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Photographer: Hasan Shaaban/Bloomberg Photographer: Hasan Shaaban/Bloomberg

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Lebanon may have just repaid $1.5 billion of Eurobonds, but its chances of escaping a default still look grim.

It will probably come down to how far it can stretch its foreign reserves while containing the worst currency crisis since it pegged the pound over two decades ago.

On both counts, recent developments have been negative.

The central bank’s reserves dropped by nearly $800 million in the first two weeks of November alone. At the current pace of depletion, they could run out as soon as next June, according to a Bank of America Merrill Lynch report seen by Bloomberg.

Deprived of the remittances from Lebanon’s diaspora that have sustained its finances for years, the economy is unraveling. The bond market is flashing warnings of a default.

“In the absence of inflows, we expect further declines in FX reserves, pressuring the government’s capacity to service debt,” Fitch Ratings analysts, including Jan Friederich, said in a report. They estimate Lebanon’s sovereign debt will stand at 154% of gross domestic product at the end of 2019, one of the world’s largest burdens.

Making matters worse, the country is without a functioning government after more than a month of nationwide protests.

Demonstrators are clamoring for a government of experts to get a grip on the crisis, a demand opposed by some political parties, including Iran-backed Hezbollah. The president’s talks with lawmakers to name a new prime minister will probably be delayed until next week.

In the meantime, Lebanon’s currency is under pressure. The pound has weakened almost 30% on the black market since the start of August, according to local website lebaneselira.net. It trades at 2100 per dollar on the streets of Beirut, as businesses struggle to buy foreign exchange at the official rate of 1507.5 from local banks.

“The emergence of a parallel market rate is likely to undermine the credibility of the dollar peg anchor, should it persist,” Bank of America analysts Jean-Michel Saliba and Andrew MacFarlane, both based in London, said in a Nov. 25 report.

Lebanese lenders have restricted dollar withdrawals and banned some transfers abroad to avoid a run from depositors. Importers have warned of imminent shortages of goods.

Lebanon has never defaulted on its sovereign debt. But some investors, including California-based Franklin Templeton, have said restructuring now would be less painful for the country than later on when its finances could be in an even worse state.

While Lebanon, through its central bank, repaid the maturing Eurobond on Thursday, the outlook for the rest of the government’s roughly $30 billion of dollar securities is less clear.

Yields on $1.2 billion of bonds maturing next March climbed to over 100% this month, from around 13% before the unrest began. The yield closed at 100.47% on Thursday. Government dollar debt maturing beyond 2021 mostly trades below 50 cents on the dollar, suggesting traders see haircuts of more than 50% should there be a restructuring.

Bank of America says even those prices may understate the risks bondholders face.

The U.S. lender forecasts that face-value losses could be as high as 80% if there’s a “disorderly adjustment.” Given the rate at which Lebanon has blown through its reserves, 2020 “could be a crunch year,” its analysts said.

“Principal payments beginning in March 2020 may prove too large for Lebanon, although political willingness remains a key uncertainty,” they said. “If deposit-withdrawal pressure is continuing, there is a risk authorities could halt payments.”

— With assistance by Paul Wallace, and Netty Idayu Ismail

( Updates with bond yield in 14th paragraph. )