Lebanon default "probable", deposit grab "possible" - Fitch

Lebanon’s precarious finances mean the crisis-hit country looks likely to default on its debt in some way and could even launch a Cyprus-style grab for savers’ bank accounts, Fitch’s top sovereign analyst said.

Lebanon’s debt problems have jumped back into focus this week after reports emerged of a bid by authorities there to try and delay some of this year’s bond repayments.

A Lebanese source told Reuters that ratings agencies had told the authorities that the plan would constitute a “selective” or “restricted” default, ending its so-far unblemished rating record and potentially triggering further problems.

Fitch’s head sovereign analyst James McCormack told Reuters a distressed debt event (DDE) is defined as when there is a material reduction in terms. That includes a maturity (payment deadline) extension to avoid a default.

“At the time of announcement, the rating would likely be downgraded to ‘C’. When the exchange was complete, the rating would likely be downgraded to Restricted Default ‘RD’,” he said in an interview. It currently rates it ‘CC’

More would likely follow, McCormack added. Deep in political turmoil, Lebanon is grappling with its worst economic crisis in decades and battered confidence in its banking system.

The risk of default and its need to rethink a 23-year-old currency peg has risen in a country with one of the world’s biggest foreign debt burdens at around 150% of it annual economic output.

“We think the finances are precarious and a restructuring of some sort is probable,” McCormack said.

The timing of it is less clear, though: “When we look at the repayment profile of the government, it looks manageable relative to the size of foreign exchange reserves the central bank has.”

“It looks OK, a little bit tight shall we say, but if the inflows don’t materialize it really becomes more urgent.”

Lebanon has $2.5 billion in Eurobonds due this year including a $1.2 billion bond set to mature in March.

There has been speculation among bankers and in local media - but ruled out by the central bank - that Lebanon could even copy Cyprus’ move when it took money from better-off savers during its debt crisis.

“That is definitely possible but for us on the sovereign side, that is not necessarily a default,” McCormack said.

“A default is narrowly defined as the government not paying its debt obligations on time.”