S&P Ratings Downgraded Lebanon’s Foreign Currency Rating to “selective default”

On Saturday 7 March 2020, Prime Minister Hassan Diab announced that Lebanon for the first time will not pay a $1.2B Eurobond due on March 9 and will seek to restructure its massive debt which reached $91B in 2019. Potential options include haircuts on principal and coupon payments, as well as an extension of maturities. In fact, BDL foreign currencies reached $28.96B at end Jan.2020 and “have hit critical levels and are needed to meet the basic needs of the Lebanese people”.

On March 11, 2020, following the decision, S&P Global Ratings lowered its foreign currency sovereign ratings on Lebanon to ‘SD/SD’ (selective default) from ‘CC/C’. Meanwhile, it maintained its ‘CC/C’ grade for the Local currency with negative outlook.

 The agency said that it would most likely remove the ratings from ‘selective default’ once any debt exchange or restructuring agreement between Lebanon and its creditors became effective. However, the negotiations might be complicated and challenging.  In fact, Lebanon has not yet requested financial assistance from the IMF which does not encourage other international donor financial support. In addition, one investment fund is holding more than 25% of the Eurobonds maturing in 2020, giving it the ability to block restructuring terms. Most importantly, any haircut on principal and coupon payments might have sever effects on Lebanese depositors and the economy since more than 60% of the outstanding Eurobonds are held by Lebanese commercial banks and the central bank (Banque du Liban).

Moreover, the agency stated that it might lower the local currency grade’s to ‘SD’ if the government signals that it will restructure local currency debt in addition to the Eurobonds.

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