“Lebanon’s international bonds (Eurobonds)” are outside the scope of the massive financial losses resulting from the war rounds, and far from the severe contraction that has affected the basic economic indicators, approaching once again the threshold of 30 percent of their nominal value, after successive rises whose combined percentages approached the highest, about 28 percent from the beginning of the year, according to the distribution of tranches and entitlements.
The foreign demand for holding bonds, and automatically contributing to raising their trading prices, raises valid questions about investment expectations and their backgrounds, in light of the country and its economy continuing to be immersed in a state of “uncertainty”, reinforced by destructive wars and legitimate fears of the possibility of their renewal or expansion, while the government continues to slow down in determining the road map for restructuring the public debt, and concluding a supporting financing agreement with the “International Monetary Fund” is faltering due to the inability to complete the response to its governing conditions.
The international banking institution Goldman Sachs indicates, in an updated assessment, that “the draft financial regulation and deposit recovery law is still pending,” which is an essential element in any comprehensive settlement of the financial crisis. While it notes that the adoption of the amended “Bank Restructuring Law” last August removed an important obstacle to a possible program with the “Monetary Fund” and debt restructuring.
It was not in passing in the new assessment from the international institution, the conclusions of which were included in an analysis by Blom Invest Bank, that the bond prices reaching the threshold of 30 cents per dollar may involve “too much” or exaggerated optimism, given that the path to restructuring public debt still faces major geopolitical and legislative obstacles.
Without any ambiguity, and beyond just saying that prices are high, the institution considers that resolving the issue of Hezbollah’s weapons and restoring the state’s monopoly on the use of force represents, in practice, an important condition for obtaining broad international financial support, even if that is not an official condition for the IMF. While the continued risk of conflict makes progress towards debt restructuring difficult; Precisely for this reason, the current market trading of bonds at high prices (29 cents on the dollar) does not adequately reflect the remaining risks.
According to a high-ranking financial official contacted by Asharq Al-Awsat, the Ministry of Finance’s initiative to launch rounds of direct negotiations with creditors falls within the international conditions for the sustainability of debt and the flow of foreign funds and loans, with the aim of concluding a consensual agreement that specifies the repayment values of assets and interest and the new timetable, according to the availability of financial capabilities and the budget surplus. Which constitutes the obvious gateway to the return of Lebanon, with its public and private sectors, to international financial markets.
It is expected that, in the event of major settlements “progressing” and their success in consolidating the state’s sovereignty and its sovereign authority in war and peace decisions, and parallel progress in financial reforms, the clearest impact on the value of these owed assets will be demonstrated, through facilitating direct negotiations with local and foreign creditors, especially after the budget is technically and actually liberated from about two-thirds of the value of the public debt denominated in lira, the real value of which “evaporated” to less than a billion dollars. Due to the catastrophic collapse of the exchange rate.
Investment expectations indicate that the process of restructuring this segment of public debt, according to the options presented by financial institutions and international rating agencies, including Morgan Stanley and Moody's, will lead to the write-off of about 65 percent of its nominal value, that is, a recovery rate of 35 percent, and may rise to 40 and 45 percent, according to a more optimistic scenario that assumes that the reforms will be supplemented by a medium-term financial plan and the revitalization of the financial sector, or it will decline to about 25 percent in the event of stagnation, slow structural reforms, and the impossibility of concluding an agreement with the IMF.
The list of Eurobonds holders includes international banks, financial institutions, and investment funds, including BlackRock and Ashmore, with combined ruling percentages exceeding 40 percent, in addition to local banks, the Central Bank, and local and foreign investors. Meanwhile, the legal contracts for the issuances stipulate recourse to New York courts, and the mandatory approval of 75 percent of creditors to any new agreement that includes restructuring payment values, reducing interest, and extending maturity periods.
It is likely, according to the financial official, that the investment demand for Lebanese bonds is following the rounds of direct negotiations between Lebanon and Israel under American sponsorship, and is anticipating the possibility of them ending in an integrated agreement. Which revives aspirations to change the stereotype in its geopolitical dimensions, especially in terms of the state’s growing capabilities to extend its central authorities and solve the “illegal” weapons dilemma, a necessary condition for the flow of external support, regionally and internationally.
Partial or incomplete reform data also contribute to reflecting a promising signal to enrich the financial dimension towards achieving the desired actual balance, which paves the way for the adoption of a public debt sustainability strategy that is conditionally guaranteed to attract support and financing, especially since the “late” reform package is diverse and includes, in particular, launching the majority of regulatory bodies in vital and basic sectors, completely stopping financing the electricity sector through treasury advances, improving public finance management, and raising spending ceilings, including It responds to filling part of the gaps in public sector allocations, and continuing work to develop treasury resources and achieving primary surpluses in the budget, while appreciating their book or theoretical nature, as long as the liabilities of the public debt are isolated.
The special importance of this portfolio does not lie in the value of its book assets amounting to about 30.6 billion dollars, and the accumulation of its interests of about 15 billion dollars, nor in its description as the largest burden on the state’s exhausted finances, but rather in the fact that it has turned, according to the financial official, into the nucleus of the monetary and financial explosions that followed at a record speed, following the previous government’s decision, in the spring of 2020, to refrain from paying the due amounts of assets and interest, and ensured the removal of Lebanon and its financial sector from the international financial markets. It reached the level of a massive systemic crisis that struck the foundations of the financial system, and its repercussions continued for the seventh year in a row.
