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Fri 21 Feb 2020 12:30 PM

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Lebanon's yields hit 1,000% as government calls in bond advisers

Beirut-based Al-Akhbar newspaper reported that the government will formally ask financial and legal advisers how it should handle its Eurobonds

Lebanon's yields hit 1,000% as government calls in bond advisers

A bond yield soars to more than 1,000 percent? It just happened with Lebanon.

The nation’s next maturing Eurobond, $1.2 billion of notes due on March 9, fell to a record low of 54 cents on Wednesday, sending the annualized yield to 1,600 percent.

What’s the latest?

Lebanese Parliament Speaker Nabih Berri said on Wednesday the best solution to the country’s debt crisis is a restructuring, state-run National News Agency reported.

Beirut-based Al-Akhbar newspaper reported that the government will formally ask financial and legal advisers how it should handle its Eurobonds, with a view to potentially restructuring them. Lebanon is reaching out to banks including Citigroup Inc., Rothschild & Co. and JPMorgan Chase & Co., the newspaper said. It didn’t disclose where it got the information.

Meanwhile, the International Monetary Fund is sending a team to Beirut between Thursday and Feb. 23 to discuss Lebanon’s economic problems with government officials, spokesman Gerry Rice said.

Lebanon was without a government for several months after protesters forced the prime minister to stand down in October. The administration of the new premier, Hassan Diab, has only been in place since late January.

What does a 1,000 percent yield really mean?

Since the bonds sunk into distressed territory, soon after the start of the protests, investors have shifted their focus to recovery rates, with trades driven by prices rather than yields.

Still, the surge in yields is an indication of how concerned markets have become.

“The entire investor focus is on the probability of default, rather than the coupon or accrued income a bond provides,” said Richard Segal, a senior analyst at Manulife Investment Management in London.

What are the other bonds doing?

Most of Lebanon’s other Eurobonds have fallen to below 35 cents, while its five-year credit-default swaps hover around 12,730 basis points, the highest in the world, according to data compiled by Bloomberg.

While Lebanon has enough foreign reserves to service its external liabilities through 2021, the costs would be so high that this strategy is “politically unrealistic,” Fitch Ratings said this week.

The consolidated balance sheet of the government, central bank and local lenders shows a negative net foreign-currency position of around $46 billion, Jefferies International Ltd. estimates. As such, repaying Eurobonds maturing in 2020 will worsen Lebanon’s credit metrics, said Alia Moubayed, a Middle East and North Africa analyst at the firm.

“A payment will heighten the risk of further protests and will likely undermine the new government’s ability to implement needed reforms,” Moubayed, who’s based in London, said.

Where does Lebanon go from here?

Lebanon will most likely have to restructure its debts, according to Standard Chartered Plc. While authorities seem reluctant to request financial assistance from the IMF -- they only want technical advice for now --- a bailout program would be the best way of restoring confidence in Lebanon’s economic and financial outlook, the bank said.

“A default or restructuring of external-debt commitments without a clear funding plan or economic framework would further strain Lebanon’s already-uncertain economic, political and social situation,” Carla Slim, an economist at Standard Chartered in Dubai, said in a note.

A devaluation of the currency, which has been pegged to the dollar since 1997, is increasingly likely if the nation fails to secure external funding of at least $10 billion this year, she said. The Lebanese pound trades around 2,400 per dollar on the black market, almost 40 percent weaker than the official rate of 1,507.5, according to local website lebaneselira.org.

“The fiscal position will worsen further if the currency continues to decouple from the official peg,” Ziad Daoud, the Dubai-based chief Middle East economist for Bloomberg Economics, wrote in a report. Public debt is more than 150% of gross domestic product and rising, and annual interest payments cost about 10% of GDP, he said.

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