Debt Relief

Even before the coronavirus arrived in Lebanon in late February, its economy was in freefall. Unemployment was thought to be as high as 25%, inflation was accelerating into double-digit rates, and, according to the World Bank, 40% of Lebanese were classified as poor. As noted in a previous essay (Crises), default on a US$1.2 billion Eurobond repayment due March 9 seemed imminent, especially as net foreign-exchange reserves held by the Banque du Liban, the central bank, were insufficient to pay for even essential imports.

On March 9th, Lebanon did not repay the $1.2 billion Eurobond. This was the first sovereign default in the country’s history; even through the civil war years in the 1980s, Lebanon had managed to meet debt obligations. Upcoming dollar-bond repayments of similar amounts are due this month and in June, but bond investors clearly do not expect anything like orderly maturity, with Lebanon’s Eurobond prices having now sunk to record lows in the range of 30-60 cents on the dollar. The new Lebanese government, perhaps acting on the advice of the IMF, has hired Lazard Ltd. and the New York law firm Cleary Gottlieb Steen & Hamilton as advisers in order to restructure its entire debt load, estimated to have reached 170% of its gross domestic product. Seeking financial aid directly from the IMF is at best complicated; Hezbollah, the Iran-supported militant and political group, strongly objects to IMF involvement, suspecting that institution’s usual program of fiscal austerity would hurt the poor disproportionately and be used by the United States as political leverage.

If Lebanon is the world’s poster child for unsustainable debt load, it’s hardly alone. The government’s efforts to restructure debt come at a time when major international lenders have just this past week agreed to debt relief for some 76 poor countries severely impacted by the coronavirus pandemic. French Finance Minister LeMaire announced debt payments, worth at least a combined $20 billion, would be suspended by official and private creditors, a move fully backed first by Group of Seven finance ministers and central bank governors, and subsequently endorsed by Group of Twenty officials, at least until the end of 2020. As well, the IMF on Monday announced $215 million in initial debt relief grants to 25 countries from its Catastrophe Containment and Relief Trust, a facility the IMF is aiming to expand to $1.4 billion. There are now even calls for outright debt cancellation, with LeMaire saying that African countries should be helped by “massively cancelling their debt”, and calling for broader cancellation on a case-by-case basis in co-ordination with multilateral lenders, particularly the World Bank.