Lebanese banks bail out government

Post-war reconstruction has led to big debts

Lebanese banks have agreed to buy about $4bn (£2.5bn) in interest-free government bonds in an attempt to help the country deal with its crippling debt burden.

Lebanon's public sector has debts of about $30bn - or almost 180% of gross domestic product - much of which was built up in the course of development and reconstruction after the 1975-90 civil war.

Last month, Lebanon won pledges for $4bn in low-interest loans from a number of international donors.

Prime Minister Rafiq Hariri has said that without the injection of funds Lebanon would be forced to default next year on its debt payments.

Without taking into account the latest moves, Lebanon was paying an average of 13% interest on its borrowings - a level commercial lenders have judged reflects the risk of default.

That level is expected to fall slightly, as Lebanon uses fresh funds to retire its most costly debt.

Payments down $400m

The Lebanese central bank said banks would buy a series of two-year euro-denominated bonds and six-month Lebanese pound treasury bills.

"The contribution arises because they would be investing, in special treasury bills that bear a zero interest rate, up to 10% of their deposits in Lebanese pounds and foreign currencies," said central bank first vice-governor Nasser al-Saidi.

"Ten per cent of that net deposit base would be approximately $4bn."

This would reduce Lebanon's debt servicing obligations by $400m a year, he added.

The chief of the country's banking association was reported as saying the banks wanted to do their part to help the country's finances.