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Fitch cut Lebanon’s credit rating for third time in a year on Thursday, warning it now expected the crisis-hit country to restructure or default on its debt. 

Fitch said its decision to chop the rating to ‘CC’ from ‘CCC’ reflected its view that a restructuring or default was now “probable owing to acute political uncertainty, de facto capital controls and damaged confidence in the banking sector.” 

That will deter capital flows vital to meeting its financing needs, while the emergence of a parallel exchange rate and the failure of the central bank to fully service its foreign currency obligations also highlighted the strains, Fitch added. 

“Indications of recession, together with restricted access to bank deposits and goods shortages magnify the risk of further social unrest. Rationing of U.S. dollars to prioritise repayment of government debt may become a more politically charged issue.” 

Lebanon’s public debt burden, equivalent to about 150% of GDP, is one of the heaviest in the world. Last year’s deficit was equal to about 11.5% of GDP, and economic growth rates have been weak for years.

This week the country’s caretaker finance minister warned a sharp fall-off in government revenues, as a result of its worst financial crisis since the 1975-90 civil war, meant this year’s deficit will also be much bigger than expected. 

Fitch said rising dollarisation — where citizens exchange their money into dollars — and the emergence of a parallel exchange rate also pointed to growing pressure on the peg of the Lebanese pound to the U.S. dollar, which has existed since 1997.

Soon after Fitch’s cut, the office of Lebanon’s caretaker prime minister Saad al-Hariri said he had discussed possible “technical assistance” with the International Monetary Fund and World Bank. 

In a statement, Hariri’s office said he told World Bank President David Malpass and IMF head Kristalina Georgieva he was committed to preparing an urgent plan that could be implemented once a new government was formed. 

The news saw Lebanon’s government bonds rally.

REUTERS

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