Foreign investors in row over Lebanese debt

Ashmore has locked horns with other creditors, including Pimco

A row has broken out between some of Lebanon’s biggest foreign creditors as the country slides towards a restructuring of its enormous debt burden.

Ashmore, which has amassed a more than $1bn position in Lebanon’s short-dated bonds, is pushing for Beirut to repay a dollar bond that matures next month, despite the parlous state of the country’s finances. The fund manager’s lobbying has drawn criticism from other big emerging-market investors, which boiled over at a client dinner hosted by Bank of America in London last month.

In a heated exchange, Pimco’s Yacov Arnopolin told Ashmore’s Larisa Babushkina that Ashmore was being irresponsible in pressuring the Lebanese government to pay the March bond in full, according to two investors present at the event.

“Ashmore is trying to support their position in what is effectively a bankrupt country,” said one of the investors. “You could pay these bonds, but you are just delaying the inevitable.”

Ashmore, Pimco and Bank of America declined to comment.

Most overseas investors backed away from Lebanese debt as the country slid into a full-blown financial crisis last year, but Ashmore appears to be unwavering. The London-based firm, led by billionaire Mark Coombs, at the beginning of January owned more than a quarter of the $1.2bn bond due to be repaid on March 9, according to Bloomberg data.

Economic growth in the Middle Eastern nation has been sluggish since the start of the Arab spring in 2011, which has put an increasing strain on government finances. A bungled October effort at raising funds through a tax on WhatsApp calls triggered the country’s biggest protests in more than a decade, and deepened the malaise.

Locals are concerned that if the government does repay the March bond in full, it will push the country’s finances into even greater stress, while foreign investors are concerned it could result in bigger losses on longer-dated debt if and when a full restructuring arrives.

Mr Arnopolin said Ashmore was in effect asking other investors to bail out the firm’s aggressive bet on Lebanon, according to investors present at last month’s dinner.

The March bond’s price has fluctuated wildly in recent weeks, rising above 90 cents on the dollar in early February amid growing hopes the government would repay before plunging to 75 cents this week after Beirut requested technical assistance from the IMF. Longer-dated bonds are trading below 40 cents on the dollar, a level that implies a very high perceived risk of default.

Collectively, foreign bondholders are in a relatively weak position, given the lion’s share of Lebanon’s dollar debt is held by domestic investors. Some are anxious to present a united front in any upcoming negotiations with the government and are uncomfortable that Ashmore has made that more difficult.

Toufic Gaspard, a former IMF official and a Lebanese economist, called the government’s decision of whether or not to default on the March bond a “choice between two evils”.

Public opinion is in favour of default, at a time when the short supply of foreign currency reserves has created a liquidity crisis in Lebanon. While Mr Gaspard says he tends to think the government will pay the March bond, he adds that “restructuring is becoming inevitable”.

Lebanon has never missed a bond repayment, though investors see a default as inevitable. The country’s public debt-to-GDP ratio of 160 per cent suggests that investors should prepare to get back less than 40 per cent of their money, according to Oxford Economics’ analysis.