Fitch warns of debt default in Lebanon

Rating agency Fitch has warned that Lebanon is likely to default on the huge debt facing the country.

The warning follows another sovereign bond downgrade – the third of the year – amid months of ongoing political unrest.

Lebanon’s credit rating now stands at CC with Fitch. The agency said that this new rating reflects the likelihood of debt restructuring or default “owing to acute political uncertainty, de facto capital controls and damaged confidence in the banking sector”.

Public debt in Lebanon is currently equivalent to roughly 15% of GDP making it one of the heaviest debt burdens in the world.

Furthermore, says Fitch, the central bank, Banque du Liban (BdL), currently has dollar liabilities in excess of its foreign reserves. Lebanon relies heavily on BdL to service its debt.

And in turn, the central bank relies on remittances from overseas to bolster its foreign reserves. However these have dried up in recent months after commercial lenders imposed bans on overseas money transfers and dollar withdrawals.

Fitch warned that the “rationing of US dollars to prioritise repayment of government debt may become a more politically charged issue”.

Following Fitch’s downgrade, Lebanon’s caretaker prime minister Saad Hariri, who resigned at the end of October, said he had talked to the International Monetary Fund (IMF) and World Bank about possible “technical assistance” and told them he was committed to arranging an urgent economic plan that could be implemented once a new government is formed in Lebanon.

Meanwhile fellow rating agency S&P Global has lowered its long-term issuer credit ratings on three Lebanese banks – Bank Audi, Blom Bank and Bankmed – to selective default status.

The action was prompted by a circular from the BdL asking the banks to pay in Lebanese pounds, half of the interest due on customers’ dollar-denominated deposits.

“In our view, the latest move, following a number of recent measures, further limits depositors’ access to their funds,” S&P Global wrote in a statement.

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