TUE 31 - 3 - 2020
Feb 27, 2020
The Daily Star
A crucial issue and its repercussions
Paying Eurobonds loans or not repaying them on maturity is a crucial issue today due to its possible repercussions in the future on the country’s abilities to import food medicines and oil and its impact on the general dreadful state finances and of the confidence of the outside in Lebanon. But a recent sale by some local banks of the Eurobonds portfolio to foreign funds at a price of less than half of initial face value is a key factor that entered into play, because if Lebanon decides to pay these bonds when they are due on March 9 ($1.2 billion) and April ($600 millions) it will generate profits that may reach hundreds of millions of dollars to these funds in a short time and have they stand to realize a 60 percent profit margin in a few weeks.
Have any guarantees of payment on maturity been given to these funds that bought Eurobonds? Are these funds the only ones to benefit from the profit that can be made or they serve as a screen for a Lebanese investor behind? Are there any politicians who will pressure the state in the direction to pay the Eurobonds upon maturity for the benefit of partners or associates?
In any case, these sales will allow the concerned banks to escape accepting what the Central Bank offered, which is the replacement of long-term Eurobonds against the current bonds (Swap), which would have postponed any income to the banks in the foreseeable future. This deal also allows them not to face the restructuring of this debt, which would have forced them to reduce the value of the debt without firm guarantees of payment on the date of the new maturity.
But this sale to foreign funds, even if it has secured to Lebanese banks some hard currencies abroad and released them from bitter negotiations, has serious consequences for the country because these so called ‘’Vulture” funds will not hesitate in the event default or failure of negotiations to attempt to seize state assets, even if the seizure is not an easy matter. Legally, any owner of these bonds, has to file a lawsuit in New York in case of default, and is not allowed to seize “official assets.” However, there are fine lines between official and nonofficial assets.
In the event that Lebanon enters into negotiations to restructure the debt, which should have started weeks ago, then these negotiations will be very difficult, firstly because these funds now own the largest part of the bonds, and consequently are able to block any deal agreed to by the other creditors.
"Ashmore" fund alone, as an example, now owns more than 25 percent of the upcoming two maturities and therefore could legally prevent or block any agreement negotiated by other owners and could impose his own.
A cross-default risk also should be a consideration in negotiations with these funds.
Secondly, these funds negotiate as professionals and specialists in this field with their priority being to achieve the highest profit in the shortest period of time.
And thirdly, these funds will not agree in our opinion to restructure or reschedule the debt without a clear program from the state that can be implemented with realistic projections that appears convincing to them and that shows that the state will be able to pay in the agreed upon time.
Conceptually, this makes it attractive for local banks or their associates to use these foreign funds as a “front” to be able to pressure the issuer to pay on time or to agree to an advantageous restructuring, which they cannot obtain on their own locally.
Through these deals, some of the banks ignored the Swap offered by the Central Bank and unilaterally decided against it as it did in the case of the "Capital Controls" they imposed unilaterally and as most of them did when they did not respond to the capital increase requirement of the Central Bank that had to be finalized before the New Year 2019.
And if the state intends to pay on maturity, why didn’t the Central Bank jump in and bought these bonds at 40 percent of their face value or even less providing millions of dollars guaranteed profit to the Lebanese people within a matter of weeks?
Therefore, we believe that the state should move toward nonpayment of Eurobonds at this point and should immediately start negotiations with the help of international experts to reschedule or restructure this debt a move that will give priority to the very precarious financial position of the Treasury and deteriorating living situation of the citizens. This, despite the fact that some local banks sales as explained above, have now made negotiations more difficult and the outcome less favorable to the country.
In the event that the state decides to pay these debts on maturity, there will be a question mark as to the real objective behind this decision, given the questionable recent maneuvers of the banks and their backers laid out above.
Habib Zoghbi, Ph.D., a financial and economic expert, is honorary president of Harvard University Alumni Association in Lebanon and president of the Association of the Harvard Business School Club in Lebanon
The views and opinions of authors expressed herein do not necessarily state or reflect those of the Arab Network for the Study of Democracy
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