Can Lebanon’s new government revive the economy?
After three months of political paralysis, Lebanon has finally formed a government under Prime Minister Hassan Diab. Now comes the task of saving the country from a biting financial crisis and winning over investors and foreign donors.HOW LIKELY IS A DEBT DEFAULT OR RESTRUCTURING?Lebanon’s public debt burden, equivalent to around 150% of GDP, and its twin current account and fiscal deficits looked unsustainable even before anti-government protesters took to the streets three months ago.With many of the international sovereign bonds trading at less than half their face value, market observers see an increasing likelihood of Lebanon struggling to repay some of its obligations and seek a restructuring with creditors at some point.One of the first tasks of the government will be to decide whether to proceed with a central bank proposal to ask local holders of some of this year’s bonds, including a $1.2 billion issue maturing in March, to swap them for longer-dated ones to ease pressure on state finances.Any move to delay bond repayments could constitute a default in the eyes of credit rating agencies and risk pushing its credit rating further into junk territory.IS A CURRENCY DEVALUATION A GIVEN?The Lebanese pound’s 22-year-old peg to the U.S. dollar has been strained to near breaking point by the country’s political and banking crisis.With the pound losing roughly a third of its official value on the black market as dollars have dried up, a devaluation has loomed increasingly large.
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IS A WORLD WAR ABOUT TO BEGIN?