Lebanon’s banks have been lauded as the jewel in the country’s economy for decades.
By the middle of 2019 their combined assets had increased 83 per cent in eight years to $253bn, equal to roughly five times the country’s economic output. In Beirut, branches boasted sparkling glass facades and fancy atriums, and bankers entertained clients with cigars and fine dining in the city’s smartest restaurants.
Now, less than a year later, branches are barricaded with thick metal plates to protect them from protesters’ firebombs, and those same executives are anxious not to be seen in public. Last month fires were started outside the central bank’s office in the northern city of Tripoli, while across Beirut “down with the rule of the bank” is sprayed on walls.
An economic, fiscal and monetary crisis has accelerated in Lebanon since March, when the government defaulted on $90bn of debt. Month-on-month inflation surged to 56.5 per cent in May, poverty and unemployment are soaring, and many Lebanese believe the country’s bankers — and its politicians — are to blame.
“[The banks] made so much money along the way they are entirely partners in [the crisis]”, said Jad Chaaban, a Lebanese economist. “They are villains as much as the ruling thugs and the [political] parties who stole money and killed people.”
Lebanon depends on imports and for years the central bank has helped to finance the trade deficit by offering high interest rates — sometimes more than 10 per cent a year — on dollar deposits from commercial lenders. The banks, in turn, passed those generous rates to their clients, helping to attract foreign currency from local depositors and the large Lebanese diaspora abroad.
The system has helped Lebanese banks generate impressive profits. But last summer fragile investor confidence waned, the flow of dollars began to dry up and the system started to break down. Mass protests began in October, stoked by frustration with stark inequality, and eventually toppled the government.
Banks closed for weeks during the demonstrations and customers panicked about retrieving their money. Lenders, anxious to prevent a bank run, imposed limits on withdrawals and the flow of dollars into the country’s commercial banks reversed. According to research firm Oxford Economics, as much as $25bn — 10 per cent of sector’s combined assets — left the banking system in 2019.
After the state defaulted in March, the position of Lebanon’s banks has become ever more precarious as the local banking sector had been a major buyer of government bonds. In total commercial lenders hold $25bn in local and foreign currency government debt, approximately 12 per cent of the sector’s total assets. The government estimates total losses across the banking sector at $69bn, including $50bn in losses at the central bank alone.
“If you follow what international standards are saying then there are no more banks with equity, they are all insolvent,” said Riad Obegi, chairman of Banque BEMO, noting that all lenders had delayed the publication of full-year accounts for 2019. “If the central bank does not pay us, certainly we will go bankrupt.”
Bankers blame the failure of successive governments to reform state finances. Yet they continued to buy high-yielding junk-rated treasury bills and profited handsomely from central bank governor Riad Salamé’s efforts to shore up the banking sector and attract foreign currency since 2016.
Collectively, the banking sector made $2.6bn in net profits in 2017, the year after Mr Salamé launched the first of his “financial engineering” operations. More than half of the sector’s assets are currently held at the central bank.
The lenders were “wilfully blind” to their growing sovereign exposure risk because they were making so much money, said one senior banker who asked not to be identified.
Now the government of Prime Minister Hassan Diab, appointed in January, is seeking to push through reforms to stabilise the economy and secure emergency financing from the IMF.
Mr Diab wants to shrink the oversized banking sector and inject new capital into each lender. But the bankers are resisting. A government mandated bail-in — using a percentage of depositors’ holdings to recapitalise the banks — would permanently destroy confidence and harm future economic growth, bankers say.
Mr Obegi said the administration was “irresponsible” for defaulting on debts made by previous governments, adding that the political leadership had created more “uncertainty” by “saying Lebanon is bankrupt”.
Such arguments are equivalent to saying “the government should have kept the scam going by lying to people”, said Mike Azar, a Lebanese economist and former lecturer at Johns Hopkins University in Washington.
Another option, supported by the banking lobby, is to use national assets, such as the two state-owned telecommunications companies, to pay back the $25bn in local and foreign debt the state owes to commercial lenders.
But Mr Azar questioned the fairness of using such a sale process just to protect those high-net worth individuals otherwise facing a possible deposit haircut. “To say that we need to sell state assets to make up the losses that the top X per cent are facing, that’s unjust,” he said.