In this photo released by the Lebanese Government, Lebanese Prime Minister Hassan Diab, gives a speech at the Government House in Beirut, Lebanon, Saturday, March. 7, 2020. Lebanon's prime minister said Saturday the government will suspend payment of $1.2 billion in loans, marking the crisis-hit country's first-ever default on its sovereign debt. (Dalati Nohra/Lebanese Government via AP)

BEIRUT - Credit ratings agency Moody's warned Tuesday that Lebanon's first-ever default on paying its sovereign debt will likely lead to significant losses for private creditors as well as serious implications for the country's banking sector.

Lebanon's prime minister on Saturday said the government will suspend payment of $1.2 billion in loans that matured Monday. Hassan Diab said Lebanon's foreign currency reserves "have reached a critical stage," leading the government to suspend its debt payment so it can continue providing basic commodities to the Lebanese people.

Lebanon has been engulfed in a financial and economic crisis that has worsened since October, when the country was rocked by nationwide protests over widespread corruption and decades of mismanagement by the ruling political class. Street demonstrations have been minimal since the outbreak of the new coronavirus.

The default marked a new chapter in Lebanon's economic crisis and could have severe repercussions on the tiny Mediterranean country, risking legal action by lenders that could further aggravate and push Lebanon’s economy toward financial collapse.

Diab said sovereign debt reached $90 billion or 170% of GDP, making it one of the highest in the world. He added that the total debt and interest Lebanon had to pay back in 2020 is at $4.6 billion.

Moody's, which downgraded Lebanon's ratings last month to Ca from Caa2, said the decision to defer payment of the March 9 international bond maturity "reflects the country's extreme financial and economic pressures and the move will likely lead to significant losses for private creditors."

"A sovereign default would have a significant negative impact on banks' financial health, and further undermine the economy and the sustainability of the peg," said Elisa Parisi-Capone, a Moody's vice-president and the report's author.

She was referring to the local currency, which had been pegged to the dollar since 1997 but in recent months lost up to 60% of its value on the parallel market.

Local banks, who are a main lender to the Lebanese government, have imposed crippling capital controls on cash withdrawals and transfers since November.

The statement by Moody's came a day after Fitch Ratings downgraded Lebanon's Long-Term Foreign-Currency Issuer Default Rating to C from CC.

Fitch said that the $1.2 billion Eurobond payment maturing on Monday has a grace period for paying the principal of seven days. Failure to make the payment during the grace period will put the sovereign into Restricted Default, or RD, and the specific bond into Default, or D.

Lebanon's economy has been hammered over the past years by the war in neighbouring Syria, the flow of more than a million Syrian refugees and a drop in remittances from the Lebanese diaspora.

News from © The Associated Press, 2020