – Lebanon is waiting for bondholders to decide whether they will cooperate in a debt restructuring or pursue legal action against the country following its move to suspend a foreign currency debt repayment, the economy minister said on Monday.
Raoul Nehme told Reuters he did not yet have a sense of what choice investors would make but expected it would take “a few weeks” for them to decide. Lebanon aimed to restructure its debt “once and for all”, he added.
Lebanon’s dollar bonds tumbled to record lows of as little as 17.5 cents in the dollar on Monday as worries about a protracted dispute with creditors mounted.
Lebanon announced on Saturday that it could not meet its debt obligations and suspended repayment of a $1.2 billion Eurobond that matures on Monday, saying critically low foreign currency reserves were needed for essentials.
That leaves the country on course for a sovereign default as it grapples with a financial crisis that is seen as the biggest threat to its stability since the end of the 1975-90 civil war.
“We are proposing to them to work hand-in-hand to find a solution, which is always better than litigation,” Nehme told Reuters in a telephone interview. “But it is their choice to decide whether to cooperate or to go legal.”
“The banks in Lebanon have announced they would like to cooperate and not to go legal, and we understand they are speaking with other bondholders in order to convince them to cooperate and to come to the negotiating table,” he said.
As the Lebanese government has few assets outside the country, Nehme said any court action would be about applying pressure rather than recouping “any real amount”.
“Now they can always go and sue and try and seize assets … but it will not work, legally speaking,” he said.
“The laws in New York and other countries are very clear — immunity of government assets that are used for government purposes and of central banks’ (assets) as well.”
Nehme said it was too early to speak about the details of what a debt restructuring might look like for bondholders, some of whom have said they are seeking to form a creditor group.
Lebanon has about $31 billion in dollar bonds that sources told Reuters on Friday the government would seek to restructure.
Nehme urged the Lebanese and their politicians to show unity.
“We will go through hard times, but I am confident that the light will be at the end of the tunnel,” he said.
Prime Minister Hassan Diab said on Saturday that Lebanon’s debt to GDP ratio had climbed to around 170%, meaning the country is almost the most heavily indebted in the world.
Nehme said a ratio of no more than 90% was sustainable, and that 60% to 80% was preferable. “We have to see how to get there and this is part of the plan that we are working on,” he said, describing this a goal for the long term and “not tomorrow”.
Asked about the fate of Lebanon’s local currency debt, Nehme said “solutions here are probably easier to find because practically we have one counterpart” — a reference to the Lebanese banking association.
Lebanon wanted “to make sure we do the restructuring once and for all. We don’t have situations like other countries where every few years we have to go back to the bondholders and say ‘sorry’”, said Nehme, himself a former banker.
He said a full economic, fiscal and monetary plan should be finalised in two months.
Lebanon’s pound has lost around 40% of its value on a parallel market since October, though the official peg remains at 1,507.5 pounds to the U.S. dollar.
Asked whether the government would devalue the pound, Nehme said: “Already today you have two markets, so maybe it will stay like that, maybe not — nobody can tell.”
Diab said on Saturday a plan must be drawn up to restructure Lebanon’s banking sector, which was too large at four times the size of the economy.
“It will necessarily shrink. It has already started shrinking as a matter of fact,” Nehme said. “Increases of equity will be necessary, we may see some mergers and so on.
“This is the responsibility of the central bank more than the government, we’ll be assisting.”
Writing by Tom Perry; Editing by Catherine Evans
Image: Demonstrators are sprayed with a water cannon during a protest seeking to prevent MPs and government officials from reaching the parliament for a vote of confidence, in Beirut, Lebanon February 11, 2020. REUTERS/Aziz Taher/File Photo