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Lebanon’s Debt Fix Now Hinges on Central Bank After Lenders Balk

Jun 25

Lebanon’s Debt Fix Now Hinges on Central Bank After Lenders Balk

Banks are unwilling to buy Treasury bonds offered at 1% rate Lebanon budget delays, regional turmoil are spooking investors

Lebanese lenders are turning against a government plan to coax them into buying Treasury bonds at lower interest rates, leaving the central bank to go it alone as regional turmoil and budget delays keep the market on edge.

Finance Minister Ali Hassan Khalil said in May that the government wanted to issue 11 trillion pounds ($7.3 billion) of the securities at a rate of 1%, allowing it to cut 1 trillion pounds from the cost of servicing debt under this year’s draft budget. Lenders won’t agree to purchase the bonds at a 10th of the market rate, according to Makram Sader, secretary general of the Association of Banks in Lebanon.

The central bank will most likely handle the program alone, with the details made clearer after parliament approves the final version of the budget, an official familiar with the matter said.

Lebanon, one of the world’s most indebted nations that spends almost half its fiscal revenue just on interest payments, has relied on commercial lenders and the central bank to keep its finances afloat. With at least three times as many Lebanese living abroad than at home, the economy has been sustained by remittances, mainly from the Gulf and Africa, which banks then use to buy government debt.

Banks are “not willing to buy any financial instrument issued below market rates,” Sader said by email. Their refusal isn’t just an issue of liquidity constraints but also reflects the industry’s cost-to-income ratio, a measure of profitability, he said.

The central bank and the Finance Ministry didn’t respond to requests for comment. Speaking on Monday to the Lebanese television channel MTV, Khalil said he expected the goal of issuing 11 trillion pounds of Treasury bonds to be met. The central bank is the “essential element” of the plan, he said.

Despite the risk of further increasing Lebanon’s cost of funding, the Finance Ministry last year issued Treasury bills at market rates for the first time in seven years to appeal to local lenders, which have instead been depositing their money at the central bank for higher rates.

Lebanon’s government approved its much delayed 2019 budget last month, along with spending cuts, additional taxes and fees, and a hiring freeze in the public sector. It projected a deficit of 7.6% of gross domestic product, down from 11.4% in 2018, and assumed a lower cost of debt servicing under the minister’s plan. The budget was referred to parliament for final approval.

Lebanon committed itself last year to a drop in its deficit by a percentage point annually in the next five years along with other measures to unlock $11 billion in funding pledged by international donors. In a sign that investors are losing confidence, Lebanese Eurobonds have entered distressed territory as political squabbles stall economic reforms.