Lebanese banks were shuttered for a seventh consecutive day on Friday, raising fears of an impending run on the banks even as the country remained paralyzed by nationwide economic protests.

The crisis has been building for months as confidence in the local currency and financial system has depleted.

Lebanon’s credit rating was downgraded to junk in August, with the global ratings agency Fitch raising the possibility the Eastern Mediterranean nation could default on its debts.

The peg of the Lebanese pound to the US dollar, maintained as the sacrosanct guarantor of banking stability for nearly two decades, is also now in greater question than ever – with black market rates emerging and banks imposing daily limits on dollar withdrawals.

“The fact that banks are closed is a telltale sign they’re afraid of a bank run happening. And this should be a major concern,” said economist Mohammad Akkaoui of the Beirut-based civic organization Kulluna Irada.

The banks are to re-open “once normalcy is restored,” the chairman of the Association of Banks in Lebanon said on Thursday, offering no timetable.

He said cash machines were being been replenished to enable people to access their accounts.

“It was a mistake to close the banks,” Dubai-based economist Nasser Saidi told Asia Times by phone. 

“When you shut down the banks, you create a crisis of confidence because people feel they can no longer access their deposits, so when it opens they will want to access their deposits.”

“What you can expect is a rush on the banks, if not a run on the banks” when they finally re-open, Saidi added.

Already, “people are worried about capital controls. You are already seeing a black market or parallel market for Lebanese pounds, and it is increasingly difficult to convert pounds to dollars, if not impossible.”

“This is our money,” read graffiti sprayed across one sealed ATM in downtown Beirut.

However, the normalcy awaited by the banking sector remains elusive as a succession of speeches by the foreign minister, prime minister and president, plus a list of emergency reforms, have failed to dampen the protest movement.

On Friday, Hezbollah leader Hassan Nasrallah, flanked by only the Lebanese flag, gave a televised address imploring the protesters to open the roads.

“A vacuum, in light of current economic situation … will lead to chaos and collapse,” he warned.

Highways blocked

An attempt by the Lebanese army to re-open key highways and intersections around the capital was rebuffed by protesters earlier this week, with women in some cases forming a shield between the crowds and the soldiers, and drivers heeding a call for reinforcements and blocking the roads with their cars.

As payday approaches, there is growing uncertainty over how and if people will be able to receive their salaries.

With at least one million people – roughly a quarter of the country – holding their ground at sit-ins nationwide, it appears many Lebanese have reached a consensus on putting aside immediate economic anxiety to attempt to force a major overhaul of what they see as a broken system.

How did we get here?

Prime Minister Saad Hariri announced a series of major reforms on Wednesday, including requiring the central bank, as well as the private banking sector, to fork over more than $3 billion to reduce Lebanon’s 2020 deficit.

At the top of the list was a 50% pay-cut for current and former ministers. Ministers in Lebanon receive salaries for life, which are among the highest in the world compared to the minimum wage, while their children receive monthly legacy benefits even after they die.

These elites – a handful of families, most of them former militia commanders or descendants of militia leaders from the country’s 1975-early 1990s civil war – have collectively run the country under a sectarian quota system for more than two decades.

One of the chief rallying cries of the current protest movement is, “All of them means all of them” – with constituencies across the country rebelling not only against rival political movements but also their own anointed leaders.

Local radio stations and television outlets over the past week have aired one protester after another, from the Sunni-majority city of Tripoli in the north, to the Shiite Amal party bastion of Nabatiyeh in the south, lambasting the entire political establishment for profiteering off the country’s coffers and compelling successive generations to leave the country to secure a decent life abroad.

The straw that sparked the demonstrations last Thursday was a tax to be levied on the free messaging service Whatsapp, the nation’s default phone plan, which Lebanese depend on to communicate with family members and friends in the diaspora, which outnumbers the local population threefold.

Lebanese nationals working abroad are, meanwhile, a key source of remittances for the country, sending $1.2 billion home in 2018, according to the Central Statistics Department.

In January, Banque du Liban issued a circular requiring Western Union and other non-financial institutions to cash out transfers in local currency – even if the original denomination was in US dollars.

The move, while intended to support the Lebanese pound, dealt a fresh blow to trust in the national currency.

One month earlier, reports had emerged that more than half a billion dollars had been converted from Lebanese pound accounts to dollar accounts in October 2018.

Until now, a triangle of mutually assured destruction between the Banque du Liban, the banking sector, and the political and business elite has kept the economy afloat. Using a mechanism known as “financial engineering,” private banks provide Banque du Liban with foreign currencies in exchange for steep and immediate profits in Lebanese pounds.

The banks have made massive profits since 2016 through this mechanism, profits that have been paid for by increasing public debt.

