Declaring it cannot pay debts, Lebanon sets stage for default

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Declaring it cannot pay debts, Lebanon sets stage for default

By Tom Perry and Ellen Francis

 

Lebanon's Prime Minister Hassan Diab speaks during a televised address to the the nation at the governmental palace in Beirut, Lebanon March 7, 2020. Dalati Nohra/Handout via REUTERS

 

BEIRUT (Reuters) - Lebanon announced it cannot meet its debt payments and halted a March 9 bond payment of $1.2 billion on Saturday, setting the heavily indebted state on course for a sovereign default as it grapples with a major financial crisis.

 

In a televised address to the nation, Prime Minister Hassan Diab said foreign currency reserves had hit a "critical and dangerous" level and were needed to meet basic needs. He called for "fair" negotiations with lenders to restructure the debt.

 

The default will mark a new phase in a crisis that has hammered the economy since October, slicing around 40% off the value of the local currency, denying savers free access to their deposits and fuelling unemployment and unrest.

 

The crisis is seen as the biggest risk to Lebanon's stability since the end of the 1975-90 civil war.

 

"How can we pay creditors abroad when the Lebanese cannot get their money from their bank accounts?" Diab said.

"Our debt has become greater than Lebanon can bear, and greater than the ability of the Lebanese to meet interest payments."

 

The long-brewing crisis came to a head last year as capital inflows slowed and protests erupted over decades of state corruption and bad governance.

 

"We are paying the price for the mistakes of the past years. Must we bequeath them to our children?" Diab said.

 

The Lebanese had "lived a dream that was a delusion as though things were just fine, while Lebanon was drowning in more debt", he said.

 

There has been no sign of a bailout from foreign states that aided Lebanon in the past. Western governments insist Beirut first enact long-delayed reforms to fight waste and corruption.

 

Diab was appointed in January with backing from the Iran-backed group Hezbollah and its allies. Former prime minister Saad al-Hariri, a traditional ally of the West and Gulf Arab states, stayed out of the government.

 

NOT PRODUCTIVE ENOUGH

 

Diab, a little-known academic when he became prime minister, said corruption had drained the state while also criticising economic policies adopted since the war. Lebanon was importing 80% of its needs and was not productive enough, he said.

 

He took aim at a banking system that drew capital to the country with dollar interest rates five to 10 times greater than those offered abroad.

 

"We do not need a banking sector four times the size of our economy. We will have to come up with a plan to restructure the banking sector," he said.

 

The gross public debt has reached around 170% of gross domestic product, meaning Lebanon is close to being the world's most heavily indebted state, he added.

 

Citing the World Bank, Diab said more than 40% of people could soon find themselves under the poverty line. Lebanon has a population of around 6 million, including about 1 million Syrian refugees.

 

Lebanon has a total of some $31 billion in dollar bonds that sources told Reuters on Friday the government would seek to restructure.

 

A set of Lebanon's bond holders are to step up efforts to form a creditor group in the coming days, one of the members of the group said.

 

"From what we understand the government wants to be reasonable and so do most creditors. They understand the country is in a difficult situation," the member said.

 

Lebanon's public debt is worth about $89.5 billion, with around 37% of that in foreign currency.

 

Lebanon has sought technical but not financial assistance from the IMF, though many analysts believe that the only way for the country to secure financial support would be through an IMF programme.

 

"Watch now if bondholders can block any deal," said Nick Eisinger, principal, fixed income emerging markets at Vanguard, which holds some Lebanese debt but has been underweight in the market for a long time.

 

"It's unclear how quick they can go down the restructuring route or get a deal because they need reforms first or at the same time," he said.

 

Banks began restricting cash withdrawals and transfers abroad four months ago. Diab indicated the controls could soon be standardised, saying a draft law would "regulate the relationship between the banks and their customers, for it to become more fair and just".

