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French Version

Bankers edgy on eurobond swap (Daily Star)

Move could do lebanon more harm than good
Institutions willing to discuss swapping with Central Bank, Finance Ministry, but fear that it has become a political tool

The political debate over swapping the 2005 and 2005 maturing eurobonds is causing serious concern among many bankers, who feel that this argument could cause more harm to the country

Freddi Baz, adviser to the chairman of Banque Audi, is one those bankers who want politicians to stop "playing games" with sensitive issues such as the swap."What is so amazing about this issue is that the same political party calling for a swap might oppose this idea under a different political climate, and those who oppose swapping might favor it in a different environment," says Baz.

Baz also argued that swapping the eurobonds may not save the government any money, especially if the risk premiums of Lebanon are included."Basically, the banks are willing to discuss swapping with the Central Bank and the Finance Ministry, but we would have preferred that this matter not be used in the political debate," Baz said.

He was alluding to the sharp debate between President Emile Lahoud, who feels that the time is suitable to swap the maturing bonds, and Prime Minister Rafik Hariri, who believes it is too early to discuss this matter.

Lahoud and his supporters project that the benchmark in interest rates on the international markets will jump by 1.5 to 2 percent at the end of this year, making it appropriate to swap the $7.5 billion in eurobonds at cheaper rates.

But not many economists and bankers share the views of Lahoud, saying that the president's supporters have not taken into account the very high risk premiums, or country risks.

The US Treasury said last week that it is considering raising interest rates to curb rising inflation. Britain has also announced similar plans.

Baz said Lebanese commercial banks, which hold about 80 percent of the government's eurobonds, cannot ignore the interest of the depositors and the benchmark rates of the international markets."The state was not able to deliver on its promises to implement the economic reforms, which caused the premiums risks to go higher," Baz said, adding that banks will ask Lebanon's monetary and financial authorities for some guarantees that economic and political reforms will be implemented within a certain period if swapping becomes an option.

Baz says he favored swapping some of the maturing eurobonds 12 months ago, because the environment was very favorable at that time: "If the government fails to meet its commitment, there is a strong possibility that the risk premiums for Lebanon may go higher."

The average yield on the maturing eurobonds in 2005 and 2006 is more than 9.5 percent.

International ratings agencies have maintained their negative outlook on Lebanon's foreign currency ratings because the government has failed to privatize any of the state-owned assets.

Privatization was an important element in the government's plan to reduce the $33 billion public debt.

But the political squabble between Lahoud and Hariri over reforms has dealt a blow to the efforts to sell some state assets to the private sector.

"Banks take risks every day, provided that these risks are remunerated," Baz says, adding that it is up to each bank to evaluate and set the risk premiums on the swap."Swapping the eurobonds is possible today - if the government is willing to remunerate the risk premiums on issues held by banks."

Only a few banks have expressed a readiness to swap the maturing eurobonds at cheaper rates, on the grounds that interest rates in the US and Europe are much lower than here.

However, the majority of banks refuse to ignore the risk factor, which is still high due to the high public debt compared to the country's Gross Domestic Product (GDP). Baz is disappointed that all the arguments focused on the swap, and not issues such as improving the social and economic conditions in the country.

He says a GDP growth of 2 or 3 percent is not sufficient to turn the economy around."Lebanon is using only a portion of its economic potential, and if this is fully exploited then the GDP growth should be at least 8 percent," says Baz, adding that the government's main objective should be to create more jobs for the Lebanese."As far as banks are concerned, we have not given up hope for the country."

Beirut 21-06-2004
Osama Habib
The Daily Star

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