Bank of America Merrill Lynch (BofA) issued on April 14 a paper analyzing the government’s draft reform program. BofA considered the program to be an adequate starting point to potential program negotiations with the International Monetary Fund (IMF). The paper considered the losses to bondholders as implied by the draft reform program to be sizeable (recovery value at below 20% and lower than prevailing market prices) and in line with their own estimates. The paper then went on to detail the main pillars of the reform program such as the worsening economic activity (GDP contractions of 12%, 7% and 3% in 2020, 2021 and 2020), the more flexible exchange rate regime (projected at LBP 3,000/USD by the year 2024), the restructuring of the financial sector (banks’ losses estimated at $83.2 billion), the elevated external financing needs (estimated at $27.3 billion over the 2020-2024 period), the gradual fiscal consolidation efforts and government debt restructuring. As far as debt restructuring is concerned, BofA understands that banks (which hold 29% of domestic debt) would suffer a 200 basis point drop in interest rate on domestic debt to 4.4%. It also considered that the government would need now to adopt a series of steps in order bolster its reform credibility such as ratifying the concerned reform program without any major adjustments before end of June, the drafting of a supplementary budget for the year 2020 over the next few months, the implementation of steps to reduce transfers to EDL, the timely approval of a budget for the year 2021, improving the legislative framework for adopting reforms and the devaluation of the official USD peg. The paper commented, however, that the implementation of the program could be undermined by the authorities’ weak track record in this field, citing in this context the withdrawal of the capital control program on the governmental level and the delay in some crucial appointment (BDL Vice Governors and judicial appointments). The paper also expected the proposed compensation for large depositors via a deposit recovery fund that would capture the proceeds of some governmental assets and potential oil and gas revenues to stir some local controversy. BofA also considered that the high governmental debt levels even post-restructuring (estimated at 92.0% of GDP) could restrain the government’s plans to tap international markets starting the year 2022. BofA also warned that initial governmental projections may prove optimistic, given that it did not take the repercussions of the COVID-19 pandemic into account, and that reform implementation could face some resistance from the vested political interests. Always in the same vein, the paper considered that the government’s plan to increase the tax on interest income for large depositors (> than $ 1 million) from 10% to 20% would generate revenues standing at 0.4-0.5% of GDP as opposed to a higher government projected level of 0.8% of GDP. The paper also warned that despite the official positive stance from an IMF program, the engagement in an actual IMF program may be at risk, as the latter could be placing more stringent targets in order to release assistance. BofA considered that the accumulation of FX reserves as per the government’s program may prove insufficient to weather exogenous shocks, and that accordingly the LBP/USD exchange rate would need to devalue beyond governmental projections. In this vein, the paper estimates that the government is targeting BDL’s net FX reserves to stand at $6.3-$8.9 billion (20.6-29.4% of GDP) by the year 2024 taking into account the government’s balance of payments’ projections, some $10-$15 billion in external support, and some $6.3 billion in additional balance of payments support. In this regard, BofA considered that some recent BDL circulars may further lower the level of said reserves. In details, the paper cited BDL circular no. 547 in which BDL pledges to provide 0% 5-year loans to banks (in LBP and USD) to alleviate the conditions of corporate clients  enduring difficulties in honoring their debt payments and covering their wage bill and operating expenses, as well as circulars 148 & 149 that allow small depositors to withdraw their money at the market exchange rate, since this issue would increase money in circulation by around 17% and accordingly exert additional pressure on the exchange rate. BofA estimates that the government is targeting a 55% value-cut to its overall debt, and to reduce the value of its coupon payments from around $10 billion over the 2020-2024 period to somewhere between $1.5 billion and $4.5 billion (i.e. 1.2%-3.6% of the prevailing gross debt stock as compared to a 7.38% weighted average interest rate as at end of year 2019). As for the factors that could influence the targeted face-value cut, the paper estimated that a 10% weaker parallel exchange rate, a 1% drop in real GDP growth, and 1% widening in the primary deficit would increase that cut to 57.0%, 55.8% and 55.5% from a currently targeted 55.3%. Finally, the paper estimated that banks would be facing a 62.0% face-value cut on their sovereign debt portfolio, whilst projecting that banks would require a 60.1% post devaluation bail-in from the top 10% of depositors (bearing in mind that the government plans to preserve the assets of 90% of the depositors) in order to adhere to the required 10.5% Capital Adequacy threshold.