Desperate for Relief, Lebanon Hatches Plan to Avoid Default

(Bloomberg) --

Lebanon's government is lurching from one extreme solution to another as it wrangles over whether to repay $1.2 billion of notes maturing in five days.

In the latest twist of its effort to avoid a default, it may revive an offer for a debt swap with local holders of its Eurobonds. At a meeting with bankers Tuesday, the finance minister suggested that Lebanese banks swap their entire Eurobond holdings for new debt with lower coupons, a person familiar with the talks said.

The government would, under this scenario, pay around $3.5 billion in principal and interest this year to foreign bondholders, said the person, who asked to remain anonymous because the information isn't public.

Lebanon has not submitted a proposal to bondholders to move into new longer-dated notes with lower coupons, Finance Minister Ghazi Wazni said in a statement Wednesday.

A separate idea is for local banks to try to buy back Eurobonds held by international funds, according to two people familiar with the matter. Lebanese officials have said it would be harder for the nation to reach a restructuring agreement if foreigners owned large amounts of its bonds.

The deliberations come as several politicians, including House Speaker Nabih Berri, call on Lebanon to default and preserve its falling reserves for vital imports such as food and medicine.

One of the world's most indebted nations, Lebanon is desperate for relief from a burden many economists say is unsustainable. Among the few options left to avoid a default is a swap with local lenders, the biggest holders of Lebanon's sovereign debt with $13.8 billion of Eurobonds at the end of December, or nearly 44% of the total.

Another way out for Lebanon is thorough a loan program from the International Monetary Fund. Although IMF experts held meetings in Beirut last week, the issue of securing financing from the fund has become politically charged. Hezbollah, an Iran-backed group that has a major say in government and parliament, has rejected the idea.

A previous swap proposal unraveled after rating companies said they might view it as a distressed exchange and downgrade Lebanon.

Local banks have lobbied against a default and said the country should live up to its spotless track record of repaying debt. The likelihood of a restructuring has only grown, however, after the government hired financial advisers Lazard Ltd. and law firm Cleary Gottleib Steen & Hamilton last week.

Few Options

Since the central bank first proposed swapping domestic holders into longer-dated notes in January, local banks offloaded some of their Eurobond holdings at a discount to overseas investors such as Ashmore Group, a British fund that's bet the government would pay out. Most of the country's dollar bonds trade at less than 30 cents, while the March 9 notes trade at 59 cents.

READ: Lebanon Said to Probe Sale of Bonds Bought Mainly by Ashmore

The transactions are now at the center of a government investigation. The Justice Ministry has asked the public prosecutor to investigate the sales on the ground that local banks might have obstructed the government's efforts to restructure debt.

--With assistance from Paul Wallace.

To contact the reporter on this story: Dana Khraiche in Beirut at dkhraiche@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Paul Wallace

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