Lebanese bond investors could see their holdings reduced by 75%, Goldman Sachs said, if the newly formed government resolves the losses in the financial system, undertakes credible reforms and unblocks funding from the International Monetary Fund.
Lebanon defaulted on its international debt in March 2020 after years of political upheaval and economic mismanagement rendered it unable to service a debt that Goldman Sachs estimated at over 300% of GDP at current market exchange rates.
After a year of political stalemate, a new government was formed this month under Najib Mikati, with three-quarters of the population now in poverty after one of the deepest depressions in modern history.
“Parliament’s ratification of the Mikati government on Monday represents the first step on a long and narrow road to Lebanese economic recovery which is likely to be fraught with pitfalls and risks,” Goldman said in a report this week.
The bank’s debt recovery projections are based on assumptions that include a strengthening of the Lebanese pound to 8,000 per dollar over the medium term from around 14,500 in the parallel market currently, as well as negative or low real interest rates. on public debt, and certain levels of economic growth and adjustment of the budget balance.
“Given these assumptions and constraints, we arrive at an estimated discount to the face value of the current Eurobonds of 75%,” he said.
Solving the losses in the financial system will be the government’s first challenge, Goldman said, estimating the banking sector’s foreign currency liabilities at $ 70 billion, compared to $ 13 billion in usable reserves at the central bank.
It would also need to launch comprehensive reforms to address the weaknesses that led Lebanon to the crisis.
“Given our view that an IMF program is needed for Lebanon, early engagement with the fund is an important precondition for discussions with creditors and eventual resolution of the default,” Goldman said.