<p>London: Israel's airstrikes in Lebanon are inflicting destruction that could set its economy back by years.</p><p>But the defaulted country's bonds have climbed to two-year highs, gaining a whopping 44 per cent since late September, as traders snap them up for pennies on the dollar.</p><p>Investors reckon the weakening of Hezbollah, the Iran-backed military group that controls the south of the country, could precipitate a shake-up of Lebanon's fractured political system and potentially an economic plan to pull the country out of default.</p>.<p>"The reason bonds have rallied is that the market thinks that the Lebanese political class might finally be able to agree a political path forward and an economic reform plan without Hezbollah in the picture," said Anthony Symond at abrdn.</p><p>"This would pave the way for the Eurobonds to eventually be restructured."</p><p>The jump still leaves Lebanon's dollar bond maturing in 2025 trading at a paltry 8.5 cents on the dollar - a fraction of the 70-cent level at which bonds are considered distressed.</p>.<p>Lebanon tumbled into default in the spring of 2020 after the country's financial system plunged into a deep economic crisis in 2019. With an effectively non-functioning government wracked by discord and corruption, few expect a debt deal anytime soon.</p><p>"Lebanese bonds started getting bids after the death of Nasrallah," said Kaan Nazli, a portfolio manager with Neuberger Berman, referring to Hezbollah leader Sayyed Hassan Nasrallah, whose death was announced on Sept. 28.</p><p>"Lebanon was in the 'it could not get worse' category," said Nazli, adding that the latest events could spark change.</p>.<p>Conflict between Israel and Hezbollah was rekindled a year ago when the Iranian-backed group opened fire in support of Palestinian militant group Hamas at the start of the Gaza war.</p><p>Fighting escalated dramatically last month when Israel bombed Lebanon's capital Beirut and the Bekaa Valley and sent ground troops into the south of the country; Hezbollah, meanwhile, has fired rockets deeper into Israel.</p><p>Bruno Gennari, emerging markets strategist with KNG Securities, said rumours that Washington could use Hezbollah setbacks to push Lebanon to appoint its first president in two years had given hope.</p>.<p>"Is all about Hezbollah getting weaker," he said.</p>.<p>SP Global Ratings said last week Israel's military action in Lebanon "put severe pressure" on Lebanon's already battered economy, and would "further delay economic and financial reforms, and the longer-term recovery of fiscal and external accounts."</p>.<p>SP has a selective default rating on Lebanon's foreign currency debt.</p>.<p>Given their incredibly low prices, any glimmers of good news could boost Lebanon's bonds again, Nazli said</p>.<p>"If you see any headline on a presidential election, or even just a schedule for one - that could be a sign that things are moving forward," he said.</p>
<p>London: Israel's airstrikes in Lebanon are inflicting destruction that could set its economy back by years.</p><p>But the defaulted country's bonds have climbed to two-year highs, gaining a whopping 44 per cent since late September, as traders snap them up for pennies on the dollar.</p><p>Investors reckon the weakening of Hezbollah, the Iran-backed military group that controls the south of the country, could precipitate a shake-up of Lebanon's fractured political system and potentially an economic plan to pull the country out of default.</p>.<p>"The reason bonds have rallied is that the market thinks that the Lebanese political class might finally be able to agree a political path forward and an economic reform plan without Hezbollah in the picture," said Anthony Symond at abrdn.</p><p>"This would pave the way for the Eurobonds to eventually be restructured."</p><p>The jump still leaves Lebanon's dollar bond maturing in 2025 trading at a paltry 8.5 cents on the dollar - a fraction of the 70-cent level at which bonds are considered distressed.</p>.<p>Lebanon tumbled into default in the spring of 2020 after the country's financial system plunged into a deep economic crisis in 2019. With an effectively non-functioning government wracked by discord and corruption, few expect a debt deal anytime soon.</p><p>"Lebanese bonds started getting bids after the death of Nasrallah," said Kaan Nazli, a portfolio manager with Neuberger Berman, referring to Hezbollah leader Sayyed Hassan Nasrallah, whose death was announced on Sept. 28.</p><p>"Lebanon was in the 'it could not get worse' category," said Nazli, adding that the latest events could spark change.</p>.<p>Conflict between Israel and Hezbollah was rekindled a year ago when the Iranian-backed group opened fire in support of Palestinian militant group Hamas at the start of the Gaza war.</p><p>Fighting escalated dramatically last month when Israel bombed Lebanon's capital Beirut and the Bekaa Valley and sent ground troops into the south of the country; Hezbollah, meanwhile, has fired rockets deeper into Israel.</p><p>Bruno Gennari, emerging markets strategist with KNG Securities, said rumours that Washington could use Hezbollah setbacks to push Lebanon to appoint its first president in two years had given hope.</p>.<p>"Is all about Hezbollah getting weaker," he said.</p>.<p>SP Global Ratings said last week Israel's military action in Lebanon "put severe pressure" on Lebanon's already battered economy, and would "further delay economic and financial reforms, and the longer-term recovery of fiscal and external accounts."</p>.<p>SP has a selective default rating on Lebanon's foreign currency debt.</p>.<p>Given their incredibly low prices, any glimmers of good news could boost Lebanon's bonds again, Nazli said</p>.<p>"If you see any headline on a presidential election, or even just a schedule for one - that could be a sign that things are moving forward," he said.</p>