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Some questions/comments that sprang to mind while reading Lebanon’s leaked govt reform plan today. In no particular order, but points which I think we need more debate and clarity on:
1. Is the expected additional increase in debt (IMF, CEDRE, other IFI) being factored into the debt sustainability analysis? IMF will not lend unless the cumulative is considered sustainable. Not clear from plan if that the extra borrowing is being factored in.
There is a risk that we may not generate FX fast enough to repay back FX liabilities (incl any new borrowing) even with reduced debt burden. Assumption on remittances flows seems over optimistic given low oil prices + global economy in contraction. Macro assmptions generally rosy
2. Lack of clarity on deposit bail-ins. The Plan mentions that the banks’ FX losses will be covered by a “transitory” contribution from large depositors AFTER a full bail-in of existing shareholders. Fine (and sensible given that sovereign is bankrupt and cannot bail out)
But very little details on how this will happen. Crucially, no mention of lirafication. No mention of how losses generated by FX devaluation will be resolved. No details on the planned de-dollarisation strategy. These issues are key.
3. Plan to compensate depositors through a bail-in to a dedicated deposit recovery fund is unconvincing. What are the mechanics of this fund, how will it distribute revenues, how long are the limits to remain in place? Basing all this on recuperation of stolen funds is fantasy.
4. Recovery fund mentions using proceeds from selling of state assets. This is too fleeting of a point to be relegated to a box on page 20. We need more details. In normal circumstances, some pooling of states assets in SWF might be a good idea, but not in a oligarchic setup
5. So much of the financing/fiscal adjustment rests on CEDRE. Instead of being a strength, this to me seems like a weakpoint, given the geopolitical associations with CEDRE and piece-meal disbursement of funds which may very well be slow and drawn out.
6. Leaving LBP debt restructuring until after parameters of EB restructuring and banking sector become clear might be problematic in terms of equal treatment of creditors. The plan for the time being is to keep rolling over LBP maturities while suspending payments on EBs.
7. The projected (and quite aggressive) drop in the debt ratio starting next year seems optimistic. The path to bring down the debt ratio to 100% in 4 years looks good on paper. But implicit in the assumptions is a haircut of ~70% on Eurobond principal
This is in addition to assumptions that more than half of the contribution to external "savings" would come from a 5-year grace period on principal and reduction of coupons to an unspecified "minimum" level. Hard to see how this will be palatable without rest of the puzzle pieces
8. While its good to see an admission that the fixed exchange rate has failed our economy & the move to a crawling peg is welcome, the projection is for LL to reach 3000 by 2024. Seriously? That grossly underestimates the FX gap or vastly overestimates FX liab. reduction
