70 percent Eurobond haircut
is being proposed by JP Morgan

Extending maturities by ten years

JP Morgan has outlined a restructuring proposal for Lebanon’s $3.1 billion face value stock of Eurobonds, estimating that current market conditions point to a 70 percent haircut and a ten-year maturity extension. The proposal comes amid signs of recovery in the value of Lebanon’s dollar-denominated bonds, which have surpassed their average price in 2020.

The investment bank attributed the recent improvement to positive political developments, particularly the election of a President and the subsequent appointment of a Prime Minister. As a result, Lebanon bonds emerged as the best performer in the EMBI Global Diversified Index last year, benefiting from a favorable global risk environment.

In a report to clients, JP Morgan expressed caution about future performance, citing ongoing political risks and significant hurdles that must be addressed before restructuring negotiations can move forward. It also noted that Lebanon’s economic recovery will take time, especially following the impact of Israel’s war on Hezbollah.

The report emphasized that restructuring efforts will require a comprehensive debt sustainability analysis. It suggested that Lebanon’s authorities should prioritize financial sector stability, recapitalization, and a depositor bail-in over sovereign debt restructuring due to the relative size of liabilities. The proposed restructuring aims to align Lebanon’s debt with sustainability targets, referencing an IMF 2022 scenario that suggested an 80 percent debt-to-GDP ratio by 2027 and gross financing needs averaging no more than 9 percent per year between 2024 and 2027.

JP Morgan highlighted the urgency of developing a reform plan in coordination with the International Monetary Fund (IMF) to secure external financing and creditor relief. It also warned that the Lebanese government would need to carefully balance the restructuring of its debt with efforts to stabilize the financial sector, particularly as 80 percent of commercial bank assets are held at the Central Bank.

Additionally, the investment bank noted that Lebanon’s economy remains highly dollarized, with dollar-denominated banknotes making up 95 percent of cash in circulation and deposits outside banks. It stressed that reconstruction efforts must be coupled with external support and structural reforms to ensure long-term economic stability.

As the country moves forward, the authorities face the dual challenge of addressing the sovereign-banking crisis and restoring investor confidence. While the road to recovery remains complex, JP Morgan’s assessment underscores the necessity of bold financial and economic reforms to steer Lebanon toward sustainable growth.