New finance chief says Lebanon to decide on March bond next week

Beirut: Lebanon’s incoming Finance Minister Gazi Wazni said the fate of debt maturing in March will be the new government’s top priority when it meets next week, as investor concerns intensify that the country could default on its next payment.

“Next week, the government will meet and decide on this,” Wazni said Wednesday in his first interview with an international news organisation. “This is a priority and will be the first item to be discussed.”

Despite Lebanon’s unblemished record of paying creditors, bond investors have all but priced in a sovereign default. Still, they differ on when it would happen and whether foreign investors were likely to be exempt.

A proposal to have local banks swap their holdings of the $1.2 billion Eurobond due March 9 with longer-dated instruments in the central bank’s portfolio was rejected by the Finance Ministry after rating companies warned of a downgrade.

To keep its currency peg intact and finance foreign-currency obligations, Lebanon has relied on the millions living abroad to send remittance through local banks, which, along with the central bank, hold most of the country’s debt. With inflows slowing, cracks in the financing model have appeared, risking the decades-old exchange rate.

Speaking by telephone hours after the new cabinet convened for its first meeting at the presidential palace in Beirut, the minister said he doesn’t see a devaluation in the short term, despite the emergence of a parallel exchange-rate market for increasingly scarce dollars.

Wazni, who has a PhD from Paris Dauphine University, served as an adviser to the finance and budget parliamentary committee for two years. He was appointed late Tuesday after the president approved the formation of a new government to replace former Premier Saad Hariri’s cabinet.

The political breakthrough injected calm into financial markets. Lebanon’s debt maturing on March 9 rose 0.6 cent to 83.8 cents on the dollar on Wednesday, adding to a 4 cent gain over the past two days.

The cost of insuring Lebanon’s debt against default for six months fell for a third day, after surging above 10,000 basis points last week. The credit-default swaps have fallen to 9,637 basis points, from around 10,280 basis points on Friday.

Hariri resigned in late October in the face of mounting protests that accuse the political elites of rampant corruption and worsening living conditions. Protests have turned violent in recent days with hundreds injured in scuffles between riot police and demonstrators.

Debt tightrope

One of the world’s most indebted countries, Lebanon is succumbing to a financial crisis that’s seen local lenders and the central bank ration US currency, leading to the rise of a parallel rate higher than the peg of 1,507.5 per dollar. The International Monetary Fund has said that Lebanon’s effective exchange rate is “significantly overvalued.”

Wazni said the parallel rate would ease as the government seeks to restore confidence and show needed action.

“We have two exchange rates now and government formation doesn’t change,” Wazni, an adviser to veteran Parliament Speaker Nabih Berri, said. “But the rate at the parallel market will depend on restoring confidence and the actions of the government.”

In separate remarks broadcast on a local television station, Wazni said it was nearly impossible for the parallel rate to return to its original level.

Lebanon needs external funding to break the grip of its financial and economic crisis, Wazni said, but added that it was too early to speak about whether the government would seek financing from the IMF.

He said the new line-up faces several challenges and should implement an overhaul that reassures the local market as well as the international community.

Under Hariri, the cabinet failed to implement much-needed reforms that would have unlocked $11 billion in international aid meant to boost the country’s ailing infrastructure. Lebanon’s usual allies in the Gulf have said they would help it get out of the crisis, yet nothing has materialised.