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 have 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 thinks the system is broken.
The loss of trust is eroding liquidity in the 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 gross domestic product.
“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 the capital, Beirut.
Dollar loans have to 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 is about 27%, any people are in dire straits.
Central bank governor Riad Salameh sought to ease concerns on Monday, saying the bank had a usable foreign cash reserve of $30 billion and total assets of $38 billion.
The central bank has taken steps to protest depositors by ensuring no bank would fail and will seek to lower interest rates through liquidity management, he said.
But the imposition by banks of controls on dollar withdrawals and transfers overseas has failed to rebuild confidence.
Bankers say customer deposits have continued to dwindle and are estimated to have dipped by at least $8 billion since August, according to Institute of International Finance’s chief MENA economist Garbis Iradian.
Giyas Gokkent, at JPMorgan Securities, said reserves were high enough to ensure Lebanon could maintain its peg to the U.S dollar.
But 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.”
The protests that have swept Lebanon for weeks are fueled 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, already faltering since their 2014 peak, have 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 have in the past acted as lifeblood to banks and the government. But the funneling of dollar liquidity from banks to the central bank to bridge the government’s funding gap – a process called “financial engineering” – has also broken.
Salameh 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.
But Moody’s Investors Service and Fitch Ratings have downgraded Lebanon’s largest banks further into junk territory, and a local banker said some international correspondent banks were now more wary of providing dollar liquidity.
Two bankers also 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.
Editing by Timothy Heritage