Wednesday 22 January 2020

Lebanon - shearing, not slaughtering the bondholders

I'm prefacing the below blog with the following caveats. Lebanon is a small country in an important location where there are bigger things at stake than 'should we reprofile or >50% haircut some Eurobonds'. As such the outcome in Lebanon from a donor standpoint is political and looking at the economic numbers is basically pointless. The economic numbers make no sense in isolation anyway. Domestically you basically have the Arab Street protesting and a politics-business axis maintaining power. I don't think the political and economic interests will give up power easily.

As such the below is purely 'educated conjecture'. We will just have to wait and see what unfolds, as at the moment there is just uncertainty and unsustainability of the status quo. We are likely to only see the bond prices bottom as negotiations go to the wire. 

My first insights into Lebanon were in the late 90s when I was studying Middle Eastern Studies for an undergrad degree in a UK university. At one point I decided to read Robert Fisk's book on the Lebanese civil war. One section I still remember from the book is his description of Rifaat Al-Assad's crushing of the Hama uprising in Syria in 1982. The Islamist Muslim Brotherhood wanted to overthrow the secular and Soviet aligned Ba'ath Party in Syria, ie the same organisation as which took power briefly in Egypt. Hama was the centre of their power and was the 4th biggest city in Syria. Rifaat, the current President's uncle, sealed off the old town and bulldozed it with perhaps 30-40k people still inside the mud buildings. He then went around the Arab world boasting about it. Later he had to leave the country and lives freely in France and Spain and owns an Arab Satellite TV channel in London.

My point in mentioning this here is that when greater interests are at stake in the Middle East, don't assume that normal rules, laws or logic are going to apply.

Lebanon as of 2020, by any normal definition, is in the midst of a socio-economic crisis. The background of which was rapid growth and real estate construction through 2008 that by 2011 was turning into a bust. Then from 2011 onwards the civil war in Syria has displaced 1.5m refugees into a country that currently has a 6m population. 

Lebanon is a country that was created via the French partitioning part of Syria in 1920 and the creation of a Parliamentary Republic in 1926. Prior to that is had been part of the Ottoman empire and many empires before that going back thousands of years. 

The country is ethnically diverse and comprises Sunni, Shia Muslims, Maronite Christians, Greek Orthodox, Druze and others. To manage the secular and sectarian interests the Parliament is made up of power blocks and uses a regional list PR system. The President is elected by Parliament for 6 years and appoints a Prime Minister who then appoints a Cabinet that Parliament must approve. The President can fire the Prime Minister. There are supposed to be elections every 4 years.

There are two main political blocks in Parliament, the ruling March 8th alliance that are biased against Israel and pro-Syria, and March 14th alliance that are less pro-Syria. The political parties are closely tied to business and banking interests.

As a small country with a large diaspora who saved USD deposits with Lebanese banks, the banking system is large and important.

The country and economy did OK until the property bust after 2011 and then the impact of the civil war in Syria which saw 1.5m refugees arrive, bringing the population up to circa 6m. After this the current account/ goods deficit rose significantly, the government deficit increased and the economy started to stall. 

As some depositors started to worry about the solvency of the government and banking system the government had to pay progressively higher interest rates to attract deposits, while last year popular protests broke out demanding change, transparency, a competent technocratic government and economic growth and reforms. 

Following the elections in May 2018, Saad Hariri of the March 14th bloc remained in power, despite having lost a majority in Parliament, but he then resigned in November 2019 on the street protests. The new Prime Minister has just formed a government and is backed by the March 8th group, led by Hizbollah. 

All of this combined has brought Lebanon to the point of crisis. 

Government debt problem
Lebanon’s government debt is one of the largest in the world. Total 2019 government debt could stand at US$88.4bn (154.5% of GDP), with domestic-currency debt of US$55.1bn (96.3% of GDP) and foreign-currency debt of US$33.3bn (58.1% of GDP). BaML estimate up to US$11.8bn in Eurobonds could be held by international market participants. The balance, so the significant majority, are held by locals. Some of the foreign held Eurobonds may also be Lebanese-linked Swiss accounts.

