Traders in the local market have confirmed that the Lebanese pound is gaining ground on the demand curve as Lebanon Eurobonds are witnessing a growth curve
Market figures have indicated that Lebanon Eurobond 6.25 of June 12, 2025 has plummeted in the beginning of the week from 11.9450 to 13.1150 dollars. Similarly the Eurobond 5.8 of April 14, 2020 is trading at 14.6250. The BLOM Bond Index (BBI), which tracks Lebanese government Eurobonds (excluding coupon payments), rose remarkably over the course of last week and reached 13.47 points on Monday December 9, 2024 after the collapse of Bashar al-Assad’s regime in Syria and then declined to end the week with a gain of 22.31 to settle at 12.92 points on December 12, 2024. BBI increased by 22.31% this week and more than doubled since the year started.
“It seems it is the era of a new trading floor for the Lebanese Lira” a trader tweeted. Lebanon’s restructured Eurobonds recovery value could reach 24.6 cents on the dollar, a new report by Goldman Sachs says. The Nominal Effective Exchange Rate (NEER) of the Lebanese pound rose by 0.25% this week against a basket of 21 influential currencies, including the US dollar and euro, and recorded 233.32 points on December 13, 2024. This increase is due to the dollar’s strength, as the Lebanese lira is pegged to the dollar. As such, the rate of broad money dollarization slightly declined slightly from 98.313% in the week ending November 28, 2024 to 98.266% in the week ending December 5, 2024.
Eurobonds fluctuations
More positive political expectations and news that Lebanese parliamentary parties increased their meetings in order to succeed in electing a new president in the upcoming scheduled presidential elections on January 9, 2025 has also given a positive breadth to the markets. Cautious optimism is spreading as many observers believe that this might be the best chance for political and economic recovery. The positive stimulus is backed up also by international market indicators as the yield curve of treasury bills on Wall Street shifted upward this week, with five-year, and ten-year yields rising by 11 and 15 bps, respectively, to stand at 4.18% and 4.32% on December 12, 2024.
Amid these developments, traders are now pricing in a 96.7% chance of a quarter-point rate cut at the Federal Reserve’s December 18 meeting, while the likelihood of no change is 3.3%, according to the CME Group’s FedWatch tool.
In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable decreased by 1,451 and 1,155 bps to record 10,142 and 7,328 bps respectively by the week ending December 12, 2024.
A bad management of the default
To be noted that BDL’s LC debt holdings are still not serviced. Lebanon’s 2020 default on sovereign debt payments continues to cast a long shadow over the short term ability to access foreign markets, a key need to trigger the much needed reconstruction process. As the five-year statute of limitations for US legal action nears, the urgency for engagement grows. The deadline is April 2025. A lawsuit could further erode the country’s already fragile financial standing. Lebanon remains in restricted default (RD) on its foreign-currency (FC) debt, following the sovereign’s failure to pay the principal on the Eurobond that matured on 9 March 2020. The government has stopped servicing its outstanding stock of Eurobonds pending a restructuring. The Long-Term (LT) Local-Currency (LC) and Short-Term (ST) LC Issuer Default Ratings (IDR) downgrades to ‘RD’ reflect that the government is not paying interest on Banque du Liban’s (BdL) holdings of LC securities issued by the government.
Before the crisis, Lebanon’s Eurobond debt totaled roughly 30 billion dollars, held by a mix of domestic and foreign investors. However, the crisis has drastically altered this landscape. Lebanese banks, once major holders, have suffered significant losses. A crucial question remains: how substantial were these losses?
