Sovereign market faces money-laundering claims

Global financial firms urged to abandon their Eurobond holdings, rating firms asked to call off rating actions

A US-based lobby group has called on US and European financial institutions to discard their holdings in Lebanese sovereign bonds. The group, dubbed ‘United Against Nuclear Iran’ (UANI), called on the US Treasury to designate Lebanon's financial system as a "money-laundering concern". It claimed that the Lebanese banking system is involved in money laudering operations through the sovereign bond market. The Wall Street Journal reported that three financial firms confirmed that they have divested themselves of their holdings in Lebanese securities.

Marwan Abi Khalil, Head of Capital Markets at BLOMInvest, said no signs for a massive withdrawal from the Eurobond market have been detected so far. He said prices of Eurobonds have been stable lately, even with the slowdown incurred by local and regional instabilities.

According to Head of Research at Bank Audi, Marwan Barakat, global firms hold a very limited share of Lebanon’s outstanding Eurobond portfolio, which totals around $18 billion. Barakat confirmed that these firms have recently been reducing their holding of Lebanon’s papers. However, he said, local investors, including banks, have increased their demand simultaneously.
Abi Khalil voiced confidence that local banks will be able to absorb the foreign currency debt currently held by foreign firms. He said that during the latest Eurobonds offering the share of foreign firms “was roughly around 20 percent” of the offering.

The US group has also urged credit rating firms to suspend their ratings on Lebanese sovereigns. It sent letters to Moody’s, S&P, and Fitch Ratings calling on them to rerate Lebanon’s sovereigns at “no rating”. It said “Lebanon’s bonds, and corresponding CDS, appear to trade at low yields with no rational economic explanation,” claiming that money-laundering proceeds are being used to prop up Lebanese debt securities. “(UANI) believes that Lebanon’s debt does not deserve this rating (you’ve given them), and that you are unwittingly being duped by false Lebanese economic indicators,” read letters which the UANI sent to the three rating firms on June 12.
No response from any of the agencies was declared. But Standard & Poor’s confirmed its ratings on Lebanon through its report published on June 28 in which it explained the rationale behind its downgrade of its outlook from stable to negative in May.

Reported by Hanadi Chami