So as such there is only $11.8bn of bonds foreign held bonds that they cant coerce into a restructuring/ reprofiling. The market value of those bonds at 45c is less than $6bn - a modest amount by multi-lateral standards and vs. what has been spent in the Levant region since 2003.

So what are the obvious options from here?

IMF program
The IMF assessment of overvalued exchange rate, unsustainable external debt and unsustainable government debt under current policies would imply a tough conditionality to restore sustainability and justify funding, although it is likely some flexibility would be accommodated given the geo-political circumstances. So far the government has shied away from approaching the IMF and seems first to be more interested in seeking help from the GCC. 

Reading through the IMF Article IV report from October, I understand there is a lot of uncertainty and it is not the IMF staffer's job to second guess what political outcomes may prevail and what restructuring policies might be implemented, but the report in many ways is unimaginative and fairly detached from likely outcomes. 

According to the IMF only 2-3% GDP growth would be achievable over the medium term and that a fiscal adjustment to take the primary surplus from about flat to 4-5% of GDP would have to be front loaded. 

Clearly, all this would do is trigger a Greece-style depression which with automatic stabilisers would probably worsen the debt load. It would destabilise Lebanon, potentially seeing the return of political violence, and at the time they are hosting 1.5m refugees and are needed to be stable and support in the rebuilding of Syria.

The IMF would also likely push for a PSI restructuring and at least a 50% NPV haircut on the debt. With bonds trading at a discount to that you might expect the medium term notes to be trading in the 30s, vs 40-45c now. This would bankrupt the banking system, which in turn is needed for recovery in Lebanon and Syria. The banks are also needed for the long term economic model, given its a small country with only limited options to develop a goods producing sector.

As such I don't see a conventional IMF programme as a realistic option.

Hard default
In the hard default scenario, which I understand at least Hizbollah is amenable to, I would expect the currency to halve, potentially more later if inflation spirals and the external bonds to trade at 20-25c, vs 40-45c now for MTNs. I would also expect them to default on the March and April bonds that are in the 75-80c range now.  

The hard default outcome, in fact any outcome that involves large principal reduction, would bust the banking system. Yet the oligarchs that control the political parties also own the banks, so they are unlikely to support a hard default/ large principal haircut outcome. 

I think the economic problems would be worse under the hard default than even the IMF induced depression outcome. So again I don't see it as politically viable. 

A managed rebalancing? Maintaining the peg, preserving the banking system, focusing on economic recovery
So is there a third way? It has taken 9 years of upheaval to get Lebanon to where it is. Is there a ten year path for them to grow and rebalance out of the problems? 

This scenario would be to keep the USD peg unchanged and to attempt to preserve the country’s banking hub position and grow the economy out of the problems. 

BaML estimate a 10-25% par-value cuts to government debt would not lead banks to require additional capital as their capital ratios would remain around 15% (minimum national regulatory capital adequacy ratio) or 10.5% (Basel III requirement). As such if they reprofile/ partially haircut the debt, they could do so while maintaining the solvency of the banks.
An economic rebound, the main stimulus of which is a rebuilding in Syria, an easing of financial conditions and a revival of private investment could also help the debt dynamics and government funding requirements a lot. 

One problem with a reprofiling is you have a mismatch of assets and liabilities, your medium duration assets might only be worth 50c at NPV but your liabilities, deposits can be withdrawn at par. Maintaining deposit withdrawal controls for the next 10 years wont work either. So in a reprofling operation it is likely donor countries would have to finance deposit outflows until confidence returns, possibly via BdL funding operations. 

In addition if the coupons on the bonds are cut to 3 or 4%, the banks have to reduce deposit yields to less than that, 1 or 2% to maintain a margin, which in turn only works if depositors are confident of solvency and access. 

