The headquarters of the General Directorate of Finance in Beirut. (Credit: PHB)
The risks incurred by the state and Banque du Liban (BDL) in connection with the Eurobonds on which Lebanon defaulted in March 2020 have been the subject of a recent series of articles and comments. These relate to the potential state contribution to partially cover losses on deposits, risks of attachment of BDL’s funds and gold reserves located in the US and related matters.
As a New York-qualified lawyer specializing in capital market and restructuring (having represented three central banks in attachment actions and more than eight countries in their issuances of Eurobonds), I offer my general views on these issues. The state of the law is complex and evolving and there can be no assurances regarding what actions creditors may take against Lebanon and BDL.
Risks
The risk of legal action by holders of Eurobonds is increasing. Since Lebanon defaulted, the holders of Eurobonds have a straightforward debt claim against the state for non-payment. As is usual, the state has submitted to the jurisdiction of the New York courts and the federal courts sitting in New York City.
The conditions of the Eurobonds provide for a statute of limitations (prescription) of 10 years for the payment of principal and five years for interest. It is therefore highly likely that suits will be brought against the state before 9 March 2025 as the holders of Eurobonds will start losing their claims to interest on that date, unless a restructuring is completed by then.
If and when judgments are obtained by holders of Eurobonds, their claims will be converted from debt claims to judgement creditor claims. Judgements will not be subject to the “collective action clauses” included in the Eurobonds which provide Lebanon with the ability to force minority holders to accept a restructuring, if it is able to obtain approval of holders of 75 percent of the Eurobonds in each series (voting on a series-by-series basis). Lebanon would then have to negotiate separately with the judgement holders. These judgement holders would then be able to enforce against any assets of the state overseas (if any), except those assets protected by immunity.
Unless a state has explicitly waived its pre-judgment attachment (which Lebanon did not), it is not possible to effect a prejudgment attachment on state assets. In light of the recent decision of the Council of State regarding the government’s restructuring plan, numerous commentators questioned whether a potential state contribution to cover depositor losses would general additional risks under the Eurobonds. The state has no contractual obligation to reimburse these depositors. Those have a contractual relationship with their respective banks which, in turn, have a contractual and regulatory relationship with BDL.
The state should not directly assume any debt owed by the banks to depositors. However, as the sole owner of BDL, it should contribute over time to BDL’s recapitalization. This contribution has been set at US$2.5 billion under the successive government plans and the preliminary agreement of the IMF. If agreed by the various constituents, the state could increase this contribution — by a limited amount — which would permit BDL to increase its participation in the reimbursement of bank deposits. No breach to the provisions of the Eurobonds would occur if the contribution is structured as indicated above.
The risks that BDL’s assets can be attached and utilized to cover debts owed by the state should not be exaggerated. The US Foreign Sovereign Immunities Act of 1976 provides that the property of a foreign central bank or monetary authority held for its own account is immune from attachment and from execution. It is difficult (but not impossible) to overcome this principle of law, especially for assets located in the United States. There are some vulnerabilities, based on BDL’s conduct post-crisis. However, this risk can be mitigated by completing a restructuring of the Eurobonds before creditors obtain a judgement against the state.
Opportunities
In light of the above, I suggest that the following actions be taken as soon as possible.
• The state should take advantage of the current price for the Eurobonds to make purchases on the secondary market, subject to compliance with applicable law. Any restructuring of Eurobonds will likely be at a higher price than the current market price, ($0.07, yesterday), given that the consent of 75 percent of the holders of each series is required in connection with any restructuring. In addition, there will likely be some amount to be paid for accrued interest in any restructuring (while accrued interest is included in the secondary market price). Finally, if Eurobonds are purchased from foreign holders, this will decrease the proportion of those holders, which should facilitate the restructuring.
• Lebanon cannot continue to postpone implementation of the pre-actions required under the IMF program. Enough dithering and populism. Even if it may not be possible or advisable to pass the required laws prior to the election of a president, getting them into an agreed form with the IMF would help restore some credibility to Lebanon and hopefully permit it to improve some of the terms of the IMF program. This in no way is a substitute for proper accountability and recovery of misappropriated funds, as well as funds transferred overseas after October 2019.
• Lebanon must commence immediate negotiations with the holders of Eurobonds, who are likely to insist on the completion of an IMF program, as they must have confidence that Lebanon will be able to service its restructured debt. Lebanon can also use the limits on indebtedness set under an IMF program to negotiate a better deal with the holders of Eurobonds.
• In parallel, it is critical to enhance BDL’s independence vis-à-vis the government and maintain and develop the recent measures taken by the interim governor in this respect.
Lebanon’s handling of the financial crisis since 2019 has most likely been the worst on record. More than four years have lapsed and tens of billions of dollars of depositors’ funds have been wasted without any meaningful progress in Lebanon while, for instance, Greece (2020) has been able to exit its crisis in less than three years.
The current approach must change. Time is not on Lebanon’s side.
Camille Abousleiman is a member of the New York and Beirut Bar Associations. He notes that his personal views, as stated above, do not constitute a legal opinion and do not reflect the views of Dechert LLP. While he participated in the issuance of the Eurobonds, he adds that he does not currently represent any party in this matter, and he has never held any Eurobonds or related derivative products.