Lebanon will not pay a $1.2 billion Eurobond due on March 9 as its foreign currency reserves have hit critical levels and are needed to meet the basic needs of the Lebanese people, Prime Minister Hassan Diab said on Saturday.
In a televised address, Diab said Lebanon was not able to pay maturing debt in the "current circumstances" and would work to restructure its debt through negotiations with bondholders.
Diab said Lebanon's public debt had reached more than 170% of gross domestic product, meaning the country was close to being the world's most heavily indebted state.
A default on Lebanon's foreign currency debt will mark a new phase in a crisis that has hammered the economy since October, slicing around 40% off the value of the local currency, denying savers full access to their deposits and fuelling unrest.
The crisis is seen as the biggest risk to Lebanon's stability since the end of the 1975-90 civil war.
Lebanon has a $1.2 billion Eurobond due on March 9, part of a portfolio of some $31 billion in dollar bonds that sources told Reuters on Friday the government would seek to restructure in negotiations with creditors.
The cabinet session followed a meeting between the prime minister, the president, the parliament speaker, and central bank governor during which the attendees opposed paying the debt, the presidency said.
"The attendees decided unanimously to stand by the government in any choice it makes in terms of managing the debt, except paying the debt maturities," the presidency said in a statement.
The financial crisis came to a head last year as capital inflows slowed and protests erupted over decades of state corruption and bad governance - the root causes of the crisis.
The import-dependent economy has shed jobs and inflation has risen as the pound has slumped, adding to grievances that have fuelled protests.
Lebanon has never before defaulted on its sovereign debt.
"This unprecedented event is the result of an accumulation of policies, crimes, and choices that exhausted the public finances," said MP Alain Aoun, a senior figure in the Free Patriotic Movement party founded by President Michel Aoun.
"There is no use in crying over the ruins ... what is helpful now is starting a rescue plan to get out of the bottom of the abyss as Greece did," he added, writing on Twitter.
Lebanon's sovereign debt was estimated at around 155% of gross domestic product at the end of 2019, worth about $89.5 billion, with around 37% of that in foreign currency.
"It looks very likely they will default," said Nick Eisinger, principal, fixed income emerging markets at Vanguard, which holds some Lebanese debt but has been underweight in the market for a long time.
"Watch now if bondholders can block any deal," he said. "It's unclear how quick they can go down the restructuring route or get a deal because they need reforms first or at the same time," he said.
A set of Lebanon´s bondholders are to step up efforts to form a creditor group in the coming days, one of the members of the group said.
"We think it (creditor group) will come together soon," the member of the group told Reuters, requesting anonymity.
"From what we understand the government wants to be reasonable and so do most creditors. They understand the country is in a difficult situation."
So far the group had been more informal, with distressed debt veterans Greylock Capital and Switzerland-base Mangart Advisors facilitating discussions between bondholders and other interested investors.