Lebanon’s bondholders will have at least 70 per cent wiped off the value of their holdings, according to an analysis of the government’s plan to restructure the country’s huge debts.
Lebanon, which defaulted on its $30bn of foreign-currency bonds in February, offered the first hints as to how it plans to return its debt to a sustainable level in a draft document circulated on Wednesday. Under the plan drawn up with advisers including Lazard, Beirut aims to cut its borrowings of more than 175 per cent of gross domestic product in half by the end of the year, and move to a more flexible exchange rate.
Currently, the Lebanese pound is pegged to the dollar. Once an anticipated slump in the exchange rate is factored in, the debt reduction implies a haircut of at least 70 per cent for bondholders, according to Nafez Zouk of Oxford Economics.
“These projections are made on some forecasts that may turn out to be rosy — particularly the forecast for growth, which is set to take a much more severe hit given the Covid-induced slowdown in activity,” Mr Zouk said. “Think of it as a minimum.”
Such a heavy discount would crystallise big losses for foreign funds that bought into Lebanon’s bonds, in particular Ashmore, the London-based asset manager that built up a more than 25 per cent stake in the bond that had been due in March. Failure to repay that bond triggered the first debt default in Lebanon’s history and kicked off the current restructuring process.
Ashmore has suffered big outflows from its funds as bets on Lebanon, Argentina and Ecuador turn sour. Lebanon and Argentina were already sliding towards default before coronavirus hit, prompting oil-rich Ecuador to suspend payments on its dollar debt as energy prices slumped.
Ashmore’s short-duration fund, which has big holdings in all three countries, has lost 31 per cent of its value this year, according to Bloomberg data. The company suffered outflows of £2.2bn in March alone, analysts at UBS estimate, equivalent to more than 10 per cent of its retail fund assets.
Ashmore declined to comment.
The restructuring plan, marked as the latest draft as of April 6, does not elaborate on the government’s plan for negotiating with foreign bondholders, further than suspending payments on interest and principal and beginning the talks.
Beirut aims to have wrestled its debt-to-GDP ratio down to 90 per cent by 2027, and must also tackle some $57bn of local currency debt, mostly held by the local commercial banking sector, which the government wants to overhaul. The plan, which assumes support worth $10bn-15bn from “external sources” including the IMF over the next five years, states Lebanon will continue to pay discounted interest on the local debt until a wider agreement is reached.
Lebanon was in the throes of its worst economic turmoil in decades even before the virus locked down the country. The draft plan puts its poverty rate at 48 per cent.