Hard default costs
To put the downside scenario into perspective BaML estimated the banking sector recapitalisation costs to be cUS$20bn (36-53% of GDP). This would lead to deposit bail-in requirements of 12-13% on all deposits to bring the Capital Adequacy Ratio (CAR) back to the national regulatory requirement of 15%. Should deposit bail-ins only apply to High-Net Worth Individuals (HNWIs), then the deposit bail-in requirements on such depositors would likely need to double to c25%.

BaML estimate banking sector recapitalisation costs to be cUS$80bn (145-225% of GDP), should domestic banking sector FX exposure to the BdL be restructured on the same terms as government debt. This would lead to deposit bail-in requirements of 49-56% on all deposits to bring the Capital Adequacy Ratio (CAR) back to the national regulatory requirement of 15%. Should deposit bail-ins only apply to High-Net Worth Individuals (HNWIs), then the deposit bail-in requirements on such depositors would likely need to double to an average of c100%, fully wiping them out.

BaML restructuring scenarios:

Another issue with depegging is the BdL has lent the government $28.5bn USD in Lebanese Pounds denominated debt, but its not obvious to me with the data I have whether that is part USD deposit financed. The BaML table of bank assets shows $31bn of Lebanese Pound deposits with the BdL however. Another table in the report shows $46bn in bank deposits in Lebanese Pounds. Overall the bank's net foreign asset position was -$10bn albeit on $262bn in total assets and $20.6bn of equity. 

These types of bail-in outcomes would basically end the banking business model for Lebanon at a significant long term cost. It would also cost the politically connected oligarchs greatly, as they own these banks. Somehow, I just dont see it as likely. 

As such shearing the bondholders with a reprofiling is more viable for Lebanon's banking model than slaughtering them with an 80% loss or years of deposit/ currency controls.

Near term events
Difficult political decisions are often forced by near term, unavoidable events. 

In November 2019, while there have not been central bank imposed capital controls, the individual banks limited withdrawals to US$1,000/week. BaML estimated US$10.3bn in FX deposits come due each month (US$7.6bn from residents; US$2.8bn from non-residents) without this.

This restriction helped the Banque de Lebanon (BdL) reserves - they increased in November:

Reserves are over 50% of GDP at $38bn ex-gold, foreigners only own $12bn of par value Eurobonds. But total debt, CA deficit and rollover/ funding needs are all big. 

Given BdL deficit monetization over the years, the fiscal constraints are less binding than the external funding one, in BaML's view.

These are several Eurobonds due repayment this year. From March to June there are US$3.4bn of principal and coupon payments. If we assume 30% of these are held by foreigners, they could pay the foreigners off for about a $1bn net FX loss. 

Paying the March and April bonds?
There was a proposal last week to offer termed out MTNs to Lebanese holders of the maturing bonds. Unfortunately the MTNs are trading in the 40-45c range and many of the holders of the 2020 bonds are Lebanese banks, so they started selling them down and the March bond dropped back to 79c:

At 80c plus 5.5c interest you are looking at an upside of 106.375 or in my view 20c in a hard default scenario, so 20.85c gain or 65.5c loss. So the market is pricing in a 75% chance of payment if your downside scenario is 20c. If your downside is 30 or 40c it is a lower probability of payment. I think it is likely they at least pay the foreigners, but I wouldn't call it a 90% probability and at 75% you are only breaking even on the odds.

After we get through these maturities, we still have the growth issue to contend with. And that is dependent on amongst other things investment and business confidence, which in turn is dependent on economic stability. 

So I don't see how they can avoid making some clear decisions before or after these maturities in order to agree a clear and deliverable path forwards.

Lebanon government debt overview
Lebanon has very high levels of debt, 152% of GDP; around 2/3 of that is in local currencies, the foreign currency debt  makes up c.57% of GDP. Foreign currency debt, held by foreigners is more like 20% of GDP. Domestic debt is held mainly by the BdL and local banks, but locals also own substantial amounts of eurobonds.

