Lebanon bonds slide to new lows as default worries spread

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Lebanon's bonds fell to new lows and default insurance costs hit a record high on Tuesday, as a flare-up in tensions with Israel compounded mounting worries about the country's finances.

Lebanon's five-year credit default swaps (CDS) rose to 1,205 basis points (bps), up nine bps from Monday's close, data from IHS Markit showed, as most of the country's bonds sank.

President Michel Aoun had said on Monday that Lebanon had a right to defend itself, likening Israeli drone strikes to a “declaration of war” amid rising tensions between Hezbollah and Israel.

Israeli Prime Minister Benjamin Netanyahu responded in Jerusalem, telling Lebanon and the commander of Iran's Revolutionary Guards Quds force to “watch what you say, and moreover be careful about what you do”.

The increased tensions also come as concerns mount about a potential debt default.

Rating agency Fitch cut its rating on the country to CCC on Friday, warning of the intensifying pressure on the country's financing model and increasing risks to the government's debt servicing capacity.

Lebanon has one of the world's heaviest public debt burdens at 150 percent of GDP as it struggles with low growth, heavy debt-servicing bills, a bloated public sector and the cost of subsidizing the country's power producer.

Tuesday's CDS spike came as the government's 2020-2030 dollar-denominated bonds also dropped to new all-time lows as prices fell between 0.5 and 1.3 cents on the dollar.

“I think you have got this ongoing bearishness among investors at the moment who are now asking themselves who is the next Argentina,” UBP strategist Koon Chow said, referring to a market crash this month when a shock primary election result ignited major default worries.

“Maybe it's silly, but the bar has been set higher for holding (the bonds of) problematic countries,” Chow added.

Adding to the jitters, Lebanese media reported that money changers - under pressure to stick to the government's official pegged exchange rate - were increasingly reluctant to sell dollars.