Breakdown of trust in financial system deepens crisis in Lebanon

One of the world's most indebted countries, Lebanon has a public debt equal to about 150% of its GDP.
Thursday 14/11/2019
Lebanese protesters gather outside a bank on the northern outskirts of Beirut on November 13, 2019. (AFP)
Lebanese protesters gather outside a bank on the northern outskirts of Beirut on November 13, 2019. (AFP)

Lebanese student Fatima Jaber's family is struggling to pay off multiple loans with double-digit interest rates.

Even before the start of protests that forced out Lebanon's prime minister, her confidence was fading in a financial system long regarded as a pillar of stability but now, like many Lebanese, she says the system is broken.

The loss of trust is eroding liquidity in the Lebanese banking sector, increasing concerns that banks may not be able to help the government fund high budget and current account deficits. One of the world's most indebted countries, Lebanon has a public debt equal to about 150% of its GDP.

"We need a change to the system because everyone has at least one loan from the bank and the rates are very high and we can't pay them," said Jaber, 22, as she and a small crowd protested outside the central bank in Beirut.

Dollar loans must be repaid in the same currency, which is especially difficult because there is a hard currency squeeze in Lebanon. With big banks' websites showing the annual interest on some loans at about 27%, many people are in dire straits.

Lebanese central bank Governor Riad Salame sought to ease concerns saying November 11 that the bank had a usable foreign cash reserve of $30 billion and total assets of $38 billion.

The central bank has taken steps to protect depositors by ensuring no bank would fail and will seek to lower interest rates through liquidity management, he said. However, the imposition by banks of controls on dollar withdrawals and transfers overseas has failed to rebuild confidence.

Bankers say customer deposits have dipped by at least $8 billion since August, Institute of International Finance's Chief MENA Economist Garbis Iradian said.

Giyas Gokkent, MENA chief economist at JPMorgan Securities, said reserves were high enough to ensure Lebanon could maintain its peg to the US dollar.

However, there are still worrying signs.

"The net foreign position of banks is declining rapidly," said an international banker who declined to be identified because of the sensitivity of the situation.

"This, the ad hoc approach to imposing capital controls and the erosion of their capital buffers means banks will not be able to attract deposits or credit lines and therefore will be less and less able to fund the government's current account deficit, piling pressure on central bank reserves."

Protests that swept Lebanon for weeks are fuelled by anger at the establishment and perceived corruption but lack of faith in the financial system is also an important factor.

The confidence of the Lebanese diaspora has also waned, with bankers saying capital inflows, faltering since their 2014 peak, had fallen further in recent weeks over fears of economic collapse.

"No sensible or normal person will be transferring money to Lebanon in the current circumstances," said Hani Salem, a British-Lebanese financial sector consultant working in Britain.

Capital inflows previously acted as lifeblood to banks and the government but the funnelling of dollar liquidity from banks to the central bank to bridge the government's funding gap -- a process called "financial engineering" -- has also broken.

Salame said liquidity management was needed, with banks able to borrow dollars at 20% interest to secure depositors' needs on condition that such funds were not sent abroad.

Farouk Soussa, senior economist at Goldman Sachs, said the banks' use of extraordinary measures to reduce foreign exchange outflows and "regulatory forbearance" would allow them to continue operating under the current circumstances.

"So long as this is the case, banks will remain solvent," he said.

Moody's Investors Service and Fitch Ratings have downgraded Lebanon's largest banks further into junk territory and a local banker said international correspondent banks were now more wary of providing dollar liquidity.

Two bankers said they doubted the ability of lenders to meet a target set by the regulator of raising their Common Equity Tier 1 capital -- an important measure of financial strength -- by 10% by the end of the year through cash injections.