Lebanon’s broken ties defy deepening conflict to hold rally

Unlock Editor’s Digest for free

FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.

Lebanon’s virtually worthless U.S. dollar bonds surged in the wake of Israel’s invasion of the country, as investors bet that weakening Hezbollah increased the chances of a ceasefire as the first step to end its long impotence.

Prices for the debt that was once worth $30 billion at face value rose above 8.5 cents on the dollar on Thursday, extending gains from 6 cents last month after Israel’s killing of Hassan Nasrallah, the group’s leader militants.

The advances have pushed ties to their highest levels since before Hezbollah began firing rockets at Israel last year, following the outbreak of war between Israel and Hamas. Even so, prices still indicate that investors will get very little repayment for their bonds, more than four years after Lebanon defaulted.

Lebanon failed to restructure debt while lacking a government and a plan to fix the country’s broken financial system, which precipitated default when it collapsed in late 2019.

Bonds remain thinly traded, meaning a handful of trades can move prices. Their near worthlessness also left them poised to rise on signs of even minor improvement in the country’s financial situation.

“Right now, the right way to think about it is that we have two stages, resolving the ceasefire and resolving the political impasse. Current assessments offer a better chance of moving forward with the ceasefire,” said Bruno Gennari, emerging markets strategist at KNG Securities.

Israeli bombings and displacement orders targeting a quarter of the country’s territory have wreaked more havoc on Lebanon’s battered economy in recent days, after half a decade of near-constant crisis.

Lebanon borrowed heavily on the Eurobond market to finance massive deficits before the freezing of tens of billions of dollars in foreign currency deposits in 2019 triggered a financial crisis.

Some analysts have estimated that an eventual depreciation of the dollar bonds could be more than 80 percent, given the likely costs to the state of resolving the banking system.

But a restructuring will be impossible without the political leadership starting negotiations with creditors and the IMF. Lebanon has yet to adopt the economic and political reforms demanded by the international community to unlock billions of dollars in investment and aid. Fitch Ratings even stopped rating Eurobonds in July because Lebanon no longer publishes updated fiscal information.

“Lebanon’s fragmented political environment, the interim government’s limited legal capacity to pass legislation, and delays in appointing key officials — including a new president — continue to impede the reforms needed to jump-start economic recovery and emerge from default,” the agency said. S&P credit rating. Global said this week.

This week, the US signaled its support for the election of a new president, which some in Lebanon’s fractured political system have called for but has been held up by Hezbollah’s veto for two years.

But analysts said even if a president could take office soon, progress on debt restructuring would also require a commitment to reforms and talks with the IMF.

“It could be read as long-term positive news for addressing the political deadlock, but I think it’s looking too far into the future,” Gennari said. “There are many steps in between.”