Lebanon, to Default and/or to Restructure: 2 Days Away from March 09th Maturing Euro bonds & 1 Day for a Decision on its Unsustainable Debt 

It is time for the long-awaited national decision. The Lebanese government is expected to make a decision by March 07th 2020 by which it will opt to either default on its first batch of Euro bonds maturing March 09th and/or also restructure this batch alone, or alongside the country’s unsustainable debt altogether. The national Euro bond decision will carry a multitude of serious repercussions inclusive of impacts on Lebanon’s fixed income market. It must therefore go hand-in-hand with a severe, full-fledged reform agenda that will set the sail for the next necessary action plans to salvage the economy.

BLOMInvest Bank’s compiled BLOM Bond Index (BBI), a market value-weighted index tracking the performance of the Lebanese government Eurobonds market excluding coupon payments, remained subdued sicne last week, standing at historical lows of 27.96 points by March 05th 2020.

With the country facing a fateful decision, the BBI lagged behind emerging markets’ performance, as seen in the JP Morgan Emerging Markets’ Bond Index (EMBI). This last in fact managed to partially overcome fears of the corona pandemic this week, recording a 1.14% uptick to close at 905.87 points by March 05th.

Expectedly, the 5Y Lebanon Credit default Swaps (CDS) sky-rocketed to an all-time high of 25,058 basis points (bps) on Mar. 05th according to Bloomberg, further up from last week’s 14,877 bps.

Eurobond yields rose moderately a day before decision-day, as previous weeks witnessed gradual yet notable upticks on bonds’ returns. Yields on the Lebanon 5Y Eurobonds held their grounds at 70.4% this week, while yields on 10Y bonds climbed from 36.20% to 36.4% by March 05th.

In the US, the Federal Reserve announced its first “emergency rate cut” since the 2008 global financial crisis, thereby slashing interest rates by half a percentage point (pp) on Tuesday. The new benchmark interest rate lies between 1% and 1.25%. As concerns intensified regarding the corona virus outbreak and global spillovers, the FED’s move attempts to jolt the US economy amid global concerns of a slowdown.

Consequently, yields on the 5Y and 10Y treasuries dropped further to attain new, unprecedented lows as per BLOMInvest Bank’s records at 0.67% and 0.92%, down from last week’s 1.11% and 1.3%, respectively.

Accordingly, the 5Y and 10Y spreads between the yields on Lebanese Eurobonds and their US comparables climbed by a weekly 44 bps and  58 bps to end the week at 6,973 bps and 3,548 bps, respectively.

Weekly Change of Lebanese Eurobonds Prices

Maturity Coupon in %06/03/202027/02/2020Change 06/03/202027/02/2020Change bps

Source: BLOMInvest Bank

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