Overall, BaML estimate that around 50% of Eurobonds are held by local banks, whilst the BdL has around 11%. Foreign investors own the remainder, around 39% of Eurobonds.

Bonds outstanding:

Foreign ownership:

Only the March 2020 bond has enough foreign owners to cause a problem with the 75% collective action clauses out of the maturities in the next two years. Then the April 2022 bond for $1.5bn and $700m April 2024 bond also have high-ish foreign ownership. The rest of the bonds it should be possible to coerce/ legislate for a reprofiling. Holdout bonds might trade at very low prices if most accept a reprofiling. 

Payment profile:

There are three maturities through June for $2.4bn, a large $2bn maturity in April 2021 and $1.5bn in Oct 22. So once they are through the near term maturities they have 2 1/2 years to get the recovery going. 
A reprofiling would alleviate much of the near term principal and a large part of the interest costs.

Adding principal and coupons, March to June 2020 inclusive sees US$2.5bn of principal payments and US$875mn of coupon payments. July 2020 – March 2021 inclusive, there are US$1.1bn of coupon payments. However, April & May 2021 see a combined US$2.8bn of principal and coupon payments. If they can get through to the April 2021 payment then the next big payment is the end of 2022, at which point the market expects a hard default. 

Assuming a 20c outcome on hard default a 45c price predicts about a 75% probability of default:

A reprofiled bond strip
The below works on the assumption that bond holders are offered a reprofiled strip with a 3.25% coupon on each bond and that foreigners voluntarily take this to avoid holding small, holdout positions while spending years fighting court cases. Also that since the Lebanese Pound maintains its peg, it is effectively Dollarised - or at least 'Lollarised' until the withdrawal restrictions are lifted.

If the new strip has a 7-year average duration and a 3.25% coupon (so 50% coupon haircut and no principal haircut) and a market 10% exit yield the strip would be worth:
  • 67c at 10% yield 
  • 57c at 12.5% yield
  • 51c at 15% yield
  • 40c at 20% yield
The bonds are 40-45c today.

If after two years the strip was then 5yr duration and the market was down to a 6.5% yield the strip would be worth 86.5c - vs 40-45c bond prices now, so you would double your money on the bond price plus get 2 years of 3.25% coupon, or a 7.6% running yield.

Interest payments are >9% of GDP, so halving them is worth more than 4.5% of GDP.

BaML has another, harsh, scenario of a 50% principal haircut, 50% coupon haircut and a 5 yr maturity extension and gets prices in the high 30s, vs 45c now:

So why are the bonds at 40-45c and potentially about to drop into the 30s? Partly uncertainty, partly the risk of a hard default, which is certainly not zero. But also a catalyst for the Eurobonds selling off late last year was the downgrade of the country to CCC, which raised the bank capital charge default risk weight for the bonds to 50% from 30% at 'B' and that sent the price from the 60s to the 40s. Defaulted bonds have a 100% charge vs recovery, which I understand is 25c, and perhaps a forced reprofiling would be rated 'Defaulted' or 'Selective Default' and force the banks to sell more. 

Terms of Lebanon Eurobonds
Lebanon Eurobonds are issued under New York law and have standard terms including cross-default, negative pledge, and grace periods, for example. BaML examine the key bond features below:

"Cross default: Yes, on any public external indebtedness of at least US$20mn equivalent. External indebtedness is defined as “any notes, debentures, bonds, or other similar securities with a stated maturity of more than one year from their date of issue which by their terms are payable, or confer a right to receive payment, in any currency other than the lawful currency of the Republic.

Grace period: 7 days for principal and 30 days for coupons.

Declaration of acceleration: 25% of principal.

Modifications / collective action clauses: The fiscal agency agreement allows meetings to be convened to modify conditions with 75% holder consent. This includes changing amounts payable, reducing/cancelling principal, and modifying currency of payment. Any such resolution passed in this manner would be binding on all holders regardless of whether they voted in favour or not.

