In the analysis, they also said that the country would require debt forgiveness of 100-125% of its annual economic output. It’s also not possible to shift the burden of the debt to local banks because they helped soak up the debt and would need recapitalizing.
They viewed it as politically problematic for Lebanon to raid bank deposits the same way Cyprus did at the height of its crisis. They also said that getting support from the IMF or elsewhere would be very difficult in the current circumstances.
“We see little benefit of a piecemeal approach to debt restructuring, given the complex inter-linkages between the finance ministry, central bank, and domestic banks,” they said.
They proposed that Lebanon should deregulate the public sector in view of subdued growth.
There are three restructuring scenarios: soft, medium, and harsh – in which bondholders will see 50%, 60%, 70% writedowns on their bonds, and their payment dates pushed back either 5 years or to 2032 or 2037 via new bonds.
This means that the money that bondholders will receive as a result of these scenarios will be significantly lower than in another restructuring. This is due to Lebanon having a much greater debt-to-GDP ratio than most countries at 152%, making it the world’s third most indebted nation.
Morgan Stanley assigned a 60% probability to the harshest restructuring scenario, and with bonds dropping as low 12 cents on the dollar; even this scenario is starting to look “attractive.”
“Bonds are trading even below the harsh restructuring scenario. However, a key issue is that the restructuring may settle only 1-2 years forward, given complexities, which dents attractiveness a tad,” they said.