Lebanon’s incoming Finance Minister Ghazi Wazni said the fate of a $1.2 billion Eurobond maturing March 9 will be the new government’s top priority when it meets next week, as investor concerns intensify that the country could default.
“This is a priority and will be the first item to be discussed, Wazni said Wednesday in his first interview with an international news organization.
Despite Lebanon’s unblemished record of paying creditors, bond investors have all but priced in a sovereign default. Still, they differ on when it would happen and whether foreign investors would likely be exempt.
A proposal to have local banks swap their holdings of the March bond with longer-dated instruments in the central bank’s portfolio was rejected by the Finance Ministry after rating companies warned of a downgrade.
To keep its currency peg intact and finance foreign-currency obligations, Lebanon has relied on the millions living abroad to send remittance through local banks, which, along with the central bank, hold most of the country’s debt. With inflows slowing, cracks in the financing model have appeared, risking the decades-old exchange rate.
Speaking by telephone hours after the new cabinet convened for its first meeting at the presidential palace in Beirut, the minister said he doesn’t see a devaluation in the short term, despite the emergence of a parallel exchange-rate market for increasingly scarce dollars.
Wazni, who has a PhD from Paris Dauphine University, served as an adviser to the finance and budget parliamentary committee for two years. He was appointed late Tuesday after the president approved the formation of a new government to replace former Premier Saad Hariri’s cabinet.
The political breakthrough injected some calm into financial markets. The March notes rose 1.4 cents to 83.7 cents on the dollar on Wednesday, paring most of their losses after the downgrade warnings last week.
The cost of insuring Lebanon’s debt against default for the next six months fell for a third day. The credit-default swaps have dropped to around 9,500 basis points after surging above 10,000 basis points last week.
Hariri resigned in late October in the face of mounting protests against alleged rampant corruption among the political elites and worsening living conditions. Demonstrations have turned violent in recent days, with hundreds injured in scuffles with riot police.
Debt Tightrope
One of the world’s most indebted countries, Lebanon is succumbing to a financial crisis that’s seen lenders ration US currency, leading to a weakening of the parallel rate beyond the peg of 1,507.5 per dollar to about 2,000. The International Monetary Fund has said that Lebanon’s exchange rate is “significantly overvalued.
Wazni said demand for dollars at the parallel rate would ease as the government restores confidence.
“We have two exchange rates now and government formation doesn’t change, Wazni, an adviser to veteran Parliament Speaker Nabih Berri, said. “But the rate at the parallel market will depend on restoring confidence and the actions of the government.
In separate remarks broadcast on a local television station, Wazni said it was nearly impossible for the parallel rate to return to its original level.
Lebanon needs external funding to break the grip of its financial and economic crisis, Wazni said, but added that it was too early to speak about whether the government would seek financing from the IMF.
He said the new lineup faces several challenges and should implement an overhaul that reassures the local market as well as the international community.
Under Hariri, the cabinet failed to implement much-needed reforms that would have unlocked $11 billion in international aid meant to boost the country’s ailing infrastructure. Lebanon’s usual allies in the Gulf have said they would help it get out of the crisis, yet nothing has materialized.
