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Lebanese bondholders will have lost at least 70 percent of the value of their holdings, according to an analysis of the government’s plan to restructure the country’s huge debts.
Lebanon, which in default on its $ 30 billion in foreign currency bonds in February, offered the first clues as to how it plans to reduce its debt to a sustainable level in a draft document released Wednesday. As part of the plan drawn up with advisers including Lazard, Beirut aims to halve by the end of the year its borrowing of more than 175% of gross domestic product and switch to a more flexible exchange rate.
Currently, the Lebanese pound is pegged to the dollar. Once an anticipated drop in the exchange rate is factored in, debt reduction implies a haircut of at least 70% for bondholders, according to Nafez Zouk of Oxford Economics.
“These projections are made on certain forecasts which may turn out rosy – in particular the growth forecasts, which should take a much more severe hit given the slowdown in activity induced by Covid,” Zouk said. “Think about it at a minimum. “
Such a large haircut would crystallize big losses for foreign funds that buy Lebanese bonds, especially Ashmore, the London-based asset manager who to build a stake of over 25 percent in the bond that was due in March. The non-repayment of this bond triggered the first default in Lebanon’s history and kicked off the ongoing restructuring process.
Ashmore has suffered major outflows as bets on Lebanon, Argentina and Ecuador turn sour. Lebanon and Argentina were already sliding to default before the coronavirus hit, prompting oil-rich Ecuador to to suspend payments on its dollar debt as energy prices plummeted.
Ashmore’s short-term fund, which has large holdings in all three countries, has lost 31% of its value this year, according to Bloomberg data. The company suffered £ 2.2bn outflows in March alone, UBS analysts estimate, equivalent to more than 10% of its retail fund assets.
Ashmore declined to comment.
The restructuring plan, marked as the latest draft dated April 6, does not specify the government’s plan to negotiate with foreign bondholders, beyond suspending interest and principal payments and l opening of talks.
Beirut aims to reduce its debt-to-GDP ratio to 90% by 2027, and must also tackle some $ 57 billion in local currency debt, mostly held by the local commercial banking sector, which the government wants to revamp. The plan, which involves $ 10 billion to $ 15 billion in support from “external sources” including the IMF over the next five years, states that Lebanon will continue to pay reduced interest on local debt until the end of the period. ‘that a broader agreement is reached.
Lebanon was in the throes of its worst economic crisis in decades before the virus even blocked the country. The draft plan puts its poverty rate at 48%.