The leading global investment firm said it was not possible to shift the burden to domestic banks because they themselves have helped soak up the debt and would need recapitalizing.
According to Reuters, raiding bank deposits of savers and firms would also be politically problematic, and getting support from the IMF or elsewhere in the Middle East may also be difficult in the current circumstances.
“We see little benefit of a piecemeal approach to debt restructuring, given the complex inter-linkages between the finance ministry, central bank and domestic banks,” stressed Morgan Stanley in its analysis.
“Considering the subdued growth outlook, it makes sense to de-lever across the broad public sector,” it added.
Lebanon; one of the most indebted countries in the world, suspended payments on all $31.3bn of its international ‘eurobonds’ this month. It also declared that it could no longer repay them.
It floated three restructuring scenarios; soft, medium or harsh. Where eurobond holders would face either a 50%, 60% or 70% writedown on their bonds. They will also see their payment dates pushed back either five years or to 2032 or 2037 via new bonds.
The harshest restructuring scenario
Morgan Stanley assigned a subjective 60% probability to the harshest restructuring scenario. This is just with the bonds dropping to as low as 12 cents on the dollar this week. Even under that option they now look “attractive”, it said.
“Bonds are trading even below the harsh restructuring scenario. However, a key issue is that the restructuring may settle only 1 – 2 years forward; given complexities, which dents attractiveness a tad,” it said.
However, “sub-15 (cents on the dollar) should look attractive on all measures”.