RIYADH: The recent Lebanese court order prohibiting lenders from transferring money overseas is the consequence of a long process of deep rot in the banking sector. This is explained by the country’s growing debt amid a deteriorating economic situation – the crisis that many blame on Lebanon’s corrupt political class and the government’s failure to repay debts to banks.
On March 24, Lebanese Judge Ghada Aoun ordered the Lebanese Customs Administration to prevent six Lebanese banks from sending money abroad. The targeted banks were Bank of Beirut, Bank Audi, Creditbank, Bankmed, SGBL and Blom Bank.
“Lebanese banks are technically bankrupt, but so far they are not legally bankrupt,” economist Roy Badaro said in an interview with Arab News.
He explained that the word “illiquid” might be more appropriate because no one really knows about the possible undeclared assets of banks. Moreover, no Lebanese bank has so far officially declared bankruptcy.
Badaro said the banks deny their situation. “Their main problem is that they were lured by the unhealthy profits offered by the government to finance its debt. During this time, they refrained from financing the economy,” he pointed out.
While the Lebanese government is embroiled in massive corruption charges, the state has accumulated more than $90 billion in debt that it is no longer able to pay, which in turn has affected banks’ liquidity.
The banking sector responded to the asset freeze with a two-day strike on March 21-22. It could be repeated if more
pressure is being exerted on the banking sector, warned a banking source on condition of anonymity
Judge Aoun is a close ally of President Michel Aoun, who is demanding a forensic audit of Lebanon’s central bank, following Lebanon’s default on debt of over $90 billion as a result of mismanagement and state corruption.
Ironically, Aoun’s party has been in power for a decade and deals exclusively with the electricity portfolio. Experts estimate that the latter represents more than 40% of the debt. Industry watchers who follow developments fear the banking sector insolvency crisis that was triggered by the state’s inability to service its debt
payouts should get worse over time. The sector will continue to unravel, with banks eventually expected to close.
Judge Aoun had previously frozen the assets of these banks, including the members of their boards of directors. The judge is investigating the transactions they have undertaken with the country’s central bank.
In addition, Judge Aoun issued travel bans against the leaders of the boards of directors of these banks.
While banks are currently facing the heat and being blamed for the current economic crisis, industry observers believe that the country’s corrupt political class should be blamed for failing to fulfill their duties and responsibilities.
“The political class is trying to divert attention from its failures before the elections (legislative in May). They want to show they are doing something by scapegoating the banking sector,” said one of the bankers whose assets were frozen, on condition of anonymity, in an interview with Arab News.
Lebanon will hold its first post-uprising legislative elections in May. In October 2019, the Lebanese rose up and protested against Lebanese politics
“If the authorities put in place formal capital controls, we would not be in the current quagmire of lawsuits, asset freezes and other court orders,” said Nassib Ghobril, chief economist at Byblos Bank. , in an interview.
with Arab News.
One of the main purposes of a capital control law is to ensure equal treatment for all depositors, he pointed out. The capital control law will further limit the preferential treatment that non-resident and affluent depositors can afford by hiring lawyers at high costs. At the same time, local court decisions discriminate against other filers by giving
The banking sector is shrinking
Past market dynamics allowed for the existence of 47 commercial banking groups, he said, adding that market forces will determine the future number of banks in Lebanon.
Ghobril believes that each bank’s outlook will be determined by the solvency and liquidity plan and business model that banks will submit to the central bank.
In turn, the authorities will put certain criteria for recapitalization, which will determine which banks will continue and which banks will leave the market.
Badaro nevertheless believes that only a few banks will survive.
“As we expect GDP to be less than $30 billion over the next five years, and the ratio of bank assets to GDP would be around 100%, that means we will end up having 7-12 banks,” he said. he pointed out.
The role of the sector will also change. According to him, his main functions will be focused on trade
financing and short-term loans of small amounts.
According to figures provided by Badaro, banks currently own about $4 billion, which means that for most depositors, the money is not accessible.
The government and central bank have estimated the financial shortfall at $69 billion, or what they consider “losses”, Ghobril said.
What has leaked in the press is that 74% of this amount will have to be borne by depositors and commercial banks, while the state and the public sector walk away without assuming any part of the burden, a- he added.
“This is absurd, because it is the abuse of power, the mismanagement of the public sector and the resulting mismanagement of the crisis that has led to the current state of the Lebanese economy and banking sector. “said the Byblos Bank economist.
Therefore, Ghobril warned that the state should bear most of the burden of losses, not depositors, “because placing the burden on depositors will lead to a loss of confidence in the long run.”