Lebanon’s financial prosecutor on Thursday issued an order to freeze the assets of the leadership of 2o banks, found to have allowed the capital flight of more than $2 billion dollars during one of the worst crises in the country’s history.
The decision, Judge Ali Ibrahim told the National News Agency, “not only protects the depositors, but also serves as a great shock for the banks.”
It was part of the Lebanese judiciary’s investigation into massive capital flight that occurred after an anti-government uprising began on October 17 of last year.
Ibrahim in his argument demanded to know why “powerful” account holders in Lebanon were able to send money abroad, while average citizens were cut off from basic transactions, AFP reported.
“No one will escape the sieve,” Ibrahim promised, using an Arabic phrase to mean that every bad actor would be sifted out.
But on Thursday, less than 24 hours later, Lebanon’s attorney general suspended the decision pending further study, citing the national interest.
“We have received from reliable sources that the international financial authorities intend, and have begun to cease dealing with Lebanese banks and financial bodies,” said Judge Ghassan Oweidat.
“Going through with such a measure would bring the country and its monetary, financial and economic sectors into chaos,” he was quoted by the state news agency as saying.
Oweidat said a state move against the banks could also complicate the work of relevant authorities, tasked with studying financial scenarios, including default, in the coming days.
On Saturday at 6:30 pm local time, Prime Minister Hassan Diab is scheduled to announce his cabinet’s decision on whether Lebanon will pay a $1.2 billion Eurobond maturity, due Monday.
‘State above a state’
The blocking of the financial prosecutor’s shock decision was met with derision by critics, who argued that the banks were protecting their powerful patrons.
The decision “proves once again that the banking sector is a state above the state, and that its policies of greed are protected by the pillars of power, who stepped in to defend the banks instead of the poor,” read an editorial in Lebanese daily Al-Akhbar.
The newspaper, which is aligned with Hezbollah, went so far as to criticize the party’s longtime Christian ally, President Michel Aoun, saying his “white” record had been tarnished by joining rival factions in blocking the move.
Officially, the financial prosecutor determined the cost to the country’s financial sector would be too great.
The influence of the banking lobby and its powerful stakeholders from across the political spectrum was likely the dominating factor, however.
“The political and financial sectors in Lebanon are very, very close,” said Karim Daher, president of ALDIC, an association promoting civic engagement in the allocation of public funds.
“You have politicians on the boards … and you have politicians who are shareholders,” he told Asia Times.
The family of former prime minister Saad Hariri, for example, are major shareholders in Bankmed. Najib Mikati, another former premier, has been linked to Bank Audi, charged last October with making illicit gains through a subsidized housing loans program.
“The political class is jointly responsible with the banks, or more, because the political class has spent all the money during the past three decades,” Daher said.
Lebanon has one of the highest debt-to-GDP ratios in the world, at over 150%.
The country has never defaulted on its debts, long a point of pride, but one which is becoming increasingly untenable given the unraveling of the local currency’s peg to the dollar.
Holding at 1,500 Lebanese pounds to the dollar for the past two decades, the pound on Friday had slipped to 2,700 at exchange offices.
Burning through reserves
To go through with the upcoming Eurobond payment, many local economists argue, would be a dereliction of responsibility to the Lebanese people, given that the country is burning through its foreign reserves, its credit is junk, and default is inevitable.
The Association of Lebanese Banks is lobbying for their payment, and a debt swap as a last resort – a path it had dismissed as recently as January, according to Bloomberg.
A number of Lebanese banks instead decided to “offload” Eurobond shares to distressed asset funds and other foreign investors.
“We know that as of Q4 2019, more than 25% of each of the three Eurobonds maturing this year was held by Ashmore,” a Lebanese economist told Asia Times on condition of anonymity.
In the past few weeks alone, he adds, there were significant sales of Eurobonds maturing in 2020, resulting in 80% foreign ownership.
The possibility for an orderly default or restructuring is meanwhile being precluded.
“The traditional ‘united’ front between banks, the central bank, and the government during times of crisis seems to have broken down completely,” said Nafez Zouk, global macro strategist at Oxford Economics.
“An aggressive campaign by banks to ensure payment of the March bond has been faced with an equally forceful campaign against using the reserves of the Banque du Liban to pay the bonds,” he told Asia Times.
The latter camp, Zouk tells Asia Times, appears to have gained the upper hand.
When PM Diab addresses the public on Saturday, he will likely announce that Lebanon is holding onto its dollars.
– With reporting by AT Finance Editor Umesh Desai