March 9, 2020 / 1:08 PM / 24 days ago

Exclusive: Lebanon waits to hear if creditors will cooperate or sue: minister

BEIRUT (Reuters) - Lebanon is waiting for bondholders to decide whether they will cooperate in a debt restructuring or take the country to court after its move to suspend a $1.2 billion bond repayment due on Monday, the economy minister told Reuters.

FILE PHOTO: Demonstrators are sprayed with a water cannon during a protest seeking to prevent MPs and government officials from reaching the parliament for a vote of confidence, in Beirut, Lebanon February 11, 2020. REUTERS/Aziz Taher/File Photo

With Lebanon facing its first ever sovereign default, its dollar bonds tumbled as low 16 cents in the dollar as worries about a protracted dispute with creditors mounted.

Lebanon announced on Saturday it could not meet upcoming debt payments, saying critically low foreign currency reserves were needed to cover essential imports and calling for “fair” restructuring talks.

The default marks a new phase in a financial crisis seen as the biggest threat to the country’s stability since the end of the 1975-90 civil war.

Economy minister Raoul Nehme said he did not yet have a sense of what choice investors would make but expected it would take “a few weeks” for them to decide. Lebanon aimed to restructure its debt “once and for all”, he added.

“We are proposing to them to work hand-in-hand to find a solution, which is always better than litigation. But it is their choice to decide whether to cooperate or to go legal,” Nehme said.

“The banks in Lebanon have announced they would like to cooperate and not to go legal, and we understand they are speaking with other bondholders in order to convince them to cooperate and to come to the negotiating table.”

As the government has few assets abroad, Nehme said any court action would be about applying pressure rather than recouping “any real amount”.

“Now they can always go and sue and try and seize assets ... but it will not work, legally speaking,” he said.

“The laws in New York and other countries are very clear — immunity of government assets that are used for government purposes and of central banks’ (assets) as well.”

Asked about the fate of Lebanon’s local currency debt, Nehme said Lebanon would hold talks “to see how we can restructure or review”. He said “solutions here are probably easier to find because practically we have one counterpart” — a reference to local banks.

Lebanese banks, big holders of the state debt, had been pressing the government to avoid default ahead of its decision.

A seven-day grace period means it may be a week before credit ratings agencies formally declare Lebanon to have defaulted.

Nassib Ghobril, chief economist at Byblos Bank, said Saturday’s announcement marked “a day that will live in infamy”, adding: “We have squandered the credibility of the Lebanese state built over decades.”

Supporters of the move said there was no choice.

“For the people of Lebanon to recover from the current debt crisis requires large write-downs of debt by international creditors,” said Tim Jones, a policy officer at the British-based Jubilee Debt Campaign.

URGES UNITY

Nehme said it was too early to speak about the details of what a debt restructuring might look like for bondholders, some of whom have said they are seeking to form a creditor group.

Lebanon has about $31 billion in dollar bonds it wants to restructure.

“We will go through hard times, but I am confident that the light will be at the end of the tunnel,” he said.

Lebanon’s debt to GDP ratio has climbed to around 170%, the prime minister said on Saturday.

Nehme said a ratio of no more than 90% was sustainable, and that 60% to 80% was preferable. “We have to see how to get there and this is part of the plan that we are working on,” he said, describing this a goal for the long term and “not tomorrow”.

Lebanon wanted “to make sure we do the restructuring once and for all. We don’t have situations like other countries where every few years we have to go back to the bondholders and say ‘sorry’”, said Nehme, himself a former banker.

A full economic, fiscal and monetary plan should be finalised in two months, he said.

Lebanon’s pound has lost around 40% of its value since October, though the official peg remains at 1,507.5 pounds to the U.S. dollar.

Asked whether the government would devalue the pound, Nehme said: “Already today you have two markets, so maybe it will stay like that, maybe not — nobody can tell.”

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Prime Minister Hassan Diab has called for a plan to restructure the banking sector, which is four times the size of Lebanon’s economy.

“It will necessarily shrink. It has already started shrinking as a matter of fact,” Nehme said. “Increases of equity will be necessary, we may see some mergers and so on.

“This is the responsibility of the central bank more than the government, we’ll be assisting.”

Additional reporting by Marc Jones, Tom Arnold and Karin Strohecker in London; Writing by Tom Perry; Editing by Catherine Evans

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