Lebanese Eurobonds maturing in March dropped the most on record as the threat of a downgrade to near default added to selling pressure.
The bond tumbled almost 7 cents Friday to 79 cents on the dollar, the biggest daily decline on record for the country’s nearest maturity and nearing a record-low reached in November.
A Central Bank offer for local banks to swap their holdings of the Eurobonds for longer-dated instruments sparked volatility in the nation’s shorter-dated debt this week. That would help ease pressure on Lebanon’s finances amid a debt crisis and months-long protests.
Local banks have been reluctant to participate, looking to offload shorter holdings, JPMorgan Chase & Co. analysts said earlier this week.
A formal announcement of the offer would probably trigger a one-step reduction in the country’s credit rating to C, followed by a further reduction to restricted default if the deal goes through, Toby Iles, a Director at Fitch Ratings, said by email.
“The proposal by Banque du Liban reflects the external financing stress that Lebanon is under and BDL’s current commitment to conserve its currency reserves and ensure that Lebanon can meet its debt obligations,” Iles said, using the official name for the country’s central bank.
For now, it’s uncertain whether the transaction will be initiated. Given the threat to the sovereign rating, the Finance Ministry has asked the Central Bank not to pursue the transaction until the government decides on a financing plan for its Eurobonds, according to a person familiar with the matter.
The security in question is a $1.2 billion bond due on March 9. The bond’s price at 79 cents still implies a higher likelihood that investors will get repaid than for longer-dated notes, which trade below 30 cents. Last year, the Central Bank used a bridge loan to the treasury to pay all maturing Eurobonds on behalf of the government.
One of the world’s most indebted nations with liabilities reaching 155 percent of GDP, Lebanon is facing its worst economic and financial crisis in decades after years of fiscal mismanagement and the failure of officials to enact much-needed reforms. A crisis in neighboring Syria, that shut down vital trade routes and sent some 1.5 million refugees into the country, has deepened economic troubles.