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Fitch downgrades Lebanon as political uncertainty increases chances of default

Fitch Ratings on Dec. 12 downgraded Lebanon's long-term foreign- and local-currency issuer default ratings to CC from CCC over concerns that the sustained political uncertainty will increase the likelihood of the country defaulting on its loans.

The sovereign's country ceiling was also downgraded to CCC from B-, while its long-term senior unsecured debt rating was downgraded to CC from CCC. Lebanon's short-term foreign and local-currency issuer default ratings were affirmed at C.

Fitch said the rating actions reflect the growing probability of a government debt restructuring or default due to acute political uncertainty, the introduction of de facto capital controls and dwindling trust in the country's banking sector — all of which will result in lower inflows of capital that is necessary for Lebanon to meet its financing needs.

The rating agency added that Banque du Liban's failure to fully service its foreign currency obligations — estimated to be $67 billion as of September — is another sign of financial pressure piling up on the country and that political volatility is likely, considering the rift between the protesting public and the political class.

Fitch expects the central bank's foreign currency reserves to drop to $28 billion at the end of 2019, with a forecast of continued erosion in 2020. The rating agency expects the Lebanese economy to contract in 2019 and in 2020. It added that the government's fiscal position looks "increasingly unsustainable" despite its perfect track record of repaying its debt.