Lebanon finally defaults, large write-down in debt needed

• Jubilee Debt Campaign has been warning of Lebanon’s debt crisis since 2015
• Large write-downs in debt will be needed by creditors to enable the country to recover

Today Lebanon defaulted on a $1.2 billion bond payment. Prime Minister Hassan Diab announced that foreign currency reserves had hit a “critical and dangerous level” and called for fair negotiations to restructure the debt.

Tim Jones, Head of Policy at Jubilee Debt Campaign, commented on the news saying:

“It is good that Lebanon has finally defaulted on the debt, rather than continuing to pay and be in an even worse position in a few months’ time. For the people of Lebanon to recover from the current debt crisis requires large write-downs of debt by international creditors.”

Jubilee Debt Campaign has warned since 2015 that Lebanon is in a debt crisis, given the huge scale of its international debt payments. External government debt payments are currently over 40% of government revenue.

The IMF is currently negotiating a bailout programme. The IMF is only meant to lend if Lebanon defaults or there is a debt restructuring which makes the debt sustainable, though the Fund often breaks its own rules.

Lebanon’s bonds do not contain so-called “Enhanced Collective Action Clauses”. This means it is easier for a vulture fund to buy a significant proportion of a particular bond issuance and block any debt restructuring agreed by a majority of bondholders. The exact terms of these contracts are unclear due to the lack of transparency.

Tim Jones continued:

“Lebanon’s debt crisis shows the continued lack of legal systems to prevent vulture funds holding up necessary debt restructurings, and how opaque government debt can be. Key jurisdictions such as London and New York need to pass laws which ensure a minority of creditors cannot block debt restructurings, and to make key information on all loans to governments publicly available once contracts are signed.”