Lebanese Banks Face Risk Of Another Lehman-Type Failure

September 2008 marked the collapse of the Lehman Brothers and a subsequent global financial crisis that shook the world.

The bankruptcy of Lehman Brothers did not only affect the United States but 23 other countries around the world according to the International Monetary Fund. These countries endeavored to rescue their failed banks and boost their economies by raising their public debt to more than 30 percent of their GDP.

For one thing, the 2008 credit crunch and recession resulted from years of deeply rooted weak spots in the global economy. At that time, economists were not able to foresee what was going to happen. But speaking about Lebanon nowadays, local banks are not excused for their reckless risk-taking and not learning from past mistakes across the world. A bruising downturn is that a bankruptcy of any bank in Lebanon currently will threaten the economy of the entire Lebanese state due to the organic relationship between the two.

Traditionally, local banks in Lebanon have freely put a large percentage of their depositors’ money in government bonds and the Lebanese government announced its intention to restructure these debts. Considering the current situation, this is a serious threat, as other countries in the world have experienced a collapse though their debt ratio to the size of their economy was relatively much lower than that of Lebanon’s.

Alongside this, reducing the country’s credit rating will make corresponding banks, which are still dealing with local banks, minimize their work together. This will reinforce the risk to banks’ bankruptcy in Lebanon as central bank will not be able to extend any failed bank with liquidity, through its reserves. This will lead that a bank falls one after another, like a domino effect. Economists and bankers have been warning about this threat since 2011 as the organic relationship between private banks and state finances will harm both parties, and depositors will have to bitterly bear the consequences of the potential collapse.

Local banks in Lebanon were rushing to lend to the government against high interest rates, which subsequently burdened the public finances. With decline in foreign investments and weakened confidence in the local economy, the financial situation has entered a vicious circle going from bad to worse.

Local banks have always viewed government sovereign bonds as less risky than lending private sector believing that government is a guarantor in all cases. However, the Lebanese government has dismissed this belief announced this month the restructuring of the Eurobonds debts which result lowering the credit rating of the three (Fitch, Standard & Poor’s and Moody's) to the point of ‘total default’ and subsequently facing risk of another Lehman-type failure that Lebanon wouldn’t be able to contain.