Lebanon is set to default on its debts for the first time on Monday as its foreign currency reserves plummet to critically low levels.
Prime minister Hassan Diab has said that Lebanon will not be able to pay a $1.2bn Eurobond that matures on Monday as the country’s economic crisis deepens.
The government is now preparing for negotiations with its creditors as it grapples with debts of more than $90bn, equivalent to about 170 per cent of the country’s gross domestic product.
“How can we pay foreign creditors when the Lebanese can’t access their deposits,” Mr Diab said as he announced the default in an address to the nation late on Saturday. He added that foreign reserves had reached “danger level”.
Lebanon’s central bank says it has $29bn in gross foreign currency reserves. But a report last month by Fitch, the rating agency, estimated that its foreign currency liabilities outweighed its assets, giving the Banque du Liban “a net negative foreign currency position . . . close to $40bn, excluding gold”.
Nasser Saidi, a former central bank vice-governor, estimated that usable reserves had fallen to “about $3bn to $4bn”. He said this was because the gross reserves included $18bn to $19bn set against deposits for commercial banks that the BdL could not spend because of reserve requirements. In addition, the BdL has lent local institutions about $6bn to $7bn to help them cover their commitments to correspondent banks, Mr Saidi said.
A Lebanese official confirmed the foreign reserve numbers, saying that there had been “simply no other option” but to default and negotiate a restructuring with Lebanon’s creditors.
The finance ministry said the government was “prepared to engage in good faith discussions with its creditors to explore options to make Lebanon’s public debt sustainable”.
Sami Atallah, director of the Lebanese Center for Policy Studies, said it “would be suicidal” for Beirut to pay the bond given the state of the government’s finances.
“This is a really serious crisis where the banks have been depleted or bankrupt,” he said. “Now we’ve reached the bottom.”
Lebanon is battling interconnected fiscal, monetary and economic crises, which have cost tens of thousands of jobs and threatened to disrupt the import of vital goods.
Mr Diab took office two months ago after weeks of mass demonstrations — partly fuelled by economic grievances — forced the resignation of the previous government.
A dollar shortage has all but cancelled a two-decade peg between the US dollar and the Lebanese pound, with the currency losing almost half its value against the greenback on the black market in less than a year.
The next challenge for the government will be negotiating with its creditors. It will need the agreement of enough investors to account for 75 per cent of the Eurobond to restructure the debt. Ashmore, the London-based emerging markets investor, has been buying the bond in recent months and now holds a blocking stake — 25 per cent and above — giving it veto power.
The government is also expected to come up with a plan to enact long-promised but politically unpopular reforms, including cutting its swollen public payroll, reforming pensions and overhauling its expensive and malfunctioning electricity sector.
In his address to the nation on Saturday, Mr Diab promised to “secure additional resources for healthcare, education and infrastructure”, fight corruption, tackle tax evasion, and create a social safety net to help the most vulnerable.
The government is taking advice from the IMF, but has not requested the body’s financial support.
“It is now urgent that the government opens up negotiations with the IMF,” Mr Saidi said, “because you’re going to need help with balance of payments, even to fund your imports”.
Mr Diab also said his government would restructure Lebanon’s oversized banking sector, which has become the focus of public anger in recent weeks. Informal capital controls imposed by the lenders since mid-October, intended to stop a run on the banks, mean depositors are able to withdraw as little as $200 every two weeks in some cases, and cannot transfer their funds abroad.
Addressing fears that depositors will end up bailing out the banks, Mr Diab said the government would “endeavour to protect” them.