This development is considered contrary to the course of events that observers usually expect in similar circumstances. It is assumed that the widespread hostilities taking place in Lebanon will be a source of concern for investors, not a source of optimism that will push them to buy bonds.”Eurobonds“And push their prices up.
This contradiction in the course of economic events in LebanonThis also applies to the situation of the Lebanese currency, which, despite the country’s crisis financial situation, was able to absorb the shock of the expansion of the hostilities and reached the outskirts of the capital, Beirut.
The exchange rate of the Lebanese pound remained stable at around 90,000 pounds to the US dollar, which is the level recorded since March 2023, after successive collapses that caused the Lebanese currency to lose more than 95 percent of its value since the end of 2019.
These unconventional financial developments, especially with regard to Lebanese Eurobonds, highlight the existence of hidden factors and strategies that affect the market and contribute to it overcoming the current crises.
What are Lebanese Eurobonds?
“Eurobonds” are sovereign debt securities in foreign currency issued by Lebanon, and the approved currency for these issues is the US dollar.
The number of Lebanese issues of Eurobonds is 27, and these bonds are owned by local banks, the Bank of Lebanon, and foreign investors.
The value of the Lebanese state’s issues of Eurobonds amounts to about 31.1 billion dollars, and with interest taken into account, the debt owed by the Lebanese state according to the nominal price of the bonds rises to more than 40 billion dollars.
On March 9, 2020, Lebanon announced its failure to pay the due installments of the “Eurobonds” debt, and this prompted local banks in Lebanon to sell their shares in these bonds to foreign investors at a low price, thus raising the share of foreign investors in Lebanese “Eurobonds” to The equivalent of $22.3 billion in nominal terms.
Since Lebanon stopped paying the due installments, Lebanese Eurobonds recorded successive declines in value, until they reached about 5 cents per dollar (i.e. only 5 percent of the nominal value of the bond).
During 2024, leaked news about the Lebanese government’s desire to buy back part of the Eurobonds contributed to raising their prices, to range between 5.875 cents and 6.5 cents to the dollar.
Until the week ending September 27, 2024, that is, the day the Secretary-General of Hezbollah, Hassan Nasrallah, was killed, the prices of Lebanese Eurobonds had not recorded any unusual positive or negative movement, despite the expansion of hostilities at that time.
However, in a strange way, days after Nasrallah’s killing, the prices of Lebanese Eurobonds recorded a mysterious jump of more than 25 percent, reaching levels of approximately 8.75 cents to the dollar currently, which raised many questions about the identity of the party that eagerly bought these bonds at the mere sight of Nasrallah. The killing of Nasrallah, and whether the war has turned into a source of optimism for investors in Lebanese Eurobonds?
Speculation to make profits
The chief economist at the Byblos Bank Group, Dr. Nassib Ghobril, said in an interview with the “Eqtisad Sky News Arabia” website that the reported rise in the prices of Lebanese Eurobonds has no real value, especially since the price of these bonds currently is still at the bottom. The rise that occurred has nothing to do with the assassination of Nasrallah, but rather with speculation and making quick profits.
Gabriel reveals that the decline in the price of Eurobonds, reaching the level of 0.6 cents to the dollar, came after the previous Lebanese government announced default in 2020, as the government did not begin any negotiations with creditors at that time, which is what the current government continued to do, despite the agreement. Which I prepared with International Monetary Fund Negotiations with creditors did not begin, indicating total neglect by Lebanon of the issue of Eurobond holders.
Gabriel considered that every increase currently occurring in the prices of Lebanese Eurobonds is due to achieving immediate and speculative profits, and has nothing to do with reforms or the future outlook of the Lebanese economy, nor with the killing of Nasrallah.
He stressed that the Lebanese government is completely absent from this file, while the picture in Lebanon today is blurry and no one knows when the war will end and when a president will be elected or a new government will be formed. Therefore, implementing a reform program that will restore investor confidence in Lebanon and advance its economy is a distant matter. Unattainable at the moment.
The reason for the steadfastness of the Lebanese pound
According to what was revealed by the chief economist of the Byblos Bank Group, Dr. Nassib Ghobril, in his interview with “Iqtisad Sky News Arabia” website, the stability of the exchange rate of the Lebanese pound against the US dollar, despite the war conditions that Lebanon is going through, is due to the following multiple factors:
- The first factor: Since 2023, the Bank of Lebanon has stopped financing the budget deficit and the needs of the Lebanese state, and thus the government was forced to find other sources of revenue generation, and it reduced the budget deficit by reducing public expenditures.
- The second factor: Since 2023, the Bank of Lebanon has reduced the size of the cash supply in Lebanese pounds on the market, which was used to speculate on the currency. The result of this decision was the withdrawal of 22 trillion pounds from the market, which means reducing the size of the cash supply in Lebanese pounds by 30 percent.
- The third factor: Through agreement with the government, the Bank of Lebanon grants salaries, allowances, and aid to public sector employees in US dollars, as the government places the money in banks in Lebanese pounds, to be paid to employees in dollars, and this contributes to preventing an increase in the monetary supply in the pound and reduces the demand for the dollar.
- Fourth factor: The Bank of Lebanon was able to raise its reserves in foreign currencies by a value of two billion and 100 million dollars from the end of July 2023 until the end of September 2024, despite all the circumstances that Lebanon went through during that period, which include the Israeli war, the presidential vacancy and the presence of a caretaker government. Not fully authorized.
- Fifth factor: The Bank of Lebanon issued circulars allowing bank depositors to withdraw a small portion of their funds monthly in US dollars.
Gabriel believes that all of the aforementioned factors contributed to the stability of the Lebanese pound at the level of 90,000 to the dollar. By pumping dollars and withdrawing the large amount of cash in the Lebanese pound from the market, the Bank of Lebanon was able to maintain stability and prevent manipulation and speculation.
He pointed out that the decisions taken in the previous stage led to the gradual dollarization of the Lebanese economy, as it has now become easier for Lebanese merchants, individuals and companies to pay in US dollars than in Lebanese pounds.
Gabriel stressed that the stability of the Lebanese currency may take a long time, as the volume of cash in Lebanese pounds available in the market until the end of September 2024 amounts to 53,463 billion pounds, or the equivalent of 597 million US dollars, against a liquid reserve in foreign currencies at the bank. Bank of Lebanon It amounts to 10 billion and 700 million dollars, which means that the monetary supply in the Lebanese pound is equivalent to less than 6 percent of the Bank of Lebanon’s foreign currency reserves, and therefore the Bank of Lebanon is easily able to drain the market of the pound to maintain the stability of the currency.
