Other rating agencies such as Standard & Poor's have maintained a negative outlook on Lebanon, criticising it for a failure to meet the 'Paris II' conference requirements where donor countries granted loans to reduce debt servicing. Political differences between Lebanese President Lahoud and Prime Minister Rafik Hariri, which have stalled reform, have also contributed to agencies' ratings.

Fitch's analysis shows that without policy measures, Lebanon's debt ratio will continue to rise. Lebanon's debt ratio is at 185 per cent, the highest of any sovereign rated by Fitch.

Fitch senior director Richard Fox said: 'Doing nothing is not an option. The debt ratio could approach 190 percent of GDP next year, while to stabilize the debt ratio without privatization, the primary surplus would need to continue rising.'

Commercial banks, which hold 80 percent of government eurobonds and Treasury bills, are expected to negotiate with the Finance Ministry and the Central Bank on the possibility of swapping $7,500 million worth of eurobonds, which mature in 2005 and 2006.

Fitch pointed to reform measures being delayed until at least the second half of 2005, with presidential and parliamentary elections in November and May. 'As events since Paris II demonstrate, the political system cannot be guaranteed to deliver necessary measures, even when pledged. None of the planned privatisation and securitisation, central to the government's Paris II program, has been achieved,' Fitch said.