Lebanon now has one of the biggest debt to GDP ratios in the world, nearing 150%.

Economist Saidi says he does not believe Lebanon is at “imminent” risk of default.

“The Central Bank and Lebanese banks own something like 90% of the debt … they have a lot of skin in the game,” he said. 

The global credit rating agency Fitch downgraded Lebanon from distress to junk territory in August, however, citing “intensifying pressure” on the country’s financing model and an increasing reliance on “unorthodox” measures to attract currency inflows.

Fitch acknowledged that the “close-knit nature of the financial sector,” namely the interdependence among the banks, monetary authority and state, as well as non-resident deposits being mainly from a heavily invested diaspora, has helped the government stay afloat.

But that may not hold indefinitely, the ratings agency cautioned.

Resign or fail

As the financial system flails, anti-government protesters have camped outside the Banque du Liban, railing in particular against its longstanding governor, Riad Salameh, who they blame for overseeing the snowballing of the crisis.

“Thief thief! Riad Salameh is a thief!” demonstrators cried out on Thursday in front of the central bank.

“He knows where all the money is and he can take it back,” another told the TV station Al-Mayadeen. 

The bank’s policies, however, are a product of the entrenched political system.

“Lebanon’s central bank has a single mandate, which is to maintain the currency peg and the stability of the financial system. So, he had to raise interest rates to fight the balance of payments crisis,” said economist Akkaoui.

“Pursuing BDL’s monetary policy goal has produced distortions in the economy that are today impossible to solve without reshuffling the whole financial system,” he continued.

“The crisis cannot be solved without political consent on a new monetary regime.”

Before the protests broke out, banks had already been limiting withdrawals of dollars in order to halt panicked runs on the country’s foreign currency reserves.

But capital controls cannot alone solve the issue, economists stress.

“Lebanon needs a reform package to bring it back on track, that package should tackle the growing stock of public debt that has reached unsustainable levels,” said Akkaoui.

For Saidi, confidence in the ruling elite is beyond repair, and a new musical chairs of political faces would most certainly deepen the crisis amidst already depleted confidence in the system.

“They need to have a new government in place as quickly as possible with the main portfolios in the hands of technocrats – not political appointees – and they need to put together as quickly as possible a macro financial fiscal plan to rescue Lebanon. That is the priority right now to avoid the meltdown,” he said.

“You cannot expect the people who are source and origin of the problem to reform. You need fresh blood. Besides that, I don’t think they have the technical expertise to deal with Lebanon’s fiscal and debt problems,” Saidi added.

The key word, besides technocrat, will be independent, as past technocrats appointed by political movements were still beholden to those superiors.

Lebanon’s political elites control vast chunks of equity in the banks, 50% of whose deposits are owned by the top 1%.

“Any default will wipe out the equity of the banks, and their own deposits are at risk, so it is in their own self-interest that a government of technocrats comes in and helps solve the problem they created,” said Saidi. 

Housing loan scandal

The judiciary is, meanwhile, turning into a battlefield for calling the political elites to account.

Mount Lebanon Public Prosecutor Ghada Aoun on Wednesday announced that a case would be brought against the former premier – believed to be Lebanon’s richest man – Najib Mikati.

Both he and Bank Audi – one of the “big four” – are accused of obtaining “illicit gains” via a subsidized housing loans fund.

Mikati vehemently denied the charges after they were announced on Wednesday, saying he was “shocked” by the prosecutor’s move.

It is unclear if the case will be an isolated event, or if it could be the start of a wave of litigation and search for blame among the elite.

Defending the case against Mikati, Aoun told reporters on Friday that the case had been under investigation for a year.

Protesters who have taken to the streets should push for lifting immunity and banking secrecy laws that shield current and former ministers from public scrutiny, she added.

Banque du Liban in January 2018 introduced a series of stimulus packages including housing loans with subsidized interest rates, allotting 750 billion Lebanese lira (US$500 million) to cover the population’s housing loan needs for 2018.

By March, to the shock of the public, the package was declared to have been depleted. Shortly after, the banks halted all applications for subsidized housing loans, including those advanced in the process and even loans which had been approved.

That fall, a senior source in the Lebanese financial sector told Asia Times, it appeared the banks had lent out significant portions of the stimulus money to developers and investors, rather than reserving it for individuals seeking housing loans.

With the latest case against Mikati and Bank Audi, it appears the details of what transpired may finally come to light.

On Thursday, in a pre-recorded speech to the nation, his first since the protests broke out, President Michel Aoun pledged that all those who stole from the public coffers would face justice.

 

The original version of this article referred incorrectly to credit ratings agency “Fisk”. It has been corrected to Fitch.