Lebanese bonds reward politicians as Cabinet impasse eases

Investors are rewarding Lebanon’s politicians for ending an 11-month stalemate that raised concern over the country’s ability to successfully refinance some of the $8.7 billion of debt coming due this year.

The yield on Lebanon’s dollar bonds maturing in April 2021 dropped 21 basis points over the past two weeks to 6.07 percent Wednesday, as feuding party leaders moved closer to agreeing on forming the Cabinet that was announced on Feb. 15. The extra yield over U.S. Treasurys fell 26 basis points in the period, to 380 basis points, JPMorgan Chase & Co. data show.

“There is a will to keep tensions under control,” said Jihad Azour, a former Lebanese finance minister who is now vice president of consultants Booz & Co. in Beirut. “The markets, capital flows and currency will feel the improvement and the Eurobond will go easily because it will surf on this wave.”

Prime Minister Tammam Salam inherits the Arab world’s most indebted country. His new government must tap investors while contending with the spillover of violence from the Syrian civil war, including more car bombs Wednesday, a slowing economy and 1 million refugees straining his country’s resources.

The Finance Ministry will issue Eurobonds to replace existing debt, Central Bank Governor Riad Salameh said by email on Feb. 13, two days before the Cabinet was formed.

“Structural problems and potential social problems are very severe and cannot be tackled very fast,” Sergey Dergachev, who helps oversee about $9 billion as a fund manager at Union Investment Privatfonds in Frankfurt, said by email. There is no “fantasy” among key investors that Lebanon will be transformed significantly by the new government, he said.

That was evident Wednesday when bombings in a suburb of Beirut where support is high for Hezbollah, which is fighting in Syria alongside troops loyal to President Bashar Assad, killed eight people. Clashes also broke out Thursday between Assad’s supporters and opponents in the northern city of Tripoli.

Azour said any tension coming at the time of the Eurobond rollover will be reflected in the pricing.

The cost of insuring Lebanese debt against nonpayment using credit-default swaps was little changed over the past two weeks as bond yields declined. They stood at 383 basis points, down nine basis points from the end of last year. Standard & Poor’s cut Lebanon’s credit rating on Nov. 1 by one level to B-, six below investment grade and on par with Egypt.

Dergachev said Lebanon will unlikely have a major economic rebound because of the Cabinet formation. Plus, the impact on Eurobond spreads will be “mildly positive” because the key driver of the performance of Lebanese debt is the inflow of deposits into banks from the diaspora, which will then be invested in Eurobonds, he said.

Lebanon’s economy has suffered since the Syrian uprising against Assad began in March 2011. The World Bank estimated in October the war had cost Lebanon $2.6 billion and it lowered its forecast for economic growth to 1.5 percent for 2013 from 2.3 percent. It expects a similar rate this year.

The violence came on top of domestic squabbles between the country’s two main rival blocs, the March 14 group backed by Saudi Arabia and the March 8 faction supported by Iran, paralyzing government institutions.

The Cabinet’s formation doesn’t spell a final end to Lebanon’s problems “but it indicates a de-escalation from the two parties and their foreign backers,” Iran and Saudi Arabia, Paul Salem, vice president of the Washington-based Middle East Institute, said by telephone. If the cooperation can stretch into a smooth election of a new president in May, “then there will be a political order that’s in for six years and people and investors can have confidence.”

A version of this article appeared in the print edition of The Daily Star on February 21, 2014, on page 5.




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