LEBANESE ECONOMY

Lebanese Economy

Lebanese Economy

TMA questions

Question 1

Describe how would a credit rating downgrade affect the Lebanese sovereign debt and the yield curve?

Lebanese credit rating downgrade means that the country will face difficulty to payback its obligation it does not meant that the government of Lebanon will default. The affect of the downgraded credit rating on the sovereign debt would be the high cost of borrowing for the government which will make the borrowing cost higher for the business and for the consumers as well. The high cost of borrowing will result in the high prices of goods and services. The high interest rate in the country will lead to the inflation. Lebanon has high sovereign debt burden and this raise in cost of borrowing will increase the debt burden because now the government has to bear the high cost of borrowing which will increase the government expenditures, creating demand for more sovereign debt. The government has to payback more interest on the debt servicing. The yield curve shows the relationship between the cost of borrowing and the term and time of the debt (Campbell, John Y. 1995). The credit rating downgrade will also affect the yield curve because yield curves deals with the cost of borrowing and with the maturity of the security. If the government of Lebanon needs short term loans and willing to pay high interest on short term debts then the negative yield curve will form. But if the government needs long term debt and willing to pay higher interest for long term loans then the normal yield curve will form, which is formed when the cost of borrowing increases with the time.

Question 2

Describe the effect of the Lebanese trade, trade balance, growth on the sovereign debt?

Lebanese trade deficit was $ 1.1 billion in January 2012; ...