BEIRUT - Lebanon's Association of Banks Wednesday urged the state to pay a forthcoming Eurobond maturity on time, despite fears that such a move may compound the country's worst economic crisis in decades.
The $1.2 billion Eurobond payment due in March is a divisive issue in debt-ridden Lebanon.
Economists warn that payment on time would eat away at plummeting foreign currency reserves, while bankers say a default would damage Lebanon's reputation and compromise its ties with lenders.
In a statement on Wednesday, the Association of Banks said paying on time "would protect the interests of depositors, preserve the country's place in global financial markets and would maintain ties with" lenders.
It said debt restructuring, which some experts have called for, could not be undertaken on time, especially as it would require talks with international bodies.
"The remaining period before the debt matures in March is very short," it added.
Lebanon is one of the world's most indebted countries, with a debt reaching more than 150 percent of GDP.
It is currently in the throes of a severe economic meltdown and a biting liquidity crunch that has seen banks impose stringent controls on withdrawals and transfers abroad.
Credit rating agencies and economists have also warned of dwindling foreign currency reserves that have plummeted in recent months, threatening import payments and a devaluation of the Lebanese pound.
The local currency has already lost more than a third of its value on the black market.
Credit rating agencies in recent month have downgraded Lebanon into junk territory, citing a high risk of default.
The Lebanese government has never defaulted on a debt payment, but some analysts say now may be the right time to do so.
"Repayment would weaken our foreign currency reserves, and we will therefore have less dollars to import basic goods, such as medicine and wheat," said economist Charbel Cordahi, who argued in favour of a deferred payment.
Mohammad Zbeeb, an economic expert, said repayment may further threaten savings of ordinary depositors, who are already struggling to access money trapped under informal banking controls.
"A comprehensive rescue plan must be developed, including restructuring of public and private debt," he said.
But a banking source close to the issue said that the Eurobond payment would ease pressure on commercial banks.
"Failure to pay by March may have an impact on commercial banks, which hold a large share of the maturing Eurobonds," said the source, who asked not to be named because he is not authorised to speak on the matter.
"Such a scenario would put additional pressure on banks," he said.
Bank of America Merill Lynch in a November report estimated that around 50 percent of Eurobonds were held by local banks, while the central bank had around 11 percent. Foreign investors owned the remainder, around 39 percent of Eurobonds, it said.
But these figures may have changed, with local media reporting that local banks have recently sold a chunk of their Eurobonds to foreign lenders.