Financial uncertainty: Why Lebanon's Eurobonds are soaring despite default

Report by Lea Fayad, English adaptation by Yasmine Jaroudi 

Lebanon's dollar-denominated Eurobonds have surged more than fivefold over the past year, rising from less than 6 cents on the dollar at the start of 2024 to above 28 cents.

Eurobonds represent Lebanon’s sovereign debt issued in U.S. dollars, which totaled around $30 billion before the financial crisis. Their value collapsed after Lebanon declared a default on its debt in 2020, plunging from near par levels of 100 cents in the years before the crisis to historic lows below 6 cents early last year.

The trend began to reverse in 2024. These included a ceasefire, the election of a president, the formation of a new government, the appointment of a central bank governor, and the passage of long-delayed reform laws.

Momentum accelerated in recent weeks, according to market observers, due to three main factors. 

The first was the approval of the financial gap law, a key step in clarifying losses in the financial system. The second was regional developments, particularly in Iran, and growing expectations of a decline in Hezbollah's influence, which investors believe could ease the path toward reforms. The third was unrest in Venezuela, prompting some investors to seek alternative high-risk, high-return opportunities, including Lebanon.

Rising demand has pushed prices higher, but analysts caution that the rally is largely speculative. Eurobonds are currently being actively traded on secondary markets, with roughly half held by foreign funds and investors who are driving prices through speculation, based on optimistic expectations that could raise the Eurobonds' price, rather than concrete improvements in Lebanon’s ability to repay its debts.

Lebanon has not resumed payments, and no funds will be recovered unless the state reaches a restructuring agreement with creditors and regains access to international financial markets.

Even in the event of a restructuring, full repayment is considered unrealistic. 

Countries that underwent similar crises offer sobering precedents. Greece ultimately repaid around 35% of its bond value, while Argentina's restructuring yielded about 40%. International banks have cited figures close to 35% as a more plausible outcome for Lebanon.

For now, the sharp rise in Eurobond prices reflects renewed hope, but the risks surrounding Lebanon’s debt remain high.