The story of how Lebanese commercial banks effectively finance the country through buying government debt has been told so many times that it is cliché — but even after all these years, it rings no less true.
As of the end of March 2012, the Association of Banks in Lebanon reported that the sovereign had rung up a tab of some $29 billion at the country’s banks, having issued them some $13 billion in Eurobonds (70 percent of the government’s Eurobonds portfolio) and $16 billion in Treasury bills (49 percent of the government’s Treasury bills portfolio). While this figure represents only 20 percent of the banking sector’s total assets, it fails to take into account deposits placed with the central bank, which stood at $50 billion as of the end of March, taking commercial banks’ overall exposure closer to 55 percent of assets.
All this is relative to total Lebanese government debt, which at the end of 2011 stood at some $54 billion; that’s an awful lot for an economy worth just $39 billion, working out to a whooping debt-to-gross-domestic-product ratio in the range of 140 percent. Those new to Lebanese economics should note, however, that this is actually an improvement relative to six years ago, when debt-to-GDP peeked around 180 percent.
“The debt itself is not a major problem,” says Fadi Osseiran, general manager of BlomInvest Bank. “The point is how much we will increase it every year relative to GDP, that’s the real story.”
The ‘drop’ in the debt-to-GDP ratio is actually due to the increase in GDP. With a weaker economy — the IMF recorded 1.5 percent economic growth in 2011 and forecasts 3 to 4 percent this year on condition of internal reform and external stability, neither of which seems likely — the debt component of the ratio would need to lose some fat for the ratio to continue dropping and alleviate concerns
regarding the bank’s weighty sovereign exposure.
One thing banks are voicing dissatisfaction with are the current rates on Eurobonds and Treasury Bills. “It does not make sense that Lebanon has a ratio of debt to GDP at 137 percent, a credit rating below investment grade and the interest rate on bonds is much better than on investment-grade bonds,” says Osseiran. The average yield on Eurobonds stands at 4.3 percent, and 5.82 percent on a two-year Treasury bill. In what was perhaps a slight correction, yields on Treasury bills were raised by 50 basis points across the board in March of this year, a move cheered by bankers.
In the national interest
“The government should understand that a higher rate will give comfort to banks to buy more government debt,” says Najib Semaan, general manager of First National Bank.
Concerned with their exposure to the sovereign risk, banks are trimming their holdings in government securities, with the gap being filled by the central bank. “All Lebanese banks are reducing their exposure to the government,” says Alain Wanna, deputy general manager and head of Group Financial Markets at Byblos Bank, but he highlights that “banks, rather than investing directly in government securities, are placing deposits with the central bank and the central bank is buying the securities so in the end it is the same.”
His observation concurs with that of central bank Governor Riad Salameh’s statement at the Arab Economic Forum in May this year, during which he said “the reduction in the banks’ exposure to the government created a gap that we filled as a central bank”. The irony is that the central bank is also the issuer of government debt, meaning that effectively it is buying from itself. The more it does so, the more the debt is monetized and the lines between who owns it and who issues it become blurry.
No place like home
But with low rates in international markets, keeping the dough at home seems like the most suitable option for now. “In this environment in which interest rates abroad are so low, banks will subscribe in the forthcoming issues because they need to grow their interest margins,” says Marwan Barakat, chief economist at Bank Audi.
More debt issuance is on the government’s agenda. Minister of Finance Mohamad Safadi announced in May the government’s intention to raise $2 billion in new foreign-currency-denominated bonds this year for infrastructure projects, which the banks will be expected to line up for yet again.
Being the prominent financiers of the republic’s coffers, however, it would seem that the banking sector ought to be able to twist the government’s arm into implementing structural reforms essential to reduce the borrowing needs of the country.
According to Nassib Ghobril, chief economist at Byblos Bank, “the political class is taking the banking sector for granted,” given that if they sought funding from abroad they would not get the same rates. “Unfortunately the banking sector has not used its leverage to put significant pressure on the authorities. If representatives of the banking sector say we will stop funding altogether until you start implementing reforms and not just talking about them, then things will be different.”