Moody’s downgraded in the last few days Lebanon’s government issuer ratings from Caa2 to Ca, which translates to “Judged to be highly speculative and with likelihood of being near or in default, but some possibility of recovering principal and interest”, and is the second lowest rating for a country.
In other terms, Lebanon’s debt default is no longer a matter of if but when, and it might happen on March 9 when the $1.2 billion Eurobonds will be due, noting that we have two other payments in April ($700 million) and in June ($600 Million) so even if we pay in March, we’re just delaying the inevitable. However, I don’t think anyone in his right mind would even consider paying the $1.2 billion at times when they can be used to import food or fuel or other necessities. In all cases, there are already talks about restructuring our debt, a scenario that usually takes place after a default or while heading for one.
What happens when a country defaults?
There are tons of articles explaining in details what happens after a default and the different ways a country can default. To sum things up:
1- Currency of the country is devalued (Which is already the case even if unofficially).
2- Debt restructuring such as extending load payments dates etc ..
3- Austerity measures and economic reforms to be adopted by the government.
4- Investors will stay away from the country until the situation is stable, which is also the case now.
5- The country will lose its reputation (What reputation?), after its ratings are dropped.
Austerity measures are usually followed by riots and protests, which is already happening now.
Is there light at the end of the tunnel?
A lot of countries have defaulted in the past, such as Venezuela, Greece, Ecuador, Argentina, Russia, Mexico and even France. A country defaulting is not as bad as a company going bankrupt, and there are plenty of ways to recover and get back on the right back, as long as the Lebanese authorities are serious about reforms and addressing corruption.
The only plausible course of action at the moment appears to be a default, followed by a debt restructuring and an IMF bailout program, BUT if the government is unable to draft AND IMPLEMENT a rescue plan, then it will only get worse. Recovering stolen funds, imposing a haircut on large depositors are a start, but given the way things are going, it’s highly unlikely that we will be recovering any money any time soon.
To sum things up, defaulting is not as bad as it sounds, as long as the new government is capable of implementing a rescue plan and recovering stolen funds or acquiring funds through a haircut. So yes there is light at the end of the tunnel, but the light is purely in the hands of the government.