The campaign to portray the Lebanese Finance Minister as a person who has taken charge of the Lebanese economy is an ongoing one. Hardly a day goes by without a news story about what she is doing and her tremendous accomplishments. Normally a new minister would still be getting used to the lay of the land after such a short period of time in office. But that is perfectly legitimate since Ms. Hassan would make a very good spokesperson for this cabinet and especially the views of the Hariri camp that she represents. The fact that she is one of the few females with a high profile in the Lebanese government does not hurt either.
What is disturbing however are the meaningless stories that accompany the items related to Ms. Hassan. They are not outright lies but the choice of items to highlight is very deceptive on purpose. It is frustrating when such stories are published in the press without generating any outrage from the press , other government officials or the public (The only possible exception, as far as I know, has been the staff at The Executive magazine).
A good example to illustrate the deliberate efforts at misrepresentation of the facts by carefully worded news announcements and placing them in a prominent position where they do not belong is the January 16 issue of Al Mustaqbal. A boxed news item on the left hand side of the leading headline on page one proclaims the tremendous demand for the Lebanese sovereign debt as can be seen by the change in prices paid for such debt at the end of last week when compared to the earlier week. The prices of the 5 year bonds went up to 103.25 from 102.19 while the yield dropped from 5.37 to 5.13 There is nothing that is factually incorrect about this but the prices for such instruments are volatile and depend on a variety of factors besides faith in the issuing economy. The most important other factor for sophisticated investors is the size of the Credit Default Swap (CDS) . A CDS is in essence the insurance premium that protects the holder of these bonds against default. The simplest way to manage risk would be to buy the bond and buy also a CDS . In the case of the Lebanese 5 year bond that is highlighted in the Al Mustaqbal article the bonds are selling to yield just over 5%. A smart investor could cover the risk of default by buying a CDS for about 2.5 % for the Lebanese 5 year Eurobond. Note that this investor has now a 2.5% net yield that is 100% secure. If the Lebanese government defaults then the CDS will make the investment whole and if the Lebanese authorities honour their obligations then this model investment will net over 2.5%. Another factor that could play a role in the price of the Lebanese Eurobonds is the fact that they are priced in dollars and the dollar has strengthened slightly against other currencies.
But the most egregious part of the story is the boast that the CDS premium for Lebanese debt has fallen to 250 from 285 basis points the week before. Again the figures are true but the boast is misplaced. Lebanese debt still carries one of the highest CDS spreads in the world . Even Greece still has a CDS (211 bp) that is below that of Lebanon. The few countries that have a higher cost of insurance premiums are Venezuela , Iceland and the Ukraine. But that is nothing to be proud of. Yes the news items was correct in saying that Dubai still has a higher CDS but keep in mind they Dubai has in essence declared a moratorium on part of its debt and that Venezuela has devalued its currency by 50% and threatens to do another devaluation round.
I am also sure that observant readers have noted why Lebanese national debt will have to carry such exorbitantly high interest rates. Potential buyers will have to spend a large share of that interest income on the purchase of insurance if they wish to manage their risk exposure, half of the yield goes to purchase insurance.
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3 comments:
The biggest financial surprise of 2010 could be sovereign defaults. Keep an eye on Lebanon and Dubai. We have not seen the end of the Dubai crisis; tall empty buildings, indoor skiing, artificial islands, underwater hotels etc... What a waste.
But the most egregious part of the story is the boast that the CDS premium for Lebanese debt has fallen to 250 from 285 basis points the week before. Again the figures are true but the boast is misplaced. Lebanese debt still carries one of the highest CDS spreads in the world . Even Greece still has a CDS (211 bp) that is below that of Lebanon. The few countries that have a higher cost of insurance premiums are Venezuela , Iceland and the Ukraine. But that is nothing to be proud of.
None of the states in your example has a heavily armed fundamentalist militia controlling large chunks of the country and playing in controlled hostilities with neighbors on the southern border. Propensity to political instability and wars are also reflected by the spreads.
Nobody,
That is part of my argument. Lebanon is so much in debt that everything will have to work without a hitch if the country is to grow itself out of this hole. Now I ask you, how likely is the idea of continuous economic growth and political stability in the Lebanese environment? Not very highly likely, heck we might not be able to meet the debt burden even without a war. All what it would take for a crisis would be a decrease in the immigrant remittances or a relatively bad tourist season.
I will be glad if the country can avoid default but I am convinced that the cost of meeting the obligations would be so high that it is only prudent to investigate other options such as moratorium, write offs etc...
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