Markets jittery about Lebanese bond yields

Lebanon plans to gradually introduce a flexible exchange rate and abandon it's peg to the US dollar as part of the government's economic rescue plan, finance minister Ghazi Wazni said in a national dialogue meeting of parliamentary blocs on Wednesday. AFPShow less

Lebanon’s sky-high bond yields and credit default swaps may start to dip if a new government unveiled this week can ease concerns about a sovereign default.

Investors are watching a $1.2 billion Eurobond, payment for which is due on March 9. Its price has risen this week due to the formation of the government, ending a period of caretaker rule since protesters forced the resignation of the prime minister in October. But it’s still trading at just 84 cents on the dollar, equating to an annualised yield of around 170 per cent. That suggests there are still plenty of investors doubtful it will be repaid.

Incoming finance minister Ghazi Wazni said in an interview Wednesday that the March securities would be at the top of the cabinet’s agenda when it meets next week. New Prime Minister Hassan Diab is set to visit countries in the Gulf Cooperation Council, raising the possibility that Lebanon gets funding from allies such as Saudi Arabia and Qatar.

“The market is on edge around the real potential for a missed redemption,” said Paul Greer, a London-based money manager at Fidelity International, which owns a small amount of Lebanese debt. “We think the chances that Lebanon pays the bond are higher than what the market is assuming, but clearly the risks are very high.”

Lebanon’s political struggles and the absence of external funding have sent its default risk soaring. The government’s five-year CDS rose above 2,900 basis points last week after ratings companies warned they may downgrade Lebanon if it got local holders of the March bond to swap into longer-dated notes. The price of the contracts has since dropped to about 2,850 basis points, still among the highest for any nation globally.

It’s unclear whether Lebanon will jeopardise its sovereign rating by pushing ahead with the swap plan. The government also has $1.3bn of Eurobonds maturing in April and June, although those have fewer foreign holders than the March notes, roughly half of which are owned by international investors, according to JPMorgan Chase.

Investors have to decide whether fat yields make up for the risk of investing in a country struggling with its worst economic and political crisis in decades. Standard Chartered Plc said a debt restructuring will become much more likely if Lebanon fails to secure sufficient external funding in the next six months.

“The government formation and a statement around the bond repayments being a priority are no guarantee that the dollar bonds due in March and June will be paid out,” said Mr Greer, whose developing-nation debt fund outperformed 94 per cent of peers in the past year.