Lebanon’s Eurobond boom, a depositor bust

After nearly five years of default, frozen deposits, and stalled negotiations with international creditors, Lebanon’s sovereign debt has suddenly returned to the spotlight. Dollar-denominated Eurobonds, once trading at distressed levels, have surged sharply in recent days, following the government’s approval of a draft financial gap law that reshapes how losses from the financial collapse would be distributed.

The rally may signal renewed confidence among investors in the prospect of debt restructuring. But behind the rising bond prices lies a deeper imbalance: gains for bondholders are increasingly coming at the expense of depositors, whose losses risk being locked in under the current framework.

Lebanon’s Eurobond prices have continued their sharp upward climb since the government approved the draft financial gap law in its current form. On Monday, the first trading day after the weekend, the bonds reached 28.9 cents on the dollar, marking a rise of nearly 60 percent in less than two weeks. Trading volumes have also remained high, making it difficult to argue that the surge is merely speculative maneuvering by bondholders ahead of restructuring talks with the Lebanese authorities.

Observers say the dramatic rally clearly reflects growing optimism among bondholders and investors that the Lebanese state may be able to reach an agreement to restructure and ultimately repay its sovereign debt.

This optimism is largely driven by the structure of the proposed financial gap law, which places the burden of covering the losses on the central bank, commercial banks, and depositors, while largely shielding the state from direct financial obligations that could further strain public finances. As a result, once the law is implemented, the state’s borrowing capacity could significantly improve.

This shift has strengthened the negotiating position of funds holding Lebanon’s dollar-denominated debt, whose principal value (excluding interest) stands at around $32 billion. These creditors are now better positioned to impose their own conditions regarding the size of the haircut they might accept as part of a restructuring. Including accrued interest, the total debt could reach $42–44 billion.

Previously, some estimates suggested that the state might agree to repay around 25 percent of the total debt as part of a restructuring deal. That assumption was plausible when Eurobond prices were trading below 10 cents. Prices later rose to around 18 cents following the regional conflict and the election of President Joseph Aoun. Today, with bonds approaching 29 cents, the idea of a 25 percent recovery has become increasingly unrealistic.

Creditors are now expected to take a much harder line, particularly regarding accumulated interest. This raises the likelihood that the state may be forced to offer closer to 35 percent of the principal to secure a restructuring agreement.

In effect, the state has already begun paying the price for what critics describe as a flawed approach in approving the financial gap law with its current design and details. If the state is ultimately forced to absorb an additional 10 percent loss as a result of higher repayment terms, this would translate into roughly $4 billion, money that, many argue, should have gone first and foremost to depositors.