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Huge losses in Lebanon's financial sector

The country's economic system accumulates losses of US$69 billion
A Lebanese flag flies along a bridge near the port of Beirut, the capital of Lebanon, while damaged grain silos can be seen in the background in front of the blast site

AFP/JOSEPH EID  -   A Lebanese flag flies along a bridge near the port of Beirut, the capital of Lebanon, while damaged grain silos can be seen in the background in front of the blast site

The Lebanese government and monetary authorities have acknowledged the difficulty of determining the exact amount of losses in the financial sector due to the economic crisis the country is going through, showing that the catastrophe that hit the banks earlier could be more catastrophic than it was. 

For an economy like Lebanon's, which is based on the service sector, the banking system is essential. But the sector is paralyzed and in a financial decline that has impoverished savers. 

Saadeh al-Shami, Lebanon's deputy prime minister told Reuters that officials "agreed to estimate the size of the financial sector's losses at between $68 billion and $69 billion," matching the figure provided by the government last year. 

However, the deputy prime minister cautioned that these figures may not be accurate, as they are based on assumptions.  

"If these assumptions change, the size of the losses will also change," Saadeh al-Shami added.

A general view of the port area of Beirut, Lebanon, August 6, 2020.
REUTERS/BADER HELAL - A general view of the port area of Beirut, Lebanon, August 6, 2020.

Various international financial institutions, whose eyes are watching the situation in Lebanon, estimate that the political and economic crisis affected the sector by approximately $83 billion in losses, a figure that, taking into account Lebanon's GDP of $55 billion in 2019, is reduced.  

The credit rating agency Standard & Poor's reported that "the full extent of the losses will not be clear until the government restructures its debt mountain," following the country's debt default.  

Also, according to the agency's experts, the cost of restructuring the banking system could range from US$23 billion to US$102 billion, as well as a reduction in the banks' credit rating. 

Above all, agreement on the amount of losses in the financial sector is vital for the Lebanese government, which intends to start the process of negotiating a program of support from the International Monetary Fund.  

The country is currently in negotiations with the aim of receiving an IMF assistance fund to help it emerge from the crisis in which it is currently immersed.  

However, for the moment they have been paralyzed due to the impossibility of establishing a consensus between the banks, the government and the central bank on the extent of the losses they are facing. 

Lebanon's President Michel Aoun
PHOTO/REUTERS - Lebanon's President Michel Aoun

It is worth noting that the banking sector has been the hardest hit in the aftermath of the country's financial crisis, following initial evidence that banks were in a state of paralysis.  

As a result, a large number of banks have been forced to cut jobs, reduce loan books and begin a search for cash in order to stay afloat.  

Analysts believe that any restructuring of the banks should be part of a more complete and comprehensive restructuring plan.  

Also, according to official data, the Government of Lebanon's debt to local banks amounts to a figure of about 25 percent of the country's total public debt, which constitutes approximately $60.4 billion.  

Most of this government debt is in the form of bonds previously acquired by the banks.  

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Also, the Government has debts to non-bank institutions, which amounted to approximately $7.7 billion, being in the form of treasury bonds.  

Among the largest creditors of the Lebanese Government, the Central Bank is currently the largest by $37.2 billion as of the last first quarter.  

Also, official data show that the public debt in local and foreign currency increased its figure to $97 billion by the end of the first quarter of the year, taking into account as a base the $60 billion at the end of 2017, as a result of indebtedness and interest accumulation.  

Various economists believe that the country's financial system is organized locally as a "Ponzi chain pyramid", in which, through a loan, previous creditors can be repaid, making this scheme work until the borrowed money runs out.  

According to a report published by the Central Bank in July this year, foreign assets fell to $21, 1 billion, which is the lowest figure since June 2009, as well as a large decline from $38, 7 billion in mid-September 2019.  

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Although the Central Bank has put in place emergency measures, Lebanon is currently plagued by a collapsed economy that is jeopardizing the country's financial system. 

Moreover, the decrease in the liquidity of the population, which used to be a source of financing to meet the needs of the financial sector and foreign investments as a result of the political crisis, is severely damaging the country's economy. 

In addition, the lack of cash causes a constant fear among the business community as to the occurrence of worse consequences.