BEIRUT/LONDON (Reuters) - Lebanon's worst bond market shock in a decade has raised doubts about whether the country's banks are willing and able to continue to bankroll the government, raising pressure on Beirut to step up reforms or risk a destabilising currency crisis.
In September the cost of insuring Lebanese sovereign debt against default <LBGV5YUSAC=MG> soared to its highest level since the global financial crisis of 2008, implying a more than 40 percent chance of default in the next five years. Many of the government's dollar-denominated bonds hit record lows, while yield spreads over U.S. Treasury debt scaled historic peaks.
The panic was triggered partly by a wider selloff in global emerging market debt. But when Lebanon's international bonds have fallen in the past, local banks could typically be relied upon to buy up the securities. Not so this time.
"When foreign entities found out Lebanese banks were selling their portfolios heavily, they started to dump theirs," said Marwan Mikhael, chief economist at BlomInvest Bank in Beirut.
Anthony Simond at Standard Aberdeen Asset Management, pointed to a shift in the bond holder structure.
"In the past, local banks were the marginal buyers of the Eurobonds, always. So Lebanon used to really outperform in down markets, because you always had that bid as a backstop," said Simond, a London-based investment manager.
Just over two years ago, Lebanese banks held just under $20 billion of the country's Eurobonds. By July, those holdings stood at just over $16 billion, having fallen to $13 billion in April while the overall debt burden has been rising.