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LONDON, Nov 7 (Reuters) - Lebanon’s dollar bonds fell and the cost of insuring exposure to its debt reached its highest since late 2008 on Tuesday, as Saudi Arabia accused Beirut of declaring war against it,
Lebanon has been thrust into the centre of regional rivalry between Saudi Arabia and Iran since the Saudi-allied Lebanese politician Saad al-Hariri quit as prime minister on Saturday, blaming Iran and Hezbollah in his resignation speech.
Lebanon’s 2022 issue fell 3.4 cents to 92 cents in the dollar, trading at its lowest ever level, according to Thomson Reuters data.
The 2025 issue is down 2.4 cents to 89.95 cents according to Thomson Reuters data, and the lowest level since it was issued in February 2015.
The cost of insuring exposure to Lebanese debt hit its highest since late 2008 on Tuesday, with five-year credit default swaps (CDS) for Lebanon jumping 51 basis points (bps) from Monday’s close to 588 bps, according to IHS Markit data.
On the JPMorgan EMBI Global Diversified index of sovereign dollar bonds from developing countries, the premium over U.S. Treasuries that investors demand to hold Lebanese debt jumped by 55 bps from Monday’s close to 581 bps.
These were well above levels for Iraq, which stood at 477 bps, up 9 bps from Monday’s close.
A Lebanese finance ministry official told Reuters the drop in price of the Eurobonds was at levels typical for political shocks in Lebanon, with trade volumes low.
He said there was currently no risk to financial stability with no capital flight and limited demand to transfer Lebanese pounds into dollars.
One banking source told Reuters he saw the most significant movement of money out of the country for a while when banks opened on Monday, although there has been an uptick in recent months because of the poor economic environment.
He attributed the outflow to concern following Hariri’s resignation.
The finance minister, central bank governor and head of the banking association have over the past two days made statements stressing Lebanon’s financial and monetary stability.
Economists and banking sources say there is little immediate risk to the stability of the Lebanese pound currency, which is pegged to the U.S. dollar, due to high foreign reserves at the central bank.
They stressed Lebanon’s past resilience to political turmoil and high liquidity of Lebanese banks.
Bank Audi Chief Economist Marwan Barakat, chief economist at Lebanon’s Bank Audi, said the roughly $44 billion of central bank foreign reserves cover around 80 percent of Lebanese pound money supply.
The vast majority of deposits in Lebanese banks are held by Lebanese who historically have not withdrawn their money during political and security crises.
Barakat said during the difficult years of 2005 and 2006, marked by the assassination of former Prime Minister Rafik al-Hariri and a war between Israel and Hezbollah on Lebanese soil, deposits mostly stayed put.
“The maximum outflows we witnessed was 4 percent of the deposit base,” he said.
But economic research consultancy Capital Economics said on Tuesday the deterioration of Saudi-Lebanon relations has raised fresh concerns over the sustainability of Lebanon’s currency peg.
“While the country has substantial FX reserves, these would be quickly eroded in the event of severe crisis, forcing the authorities to devalue the pound,” it said in a research note.
Barakat said the real economy will likely suffer under another period of political uncertainty.
“What happened is likely to impact investments, likely to impact tourism and ultimately likely to impact growth in Lebanon,” he said. (Reporting by Lisa Barrington, Claire Milhench and Karin Strohecker, editing by Richard Balmforth)