Lebanon Moody’s rating cut to the same grade as Venezuela

Lebanon’s Moody’s rating has been cut to the lowest possible grade, a C, the same classification as Venezuela, the agency said in a statement yesterday.

The downgrading reflects an assessment by Moody’s Investment Service, which states “that losses incurred by bondholders through Lebanon’s current default are likely to exceed 65 per cent”, Bloomberg quoted the organisation’s statement as saying.

Already this year, Lebanon has defaulted on a $1.2 billion Eurobond debt – the first sovereign default in the country’s history – and has faced an accelerated currency collapse.

“The collapse of the currency in the parallel market and the concomitant surge in inflation fuel a highly unstable environment,” the statement by Moody’s was quoted by Bloomberg as saying.

Adding, “in the absence of key steps toward plausible economic and fiscal policy reform, official external funding support to accompany a government debt restructuring is not forthcoming.”

The downgrading comes as Lebanon’s government is struggling to secure international aid, and while bailout talks with the International Monetary Fund (IMF) have stalled over the issue of Central Bank losses.

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Meanwhile, Minister for the Economy, Raoul Nehme, told Bloomberg Television yesterday that, even if an IMF bailout deal is forthcoming, the international organisation could only supply half of the $10 billion requested by the Lebanese government.

Lebanon would then seek to bridge the gap by unlocking conditional international aid, such as the $11 billion pledged during the CEDRE 2018 conference, which is tied to reforms, according to Nehme.

“All of them [international donors] are waiting for the IMF, in my opinion,” Nehme was quoted by Bloomberg as saying, warning Lebanon could face a “real black scenario” if the government fails to secure an IMF bailout.

Lebanon is currently facing its worst economic crisis since the end of the civil war in 1990, and has seen the currency, the Lebanese lira, or pound, lose more than 80 per cent of its value in recent months, undermining the dollar peg which has been in place since 1997.

Officially, the lira is pegged to the US dollar at 1,507.5. In recent months, however, it has traded between 4,500 and 9,000 to the US dollar on the black market.

In response, the government has introduced a second exchange rate of 3,900 to $1 for importers of essential items, including food, allowing importers to purchase goods with dollars. Regular depositors are still tied to the pegged rate.

Despite calls to unpeg the lira as a way to reduce the effects of the economic crisis, however, Nehme told Bloomberg, “until we have an IMF program, we will stay with two official rates… a crawling peg is the ideal solution but it has to be accompanied by social measures”.

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