Lebanon’s international bondholders are close to appointing a financial adviser as restructuring talks with the authorities finally look set to resume five years after the Middle East country defaulted.

Negotiations faltered in 2022 after the Lebanese government refused to accept proposals by the International Monetary Fund. That saw the US$29bn of defaulted Eurobonds by value mostly fall to a cash price of just six cents in the dollar as the country descended into economic chaos.

The situation was exacerbated by irregularities at the central bank, culminating in long-serving governor Riad Salameh stepping down in 2023. The banking system has since been in stasis, with deposits mostly frozen and banks having to accept they will need to be recapitalised as part of the restructuring.

But after two years of caretaker government and following last year's partial collapse of Iranian-backed paramilitary organisation Hezbollah, a new technocratic government has taken control, led by an ex-army chief and a member of the judiciary. It is seemingly prepared to restart negotiations with the IMF, which could lead to talks with Lebanon’s creditors.

Since the ceasefire was agreed between Israel and Hezbollah in November, bond prices have tripled to 18 cents.

Over the past week, IMF staff have visited Beirut. Ernesto Ramirez Rigo, IMF mission chief, said he met president Joseph Aoun, as well as prime minister Nawaf Salam, cabinet ministers and representatives from the Banque du Liban and welcomed their request for a new programme.

“Lebanon’s economy remains severely depressed, and poverty and unemployment have been exceptionally high since the 2019 crisis,” Ramirez Rigo said. "The banking sector collapse continues to hamper economic activity and provision of credit, with depositors unable to access their funds.

“A comprehensive strategy for economic rehabilitation is critical to restore growth, reduce unemployment, and improve social conditions. The IMF stands ready, together with the international community, to support the authorities’ efforts in addressing these challenges.”

Ramirez Rigo said that financial sector restructuring was an essential part of reviving the economy, alongside making Lebanon’s debt sustainable.

New model?

One financial restructuring adviser said it was important for bondholders to make sure they are a central part of the reform process. Previously, banking was a significant part of Lebanon’s economy, but it was not clear what the focus would be in future.

“What is the new economic model? Banks will still be needed, of course, so the big question is how to restructure the banking sector,” he said, noting that banks no longer hold as many government bonds as they once did.

Traditionally, major banks have been dominated by different political factions in Lebanon, making their restructuring unusually sensitive.

Elections are due next year giving an incentive for an IMF programme and accompanying debt restructuring proposals to be agreed by then, said the adviser. Once that is underway then pledges of money by Saudi Arabia and other bilateral lenders could be released.

“If the situation normalises a bit, then the economy could come back quickly,” he said.

New members

Six firms – Rothschild, Newstate, Alvarez & Marsal, Houlihan Lokey, GSA and Centerview – are understood to have been invited to pitch to the ad hoc bondholders group, which has added four members to the original five institutions that previously made up the group.

The new investors are Greylock, GMO, Morgan Stanley Investment Management and Neuberger. Law firm White & Case is advising the bondholders, with Lazard and Cleary Gottlieb advising the government.

Lebanon’s last IMF assessment for 2019, the year before default, put its debt-to-GDP ratio at an eye-watering 178%. Since then, GDP is estimated by the World Bank to have fallen by 40%, increasing the proportion of debt to around 300% of Lebanon’s economy. That would suggest heavy losses for the country’s creditors.

“The numbers are all over the place. Nominal GDP could be anything from US$18bn to US$33bn,” said a second financial restructuring adviser. “Frankly, no one has any serious number to base things on at the moment.”

The World Bank in a report this month estimated reconstruction costs at US$14bn. One glimmer of hope is that the value of domestic government debt, mainly held by banks, has shrunk significantly because of rampant inflation in recent years.

The second adviser said he expects talks to recapitalise the banks to run in parallel with negotiations with creditors, meaning a deal could be concluded more quickly than the impasse of the past five years might suggest.

“The tricky aspect will be how to restructure the central bank itself, which also needs recapitalising. That has never been done before in a sovereign debt restructuring context.” The central bank is estimated to have a shortfall of US$45bn, dwarfing other government liabilities.