However, there is no collective action clause across several classes, with the most recent prospectus specifically highlighting that this type of clause does not apply. As a result, each bond would be restructured series by series."

A reprofiling with a lower coupon would trigger CDS as it is both a reduction in interest and extension of maturity. So paying foreigners in March but offering new bonds to locals should be a default event.

Donor Package size
BaML estimate a total combined IMF, international and GCC support package would need to be around US$26.4bn (46% of GDP) over three years. Of which the IMF program over three years would need to be around US$9.2bn (16% of GDP; 1,061% of quota).

Its a pretty small amount of money in the scheme of things, and even if it takes more in order to stabilise bank funding via a 'TARGET2-type approach' of providing USD to the BdL and the BdL funding the banks who in turn let depositors withdraw.

Economic situation
During 2018–19, the authorities have also taken some important structural measures. Parliament has approved a plan to reform the electricity sector in April 2019, which is expected to contribute to a reduction of the fiscal deficit over the medium term. The electricity sector undersupplies the economy, is a large impediment to economic growth and industry and as underpriced cost an incredible 3% of GDP in subsidies. 

Other laws approved include a code of commerce and a law on judicial intermediation. These and other planned reforms could encourage donor disbursements of concessional financing for the Capital Investment Plan (CIP) committed at CEDRE in April 2018.

Lebanon’s economic growth slowed to around 0.3% percent in 2018 on the back of low confidence, high uncertainty, tight monetary policy and a substantial contraction in the real estate sector. 

Youth unemployment is high while any Syria recovery would massively boost industrial output, in particular construction materials. 

Some refugees returning home, some emigrating and some being normalised into the economy would help. As many are probably doing informal service jobs, some entering productive industries would help the goods trade deficit.

 An economic recovery domestically can be engineered via (and it will be donor mandated);
  • Anti-corruption measures
  • The improved stability of a Syria recovering from the war and some refugees going back
  • The reforms and investment in electricity
  • Supporting a formalisation of businesses and perhaps formalising the position of refugees who wish to stay
  • Forcing banks to offer domestic credit more easily
  • General investment in skills, infrastructure, certain key industries (such as building products to export to Syria). The industrial sector is only 14% of the economy, vs 32% in Turkey and 35% in Egypt
  • Efforts to reduce youth unemployment from 17%

While the population has grown about 1.2-1.3% a year steadily, the Arab spring and the civil wars and upheavals that were caused across the region has led to a lost economic decade:

Electricity sector
The electricity sector is highly inefficient in Lebanon and is imposing a significant economic and social cost. Electricité du Liban (EdL), the state-owned company mandated with the responsibility of generation, transmission, and distribution of electricity, is faced with three main challenges:
  • Production capacity is well below consumers’ demand
  • Losses (technical, non-technical and non-collection) are very high, estimated at 43 percent of production—i.e. only 57 percent of electricity produced is actually transmitted, billed, and collected; and 
  • Electricity tariffs are well below cost recovery, and EdL’s large financial losses impose a heavy burden on the government budget.
The installed generating capacity of 3,017 MW2 is estimated to fall short of demand by about 1,500 MW (even excluding some large energy-intensive companies that rely on their own generators).

Building 3000-4000 MW of generation capacity would cost up to $5bn and would be a brilliant donor project. It would be a huge economic boost on a $57bn economy. Moreover demand for electricity is estimated to grow by 500 MW every five years.

Currently electricity is underpriced at 9.6c/kWh vs 22c in the private sector. Losses are also 43% of production due to inefficient transmission, and theft/ non-payment. The government was subsidising electricity for $1.8bn in 2018, 3.1% of GDP.

So per the above chart, between interest payments on the debt and the subsidies to EdL, these two areas alone account for pretty much the entire government deficit, which is remarkably good considering the crisis they have been through.

Lack of access to electricity and outages are sighted as one of the top impediments to business in Lebanon. As such 84% of firms own a generator and use it for half of their electricity.

