March 10, 2020 / 12:42 PM / 21 days ago

Lebanon's private creditors face significant losses, Moody's warns

BEIRUT (Reuters) - Moody’s Investors Service warned on Tuesday that private creditors faced significant losses as a result of the government’s decision to defer payment of the March 2020 Eurobond.

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.

“A sovereign default would have a significant negative impact on banks’ financial health, and further undermine the economy and the sustainability of the peg,” said Elisa Parisi-Capone, a Moody’s vice president - senior analyst and the report’s author.

Lebanon’s announcement involved the halting of a payment of $1.2 billion on a Eurobond maturing on March 9.

Fitch Ratings on Monday downgraded Lebanon’s long-term foreign-currency issuer default rating to ‘C’ from ‘CC’. Fitch said a failure by Lebanon to make the principal payment during the seven day grace period will put the sovereign into ‘restricted default’ and the bond into ‘default’.

Lebanon’s balance of payments has worsened in recent years as the war in Syria has closed trade routes and led to an influx of refugees. Also, lower oil prices have dented foreign investment and remittances - particularly from the Gulf area, which hosts about a third of Lebanese expatriates.

The challenges came to a head with the outbreak of public protests against the ruling elite in October last year that led to a change in the government earlier this year.

Usable foreign exchange reserves have dwindled to between $5 billion and $10 billion, Moody’s estimated. That compared with foreign currency debt service requirements of $4.7 billion in 2020 and $4 billion in 2021, it added.

The very low level of foreign exchange reserves meant the pressure on the Lebanese pound is acute, Moody’s said, adding that it pointed to a possible abrupt and very large change in the exchange rate.

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

The central bank’s foreign-exchange reserves have declined to or fallen below minimum levels, Moody’s said, citing standard measures for foreign-exchange reserve adequacy for countries with a fixed exchange rate and a large banking system.

The March issue was trading at 26 cents on Tuesday, a level similar to some of the longer-dated bonds, after shedding more than half its value since last week, according to Refinitiv data.

“The yield curve has collapsed. In a default scenario that usually happens,” said Richard House, CIO emerging market debt, Allianz Global Investors. “Bonds don’t trade on yield in this situation. They trade on cash price.”

Reporting by Tom Arnold; Editing by Chizu Nomiyama

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