Lebanon to see dire repercussions as correspondent banks cut ties: experts

The decision by some correspondent banks to cut financial relations with the Central Bank of Lebanon will have dire repercussions for the country, Lebanese financial experts said.

The experts’ warnings come following a statement, released earlier this month by Lebanon’s Central Bank Governor Riad Salameh, saying that international correspondent banks started to curtail their business relationships with the central bank, or Banque Du Liban (BDL), due to such facts as Lebanon’s default on Eurobonds and political campaigns against the BDL.

The central bank governor added that such a move will place Lebanon in a difficult situation regarding foreign transfers and the purchase of basic commodities, as well as obtaining foreign currencies to operate various economic facilities.

Mohammad Faour, a financial researcher at the University College Dublin, told Xinhua that Lebanon is at the risk of witnessing a serious humanitarian crisis if all correspondent banks decide to cut their ties with the Lebanese financial sector.

“The Lebanese financial system will be excluded from the international financial system. We won’t be able to import our needs knowing that Lebanon imports most of the goods consumed in the country,” Faour said.

Ghassan Ayache, former vice governor of Lebanon’s central bank, told Xinhua that all the country’s international trade activities will be affected if correspondent banks decide to cut their relationships with Lebanon.

Ayache explained that Lebanese banks will no longer be able to issue letters of credit which constitute an important tool of international trade.

In this case, Lebanese banks may opt to agree with an international bank to open letters of credit on their behalf in return for a commission, according to Ayache.

Ayache cites another difficulty that will face Lebanese students who are willing to study abroad but will not be able to issue any bank guarantees amid unstable ties between local and correspondent banks.

Ayache explains that students usually ask for this service from local banks which, in turn, request this service from correspondent banks.

“This will no longer be the case as students will need to have access to cash money to open bank accounts in foreign countries for them to be able to complete their education and all other universities’ procedures,” he said.

Meanwhile, Mounir Rached, president of the Lebanese Economic Association, said that unstable ties with correspondent banks will put pressure on individuals and businesses who will need to have access to foreign reserves to complete any transactions with suppliers of services and products in foreign countries.

Lebanon has been facing an unprecedented banking crisis amid shortage in foreign reserves which limits the country’s ability to make cross-border payments.

Ayache told Xinhua that other correspondent banks may decide to cut their ties with Lebanon in the near future due to the lack of trust in the Lebanese banking sector, the government and the country’s central bank.

Faour reiterated Ayache’s remarks, adding that correspondent banks prefer not to deal with risky counterparties.

He added that the main factor prompting correspondent banks to be cautious towards Lebanon is the reputational risk after accusations by Swiss judicial authorities against central bank governor over alleged money laundering activities.

Faour asserted that the only thing that Lebanon can do to preserve its ties with correspondent banks is to work again on negotiations for a comprehensive financial stabilization plan with the International Monetary Fund.

“We need to restructure and recapitalize the banking sector, and restructure the public debt. As long as the local banking sector is insolvent, correspondent banks will be very skeptical about dealing with the Lebanese financial system,” he said.