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governmentMay 26, 2021

Government debt restructuring, asset write-downs to hit Lebanon banks

Resolving the political deadlock in Lebanon is critical to starting the restructuring process, says S&P


More than a year after the Lebanese government defaulted on its foreign currency obligations, pressure on the banking system is still mounting, according to S&P Global Ratings.

In a report titled 'Calculating The Cost Of Lebanon's Bank-Sovereign Doom Loop', the ratings agency said it estimates government debt restructuring and asset write-downs could cost Lebanese banks up to 134 percent of forecast 2021 GDP.

'With banks struggling to raise capital, we believe bailing in depositors, in some form, is likely if the banking sector is to absorb the high costs of restructuring,' said S&P Global Ratings credit analyst Dr. Mohamed Damak.

Last year the Lebanese government defaulted on its foreign currency obligations, putting pressure on the banking system. The COVID-19 pandemic's economic impact, the Beirut port blast last August, Lebanon's ongoing political deadlock, and a run on deposits that's only been partly slowed by Lebanon's ad hoc capital restrictions, have exacerbated the situation.

“Resolving the political deadlock in Lebanon is critical to starting the restructuring process, and delays could complicate a recovery,' said S&P Global Ratings credit analyst Zahabia Gupta. 'The main stumbling block to restructuring appears to be that Lebanon is currently functioning with a caretaker government without authority to agree terms with creditors.'

S&P estimates that the cost for banks could range from 30 percent to 134 percent of Lebanon's estimated 2021 GDP, before the impact of potential currency devaluation.
Due to the size of the problem, “we believe shareholder or external funding alone will probably be insufficient to absorb those costs. Bailing in depositors, in some form, is likely if the banking sector is to absorb the high costs of restructuring,” Gupta said.

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