Risk Of Another Lehman-Type Failure Faces Lebanese Banks

Business

Risk Of Another Lehman-Type Failure Faces Lebanese Banks

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

The bankruptcy of Lehman Brothers did not only affect the United States but 23 other countries across the world in accordance to the International Monetary Fund. These countries endeavoured 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 world economy. At that time, economists were unable to predict what was going to take place. But talking about Lebanon thesedays, local banks are not excused for their reckless risk-taking and not learning from previous mistakes throughout the world. A bruising downturn is that a bankruptcy of any bank in Lebanon presently will threaten the economy of the whole Lebanese state due to the organic relationship between the two.

Usually, local banks in Lebanon have freely put a huge percentage of their depositors money in government bonds and the Lebanese government declared its intention to restructure these debts. Considering the present 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 lesser than that of Lebanons.

Alongside this, minimizing the countrys credit rating will make corresponding banks, which are still dealing with local banks, reduce 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 healthy relationship between private banks and state finances will harm both parties, and depositors will have to bitterly bear the outcomes of the potential collapse.

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

Local banks have constantly 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 declared this month the restructuring of the Eurobonds debts which result lowering the credit rating of the three (Fitch, Standard &Poors and Moody's) to the point of total default and continuously facing risk of another Lehman-type failure that Lebanon wouldnt be able to contain.