Lebanese Banks Seek Adviser for Talks on $80Bn of Losses

Lebanese lenders are preparing to appoint an adviser as they gear up for potential talks with the central bank over some $80bn in claims, a pivotal step in untangling the financial crisis that hit the Middle East’s most indebted nation and stalled international bailout efforts.

The Association of Banks in Lebanon, a grouping of about 60 lenders that’s also known as ABL, is looking at proposals from Alvarez & Marsal and Ankura to conduct the negotiations, according to people familiar with the matter, who asked not to be identified because talks are private.

There’s no clarity yet on when the talks would begin or how steep the losses for banks could be. After Lebanon defaulted on some $30bn of Eurobonds in 2020, local lenders tapped the likes of Global Sovereign Advisory and Houlihan Lokey to engage in similar discussions with authorities. Progress has since stalled.

The election of a US-backed president early in the year and the formation of a technocratic cabinet helped restore some investor confidence. The defaulted sovereign bonds of Lebanon have surged, handing investors 45% returns this year, the best performance among 69 emerging markets tracked by the Bloomberg EM Sovereign Total Return Index.

The banking lobby’s decision to hire an adviser came at the request of the central bank, the people said. The list of eligible entities was short as many financial firms hold Lebanese bonds, posing a conflict of interest, one of them said.

An ABL spokesperson said the process related to the potential appointment of an international financial adviser is currently underway and has not yet been finalised. The banking lobby also said the monetary authority advised the banks to do so as both the government and central bank are in the process of designating their own advisers.

“At this stage, there are no further details to share regarding the timing or scope of any potential discussions,” ABL said in a statement.

The central bank didn’t respond to a request for comment.

Lebanese lenders parked billions at the central bank known as Banque du Liban, or BDL, after it launched the so-called financial engineering in 2016, a mechanism that helped fund government spending while banks attracted deposits with high interest rates. The setup unravelled in 2019 as foreign inflows dried up and the currency peg to the dollar collapsed. 

BDL couldn’t repay the banks its estimated debt of around $80bn, and the two sides have been locked in a standoff ever since.

Lenders insist the central bank and government should absorb the losses. The impasse has stalled a potential deal with the International Monetary Fund, with the Washington-based lender recently warning Lebanon still faces “significant” external financing needs.

Any external aid hinges on the new government’s ability to carry out reforms — primarily a plan to address BDL’s losses and return depositors’ money. Lebanon’s parliament has already made some headway in meeting IMF demands for greater transparency in the financial sector and more recently approved a plan to restructure banks.

The fund is in talks for a new staff-level agreement with the country on those reforms, saying that more work is needed to ensure the government’s strategy is aligned with “international standards and debt sustainability requirements.”