Preliminary Estimate of Lebanese Banks’ Losses on Sovereign Eurobonds

Source: Blominvest Bank; BDL

Insult was added to injury as far as the Lebanese crisis is concerned when the Lebanese government defaulted on its sovereign Eurobonds. The most directly affected were, naturally, holders of these Eurobonds, which Lebanese banks constituted a big part of them. Just before the crisis started, Lebanese Eurobonds outstanding totaled around $30 billion, with banks holding $14.8 billion, BDL $5 billion, and foreign investors the remaining $20.2 billion[1]. But throughout the crisis, this composition has changed dramatically with considerable losses on the part of Lebanese banks. An interesting question is: how big exactly were these losses?

We will try to provide a preliminary answer to the above question. To that effect, a look at the above table reveals three interesting observations. First, even before the crisis hit in Q4 2019 (specifically on 17 October), the average weighted price of Eurobonds in the previous quarter was quite below par (of 100) at 75.93, a harbinger perhaps of worse things to come[2]. Second, the biggest drop in the weighted price took place in Q1 2020, from 54.44 to 32.25, as the Lebanese government’s default took place during that quarter (early March 2020); also, it continued to drop as no resolution was in sight for the crisis, reaching 6.18 by Q4 2022. Third, Lebanese banks’ holding of Eurobonds fell notably during Q1 2020 by $3 billion, as banks scrambled to unload some of their Eurobond holdings right before and after the default. Additionally, Eurobond holdings fell again by $3.2 billion in Q4 2021, driven by the need to abide by BDL’s regulation that required banks to increase their FX reserves by 3% and by the need to enhance their FX liquidity to meet clients’ demand arising from Circular 158[3]. In fact, the urgent need for FX liquidity drove banks’ Eurobond holdings down to $2.9 billion by Q4 2022! And the end result was that $11.9 billion of Eurobonds changed hands from banks to mostly venture funds who hoped to cash in on huge capital gain profits once the crisis is over and a resolution to foreign debt restructuring is agreed upon.

Of course, these “fire sales” – or the (reasonable) fear of being FX illiquid – on the part of banks implied huge losses as they were forced to sell their Eurobonds at market prices way below par. As we can we see from the table above, total realized losses stood at more than $9.5 billion by Q4 2022, close to 65% of their initial holdings of $14.8 billion and, more importantly, about 50% of banks’ total capital prevalent on the eve of the crisis[4].

These are no doubt huge losses, not counting banks’ losses accruing from NPLs, let alone the losses accruing from deposits at BDL, which potentially could be even bigger. 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. That really hurts!

[1] Usually before the crisis, banks held their Eurobonds till maturity, valued at their nominal prices or at par.

[2] Actually, the weighted price of Eurobonds is nothing but the Blom Bond Index (BBI), as it reflects the prices of Eurobond issues with each price weighted by the amount outstanding.

[3] Circular 158 stipulated that banks pay qualified customers $400 in cash each month, and another $400 in LBP at the rate of 12,000. It was issued by BDL in June 2021.

[4] Losses were estimated at (100 – the average weighted price) per unit of Eurobonds.