The irony is that the default on Eurobonds was intended to save BDL reserves, but with the government deciding also at the time to subsidize basic (mostly imported) goods, the country ended up hemorrhaging more FX reserves, besides punching a great hole in banks’ capital and losing precious international credibility. Eurobonds have long been a cornerstone of Lebanon’s financial strategy. By issuing these international bonds denominated in foreign currencies, primarily US dollars, Lebanon aimed to attract foreign capital and finance its budget deficits. While this approach initially fueled economic growth, it also increased the country’s vulnerability to global economic shocks and exchange rate fluctuations. The 2020 default on Eurobond payments marked a watershed moment, exposing the unsustainable nature of Lebanon’s debt-driven model. The ensuing economic turmoil has had devastating consequences for the Lebanese people, with hyperinflation, currency devaluation, and a collapse in living standards.
Lebanon’s experience serves as a stark reminder of the dangers of excessive reliance on foreign debt. The country’s financial crisis underscores the importance of prudent fiscal policies, sound economic management, and sustainable debt levels. As Lebanon navigates the complexities of its debt restructuring and economic recovery, it must learn from its past mistakes and adopt a more sustainable path forward.
The 2019 revelation that the government misappropriated billions from citizens’ bank deposits to cover its overspending sent shockwaves through the nation. This, coupled with the subsequent default on Eurobonds and the continued drain of billions on subsidies, has plunged Lebanon into a deep financial crisis. With the state effectively bankrupt and isolated from international markets, the need for decisive action is paramount. The future of Lebanon’s economy and its people hangs in the balance.
Recovery values of Eurobonds
The strong impulse of the market pulse has pushed analysts to reconsider debt recovery values and sustainability as Lebanon’s defaulted Eurobonds have more than doubled in value since mid-September (6.2 cents to around 13.47 cents currently); besides there has been new political developments in Lebanon, most noticeably the end of the war with Israel and the setting of a date, in early January 2025, to elect a new President for the republic. Data from Goldman Sachs CEEMEA Economics Analyst Report, “Revisiting Lebanon Debt Recovery Values”, revisits its previous January 2019 estimates of Lebanese debt recovery values.
These optimistic reports are still looking for support from the Central bank of Lebanon (BDL) figures as the Central Bank’s total assets declined by 12.17% annually, to reach 93.83 billion dollars by end of November 2024, amid adopting the 89,500 LBP/USD official rate by BDL since February 1st, 2024. The fall was mainly due to the 96.49% year-on-year (YOY) drop in other assets, which reached 264 million dollars by the end of November 2024. But on the positive spin and according to BDL’s latest monetary report, the Balance of Payment (BOP) recorded a surplus of 6,464.9 million dollars by September 2024, far higher than the surplus over the same period last year of 1,541.3 millions.
Based on the BDL Central Council’s Decision Number 37/20/24 dated 19/09/2024, BDL’s foreign assets starting January 2024 include the Monetary Gold, the Non-Resident Foreign Securities held by BDL, and the Foreign Currencies & Deposits with Correspondent Banks & International Organization; while excluding the Lebanese Government’s Sovereign Bonds and the BDL loans in FX to Resident Banks and Financial Institutions.
Also the positive market breadth still needs time. It seems to be translated in the consolidated balance sheet of the commercial banks as claims on resident customers, constituting 4.85% of total assets, shrank considerably by 32.60%, to stand at 5.04 billions in September 2024. Moreover, the resident securities portfolio, representing 5.2% of total assets, dropped by 11.87% in September 2024 to stand at 5.4 billions. More specifically, the Eurobond holding recorded a decline of 14.19% since September 2023, to reach 2.2 billion (net of provisions) by end of September 2024. Additionally, claims on the non-resident financial sector shrank by 3.07% YoY to stand at 4.29 billion dollars by September 2024.
In more details, Lebanese Government Eurobonds with a market value of 4.85 billions were transferred to securities portfolio; whereas 298.8 millions was transferred to loans to the financial sector. As such, BDL foreign reserve assets, consisting of 10.82% of total assets (after transferring the Eurobonds to securities portfolio and the other resident and / or illiquid assets to loans to financial sector) rose by 11.2% YOY and stood at 10.15 billion dollars by end of November 2024. Additionally, foreign reserve assets decreased by 46.72 millions in the last two weeks of November 2024.
