Salameh proposes Eurobond swaps for local bondholders

BEIRUT- Lebanon’s central bank has proposed that Lebanese holders of a $1.2 billion Eurobond due to mature in March swap their holdings for longer-dated notes, senior financial and government sources said on Sunday. 

One of the world’s most heavily indebted states, Lebanon is suffering from its worst financial and economic crisis since the 1975-90 civil war. Slumps in its international sovereign bonds and rocketing credit default swaps have suggested Lebanon may be drifting towards a default. 

The swap proposed by central bank governor Riad Salameh was first reported by Bloomberg. 

Such a move, which would require the approval of cabinet and a law, would provide “breathing space” for Lebanon, a senior government source told Reuters. Such a swap would need to be “in agreement with the holders of the bonds that mature in March”. 

Last, year the central bank paid off $2.6 billion in maturing Eurobonds. 

The country has been without effective government or an economic rescue plan since Saad al-Hariri quit as prime minister in October. 

One of the financial sources said Salameh’s idea was “just a proposition” to the banks and it was up to the government as to how it would manage Eurobonds due this year, which amount to $2.5 billion in principal including the $1.2 billion due in March. 

A second financial source, a senior banker, said that ahead of the March maturity Salameh had proposed swaps for “paper with longer maturities”.

Last month, the Iranian backed Lebanese group Hezbollah and its political allies nominated former government minister Hassan Diab to form a government. 

But there is no sign of him forging a deal on the make-up of the cabinet as complications grow. 

Salameh, in his interview  with Bloomberg, said he was making “pre-emptive proposals that are voluntary”, regarding the debt swap plan for the Eurobond. 

“We haven’t taken any decision yet because we don’t have a government,” Salameh said, adding that the central bank wants the proposals to be dependent on the consent of Lebanese banks. 

Lebanon’s Treasury should move domestic holders of the Eurobond maturing in March into longer-dated instruments at higher rates, Salameh said. 

He did not say what would happen to foreign holders of the debt, Bloomberg said. 

Salameh also said the bank had not yet decided whether to extend a bridge loan to the Lebanese government so that it can pay all of its Eurobonds due this year. 

Salameh said the country’s foreign reserves are still at “acceptable and comfortable” levels, Bloomberg said.

The central bank will accept a government request to waive interest payments on Treasury bills this year, he said. 

Separately on Sunday, Salameh said that Lebanon’s central bank is seeking extra powers, to regulate and standardise controls which commercial banks are imposing on depositors.

(Reuters)