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Lebanon Bond Repayment Wins Time for a Nation in Crisis

Dana Khraiche
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Lebanon Bond Repayment Wins Time for a Nation in Crisis

(Bloomberg) -- Lebanon repaid a $1.5 billion Eurobond on Thursday, an official with knowledge of the matter said, buying the country time as speculation swirls over its ability to avoid a default during a political and economic crisis.

The Finance Ministry issued payment instructions to the central bank, also known as Banque du Liban, the official said on condition of anonymity. The next bond payment is scheduled for March, when a $1.2 billion Eurobond comes due.

Lebanon has never defaulted on its obligations despite struggling under one of the world’s biggest debt burdens, and the central bank had repeatedly said it would cover the $1.5 billion bond. But weeks of nationwide protests that ousted the government saw credit risk surge and investor confidence slump.

The yield on the March 2020 bond rose as high as 105% last week from a mere 13% on Oct. 17, when the demonstrations kicked off. Higher yields, and this month’s record costs for insuring government debt, reflect concern the government may have to restructure sooner or later.

Foreign bondholders are estimated to hold $500 million of the repaid Eurobond, while the central bank has $600 million and the rest is most likely held by local banks, according to a Bank of America Merrill Lynch research note this week.

On Wednesday, the Finance Ministry sold two bonds, each valued at $1.5 billion, to the central bank, a person familiar with the issue said. They were a 10-year bond issued at 11.5% and a 15-year bond at 12%, according to the person, who asked not to be identified.

The ministry delayed plans to issue up to $3 billion in Eurobonds to the central bank and local lenders earlier this month due to the unrest. The government was supposed to use part of the money to repay the central bank after the latter had paid some $3 billion in maturing debt this year.

Day of Reckoning

Lebanon is nearing its day of reckoning after years of overspending, borrowing and political paralysis, coupled with the crisis in neighboring Syria that sent more than 1.5 million refugees into the tiny country.

With a current account deficit of over 25% of its gross domestic product, weak growth and debt that’s reached 155% of the economy, the central bank tried to maintain financial stability throughout the years and carried out what it called financial engineering. The operation was meant to shore up reserves and raise the capital of local banks, the country’s largest debt holders.

The protests were sparked by a government levy on phone calls such as those using the free WhatsApp service along with other tax measures. The demonstrations quickly turned against a ruling class accused of corruption. Prime Minister Saad Hariri resigned and politicians have been unable to agree on a new name to lead the next government.

The central bank began rationing dollars even before the unrest ignited, pushing up demand for the foreign currency and causing the Lebanese pound to plummet on the black market. The move has stymied trade and imports in a country that’s almost entirely reliant on foreign goods.

The central bank has said that it would supply dollars to the importers of fuel, wheat and pharmaceuticals and earlier this week added medical equipment to that list of essential goods.

(Updates with ministry bond issuance)

To contact the reporter on this story: Dana Khraiche in Beirut at dkhraiche@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Mark Williams, Paul Wallace

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