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Fitch Downgrades Lebanon, Moody's Warns Private Creditors Face Major Losses

Fitch Downgrades Lebanon, Moody's Warns Private Creditors Face Major Losses

Tuesday, 10 March, 2020 - 12:30
FILE PHOTO: A view shows a street hosting banks and financial institutions, known as Banks Street, in Beirut Central District, Lebanon August 22, 2019. REUTERS/Mohamed Azakir

Moody's Investors Service warned on Tuesday that private creditors faced significant losses as a result of the government's decision to defer payment of the March 2020 Eurobond.

Lebanon announced on Saturday it could not meet upcoming debt payments, saying critically low foreign currency reserves were needed to cover essential imports and calling for "fair" restructuring talks.

Earlier on Monday, Fitch Ratings downgraded the country's long-term foreign-currency issuer default rating to 'C' from 'CC'.

Fitch said a failure by Lebanon to make the principal payment during the seven day grace period will put the sovereign into 'restricted default' and the bond into 'default'.

"A sovereign default would have a significant negative impact on banks' financial health, and further undermine the economy and the sustainability of the peg," said Elisa Parisi-Capone, a Moody's vice president - senior analyst and the report's author.

Lebanon's announcement involved the halting of a payment of $1.2 billion on a Eurobond maturing on March 9, Reuters reported.

The situation worsened in the country with the outbreak of public protests against the ruling elite in October last year that led to a change in the government earlier this year.

Usable foreign exchange reserves have dwindled to between $5 billion and $10 billion, Moody's estimated. That compared with foreign currency debt service requirements of $4.7 billion in 2020 and $4 billion in 2021, it added.

The very low level of foreign exchange reserves meant the pressure on the Lebanese pound is acute, Moody's noted, adding that it pointed to a possible abrupt and very large change in the exchange rate.

Lebanon's pound has lost around 40% of its value on a parallel market since October, though the official peg remains at 1,507.5 pounds to the US dollar.

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