Lebanon will not pay upcoming bond maturities to provide citizens’ ‘basic needs’

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The Lebanese government voted on Saturday to default on payment of a $1.2 billion Eurobond maturing on March 9, vowing to use the funds to provide the population with their basic needs.

“How can we make outside payments when there are people who cannot even afford bread,” Prime Minister Hassan Diab said following a Cabinet session held at the presidential palace.

He explained that the decision was taken because Lebanon was simply unable to pay its upcoming maturities. This is the first time Lebanon has failed to meet its foreign debt obligations.

“The reserves of hard currency have reached a critical and dangerous level … and the public debt became larger than Lebanon could bear,” Diab said.

According to the prime minister, public debt has reached 170 percent of GDP, putting Lebanon close to being the world’s most indebted country.

Diab said the government would enter into negotiations with creditors on restructuring the remainder of its $31 billion foreign currency debt “with the best intentions.”

However, Lebanon should be prepared for tough negotiations with “less friendly” creditors, Mohamad Faour, a postdoctoral researcher in banking and finance at University College Dublin, told Al Arabiya English.

“It’s quite frequent that debt restructuring involves fights … we should be bracing ourselves.”

A source told Reuters earlier Saturday that bond holders were attempting to form a creditor group to discuss the default.

The non-payment comes as Lebanon sinks further into economic crisis, its worst in decades.

Depleted dollar supplies have threatened imports of essential goods such as wheat and medicine, and led banks to impose oppressive cash withdrawal limits on account holders.

The Lebanese pound, which has been pegged to the dollar since 1997, has lost more than 40 percent of its value on the parallel market in the last few months, slashing life savings and drastically reducing purchasing power.

Diab promised that his government would now embark on an ambitious set of reforms, including overhauling the dilapidated electricity sector, cracking down on tax evasion, fighting corruption and launching a social support program for the country’s most vulnerable.

The premier also admitted that Lebanon’s banking sector is bloated to four times and requires a total overhaul.

“It’s good that he acknowledged this, as it is an important point that has been seldom highlighted by previous policymakers,” Faour said.

Earlier Saturday, the presidency announced that the country’s top leaders were united in their opposition to repayment after a meeting between the president, prime minister, parliament speaker, central bank governor and the head of the banking association.

"The attendees decided unanimously to stand by the government in any choice it makes in terms of managing the debt, except paying the debt maturities," the presidency statement read.

Last week, the government hired investment bank Lazard and law firm Cleary Gottlieb Steen & Hamilton LLP as its financial and legal advisers.

The decision on whether to pay back the bonds had been a source of contention. Those in favor of repayment, including local banks that own a significant share of the bonds, argued that not paying would ruin Lebanon’s reputation with international creditors and make it more difficult to ask for investment in the future.

Lebanon’s sovereign credit rating slid deeper into junk territory after two global ratings agencies downgraded it last month.

Those opposed to repayment said using the country’s dwindling foreign currency reserves for debt servicing would be unjustifiable. Participants in Lebanon’s nationwide anti-government protests, now in their fifth month, also advocated against paying the debt.

Despite the weeks of intense political debate and media speculation, Faour believes the default was “inevitable.”

“Lebanon’s dollar reserves have been dwindling … it was only a matter of time.”

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