What are the scenarios for recoverable Eurobonds after May Elections?

In light of the upcoming parliamentary Elections in Lebanon, we reflect that it has been over two years since the Lebanese government has defaulted on its Eurobonds, without providing a clear plan of action to restructure or make reforms. Bank of America established three different scenarios going forward after the Parliament Elections, in order to assess whether the Lebanese Eurobonds are recoverable. In this note, we will briefly discuss this article, and state our opinion (see “Lebanon- Are the Eurobonds recoverable?” Emerging Insignt, Bank of America Global Research, 31 March 2022).

An IMF mission is currently ongoing in Beirut, discussing the possibility of an IMF program implementation. Although, such programs are notoriously challenging, we expect that it will likely be well received by the market. Nevertheless, the political class might not be in favor of austerity measures prescribed by the IMF. In fact, the political class may not have any interest to implement IMF reforms nor to boost the local economy, but is simply playing for time ahead of May parliamentary elections. Self-preservation of the political class likely implicates preventing total collapse but not necessarily targeting a strong rebound in the economy. In fact, when looking back over the past two years, they demonstrated a lack of initiative and inaction, which keeps us cautious regarding the implementation of IMF reforms. Thus, Bank of America predicts the likelihood that investors will one day be able to review their investments, as follows:

In the first scenario, we assume that civil society and opposition gain majority seats in May parliamentary elections. This would translate into major support from the international community and would pave the way towards an IMF deal. Thus, it will enable strong inflows of Foreign currency into the country, and in turn will appreciate the national currency, pushing back the Lebanese economy to quickly return to growth.  This scenario is the least probable according to Bank of America (V-shaped recovery).

In the second scenario, we assume that civil society and opposition movements form a minority bloc in parliamentary elections. In this case, the political class might calculate its interests from striking an IMF deal. This compromise scenario could help stabilize the economy but the recovery would be more tepid than in the previous scenario. This demonstrates that post restructuring government debt will likely remain high. In this scenario, the earliest to conclude a restructuring deal could be mid-2023, assuming an IMF agreement is concluded soon. In the alternative where there is no near-term agreement, the earliest time where a restructuring could conclude would be in early 2024. This assumes a full year of negotiations would be needed to conclude negotiations with bondholders, in line with historical precedents and given the legal complexities surrounding the restructuring of Lebanese Eurobonds. This scenario has medium probability according to Bank of America (U-shaped recovery).

In the third and last scenario, we assume that the political class maintains the current status quo policy of economic adjustments without reforms. The political class could judge that negotiations with IMF were unsuccessful, and therefore did not reach a deal, alternatively, they may decide not to implement any IMF staff agreement. Following the parliamentary elections, BDL might stop the Fx intervention. This scenario would imply that the economy has not yet reached the bottom and gradual lirafication of Fx-denominated deposits could continue for the next several years. Therefore, the status quo could result in a lost decade for Lebanon and the process of lirafication could take 5-10 years to complete. As such, continued lirafication would further lead to currency depreciation and reduce domestic purchasing power and Eurobonds may not be recoverable. It is unclear if this scenario could prove sustainable or would result in social implosion. This scenario has medium probability according to the bank of America (L-shaped recovery).

In our opinion, the first scenario is the least probable as the vast majority of voters still follow a political party. We suspect that the third scenario will likely happen, as there will be no reforms. As such, Lebanese Eurobonds might never be fully recoverable. In addition, BDL will likely put an end to circular no. 161 (Sayrafa) due to limited foreign reserve after the parliamentary elections while continuing a gradual lirafication (BDL circular 151). As a result, the Lebanese currency will continue to depreciate, leading to high inflation and a decrease in purchasing power. Therefore, we encourage people to vote wisely.

By: Stephanie Aoun

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