Lebanon’s battered bonds defy deepening conflict to stage rally

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Lebanon’s practically worthless US dollar bonds have rallied following Israel’s invasion of the country, as investors bet that the weakening of Hizbollah raised the chances of a ceasefire as the first step to ending its long default.

Prices for debts that were once worth $30bn at face value rose above 8.5 cents on the dollar on Thursday, extending their gains from 6 cents last month following Israel’s killing of Hassan Nasrallah, the militant group’s leader.

The advances pushed the bonds to their highest levels since before Hizbollah began firing rockets towards Israel last year, after the outbreak of war between Israel and Hamas. Even so, the prices still indicate that investors will receive very small repayments on their bonds, more than four years after Lebanon defaulted.

Lebanon has been unable to restructure the debt while it has lacked a government and a plan to fix the country’s broken financial system, which precipitated the default when it collapsed in late 2019.

The bonds remain thinly traded, meaning a handful of deals can move prices. Their near worthlessness also has left them primed to increase on signs of even minor improvement in the country’s financial situation.

“Right now, the correct way to think about this is that we have two stages, solving the ceasefire and solving the political stalemate. Current valuations are putting higher chances on moving forward with the ceasefire,” said Bruno Gennari, emerging markets strategist at KNG Securities.

Israeli bombings and displacement orders targeting one quarter of the country’s territory have piled more ruin on to Lebanon’s shattered economy in recent days, after half a decade of near constant crisis.

Lebanon heavily borrowed on the eurobond market to bankroll massive deficits before the freezing of tens of billions of dollars in foreign currency deposits in 2019 set off a financial crisis.

Some analysts have estimated that an eventual writedown of the dollar bonds could be over 80 per cent, given the likely costs to the state to resolve the banking system.

But a restructuring will be impossible without political leadership to begin negotiations with creditors and the IMF. Lebanon has yet to enact economic and political reforms demanded by the international community to unlock billions of dollars in investment and aid. Fitch Ratings even stopped rating the eurobonds in July because Lebanon no longer publishes up to date fiscal information.

“Lebanon’s fragmented political environment, the caretaker government’s limited legal capacity to enact legislation, and delays in appointing key officials — including a new president — continue to impede the reforms necessary to kick-start economic recovery and emergence from default,” credit rating agency S&P Global said this week.

This week the US signalled its support for the election of a new president, which some in Lebanon’s fractured political system have called for but has been held back by Hizbollah’s veto for two years.

But analysts said even if a president could soon take office, progress on restructuring the debt would also need commitment to reforms and talks with the IMF.

“It could be read as positive news in the long term for addressing the political stalemate, but I think that is looking too much into the future,” Gennari said. “There are many steps in between.”