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UPDATE 4-Lebanon set for debt default as government decides not to pay

Laila Bassam and Ellen Francis

* As financial crisis deepens, Lebanon set for sovereign default

* Economic crisis seen as biggest risk to stability since war

* Lebanon must focus on rescue plan-MP says (Updates with government decision not to pay)

BEIRUT, March 7 (Reuters) - Lebanon decided on Saturday not to pay foreign currency debt, official sources said, setting the heavily indebted state on course for a sovereign default and restructuring negotiations as it grapples with a major financial crisis.

The decision not to pay maturing Eurobonds and to launch negotiations with creditors was taken unanimously at a cabinet meeting, ministerial sources and a senior politician said.

Prime Minister Hassan Diab is set to announce the decision, which was taken unanimously at a cabinet meeting, in a speech to the nation at 6:30 p.m. (1630 GMT).

A default on Lebanon's foreign currency debt will mark a new phase in a crisis that has hammered the economy since October, slicing around 40% off the value of the local currency, denying savers full access to their deposits and fuelling unrest.

The crisis is seen as the biggest risk to Lebanon's stability since the end of the 1975-90 civil war.

Lebanon has a $1.2 billion Eurobond due on March 9, part of a portfolio of some $31 billion in dollar bonds that sources told Reuters on Friday the government would seek to restructure in negotiations with creditors.

The cabinet session followed a meeting between the prime minister, the president, the parliament speaker and central bank governor during which the attendees opposed paying the debt, the presidency said.

"The attendees decided unanimously to stand by the government in any choice it makes in terms of managing the debt, except paying the debt maturities," the presidency said in a statement.

Sources told Reuters on Friday Lebanon was set to announce on Saturday that it cannot make upcoming dollar bond payments and wants to restructure $31 billion of foreign currency debt unless a last-minute deal with creditors could be found to avoid a disorderly default.

Lebanon hired U.S. investment bank Lazard and law firm Cleary Gottlieb Steen & Hamilton LLP last week as advisers.

REFORMS NEEDED

The financial crisis came to a head last year as capital inflows slowed and protests erupted over decades of state corruption and bad governance - the root causes of the crisis.

The import-dependent economy has shed jobs and inflation has risen as the pound has slumped, adding to grievances that have fuelled protests.

Lebanon has never before defaulted on its sovereign debt.

"This unprecedented event is the result of an accumulation of policies, crimes and choices that exhausted the public finances," said MP Alain Aoun, a senior figure in the Free Patriotic Movement party founded by President Michel Aoun.

"There is no use in crying over the ruins ... what is helpful now is starting a rescue plan to get out of the bottom of the abyss as Greece did," he added, writing on Twitter.

Lebanon's sovereign debt was estimated at around 155% of gross domestic product at the end of 2019, worth about $89.5 billion, with around 37% of that in foreign currency.

It looks very likely they will default," said Nick Eisinger, principal, fixed income emerging markets at Vanguard, which holds some Lebanese debt but has been underweight in the market for a long time.

Watch now if bondholders can block any deal," he said. "It's unclear how quick they can go down the restructuring route or get a deal because they need reforms first or at the same time," he said.

A set of Lebanons bond holders are to step up efforts to form a creditor group in the coming days, one of the members of the group said. (Reporting by Tom Perry, Ellen Francis and Laila Bassam in Beirut; and Tom Arnold and Marc Jones in London Writing by Tom Perry Editing by Alison Williams and Frances Kerry)

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