Saudi won’t let Lebanon fail

Lebanese bonds and CDS are under rising pressure as tensions with Israel have added to the country’s domestic woes. We put a probability of Gulf support at about 70%, most likely from Saudi Arabia.  The current sell-off could offer a good opportunity to buy into Lebanese bonds, which would partially recover when support comes through, although longer-term concerns persist.  Lebanese CDS spreads and bond yields rose to record highs today, with 5-year CDS spreads up 412 basis points to 1230 since the 8th July and US-dollar bond yields up around 260 basis points over the same timeframe. The CDS spread was driven up to a new record as tensions mount with Israel as the Lebanese army, which as shot at (and downed) several Israeli drones. Also, on Monday Israeli planes bombed a base on the Lebanon-Syria border used by the Popular Front for the Liberation of Palestine-General Command (PFLP-GC), a minor Palestinian faction with close ties to Iran. This was the most serious incursion since the 2006 war in which over 1,200 Lebanese and 158 Israelis were killed. There is a heightened risk of Israeli attacks, which could partly be driven by Israeli domestic politics, ahead of critical elections on 17th September (following the first-ever failure to form a coalition government after April elections). This comes on top of longer-term domestic problems including rising debt, deteriorating external accounts, falling foreign exchange reserves, a widening fiscal deficit, political paralysis that has delayed the passing of the budget and a downgrade by……...