Lebanon Debt Plan May Need 70% Haircut, 50% Currency Drop, Capital Economics Estimates

  • Economics
Lebanon Debt Plan May Need 70% Haircut, 50% Currency Drop, Capital Economics Estimates

Lebanon formally requested the IMF’s technical help on Wednesday as it tries to avoid a full-blown economic collapse. Whether that turns into a formal bailout remains to be seen, but analysts have started to evaluate possibilities.

“Past experience suggests that this will involve haircuts (debt write-offs) of up to 70%,” Capital Economics’ Jason Tuvey wrote in a note.

That would wipe out banks’ capital, and the cost of re-capitalising the banks would come to around 25% of Lebanon’s gross domestic product. IMF technical assistance could help limit the strains.

A cut in government spending of 3% to 4% of GDP will also be needed to prevent the debt burden from growing. Austerity will focus on reining in public-sector wages and overhauling the state electricity company.

As in Egypt in 2016, the IMF would be likely to insist that – as a pre-condition to a deal – authorities devalue the Lebanese pound, Tuvey said.

Black-market exchange rates are now around 30% below the country’s official rate, but the IMF’s most recent review of Lebanon estimated the currency was over-valued by 50%.

“We think the currency could fall by 50% against the dollar,” Tuvey said. “And in the meantime, the economy is likely to fall into an even deeper recession. Overall, we expect GDP to contract by 5% this year. Our forecast lies right at the bottom of the consensus range.”

Source: Reuters