By Tom Arnold
LONDON (Reuters) – Lebanon’s creditors are wary of the risk of even steeper losses as a devastating blast in Beirut complicates an already stalled debt restructuring process.
Even before Tuesday’s explosion in Beirut’s port that killed 154 people, progress had been slow on a turnaround from deep financial turmoil that culminated in a default on Lebanon’s foreign currency debt in March.
Reflecting the gloomy outlook, the country’s $31 billion of sovereign dollar-bonds, beset by thin liquidity since the default, have sunk generally deeper below 20 cents in the dollar since March.
This has further diminished prospects of recovery for creditors already facing wider losses than for Argentina and Ecuador, two other troubled sovereigns which both moved closer to finalizing their own debt revamps this week.
Trading volumes on Lebanese bonds spiked to their highest in three weeks on Wednesday, according to MarketAxess data, with financial sources citing a push by some creditors to try to sell their holdings.
“It means Lebanon is more likely to see goodwill from the international community but we don’t know how this dynamic will play out and what it means for the reform program,” said Steffen Reichold, portfolio manager at Stone Harbor Investment Partners, which holds some Lebanese Eurobonds.
“In terms of recovery values, it’s not going to be positive. If anything, it will be negative.
“But the main determinant is the cold hard facts on the balance sheets of the various institutions involved – the government, BdL (central bank) and the local banks – and that’s what will drive recoveries.”
With Lebanon’s economy expected to face a more severe economic dip this year in the wake of the blast, investors are pondering the scale of revisions that may be required to the government’s debt sustainability metrics laid out in an existing rescue plan, as the parallel exchange rate weakens further and government costs rise.
“The prospects are even worse than before,” said a foreign creditor who spoke on condition of anonymity. “This episode underlines how weak the state of governance is in Lebanon.”
Even before the blast, the process of overhauling the debt had hardly begun, with the government’s financial adviser Lazard yet to engage comprehensively with creditors as talks with the International Monetary Fund over financing were put on hold.
Lebanon’s commercial banks, the single largest constituency of Eurobond holders, had raised concerns about the government’s plan.
Tuesday’s explosion was a “watershed event” that could change the political system for the better, said an adviser to the banks association who asked to remain anonymous.
The adviser also warned that if the existing, long-ruling political class hangs on to power, the economic costs of the blast could lead to lower recovery values.
(Editing by Mark Heinrich)
