January 15, 2020 / 7:16 PM / 10 days ago

The various ways Lebanon could default

* Interactive debt graphic tmsnrt.rs/3ac6MMv

LONDON, Jan 15 (Reuters) - Lebanon’s caretaker finance minister has asked the central bank governor to hold off on a proposed swap of 2020 Eurobonds after ratings agencies warned it could constitute a selective default, a source familiar with the matter said on Wednesday.

One of the most heavily indebted countries in the world, Lebanon has $2.5 billion in Eurobonds due this year including a $1.2 billion bond set to mature in March.

But its dire finances and political crisis mean it is running out of options to avoid a default. There are a number of ways this could happen. These are the main ones:

EXTENDING PAYMENT DEADLINES ON BONDS

Lebanon had proposed asking local banks and other investors that hold a set of government bonds due for repayment this year to switch them for longer-dated ones to give it more breathing space.

As that would change the fundamental contract of the bonds, rating agencies appear to have warned the country it would constitute what is known as a “selective” or “restricted” default.

A selective or restricted default is different to a broader default in that it reflects the fact that some bonds or obligations might still be being paid.

Credit Default Swaps

While a rating agency default tag carries symbolic weight, it does not necessarily trigger Credit Default Swaps that investors or traders may have bought as insurance for the holdings. That instead depends on a committee, usually made up of banks, investors and other specialists in the CDS market. These committees tend to sit under the umbrella of the New York-headquartered International Swaps and Derivatives Association.

A CYPRUS-STYLE HIT TO BANK DEPOSITS

One of the possibilities to help Lebanon’s finances is to take a slice of the deposits individuals and firms hold at Lebanese banks.

The controversial measure was used in Cyprus at the height of the euro zone debt crisis. James McCormack, head of Fitch’s sovereign rating team, said that move didn’t actually trigger a default as the definition of a default is more narrowly focused on the non-payment of debt.

Reporting by Marc Jones; Editing by Hugh Lawson

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