Thread by @GrundSebastian

Today, I had the honor to give a presentation on the Lebanese sovereign debt restructuring to members of the @Harvard Club of Lebanon.

My presentation can be found here: drive.google.com/file/d/19cexHp…

The recording here: zoom.us/rec/share/6Msp… (Password: 6M*7.Y2p)

THREAD 1/x

https://twitter.com/dan_azzi/status/1265690621911728128

First, 🇱🇧 - like Argentina - has already been in a difficult financial situation when the #Covid pandemic hit. Yet, the context within which 🇱🇧 will restructure its debt should not be forgotten and the pandemic could give 🇱🇧 a stronger hand in negotiations. 2/x

Given the lack of debt sustainability, the 🇱🇧 government has already announced that a comprehensive debt restructuring will be part of the Economic Recovery Plan and will include both foreign currency (Eurobonds) and local currency (mainly LBP T-bills). 3/x

1. Eurobonds:
While the size of the haircut will be heavily disputed, the 🇱🇧 government's plan aims at a principal & coupon reduction of $15-18bn of the outstanding Eurobonds (USD-denominated) [a +50% haircut, given $31bn in outstanding Eurobonds] 4/x

The restructuring of the 29 NY-law governed Eurobonds series could either be done cooperatively (by relying CACs) or coercively (essentially through exit consents or unilateral default). 5/x

The cooperative approach seems difficult, given that 🇱🇧's Eurobonds do not allow for cross-series modifications (latest ICMA standard) but require a majority of 75% of bondholders to accept a restructuring. According to reports, some funds have built blocking positions. 6/x

The coercive approach would involve the use of exit consents and essentially exploit ambiguities in the Fiscal Agency Agreement. Details are technical but it's a risky approach. See for a discussion of the issue by Mitu Gulati here: creditslips.org/creditslips/20…. 7/x

The litigation threat is real, not least since some creditors acquired blocking positions. Against this backdrop, the 25% approval threshold to accelerate Eurobonds should not be an issue. Still, the route is littered with obstacles and the holdout business is expensive. 8/x

As a sovereign, 🇱🇧 enjoys certain immunity wrt the attachment of public-sector assets - only "commercial" assets (such that are used for commercial purposes by the government) can be attached by creditors abroad. Shares in companies could be an attractive target. 9/x

2. Domestic debt:
There are different visions in 🇱🇧 wrt to the domestic debt (63% of total debt). While the 🇱🇧 commercial banks ask for a soft reprofiling, the government has announced its intention to impose a (big) haircut on domestic 🇱🇧 debt (also hitting depositors). 10/x

The legal risks of restructuring domestic debt are more manageable, since the instruments are governed by 🇱🇧 law. (see, e.g., Greek debt restructuring of 2012). The ultimate safeguard for investors is the 🇱🇧 Constitution (and limits to expropriatory measures). 11/x

Certainly, the domestic debt restructuring is more a political than a legal issue. The 🇱🇧 government and the commercial banks have different visions wrt to the distribution of losses - the negotiations will show which side will have the upper hand. 12/x

Another important issue is the @IMFNews's involvement. The pros of obtaining an IMF program seem to outweigh the cons, but the 🇱🇧 government will have to lobby hard (esp. with the 🇪🇺 & the 🇺🇸) to ensure approval in the @IMFNews Executive Board to obtain exceptional access. 13/x

The @IMFNews will likely require an upfront debt restructuring. The Fund will not only be critical to provide the necessary external financing (we are talking about +$10bn) but also to mediate between creditors with a view at providing the necessary level of credibility. 14/x

To conclude, difficult policy decisions in 🇱🇧 are both inevitable and necessary. A restructuring of both the Eurobonds and the domestic debt is a necessary yet insufficient condition to bring 🇱🇧 back to a sustainable growth path. 15/x

There are several issues I did not address in this presentation, most notably the role of USD certificates of deposits, the BDL reserves, the discussion on the use of the 🇱🇧 gold, etc. 16/end