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Foreign borrowers, including HSBC and Wells Fargo, are severing ties with the Lebanese central bank, sources familiar with the matter told Reuters, underlining the country’s international isolation as it rises from the economic crisis.

In a letter to Lebanon’s public prosecutor last week, Central Bank Governor Riad Salameh warned that foreign correspondent banks were beginning to cut their business relationship with the domestic financial system as Wells Fargo closed a central bank account in dollars. and HSBC had closed that sterling British Account, according to three sources from the banking sector and the judiciary.

Salameh described the negative shocks in relations between the central bank Banque du Liban and foreign correspondent banks, which he said would make it difficult for Lebanon to transfer foreign payments and buy basic goods from abroad, a judicial source said.

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

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

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

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

Careful

Foreign banks turned cautious towards Lebanon when the government failed to pay its debt last year and they became even more cautious after its currency collapsed and a stalemate over the composition of a new government deepened in recent months, shattering hopes for a resurgence of financing talks with the International Monetary Fund.

In these banks, when they Google Lebanon and they see low levels of foreign reserves, default damage reputation and corruption, and all this disgusting state were in, what do they say? They say it’s certainly better not to deal with them, said one of the sources, an old banker.

Bankers estimates for reduced activity by foreign lenders since 2019 ranged from 20 percent to 80 percent.

Salamehs’ warnings come as he faces growing scrutiny for his role in the financial crisis both at home and in Europe, with a Swiss investigation linked to the Lebanonscentral bank under way.

Lebanese President Michel Aoun blamed the central bank, in a speech late Wednesday, for the financial collapse and for blocking a control that is essential to unblocking foreign aid.

The central bank has not responded to Aouns remarks.

Salamehs’ letter said JPMorgan was still providing the credit letters needed to help Lebanon import fuel and other goods, a judicial source added. JPMorgan declined to comment.

But basic subsidies, received from critical foreign reserves, are already uncertain. The money to fund grain, fuel and medicine imports will run out by the end of May, the interim finance minister told Reuters news last week.

A view shows an empty street near the government palace in central Beirut, Lebanon [File: Mohamed Azakir/Reuters]

Given the situation, it is not surprising that some banks are withdrawing from Lebanon, said Khaled Abdel Majeed, manager of the MENA fund at SAM Capital Partners, a London-based investment advisory firm.

The question is more about the lack of money to buy anything. I think that stage will be reached before the other banks withdraw.

The danger

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

He also pointed out that most of the deposits were held by banks from Switzerland, followed by the United Kingdom, the United States and Germany.

Lebanon’s location echoes that of Venezuela, it is also increasingly shunned by international lenders as the South American country faces economic crisis and sanctions.

Iran-backed Hezbollah’s role in Lebanon means that some of the country’s banks have long been considered dangerous to international lenders, some of whom have faced US sanctions for their relations with Iran.

A damaged ATM cash machine has been presented in Beirut, Lebanon [File: Mohamed Azakir/Reuters]

This risk aversion intensified as the Lebanese sovereign credit rating was cut deeper into waste territory in recent years as concern grew about the sustainability of its public debt. Its debt-to-GDP ratio is now climbing close to 200 percent.

The heavily indebted state and the central bank have since traded the blame for the crisis, bad Lebanon for decades.

Paralyzed banks, the state’s largest creditor have locked people out of their deposits under informal capital controls imposed without legislation since late 2019, tarnishing the image of the Lebanese banking sector as a pillar of stability.

Some smaller banks had already been cut off from correspondent banking ties, making them dependent on Lebanese colleagues who still had such relationships if they wanted, for example, to clear an international dollar transfer, a senior banker said.

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

Still, a source from one of the largest Lebanese banks told Reuters news that it had not encountered any difficulties with its correspondent banks. So far they were okay, said another banking source. But if a large number of correspondents stop working with Lebanese banks, we will have serious problems.



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