Investors who pushed Lebanese bonds to the edge of a cliff are turning more confident that one of the world’s most indebted countries will maintain its unblemished record of honoring its obligations. Lebanese dollar bonds, the worst performers across emerging markets this year after crisis-hit Argentina and Zambia, rallied this week, fueled by a renewed government commitment to urgently repair public finances and an addition of $1.4 billion to central bank reserves. “The authorities seem to now realize the gravity of the situation and are making a firm and unified call for urgent action,” according to Garbis Iradian, chief Middle East economist at the Washington-based Institute of International Finance. “We still believe that Lebanon will not default given its sizable international reserves, robust banking system, and a track record of having never defaulted on foreign-currency debt,” Iradian said in a report released on Wednesday. The yield on notes due in 2021 tumbled more 120 basis points on Tuesday, the most since Jan. 31. It stood at 18.4% as of 10:37 a.m. in London on Wednesday, according to prices compiled by Bloomberg. Read: Lebanon Holds Firm on Peg With $1.4 Billion Boost to Reserves Fitch Ratings last month cut Lebanon’s credit ranking deeper into junk territory, taking it down to CCC. Credit-default swaps, which reflect the cost of insuring debt against the risk of default, have scaled record highs in recent weeks as investors fretted that Lebanon’s day of financial reckoning is looming. In response, the government has declared a state of “economic emergency” and vowed to press ahead with plans to cuts the budget deficit to below 8% of gross domestic product this year from almost 12% in 2018. The International Monetary Fund estimates that Lebanon’s public debt burden will rise to near 180% of economic output by 2023. The announcement suggests that authorities “will put in place new measures to limit public spending and continue to service the debt,” according to Jan Dehn, the London-based head of research at Ashmore Group, which oversees about $92 billion in emerging-market assets. “This is positive,” he said. Lebanon has relied on billions of dollars in deposits from the diaspora to service its public debt accumulated following the end of a devastating 1975-1990 civil war. But political turmoil and the conflict in neighboring Syria have combined to dry up inflows and aid from Gulf Arab allies. The economy is expected to shrink for a second year in 2019, following a revised estimate of a contraction of 0.2% last year, according to the IIF. The recent hostilities and risk of escalation between Israel and the Iranian-backed Lebanese Hezbollah militants could also “weigh on investor and depositor confidence” in Lebanon, according to Moody’s Investors Service. While Lebanon’s credit-default swaps have dropped from their record highs this week, they remain well within distressed territory at more than 1,200 basis points, according to CMA prices. “In the absence of meaningful adjustment and external support, Lebanon would remain in a vicious cycle of rising debt, high interest rates, depressed private investment, and subdued growth,” Iradian said.