Beirut, We Have A Problem: Bond Rout Looms As Situation In Lebanon Reaches Tipping Point

Ok, so tensions are high in the Mideast. You know that.

For now, no one knows what the outcome is going to be. The Saudis are trying to squeeze Hassan Nasrallah, everyone (Saudi Arabia, the UAE, Bahrain, and Kuwait) has told their citizens to get the hell out of Lebanon, everyone is accusing everyone else of declaring war, and generally speaking, it doesn’t appear that cooler heads are going to prevail anytime soon – at least not on the Saudi side.

I’m not entirely sure Hezbollah and Iran give a shit one way or another. I realize that’s a crass way to put it, but Hassan Nasrallah’s armies are already at war in Syria and are the very definition of “battle-hardened”, Iran’s proxy armies have been taking on all comers in Iraq since 2003, and the Houthis just refuse to give up the ghost in Yemen despite a Saudi-led campaign that will enter its third year starting in early 2018. And of course the Quds are pulling the strings on all of that.


Earlier today, in a televised address to mark Martyr Day, Nasrallah again contended that Saad Hariri is basically being forced to stay holed up under house arrest in Saudi Arabia. French Foreign Minister Jean-Yves Le Drian disputes that, saying that as “as far as France knows,” Hariri is free to move around.

Nasrallah went on to claim that everyone (including and especially the Saudis) has underestimated the Yemenis – that’s an effort to deflect from the contention that Iran supplied the Houthis with the missiles being launched at Riyadh.

Ultimately, it’s not 100% clear that Riyadh is going to be able to intimidate anyone here and if the seizure of Kirkuk was any indication, the U.S. has absolutely no idea what’s going on strategically in Iraq – indeed, that incident seems to suggest the Pentagon isn’t even being consulted anymore.

Additionally, I’m still not convinced that this isn’t (mostly) an internal issue for Saudi Arabia. Sure, bin Salman is raising the stakes in the region, but the scope of the anti-corruption purge and the sheer brazen ambition inherent in the Crown Prince’s power grab suggests this is just as much about ensuring he can shape the Kingdom’s future as much as it is about starting a sectarian war. And even if it is about starting a sectarian war, you might have noticed that there’s always a sectarian war or three going on in the Mideast whether by proxy or otherwise. So barring an outright conflict between the Israelis and Hezbollah or something that brings the Saudis into a direct (i.e. not by proxy) conflict with Iran, it seems to me that the only thing which will look profoundly different from the way it looks now in 12 months will probably be Saudi Arabia itself. I mean things can’t really get much worse in Yemen or in Syria or really in Iraq either.

That said, MbS is hawkish on foreign policy, so the risk of this spiraling completely out of control is heightened and there is no question that at least in the near-term, the risk of the situation in Lebanon deteriorating meaningfully has risen. That’s being reflected in markets. Have a look at CDS:


And the bond sell off is accelerating. Have a look:



Things could calm down “if a new prime minister is found quickly and the government can get back to business, but this doesn’t appear to be likely in the short term,” Carmen Altenkirch, EM sovereign analyst at Axa Investment Managers, said on Friday.

Here’s BofAML’s take:

Hariri’s resignation likely signals the end of the late 2016 agreement that oversaw a political détente. We expect the political camps to re-align again into pro-West (March 14) and pro-Iranian (March 8) camps. This realignment is likely to reflect domestic positioning ahead of elections in mid-2018 (assuming no delay). While the new Electoral law may not change much the parliament’s composition, the influence of expatriates voting (allowed for the first time) remains unclear.

The possible political re-alignment may bring risks of domestic stalemate. The press reports of a foiled assassination plot suggest PM Hariri may ultimately decide to move back to exile (as in 2011-14). To designate the next PM, President Aoun needs to call for parliamentary consultations where a majority of 65 MPs out of 128 is needed to confirm the PM appointment. The choice of the next PM will likely be influenced by the “centrists” (such as the PSP bloc), who could push Hariri’s bloc into opposition a la 2011.

Tensions may delay adoption of the 2018 budget (despite the agreed upon audit of previous years’ off-budget spending). MoF is likely to conduct liability management exercises to exchange US$2.3bn of Eurobonds maturing in June and November 2018. Tensions are likely to delay a possible Paris IV donor conference in 1H18. It is unlikely that a caretaker Cabinet could finalize the award of offshore gas bids (one consortium bid for two out of five blocks). Still, we do not expect potential application of anti- Hezbollah HIPFA II legislation to lead to systemic banking sector risks.

Also on Friday, top Lebanese Druze politician Jumblatt told Reuters the following about the situation:

Lebanon does not deserve to be accused of declaring war on Saudi Arabia. For decades we’ve been friends. Lebanon can not afford to declare a war against anybody.

We are a country that is squeezed between two antagonistic interests, between Saudi Arabia and Iran.

The majority of Lebanese are just paying the price.

That latter bit probably sums it up best.



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One thought on “Beirut, We Have A Problem: Bond Rout Looms As Situation In Lebanon Reaches Tipping Point

  1. At the end of the day this is nothing but weak ass wolfing by MbS and Saudi Arabia and Hezbollah will be sitting right where they are for the foreseeable future. This entire episode is disgusting SA flailing that may ultimately cost some life and a wedge of precarious peace..but it will not degenerate into an Israeli-Saudi coalition that crusades for Lebanese peace and order. The Israelis are far too shrewd to get sucked into MbSs pathetic show of “power…”

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