Defaulted Lebanese government bonds hit a six-year high on Thursday as the escalating Middle East conflict raises hopes that weakening Hezbollah could pave the way for Lebanon to emerge from years of crisis.
The war-torn country’s long-term bonds have gained as much as 2 cents since Friday’s close, with much of the curve now trading between 30.5 cents and 31.5 cents on the dollar, the highest levels since spring 2020, when the fallout from the coronavirus pandemic roiled global markets.
This debt performed best in 2026, with returns to investors of nearly 33%. The latest gains come after Hezbollah, founded by Iran’s Revolutionary Guards in 1982, fired rockets and drones into neighboring Israel on Monday in retaliation for the killing of Iranian Supreme Leader Ali Khamenei, sparking ongoing full-scale hostilities with Israel.
The group’s decision to enter a “Middle East war” in support of its patron Iran has created a rift with Lebanon, its main political ally, and left it deeply isolated.
“Weakening Iran/Hezbollah will make it easier to promote disarmament and improve its governance capacity,” said Bruno Gennari of KNG Securities. “We may not see such improvements today, but we will in the medium to long term.”
default
Lebanon defaulted on $31 billion in outstanding international bonds in March 2020 amid a financial crisis that destroyed bank balance sheets and wiped out 99% of the value of the country’s currency.
Escape from the spiral is slow.
The formation of a new government more than a year ago after two years of paralysis has raised hopes among investors that authorities will move the country closer to accessing recovery funds and emerging from debt default.
However, policymakers still need to navigate a myriad of fiscal and economic challenges, including the contentious restructuring of the banking sector and shaping the contours of a medium-term fiscal strategy. Meanwhile, its location at the center of the Middle East conflict and delays in elections scheduled for May but postponed due to the conflict with Israel have added to the uncertainty.
Lebanon requested the program from the International Monetary Fund a year ago, and a delegation from the Washington-based lender of last resort visited Beirut last month.
(Reporting by Karin Strohecker and Libby George; Editing by Kirsten Donovan)