In 2019 they have been building new high voltage transmission lines and installing smart meters. They also have temporary solutions in terms of generators and power barges and are working on LNG imports for 2022. They are planning to raise prices to 14.4c soon but would need 16.2c to eliminate subsidies per the IMF report.

The reforms should significantly reduce losses/ subsidies by 2021 and 2022:

Government finances
If they eliminate electricity subsidies and halve the coupon on their debt and the economy grows, are the government finances sustainable?

I'm not sure how the IMF puts the numbers below together but it seems to be a mix of the governments current plans, and extrapolated forecasts.

The IMF present the following forecasts:

I would make a couple of points. Their GDP recovery estimate is very undemanding. If Lebanon engage in supply side reforms and Syria starts to reconstruct and some refugees go home/ some normalise then the mix of the primary deficit would improve, tax receipts would rise, social spending fall, GDP rise etc.

If they reprofile the debt with a halved coupon on local debt and Eurobonds held by locals, it will cut the interest paid almost in half and even under the IMF numbers above a halved interest bill would almost bring the debt to a stable level. A higher GDP growth rate or a better mix of taxes to spending would improve the debt/ GDP profile further. The overall tax base is fairly low in the low 20s % of GDP, but the reprofiling is a massive tax on asset owners and taxing real estate, if it causes real estate prices to fall may drive more bank NPL's. That said when I looked up Beirut property prices, they seemed sky high to me and eminently taxable.

They also have private investment declining from 20% to 15% of GDP over the forecast period, which is non-sensical in a recovery scenario.

Over the forecast period to 2024 they also have local interest rates remaining at 10%, but as a dollarised, pegged currency, with a reprofiled curve, they should fall to much lower than that:

The IMF numbers show little external rebalancing, which is not consistent with the crisis causing the imbalances in the fist place. Goods export growth would clearly be driven by a Syria recovery. The 25% trade deficit is also clearly linked to the 25% of population that are refugees. But by 2024 the IMF has little improvement in export growth or the trade balance. More electricity should support import substitution and rebuilding in Syria will boost imports, exports and local value added.

The IMF estimate that the unemployment rate is estimated at about 20 percent with youth unemployment even higher at 30 percent. But their estimates dont seem to show any output gap closing.

Another point is if FDI went back to $4bn or so, which is about 6% of GDP, it would help. That was the FDI level from before the crisis.

Government twin deficit rebalancing by definition should help the current account rebalance.

The IMF's explanation for the lack of a recovery in their forecasts are that the measures taken so far are temporary and will wear off and that without a restructuring a lack of confidence will hold the economy back.

The gross and net balance sheets
Commercial bank assets are 400% of GDP. However a lot of this is FX deposits that the commercial banks then redeposit with the central bank who then redeposit it with external banks. If the FX peg is maintained then there is no issue with offshore USD deposits backed by USD assets being unwound. The bigger issue is where there are USD deposits and LBP assets. If deposit flight was very big then a backstop arrangement where the BdL could borrow USD from the IMF would remove the need for large depositors to worry.

Once things are stable, if you are a Lebanese expat, do you prefer a USD Libor deposit with a Lebanese bank or buying the reprofiled strip at a high single digit IRR or even double digit IRR?

According to the IMF, to stabilise the debt dynamics on their numbers above, with no debt restructuring they would need to front load a fiscal adjustment and target a primary surplus of 4–5 percent of GDP over the medium term. The primary surplus is already flattish and a 4-5% surplus is not remotely viable. They could increase the primary surplus if they exported goods to Syria for the recovery there and taxed those exports to pay down debt. But outside that the primary surplus is already high enough and any Syrian export tax revenue should be used to build up the domestic economy first. Running a large primary surplus to pay external debt, is simply depressionary as we have seen in Greece and elsewhere.

