Lebanon’s Eurobonds have continued to rally despite the heavy financial damage caused by successive rounds of war and a sharp contraction in the country’s main economic indicators, with prices once again approaching 30 cents on the dollar.

According to Asharq Al-Awsat, the bonds have posted a series of gains, rising by around 28% since the beginning of the year, although performance varies by tranche and maturity.

The rally has been driven in part by foreign investor demand, raising questions about the expectations underpinning the renewed appetite for Lebanese debt at a time when the country remains mired in profound economic and political uncertainty.

Goldman Sachs, in an updated assessment cited by BLOM Invest, said a draft law on financial regularization and the recovery of deposits remained stalled, describing it as a key element of any comprehensive settlement of Lebanon's financial crisis.

The investment bank also said Parliament's approval in August of an amended bank restructuring law had removed an important obstacle to a potential IMF program and the restructuring of public debt.

Lebanon has been in sovereign default since 2020, and the country's Finance Ministry continues to list Eurobond restructuring as a central issue in its dealings with creditors.

However, Goldman Sachs' latest assessment cautioned that the approach of bond prices toward 30 cents on the dollar could reflect excessive optimism.

The path toward restructuring Lebanon's public debt still faces major geopolitical and legislative obstacles, the assessment said, meaning current market prices may not fully reflect the risks that remain.

The bonds were trading at around 29 cents on the dollar, a level that represents a dramatic recovery from the depths of Lebanon's financial crisis but remains far below their original face value.

Goldman Sachs also highlighted the political dimension of the recovery.

Resolving the issue of Hezbollah's weapons and restoring the state's exclusive authority over the use of force would, in practice, be an important condition for securing broad international financial support, even if it is not a formal IMF requirement, according to the assessment.

As long as the threat of conflict persists, progress toward a comprehensive debt restructuring will remain difficult.

That makes the current bond prices potentially vulnerable if geopolitical conditions deteriorate or reforms fail to advance.

Direct talks with creditors seen as crucial

A senior financial official who spoke to Asharq Al-Awsat said Lebanon's Finance Ministry must launch direct negotiations with creditors as part of the international requirements for restoring debt sustainability and securing access to external financing.

The objective would be to reach a consensual agreement setting out the amounts to be repaid in principal and interest, as well as a new repayment schedule based on Lebanon's financial capacity and projected budget surpluses.

Such an agreement would be a crucial first step toward allowing both Lebanon's public and private sectors to regain access to international financial markets.

The country's ability to return to those markets depends not only on the terms of any eventual debt restructuring, but also on progress in restoring confidence in its fiscal and financial institutions.

The IMF has repeatedly emphasized the need for deep debt restructuring alongside reforms to restore credibility and transparency to Lebanon's fiscal framework.

Geopolitics and debt restructuring intertwined

The outlook for Lebanon's Eurobonds is closely tied to developments beyond the financial sector.

If major political settlements succeed in strengthening the state's sovereignty and establishing its authority over decisions of war and peace, while financial reforms advance in parallel, the impact on the value of Lebanon's outstanding debt could become more apparent.

Such developments would also facilitate direct negotiations with domestic and foreign creditors.

The country's budget has already been effectively relieved of a large portion of the burden represented by public debt denominated in Lebanese pounds. Roughly two-thirds of that debt's real value has evaporated following the catastrophic collapse of the Lebanese currency, leaving it worth less than $1 billion in real terms.

This has changed the composition of Lebanon's debt burden, increasing the relative importance of the foreign-currency Eurobond portfolio in any eventual restructuring.

Investors expect a steep haircut

Investment expectations suggest that restructuring the relevant portion of Lebanon's public debt could involve a substantial reduction in its face value.

Scenarios cited by financial institutions and international rating agencies, including Morgan Stanley and Moody's, point to a haircut of around 65%, implying a recovery rate of about 35 cents on the dollar.

That recovery could rise to between 40 and 45 cents under a more optimistic scenario in which structural reforms are reinforced by a medium-term fiscal plan and a revival of the financial sector.

Under a less favorable scenario, in which reforms remain stalled and Lebanon fails to reach an agreement with the IMF, recovery values could fall to around 25 cents on the dollar.

The wide range of possible outcomes illustrates why investors are closely watching both Lebanon's reform program and its political and security environment.

Who holds Lebanon's Eurobonds?

Lebanon's Eurobond holders include international banks, financial institutions and investment funds, among them BlackRock and Ashmore, which together with other major investors hold a controlling share of more than 40%, according to the source.

Local banks, Banque du Liban and domestic and foreign investors also hold portions of the debt.

The legal documentation governing the bonds provides for disputes to be handled by New York courts and requires the approval of 75% of creditors for any new agreement involving changes to repayment amounts, interest payments or maturities.

That structure means the government will ultimately have to secure broad creditor support for any restructuring deal.

Bondholder groups have already been preparing for renewed negotiations, with major international investment firms among the creditors represented in discussions.

Investors watching Lebanon-Israel talks

The senior financial official said demand for Lebanese bonds was also likely to be tracking the direct negotiations between Lebanon and Israel under U.S. auspices.

A comprehensive agreement could improve investor perceptions of Lebanon's geopolitical risk, particularly if it strengthens the central state's ability to exercise authority across the country and resolves the issue of weapons outside state control.

Such a development would be viewed as an important prerequisite for attracting broader regional and international financial support.

The potential improvement in Lebanon's geopolitical position is therefore increasingly intertwined with expectations about its financial recovery.

Reforms offer some hope

Partial progress on reforms has also provided investors with some positive signals, even though the reform agenda remains incomplete.

The measures include the establishment of most regulatory authorities in key sectors, a complete halt to financing the electricity sector through Treasury advances, improvements in public-finance management and higher spending ceilings designed to address some of the funding gaps facing the public sector.

The government is also continuing efforts to increase Treasury revenues and generate primary budget surpluses.

Those surpluses remain largely accounting or theoretical, however, as long as the government's public-debt obligations are excluded from the calculations.

Still, the combination of fiscal reforms, banking-sector restructuring and efforts to restore public finances could eventually provide the foundation for a debt-sustainability strategy capable of attracting international financing.

The challenge is that many of the reforms have been delayed, while the financial sector remains deeply impaired.