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Analysis: Lebanon’s woes push it to the margins of the global financial system

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BEIRUT / LONDON (Reuters) – Foreign lenders including HSBC and Wells Fargo are cutting ties with Lebanon’s central bank, sources familiar with the matter told Reuters, highlighting the country’s international isolation as it recovers of the economic crisis.

FILE PHOTO: A man wearing a face mask walks past a fortified Blom Bank ATM, as Lebanon imposed a partial lockdown for two weeks from Friday in a bid to counter the spread of the coronavirus disease (COVID- 19), in Beirut, Lebanon August 21, 2020. REUTERS / Alkis Konstantinidis / File Photo

In a letter to the Attorney General of Lebanon last week, Governor Riad Salameh warned that foreign correspondent banks were starting to restrict their trading relationships with the local financial system, while Wells Fargo had closed a central dollar bank account and HSBC had closed its British pound sterling. account, according to three sources from the banking and legal sector.

Salameh described “negative shocks” in the relationship between the central bank and foreign correspondent banks, which he said would make it difficult for Lebanon to transfer foreign payments and buy commodities abroad, he said. said a forensic source.

The central bank did not respond to a request for comment. Wells Fargo and HSBC declined to comment.

These two banks, along with Bank of America and Deutsche Bank, were among lenders that had also reduced their business with Lebanese banks in areas such as cross-border payments and letters of credit, banking sources said.

However, other banks such as JPMorgan, Bank of New York Mellon, Citi and Commerzbank were still active, the sources said.

Deutsche Bank and JPMorgan declined to comment. The other banks did not immediately respond to a request for comment.

CAREFUL

Foreign banks became cautious of Lebanon when the government defaulted on its debt last year, becoming even more suspicious when its currency collapsed and the deadlock over the composition of a new government has worsened in recent months, dashing hopes for a resumption of funding talks with the International Monetary Fund.

“In these banks, when they Google ‘Lebanon’ and they see the low levels of foreign exchange reserves, the default… the damage to reputation and corruption, and all this disgusting state that we are in, what are they saying? ? They of course say it’s better not to deal with them, ”said one of the sources, a senior banker.

Bankers’ estimates of the reduction in foreign lender activity since 2019 ranged from 20 to 80 percent.

Salameh’s warnings come as he comes under increasing scrutiny for his role in the financial crisis both at home and in Europe, as a Swiss investigation linked to Lebanon’s central bank is underway.

President Michel Aoun blamed the central bank in a speech Wednesday night for the financial collapse and for delaying an audit essential to unlock foreign aid.

The central bank did not respond to Aoun’s comments.

Salameh’s letter said JPMorgan was still offering the necessary letters of credit to help Lebanon import fuel and other goods, a judicial source added. JPMorgan declined a request for comment.

But core subsidies, drawn from critical foreign reserves, are already precarious. The money to finance imports of wheat, fuel and medicine will run out by the end of May, the acting finance minister told Reuters last week.

“Given the situation, it’s no surprise that some banks are pulling out of Lebanon,” said Khaled Abdel Majeed, MENA fund manager at SAM Capital Partners, a London-based investment advisory firm.

“The question is … no more not having the money to buy anything.” I think this stage will be reached before the other banks pull out.

RISK

Deposits held by Lebanese banks with internationally active banks stood at $ 16.7 billion at the end of September 2020, less than half of what they were two years earlier, according to the latest data from the Bank for International Settlements.

It also showed that most of the deposits were held by Swiss, then British, American and German banks.

Lebanon’s predicament echoes that of Venezuela, also increasingly shunned by international lenders as the South American country grapples with an economic crisis and sanctions.

The Iranian-backed role of Hezbollah in Lebanon means that some of the country’s banks have long been viewed as risky for international lenders, some of whom have faced US sanctions for their dealings with Iran.

This risk aversion intensified after Lebanon’s sovereign credit rating was lowered deeper into junk territory in recent years, as concerns grew over the sustainability of its public debt. Its debt-to-GDP ratio now hovers around 200%.

The heavily indebted state and the central bank have since traded responsibility for the crisis, the worst Lebanon has seen in decades.

Paralyzed banks – the state’s largest creditor – have blocked people from their deposits under informal capital control imposed without legislation since late 2019, shattering the image of the Lebanese banking sector as a pillar of stability.

Some smaller banks had already been stripped of their correspondent banking relationships, making them dependent on their Lebanese counterparts who still had such relationships if they wanted, for example, to allow an international transfer of dollars, a senior banker said.

And many banks were prevented from opening letters of credit with foreign lenders because they had to provide collateral against the full amount of the facility, the same banker said.

Still, a source from one of Lebanon’s largest banks told Reuters that she had not encountered any difficulties with her correspondent banks. “So far, everything is fine,” another banking source said. “But if a large number of correspondents stop working with Lebanese banks, we will have serious problems.”

Additional reporting by Samia Nakhoul, Dominic Evans, Karin Strohecker, Nikolaj Skydsgaard and Nichola Saminather; Editing by William Maclean


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