Lebanon announced on Saturday that it could not meet its debt obligations and suspended repayment of a $1.2 billion Eurobond that matures on Monday, saying critically low foreign currency reserves were needed for essentials.
This has left the country on course for a sovereign default as it grapples with a financial crisis that is seen as the biggest threat to its stability since the end of the 1975-90 civil war.
Now Lebanon is waiting for bondholders to decide whether they will cooperate in a debt restructuring or pursue legal action against it, the economy minister said on Monday.
Raoul Nehme told Reuters 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.
“We are proposing to them to work hand-in-hand to find a solution, which is always better than litigation,” Nehme told Reuters in a telephone interview.
“But it is their choice to decide whether to cooperate or to go legal.”
“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,” he noted.
As the Lebanese government has few assets outside the country, 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.
Lebanon’s dollar bonds tumbled to record lows of as little as 17.5 cents in the dollar on Monday as worries about a protracted dispute with creditors mounted. It also has about $31 billion in dollar bonds that sources told Reuters on Friday the government would seek to restructure.
However, 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.
Nehme urged the Lebanese and their politicians to show unity.
“We will go through hard times, but I am confident that the light will be at the end of the tunnel,” he said.
Asked about the fate of Lebanon’s local currency debt, Nehme said “solutions here are probably easier to find because practically we have one counterpart” — a reference to the Lebanese banking association.
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, who is a former banker himself.
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 US 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.”
Prime Minister Hassan Diab said on Saturday that Lebanon’s debt to GDP ratio had climbed to around 170%, meaning the country is almost the most heavily indebted in the world.
He also said a plan must be drawn up to restructure Lebanon’s banking sector, which was too large at four times the size of the economy.
