By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
This is another tragic moment in the history of the Lebanese people who have known far too many tragedies since the civil war first erupted in 1975. Lebanon desperately needs a holiday from its overdose of history its location made inevitable. Now clashes between the security services and protesters have left more than 220 people wounded and Prime Minister Hassan Diab has been unable to break the political gridlock, let alone apply for an emergency IMF bailout loan that Washington seems in no hurry to sanction.
Solidiere shares have surged 50% as investors scramble to buy its landbank as a default hedge. The $1.2 billion 10-year sovereign Eurobond maturing in March 2020 trades at 82 to the US dollar for an implied yield to maturity of 175%. If Lebanon repays the full principal to bondholders which include the Fidelitys and Ashmores of this world, buying this debt issue would be fabulously profitable. I did something similar on the eve of the 2002 Paris II conference but I will do nothing now.
Lebanon is now the victim of a game of geopolitical and financial chicken played for the highest stakes among the Great Powers and their client states in the Middle East. France, Saudi Arabia and Kuwait will no longer underwrite a Lebanese bailout, as in 2002. The United States wants to punish Hezbollah and Iran as the financial storm clouds darken in Beirut.
Tear gas and water cannons howl with the winter winds and ice cold rain to make the downtown Solidiere district, the legacy of the assassinated Prime Minister Rafiq Hariri, a visionary whose dream of Lebanon’s rebirth was snuffed out in a bomb blast as his motorcade passed Ain al-Mreisse on Valentine’s Day 2005.
Lebanese debt has long traded at distressed levels. Yet despite its debt/GDP ratio of 160% (nothing new here for the Levantine Argentina!), I doubt if the Lebanese government will impose a draconian haircut on the March 2020 maturity Eurobond – and thus instantly the local banking system, whose deposits are three times Lebanon’s $50 billion GDP, a ratio exceeded by no other country in the world apart from Hong Kong and Luxembourg. Paris, London, Brussels and Berlin do not want the financial destruction of Lebanon and a new failed state/refugee crisis in the east Med.
So I believe that Beirut will not default on the March 2020 Eurobond. Lebanon’s political crisis amplifies its fiscal, banking, currency and sovereign debt crisis. Yet the best case scenario is that Hassan Diab’s government asks and receives an IMF bailout so that the March 2020 Eurobond is fully repaid. This Lebanon trade is a no brainer for those investors who share my short term take on this tragic, fast-evolving situation.