 

(Reporting by Tom Perry, Ellen Francis and Laila Bassam in Beirut; Tom Arnold and Marc Jones in London; Writing by Tom Perry; Editing by Kevin Liffey and Frances Kerry)

 

-- © Copyright Reuters 2020-03-08

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[AussieBob18]

Debt and Corruption are the greatest threat to the world economy and the people.  I have a feeling that there will be others following suit.  Lebanon is very bad, with no way to pay back the debts - except maybe sell a few islands.  Greece is even worse and so is Japan, but they both have the potential economic capabilities to eventually pay off the debt.  This is going to be a big worldwide issue going forward - the world banks have allowed too many countries to get into too much debt - and most of that debt is because of corruption (and socialist programs).

 

[RichardColeman]

Sorry, but in their right would actually lend Lebanon money ? 

[justin case]

sell a part of it to ISRAEL ? 

[generealty]

I can see other nations following suit. It could lead to war in some situations, so not a comforting time

[Mick501]

Never mind. China will once again be the Good Samaritan and inject funds to the Lebanese economy, for the token price of a major port and a couple of air fields.

[Magenta408]

What was being produced was surely much less than the debt incurred. This has been the formula for a long time in Lebanon - sitting on the fence with eyes shut, hand over mouth and ears.

[IAMHERE]

5 hours ago, RichardColeman said:

Sorry, but in their right would actually lend Lebanon money ? 

We will soon see.  I'd imagine it is a small price to pay for a nice seaport for Russian or Chinese ships. The IMF is most likely to fork over the money and I don't know who'll benefit from that. Heck, even America may pay thinking they'll then have a 'friend' in Lebanon. 

[Bluespunk]

7 hours ago, AussieBob18 said:

Debt and Corruption are the greatest threat to the world economy and the people.  I have a feeling that there will be others following suit.  Lebanon is very bad, with no way to pay back the debts - except maybe sell a few islands.  Greece is even worse and so is Japan, but they both have the potential economic capabilities to eventually pay off the debt.  This is going to be a big worldwide issue going forward - the world banks have allowed too many countries to get into too much debt - and most of that debt is because of corruption (and socialist programs).

 

You were doing so well before your final parenthesis. 

[AgMech Cowboy]

On 3/8/2020 at 9:09 AM, AussieBob18 said:

and most of that debt is because of corruption (and socialist programs).

and Hezbollah, Hamas, etc..

[AussieBob18]

23 hours ago, Bluespunk said:

You were doing so well before your final parenthesis. 

Yeh - I meant more fake social programs that cost lots and deliver votes, but dont drive real economic growth. 

But as most socialist countries have found out in the long run - that form of Government doesnt work economically (eventually).

[Sujo]

8 minutes ago, AussieBob18 said:

Yeh - I meant more fake social programs that cost lots and deliver votes, but dont drive real economic growth. 

But as most socialist countries have found out in the long run - that form of Government doesnt work economically (eventually).

So the US and oz and other western countries are socialist. Police are funded. The courts are funded, farmers are funded, even car manufacturers are funded.

 

I would hate to live in a society where police and courts were private enterprizes and no govt money in it.

 

Society is judged by how it looks after its poor. The problem with conservatives is that they only care about right to life until the baby is born, then its left to fend for itself and they dont care if it dies.

[Bluespunk]

2 hours ago, AussieBob18 said:

Yeh - I meant more fake social programs that cost lots and deliver votes, but dont drive real economic growth. 

But as most socialist countries have found out in the long run - that form of Government doesnt work economically (eventually).

Most people find the same with capitalism.

[sanemax]

2 hours ago, Sujo said:

The problem with conservatives is that they only care about right to life until the baby is born, then its left to fend for itself and they dont care if it dies.

Stop being extremely ridiculous .

Babies are cared for by the state right up to the age of 18

[Chomper Higgot]

2 hours ago, sanemax said:

Stop being extremely ridiculous .

Babies are cared for by the state right up to the age of 18

You need to get out more.