Lebanon cannot meet its forthcoming debt maturities, the prime minister announced on Saturday, setting the heavily indebted state on course for a sovereign default as it grapples with a major financial crisis.
In a televised address to the nation, Prime Minister Hassan Diab declared the suspension of a bond payment of $1.2 billion due on March 9, saying foreign currency reserves had hit dangerously low levels and were needed to meet basic needs.
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Diab said Lebanon's public debt had reached around 170% of gross domestic product, meaning the country was close to being the world's most heavily indebted state.
"The debt has become bigger than Lebanon can bear, and bigger than the ability of the Lebanese to meet interest payments," he said. "In light of the current situation, the state cannot pay the coming maturities."
"The Lebanese state will strive to restructure its debt in line with the national interest by holding fair, well-intentioned negotiations with all lenders," he added.
A default on Lebanon's foreign currency debt 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 widely seen as the biggest risk to Lebanon's stability since the end of the 1975-90 civil war.
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Lebanon has a total of some $31 billion in dollar bonds that sources told Reuters on Friday the government would seek to restructure in negotiations with creditors.
The decision not to pay maturing Eurobonds and to launch negotiations with creditors was made on Saturday, official sources said, and was taken unanimously at a cabinet meeting, according to ministerial sources and a senior politician.
The cabinet session in which the decision was met 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.
Lebanon hired U.S. investment bank Lazard and law firm Cleary Gottlieb Steen & Hamilton LLP last week as advisers.
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.
"Watch now if bondholders can block any deal," 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. "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 bond holders are to step up efforts to form a creditor group in the coming days, one of the members of the group said.