The reports’ methodology for calculating recovery values consists of estimating the haircut: the required haircut on all external debt would bring the public finances to a sustainable level; and this is assumed to be a debt/GDP ratio of below 80% ten years after the debt restructuring. Applying the haircut to outstanding debt: the haircut is applied to the total projected outstanding debt stock at the time of the restructuring, around 47.3 billion dollars in 2025, which includes principal and past due interest (PDI) on defaulted debt and 2.9 billions in zero-coupon bonds to pay back depositors in the event of bank resolution; 3) Taking the Net Present Value (NPV): it is assumed that the new bonds issued in the restructuring carry a tenor of 10 years and a coupon of 8%; also assumed is an exit yield of 12% to discount the cash flow from these bonds to arrive at the NPV of the restructured bonds, which in turn would represent the current recovery value.
An optimistic scenario in the making
Moreover, for the restructuring process to be implemented, the report stipulates a permanent end to the conflict with Israel; the election of a new president; the formation of new government; the completion of the IMF prior actions as per the April 2022 Staff Level Agreement; the parallel discussion with bondholders; and final approval of an IMF program. In addition, for the Debt Sustainability Analysis (DSA). If a flat primary balance is adapted until restructuring, this will reverberate on a hike of 2% of GDP within four years of an IMF deal followed by a sharp rebound in growth post-restructuring where output converges to the pre-2019 trend in around a decade; and a sharp step depreciation post-restructuring as a result of the conversion of a significant portion of domestic dollar deposits into Lebanese Lira (Lirification). However, a steady moderate (3% per year) depreciation in the Lira thereafter; a post-restructuring spike in inflation due to the high FX pass-through in the near term coupled with inflation stabilizing later at around 4% per year need to be felt by the markets.
Under these conditions, the Lebanon Debt Recovery Values (DSA) reveals that, for the debt/GDP ratio to settle around 80% ten years after restructuring, a 75% haircut to the outstanding debt stock is required (a write-off of roughly 35 billions of the country’s outstanding external debt).
Under Goldman Sachs scenario and if the 75% haircut needs to be applied to the outstanding amount for each of the 30 defaulted Lebanese Eurobonds to calculate bond-holder claims post-restructuring. Assuming then that this claim is met with the issuance of a new 10-year bond carrying a coupon of 8%, the net present value of each bond is calculated using the ‘exit yield’ as the discount rate, the report said.The recovery value will make the debt sustainable, and will differ from bond to bond depending on the corresponding defaulted bond’s payment profile.. The higher the exit yield relative to the coupon, the deeper the discount factor will be and the lower the recovery value, the report added.
As interesting, the report conducts stress tests for downside and upside risks. The downside risks are a delay in bond restructuring; weaker growth; larger, more persistent depreciation; and a higher banking system restructuring bill. As for the upside risks, those were cited as lower banking system restructuring bill; stronger fiscal consolidation; stronger currency; greater external support.
How plausible is the recovery scenario?
In its previous rating review of Lebanon in August 2022, Fitch Ratings viewed the government running up arrears to the BDL in the context of the unusually complex relationship and financial engineering between the government and central bank as consistent with affirming the LT LC IDR at ‘CC’ and the ST LC IDR at ‘C’. Fitch now views this as an event of default, given the subsequent prolonged accumulation of arrears. The slow Implementation of IMF suggested reforms is key. The IMF and Lebanon reached a staff-level agreement in April 2022 for a four-year Extended Fund Facility (EFF) of about 3 billions in support of a comprehensive economic and financial reform programme. The IMF identified 10 prior actions needed for board approval. Only four prior actions have been completed, including the adoption of a 2022 budget in late September 2022.
Maan Barazy is an economist and founder and president of the National Council of Entrepreneurship and Innovation. He tweets @maanbarazy.
The views in this story reflect those of the author alone and do not necessarily reflect the beliefs of NOW
