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CHAMPION OF THE DAY
by S&P and Moody’s
Ratings are ten notches
below investment grade
Two of the three biggest credit rating agencies downgraded Lebanon on Friday as the country officials are considering default next month.
Each of the downgrades is ten notches below investment grade. That puts Lebanon’s rating below the likes of Argentina, Mozambique and the Democratic Republic of Congo.
S&P Global Ratings cut the country’s long-term foreign currency issue ratings to CC/C from CCC/C with a negative outlook. “We are lowering our ratings because we believe restructuring or non-payment of Lebanon’s government debt is virtually certain, regardless of the specific time to default,” said Zahabia Gupta, S&P’s primary credit analyst, in a statement. “The government’s funding model has collapsed following substantial deposit outflows from the banking system,” she said. “Social unrest, a contracting economy, and intensifying liquidity pressures in the private sector will make it politically difficult to repay creditors in 2020,” said Gupta. Given that the debt is mostly held by residents, a potential restructuring will have ripple effects across the domestic financial system, including depositors, and the economy,” S&P said. “We expect that social unrest, a contracting economy, and intensifying liquidity pressures in the private sector will make it politically difficult to repay creditors in 2020. Deep sectarian divisions in the political system and high regional security risks will continue to hamper policymaking, in our view."
Moody’s Investors Service downgraded the government issuer rating to Ca from Caa2 with a stable outlook. It also downgraded Lebanon’s senior unsecured medium term note program rating to (P)Ca from (P)Caa2. The country’s long-term foreign currency bond was lowered to Ca from Caa1, and deposit ceilings to Ca from Caa3. According to Moody’s, the nation’s plans for an economic overhaul will probably include bond write-downs in the range of 35 percent to 65 percent. “Creditors will likely incur substantial losses in what seems to be an all but inevitable near-term government debt restructuring,” it said. Rapidly deteriorating economic and financial conditions are increasingly “threatening the sustainability of the government’s debt and currency peg”.
Last week, Fitch Ratings also said Lebanon’s financial position points to a likely restructuring of its debt and the country’s financial sector.
The downgrades follow a warning by the World Bank of an implosion while the yield on the government’s Eurobonds maturing next month skyrocketed to more than 1,000 percent.
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Feb 24, 2020
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