In terms of donations. Donors have granted $11 billion in pledged concessional funding via their Capital Investment Plan (CIP) at the CEDRE conference in April 2018. But release of this money is dependent on reforms. Frankly the government should ask for much more money to support the refugees. Even $500/ month/ refugee would be $750m a month. Per this report, 51% of Syrian refguee households survive on about $1000 a year per person, vs Lebanese GDP per capita of $6,200 (down from $7,700 in 2010).

Government & Parliament
As of writing this the Prime Minister, Hassan Diab has formed a new government. There is great scepticism that he, as an ex-academic, and as representative of the March 8th block and vested interests will have much authority or power to push through the necessary reforms and challenge vested interests to drive the recovery. They have also pointedly indicated they don't want to go to the IMF but would prefer GCC donor support instead. 

In the Parliamentary and Government system in Lebanon the President can dismiss the Prime Minister. As such the donors can force Diab out of office and replace him with a technocrat with more broad support to replace him. However I would have thought such an act would only be done after negotiations fail.

IMF measures
The IMF's further fiscal measures to get to an unrealistic 4%+ primary surplus are mainly based around tax increases on goods and assets. They are worth up to 6% of GDP, versus an existing tax base of about 20% of GDP. This is likely to just push the economy into a greater recession if implemented.


Taking the next two tables together. If a recovery sees 4-5% real GDP and 7-8% nominal, if they halve the interest bill via a reprofiling, while running a flat primary balance, the debt to GDP ratio would actually start declining.

In 2020, the estimated interest costs plus EdL electricity subsidy total 130% of the total government deficit. Looking at that the otherway, they only really have two big problems to deal with if the economy starts to recover.

One of the main issues Lebanon is financing the massive current account deficit to GDP that developed as the refugees arrived. It has nothing really to do with the domestic economy or economic policies. If 25% of your population are refugees you have to import food and goods to pay for them. 

They had a trade deficit develop during the real estate boom years pre-2008 and it has been maintained/ got worse since:

But remittances of around $750m a month, supported the current account until recently:

Lebanon post-civil war growth and pre-2011 growth
The civil war ended in 1990 and after two years of 'bounce' the country settled into a sustained growth period, 92-98, or 7 calendar years, real GDP grew 42% or 6.3% on average. 

GDP growth
Lebanon has been able to run 7-10% annual growth for a few years when investment levels have been high. 

USD GDP Per Capita:

USD GDP more than tripled in the years after the civil war.

While the IMF have private investment flat lining at 18-20% of GDP, history suggests that it could increase to 25-30% in a recovery:

But too much of the investment boom pre-2011 went into real estate which then turned to an NPL bust:


The civil war in Syria imploded the economy by $50bn/ 75%. Quite a bit of that could be recovered quickly if the economy starts to rebound. 

Syrian oil production in Mbpd:

 GDP % change:

So what is the conclusion? 

Apparently they will decide the fate of the March bond next week

My guess is they will pay the foreigners, and possibly locals (we don't know who locally owns it and in any case the locals will be getting big haircuts elsewhere, so why punish the local banks now when they will be under pressure over the next few years and Lebanon is going to have to ask the donors for a package anyway).

If they pursue a donor supported reprofiling and growth comes back, then I think there is upside from the current 40-45c for most of the MTNs in a reprofiled strip with a 3.25% or similar coupon. 

However if there is some sort of scare or they dont pay the March bond, I would be more interested in the MTNs in the 30s, as I think any sort of hard default will see the bonds in the 20s. 

I don't think a hard default is likely or optimal or would be wanted by donors, but the negotiations could go to the wire, with reforms, anti-corruption and bank capital requirements being huge likely sticking points. Hopefully that stress will push the MTNs down into the 30s first. If we use Greece as a template, the PSI debt only bottomed after the restructuring, as retail investors dumped the new strip at 13c (or 6.5c the pre-50% haircut price). Then again in July 2015 the Greek PSI bond yields peaked, from my memory, one or two days before the third bailout phase was agreed after weeks of tense negotiations that threatened to see Grexit happen. 

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