Today, I had the honor to give a presentation on the Lebanese sovereign debt restructuring to members of the @Harvard Club of Lebanon.

My presentation can be found here: https://drive.google.com/file/d/19cexHpmikeAn_7E8n-wlUsrqkSquRzhW/view?usp=sharing

The recording here: https://zoom.us/rec/share/6MspI4uv3zxOGoWR10_cZqN6PobUaaa8hidMrvQLyxr-EDBGMlUfV5fNwGB2FzwN?startTime=1590591763000 (Password: 6M*7.Y2p)

THREAD 1/x https://twitter.com/dan_azzi/status/1265690621911728128

First, - like Argentina - has already been in a difficult financial situation when the #Covid pandemic hit. Yet, the context within which will restructure its debt should not be forgotten and the pandemic could give a stronger hand in negotiations. 2/x

Given the lack of debt sustainability, the government has already announced that a comprehensive debt restructuring will be part of the Economic Recovery Plan and will include both foreign currency (Eurobonds) and local currency (mainly LBP T-bills). 3/x

1. Eurobonds:
While the size of the haircut will be heavily disputed, the government's plan aims at a principal & coupon reduction of $15-18bn of the outstanding Eurobonds (USD-denominated) [a +50% haircut, given $31bn in outstanding Eurobonds] 4/x

The restructuring of the 29 NY-law governed Eurobonds series could either be done cooperatively (by relying CACs) or coercively (essentially through exit consents or unilateral default). 5/x

The cooperative approach seems difficult, given that 's Eurobonds do not allow for cross-series modifications (latest ICMA standard) but require a majority of 75% of bondholders to accept a restructuring. According to reports, some funds have built blocking positions. 6/x

The coercive approach would involve the use of exit consents and essentially exploit ambiguities in the Fiscal Agency Agreement. Details are technical but it's a risky approach. See for a discussion of the issue by Mitu Gulati here: https://www.creditslips.org/creditslips/2020/03/subordinating-holdouts-in-a-lebanese-restructuring.html. 7/x

The litigation threat is real, not least since some creditors acquired blocking positions. Against this backdrop, the 25% approval threshold to accelerate Eurobonds should not be an issue. Still, the route is littered with obstacles and the holdout business is expensive. 8/x

As a sovereign, enjoys certain immunity wrt the attachment of public-sector assets - only "commercial" assets (such that are used for commercial purposes by the government) can be attached by creditors abroad. Shares in companies could be an attractive target. 9/x

2. Domestic debt:
There are different visions in wrt to the domestic debt (63% of total debt). While the commercial banks ask for a soft reprofiling, the government has announced its intention to impose a (big) haircut on domestic debt (also hitting depositors). 10/x

The legal risks of restructuring domestic debt are more manageable, since the instruments are governed by law. (see, e.g., Greek debt restructuring of 2012). The ultimate safeguard for investors is the Constitution (and limits to expropriatory measures). 11/x

Certainly, the domestic debt restructuring is more a political than a legal issue. The government and the commercial banks have different visions wrt to the distribution of losses - the negotiations will show which side will have the upper hand. 12/x

Another important issue is the @IMFNews's involvement. The pros of obtaining an IMF program seem to outweigh the cons, but the government will have to lobby hard (esp. with the & the ) to ensure approval in the @IMFNews Executive Board to obtain exceptional access. 13/x

The @IMFNews will likely require an upfront debt restructuring. The Fund will not only be critical to provide the necessary external financing (we are talking about +$10bn) but also to mediate between creditors with a view at providing the necessary level of credibility. 14/x

To conclude, difficult policy decisions in are both inevitable and necessary. A restructuring of both the Eurobonds and the domestic debt is a necessary yet insufficient condition to bring back to a sustainable growth path. 15/x

There are several issues I did not address in this presentation, most notably the role of USD certificates of deposits, the BDL reserves, the discussion on the use of the gold, etc. 16/end