Lebanon’s Critical Week: A Turning Point for Political Stability and Economic Recovery
As Lebanon embarks on a crucial week in its prolonged quest for political stability, bondholders are cautiously optimistic about a potential breakthrough. After 26 months without a president, the country is set to hold an election among lawmakers on January 9 to appoint a new head of state.
A Functional Government on the Horizon?
Despite repeated failures in the past, bond-market trends suggest that investors are betting on a functional government taking over soon. Lebanon’s defaulted sovereign dollar bonds have risen for a third consecutive day, building on a 114% return to bondholders last year – the largest in the emerging-market asset class.
US Envoy’s Arrival Boosts Hopes
Amos Hochstein, a senior Middle East envoy of US President Joe Biden, arrived in Beirut on Monday to meet with Prime Minister Najib Mikati. This move is seen as part of American efforts to persuade lawmakers to elect a president this time around.
Milestones to Recovery
Before addressing the economy and recovering from a debt default, Lebanon’s politicians must navigate several critical milestones this month. These include securing an end to military conflicts, particularly the fragile ceasefire between Israel and Hezbollah, which is set to expire later this month.
Bondholders on High Alert
Bondholders are closely watching the situation, with some expecting a rally if a new president is elected. “Electing a president probably means the appointment of a prime minister and a full working government instead of the ‘acting’ government,” said Soeren Moerch, a portfolio manager at Danske Bank AS.
A Long and Winding Road
Lebanon defaulted on its international debt in March 2020, triggering a series of currency devaluations, high inflation, a banking crisis, and widespread poverty. Despite this, bond investors have been bidding up Lebanese securities for months, hoping for a turnaround.
Binary Outcome Ahead
The uncertainty surrounding the political front leaves bond investors facing a binary outcome. The appointment of a reform-driven president would lead to a boost in investor sentiment, while continued political deadlock would likely result in severely negative sentiment, a sharp depreciation in the currency, and a high risk of international sanctions.
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