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Opinion

Seven options for Lebanon as economic crisis deepens

The Lebanese authorities said that they met a $1.5 billion bond payment in late November, but with the country rapidly running out of money and in the absence of any clear ability to enact reforms, Euromoney looks at its options.

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1. Default

Lebanon needs to substantially reduce its gross public debt, which stands around $85 billion; with ongoing political and economic stagnation, it can neither grow nor inflate out of the problem. Restructuring is the only option.

External debt is estimated at about 190% of GDP in 2018, according to the IMF’s most recent Article IV report. Of this, 77% is non-resident deposits with maturities of less than one year, while government debt accounts for 10% of external debt, of which roughly a third is held by foreign investors.

“They can’t live with this debt-to-GDP [ratio]; servicing those debt levels is killing them,” says Michael Doran, a partner at Baker McKenzie.

Dollar bond spreads now stand at more than 2,300 basis points – greater than in Argentina – and credit default swap premia imply a 92% chance of the government defaulting within the next five years, according to Capital Economics.

The Banque du Liban’s policy of continuing to pay bond obligations may be viewed positively by international investors, but it is at the same time rationing access to dollars for the likes of medical equipment and basic food-stuffs, which is politically dangerous, says a London-based credit analyst.

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