Predicting default probability and the default recovery ratio: evidence from the Lebanese external public debt

With a national debt exceeding 190% of the GDP at the end of 2006, the Lebanese government is in a difficult situation. The literature on emerging markets reveals the various causes that might lead to a default on their public debt. The first objective of this paper is to analyze the evolution of the credit spread for the Lebanese US Dollar Eurobonds. The second objective is to extract both the implied default recovery ratio and the risk neutral default probability term structure for the Lebanese US dollar Eurobonds between October 2001 and November 2004. Our results show that the recovery ratio is strongly related to the market reaction linked to political and economic tension within Lebanon. For the period after the Paris II conference in November 2002, the average estimates show a decline in the default probability for the long-term period accompanied by an increase in the default recovery ratio.Particularité de la situation macro-économique au Liban: Evaluation du nouvel accord de Bâle II sur les fonds propres des banques libanaises et analyse critique de son effet sur l’exposition du système financier au risque de crédit