Lebanon’s economy was a Ponzi scheme. Such schemes can last a long time and even be made to appear legal when state-sponsored, like in Lebanon’s case.

These are based on their participants’ confidence in the solvency and liquidity of the scheme. Inevitably, when one of those pillars breaks down, the system collapses.

Behind the Lebanese Ponzi scheme, commercial banks played a key role. From lending to the state at high interest rates, promoting the rentier economy, and finally, partaking in the financial engineering scheme, the banking sector has been one of the main actors of the Ponzi scheme.

The banks rode on the waves of easy profits, created perverse incentives across the economy with their lending strategies, and didn’t manage their balance sheets properly. Banks underestimated risks of buying Lebanese government debt instruments and held balance sheets with high levels of maturity mismatches. They have also violated countless laws related to capital controls and depositor rights.

By law, Lebanese banks are obliged to invest in Lebanon, except in cases of subsidiaries’ growth, though they are not obliged to lend to the government except under exceptional and justifiable reasons.

There is direct connection between banks and politicians, with the latter being shareholders in over 40% of banks, although ABL and the government are not always aligned.

In 2014, the ABL did voice its opposition to the state’s fiscal plan, going to court with the state, although the case was eventually settled behind the scenes.

Prior to the crisis, banks held 68% of public debt – half the dollar debt (~$15bn), and two-thirds of the Lira debt (~$40bn-worth). Since the crisis began, they have offloaded about $6bn in eurobonds and shifted $8bn in Lira treasuries to BdL.

In December 2019, about 144 banks held $216bn in assets, equal to roughly five times the country’s economic output at the time. The restructuring envisioned in the Lazard financial reform plan, and opposed by many banks, includes haircuts to spread ~$70-80bn in financial losses, bank mergers, and wipe-out of ~$20bn in shareholder equity.