(Bloomberg) -- Top Lebanese officials, including the president, the caretaker prime minister and the central bank chief, are scrambling to reassure bond investors panicking over the risk of debt restructuring after initial efforts at damage-control failed to calm markets.
In a meeting on Sunday at the presidential palace, the officials said Lebanon was discussing how to reduce the budget deficit and implement fiscal reforms -- but would not restructure its debt. “The issue of restructuring the public debt isn’t on the table at all,” caretaker Finance Minister Ali Hasan Khalil read from a statement after the meeting, which was also attended by the minister of economy and the head of the country’s bank association.
Lebanese dollar-denominated bonds began tumbling and the country’s credit risk surged last week after Khalil said in an interview with Al Akhbar newspaper that the country was considering restructuring its debt.
Trying to clear up confusion and calm investor nerves, he said a day later that while a program of fiscal reforms to control one of the world’s highest debt burdens doesn’t include a restructuring, it may entail a rescheduling of debt. Lebanese officials also said the securities in question were local, not Eurobonds.
But the plunge in Lebanese bonds last week showed how just talking about the country’s debt problem -- let alone fixing it -- is proving to be a challenge.
Investors didn’t wait for politicians to work out the semantics, with the price of the 2028 bonds plunging below 72 cents on the dollar on Friday. The surge in the cost to insure the country’s debt through credit default swaps has been among the most in the world over the past year, CMA prices show.
Despite an unblemished record of bond repayment through war and political strife, Lebanon is coming to a reckoning with years of fiscal overreach. While maintaining that an imminent restructuring is unlikely, Goldman Sachs Group Inc. has gone as far as calculating how much investors could recover should Lebanon overhaul its sovereign debt.
Lebanon’s public debt, estimated at over 160 percent of gross domestic product this year, is projected to rise to near 180 percent by 2023, second only to Japan’s, the IMF says. Its “debt affordability” is the weakest of all the sovereigns rated by Moody’s Investors Service.
Still run by a caretaker government eight months after elections, Lebanon has been mired in sectarian and political strife since Syria crisis began in 2011.
The recommendations under consideration by the Lebanese government include spending cuts as well as tax and electricity reforms, according to Khalil.
Lebanon has also committed to reducing the budget deficit by 1 percent annually over five years as part of reforms to unlock $11 billion in aid allocated during a donor conference last year.
Before the government stepped in last month by offering Treasury bonds closer to market rates, the central bank, also known as Banque du Liban, pulled the weight of Lebanon’s debt burden by means of what it called “financial engineering.” Offering commercial lenders above-market rates for deposits, it encouraged them to purchase sovereign notes while buying the government debt that wasn’t absorbed by banks.
While that enabled the central bank to keep interest rates low and stable, its domestic holdings jumped to 50 percent of the government’s total local-currency debt as of last September, from about 27 percent at the end of 2010, according to Moody’s.
Last week “showed there is clearly a lack of coordination within the government as well as no unified strategy on how to deal with the financing issue,” said Ray Jian, London-based portfolio manager and head of emerging markets aggregate debt at Amundi Asset Management.
Liquidity conditions are “a function of confidence,” Jian said. “The restructure word and lack of coordination in the government definitely is not inspiring that.”
--With assistance from Dana El Baltaji and Selcuk Gokoluk.
To contact the reporters on this story: Dana Khraiche in Beirut at firstname.lastname@example.org;Donna Abu-Nasr in Beirut at email@example.com
To contact the editors responsible for this story: Lin Noueihed at firstname.lastname@example.org, Paul Abelsky, Alaa Shahine
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