After default, Lebanese bond holders meet to discuss restructuring of debt

Lebanon will today begin the process of restructuring its $30 billion-plus Eurobond debt with an investor presentation.

Lebanon’s economy, which hinged on high-interest borrowing to finance imports, government salaries, debt payments, and social programs, came crashing down last year amid a dollar shortage to the country. Beirut has since experienced widespread protests and its first sovereign default.

Though it will be far from painless, one of the more probable ways out of this crisis will be to seek a loan from the IMF, which would establish some credibility with bondholders during restructuring talks. However, IMF loans are usually conditional. The Fund would likely seek a dramatic hike in the country’s value added tax. Such a change is vehemently opposed by the government as it would hurt everyday citizens and probably spark another round of mass protests.

Even if lenders agree to restructure, they are likely to see payments pushed back at least five years with cuts of, at minimum, 50%. This could serve to functionally lock Lebanon out of capital markets for years. In the long-term, Lebanon must restructure its economy by promoting the development of domestic industries and decreasing its reliance on imports. However, this will prove difficult, if not impossible, if Beirut cannot gain access to foreign investment at (somewhat) reasonable interest rates.

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