Eurobonds: The Lebanese Government Must Not Waste Time
The word "crisis" could almost serve as the headline for every issue concerning the state in Lebanon, across both public administrations and public services. The crisis in public administration encompasses civil registry offices, land registries, the Motor Vehicle Registration Department, and other agencies. The crisis in public services, meanwhile, is far from limited to electricity, road maintenance, drinking water authorities, waste treatment, and sanitation, among many other crises. Yet the most prominent crisis remains that of public debt and public finances, as its effects reverberate across all state administrations and public services.
Within this context, the issuance of Lebanese foreign-currency treasury bonds (Eurobonds) stands as an expression of the public debt crisis and one of its clearest direct manifestations. The Lebanese government has resorted to borrowing in US dollars since 1994, following the growth of public debt driven by the persistent deficit in the 1993 budget. One reason for turning to Eurobonds was a declining appetite among domestic capital holders to subscribe to bonds denominated in the national currency, despite their high interest rates.
In its report for 1994, Banque du Liban considered the Eurobond issuance an achievement for Lebanon, as the first Arab country to tap international financial markets for borrowing. What escaped the report's author was that state borrowing in a foreign currency in which it has no steady income is an operation fraught with risk, since any appreciation of that currency against the Lebanese pound swells the public debt and leaves the state unable to meet its obligations.
The first tranche of Eurobonds issued by the Lebanese government came on 14 October 1994, valued at $400 million in US dollars and maturing in 1997, three years after issuance. These bonds were divided into three denominations of $1,000, $10,000, and $100,000 in US dollars. Subsequent Eurobond issues followed annually with progressively longer maturities, some reaching ten years instead of three, while their interest rates ranged between 7.4% and 10.89%.
Eurobonds were adopted because their interest rates were lower than those on bonds denominated in Lebanese pounds, in an effort to reduce the cost of public debt and relieve the domestic financial market of the pressures caused by state borrowing. Issuing Eurobonds made it possible, on the one hand, to lengthen the maturity profile of the public debt after maturities on national-currency bonds had been limited to a single year, and, on the other, to lower borrowing costs that in some issues had approached 35%.
Most Eurobonds were issued to redeem maturing debts and their interest. On the eve of the suspension of payments on due installments in March 2020, the total face value of these bonds stood at approximately $13.31 billion, with maturities extending to 2036. By then, the trading price of Lebanese Eurobond issues had fallen to less than 38% of their face value at maturity.
Defaulting on Eurobond obligations on 7 March 2020 constituted one more crisis added to the sum of Lebanon's crises rather than the cause of the financial crisis that continues to batter the country. Indeed, mounting public debt and its rising ratio to domestic output fueled growing doubts among both domestic and foreign creditors over the solvency of the Lebanese state and its capacity to repay, leaving Lebanon unable since 2017 to sell its bonds on global financial markets.
Notably, Lebanon's foreign-currency obligations are not confined to Eurobonds, but also include the concessional loans obtained under the resolutions of the Paris I, II, and III conferences. By the end of 2000, shortly before the Paris I conference convened, Lebanon's public debt-to-GDP ratio had reached 151%, while debt-servicing costs consumed 89% of total state revenues. All these conferences ultimately achieved was to widen the Lebanese authorities' room for maneuver to maintain relative control over the public debt crisis, contain its immediate risks, and postpone its maturities, without producing a solution.
Neither Eurobond issuances nor the concessional loans and grants provided by the successive Paris conferences since 2001 proved effective against the chronic deficit in the public budget. Nor did the efforts of the CEDRE conference succeed in pushing the Lebanese government to undertake structural reforms capable of boosting state revenues and raising their share of gross domestic product, alongside rationalizing expenditure and managing and containing the public debt through a fiscal policy designed to narrow the budget deficit.
Suspending payments on maturing Eurobonds had its justification on the eve of the decision, particularly as Eurobonds were trading on financial markets at roughly 38% of face value, or just 38 cents, leaving no rationale for paying their full face value of 100 cents. Today, however, the time has come for the government to move to buy back Eurobonds from their foreign holders, especially now that the price of Eurobonds, including accrued interest, is approaching 7 cents, the lowest level recorded for sovereign bonds, meaning that $1 billion would suffice to retire $10 billion in debt.
Accordingly, stalling on addressing the Eurobond crisis deprives Lebanon of the opportunity to take advantage of the depressed price these bonds have reached, since any positive domestic development, such as the election of a credible president of the republic, will inevitably drive the price higher. Further delay could also allow hedge funds specializing in buying distressed debt, such as Lebanese Eurobonds, to acquire them at rock-bottom prices and subsequently file lawsuits aimed at securing the highest possible payout in order to turn a profit.
Acquiring Lebanese Eurobonds for the state at current low prices is no less important than finding a solution that ensures depositors recover the bulk of their deposits in Lebanese banks. The more the Lebanese state sheds its external obligations at a reasonable cost, the greater its capacity to meet its domestic obligations. Otherwise, the Lebanese will pay with their own future and that of their children for the paralysis and hesitation of officials, having already paid with their life savings for those officials' disregard for their responsibilities and reckless squandering of the nation's resources.
Translated from Arabic with AI. Read it in Arabic