Beirut: Lebanese Eurobonds maturing in March dropped the most on record as the threat of a downgrade to near default added to selling pressure.

The bond tumbled about 7 cents on Friday to 80 cents on the dollar, the biggest daily decline on record for the country’s 2020 notes and approaching a record-low reached in November.

A central bank offer for local banks to swap their holdings of the Eurobonds for longer-dated instruments sparked volatility in the nation’s shorter-dated debt this week. That would help ease pressure on Lebanon’s finances amid a debt crisis and months-long protests.

Local banks have been reluctant to participate, looking to offload shorter holdings, JPMorgan Chase & Co. analysts said earlier this week.

A formal announcement of the offer would probably trigger a one-step reduction in the country’s credit rating to C, followed by a further reduction to restricted default if the deal goes through, Toby Iles, a Director at Fitch Ratings, said by email.

“The proposal by Banque du Liban reflects the external financing stress that Lebanon is under and BdL’s current commitment to conserve its currency reserves and ensure that Lebanon can meet its debt obligations,” Iles said, using the official name for the country’s central bank.

For now, it’s uncertain whether the transaction will be initiated. Given the threat to the sovereign rating, the Finance Ministry has asked the central bank not to pursue the transaction until the government decides on a financing plan for its Eurobonds, according to a person familiar with the matter.

The security in question is a $1.2 billion bond due on March 9. The bond’s price still implies a higher likelihood of repayment than for longer-dated notes, which trade below 30 cents. Last year, the central bank used a bridge loan to the treasury to pay all maturing Eurobonds on behalf of the government.

One of the world’s most indebted nations with liabilities reaching 155% of output, Lebanon is facing its worst economic crisis in decades after years of fiscal mismanagement and the failure of officials to enact much-needed reforms. A crisis in neighbouring Syria, which shut vital trade routes and sent some 1.5 million refugees into the country, has deepened economic troubles.

To keep a currency peg intact and finance foreign-currency obligations, Lebanon has relied on the millions living abroad to send remittance through local banks, who, along with the central bank, hold most of the country’s debt. With inflows slowing, cracks in the financing model have appeared, risking the decades-old exchange rate.

While Lebanon has met all obligations in the past, bond investors have priced in a sovereign default. Still, they differ on when it would happen and whether foreign investors would be exempt.

Weaker Firepower

In an interview with Bloomberg published last week, central bank Governor Riad Salameh said that no decision has been made on the proposed swap due to the lack of a functioning government.

Weeks of protests forced the collapse of Prime Minister Saad Hariri’s government in October at a time when the central bank and local lenders had been rationing US dollars. The shortage of foreign currency led to the emergence of a black market rate higher than the fixed exchange regime.

The central bank has sufficient gross reserves, close to $30 billion, to meet near-term debt repayments, Fitch’s Iles said. The central bank has been covering imports of essential goods, including fuel and wheat, in a country that’s almost completely reliant on foreign goods.

But when various liabilities to banks are netted out “the central bank’s firepower is much weaker,” Iles said. “Balance of payments trends imply ongoing monthly declines in reserves.”