Lebanon's Defaulted Bonds Surge Amid Iran Protests... "Buying Opportunity at the Bottom"

Expectations of Hezbollah Weakening Signal 'Risk Easing'
Foreign Interest Rises Amid Possibility of Regime Change in Iran

The aftermath of anti-government protests in Iran is causing fluctuations in the prices of Lebanon's defaulted bonds. As Iran's influence weakens, there is a growing possibility that funding for the armed group Hezbollah will decrease, leading to expectations that Lebanon's internal political and security risks may ease as a result.

According to the Financial Times (FT) on January 17 (local time), the price of Lebanon's dollar-denominated defaulted bonds has risen by about 25% this year, from 23 cents to 29 cents per dollar.

Lebanon has remained in a state of default since declaring a moratorium on debt payments after failing to repay $1.2 billion in Eurobonds during the economic crisis in 2020. The FT explained, "Bond prices are at their highest level since the default," adding, "This is the result of both expectations for improvement in fiscal issues and the weakening of Iran-backed groups."

Iran's Supreme Leader Ayatollah Ali Khamenei is holding a press conference after casting his vote in the presidential election on June 28, 2024 (local time) in Tehran. Photo by Yonhap News

Experts believe that the recent rebound is rooted in the situation in Iran. As the protests have weakened the Iranian regime's control, there is a higher likelihood that financial support for Hezbollah will be reduced. In fact, after Israel assassinated Hezbollah leader Hassan Nasrallah in September 2024, the price of Lebanon's bonds more than tripled from 6 cents per dollar.

The Lebanese government's push for legislation to address large-scale deposit losses caused by the financial crisis and the collapse of the banking sector has also had a positive effect on investor sentiment. The increase in foreign exchange reserves due to rising international gold prices, along with improvements in some macroeconomic indicators, has further supported the bond rebound. However, some point out that more time is needed to complete debt restructuring based on IMF support.

International investors see the current situation as a "buying opportunity at the bottom." Bonds purchased at a steep discount during default can yield high returns if the country's credit status is normalized. In the past, Venezuelan bonds also recorded a significant rebound after political changes.

With the possibility of regime change in Iran and expectations for economic normalization, inquiries from foreigners about investing in Iranian stocks have also surged. Although the Iran TEDPIX index has recently risen, it remains at only one-third of its 2020 peak in dollar terms. There is considerable potential for a rebound if access to financial markets and foreign currency funding improves.