New Report Analyzes Lebanon’s Financial Crisis, the Criminal Role Hezbollah Played, and What Can Save Lebanon

Report by Foundation for Defense of Democracies determines that Lebanon will require more than $93 billion to get its banks back on their feet.  The country has gold holdings that the Government has refused to use as leverage.  Any bailout will be near impossible as long as Hezbollah illicit finance permeates the system.  But, the “Party of God” is not going away anytime soon.

Washington, D.C., August 5, 2020 – As the Lebanese Government is engaged in high-stake talks with the IMF to stabilize the country’s financial crisis, the Foundation for Defense of Democracies (FDD) has issued a report, Crisis in Lebanon: Anatomy of a Financial Collapse.  The report notes that current bailout plans are woefully insufficient, as the country’s debt likely exceeds $93 billion. That number derives from debt incurred by the country’s central bank, commercial banks and defaulted Eurobonds.

The FDD report comes after Alain Bifani, a member of Lebanon’s negotiating team with the IMF who served as the director general of the country’s finance ministry for 20 years, resigned. He is the second member of Lebanon’s team at the International Monetary Fund talks to resign in recent weeks.

According to the author, James Rickards, “Lebanon today is broke. The entire country has been picked clean by terrorists, criminals, elites and the political class.” Rickards, a renowned economist, is on the Advisory Board of FDD’s Center of Economic and Financial Power. He is also a best-selling author and the editor of Strategic Intelligence, a financial newsletter.

On June 26, IMF Managing Director Kristalina Georgieva said she does not yet have reason to see a breakthrough in negotiations with Lebanon to help resolve the country’s economic crisis and it is unclear whether the country’s leaders, stakeholders and society can unify around reforms needed to stabilize its economy and return it to a growth path.

Profound problems plague the country. The Lebanese pound recently “crashed in value, inflation is surging, banks are being firebombed, protestors are rioting in the streets, bank deposits are frozen, capital controls are in place, Lebanon has defaulted on its external dollar-denominated debt (with more defaults expected soon),” Rickards writes.

Rickards calls for a myriad of policy recommendations. These include: 1. Devalue the currency to promote the export sector and tourism. 2. Reform the banking system by creating new clean banks with untainted management and external oversight boards. This will work better than trying to clean up the existing corrupt banks. 3. Rescue funds should be conditioned on excluding Hezbollah from the dollar payments system. This can be done via U.S. correspondent banks and calibrated sanctions.

In summary, this is not a case of preventing losses. The losses have already occurred. The only issue remaining is to determine how the losses will be apportioned among citizens, bankers, elites and religious factions. A fair apportionment would seek to put losses onto bankers, elites and factional leaders while protecting civil society to the extent possible.

In the 57-page report, Rickards notes that Lebanon’s currency is now subject to hyperinflation, the banking sector is insolvent and “money transfers aid money laundering to support global terrorism.”  Rickards’ critique of Banque du Liban (BdL), the central bank, is damning, calling it “the most corrupt and incompetent central bank in the world. It is at the heart of one of the largest Ponzi schemes in history.”

Rickards says of the Lebanese Ponzi scheme:  The losers are the people of Lebanon; the Lebanese diaspora; external creditors; bank depositors; and businesses that relied on Lebanon’s banking system.  The “winners” were Hezbollah; the bankers and elites who made windfall profits from BdL’s “financial engineering” or moved dollars offshore before capital controls were imposed.

The foreword of the report by FDD CEO Mark Dubowitz and Senior Vice President for Research Jonathan Schanzer, argues that Hezbollah’s role in the government will further complicate bailout efforts.  “Hezbollah controls the health ministry, and is the majority partner of the current coalition,” they write.  “International donors cannot in good faith bail out a government controlled by a terrorist group that answers to the Islamic Republic of Iran, the world’s leading state sponsor of terrorism, according to both Democratic and Republic administrations.”

Hezbollah’s economic network is detailed in the FDD report. Drug smuggling, originally a way to finance terrorism and social programs, became a lucrative end in itself, according to Rickards. Criminal enterprises expanded to diamonds, gold and weapons.  Money laundering was facilitated by a global illicit finance network with the knowledge of Lebanese banks. The enterprise became known as the “The System.”

Many of the banks analyzed in the report are defendants in the case of Bartlett v. Société Générale de Banque au Liban S.A.L. (SGBL).  The plaintiff in the case alleges that these banks:

“…used its New York correspondent banks to ‘clear’ U.S. dollar-denominated transactions on behalf of Hezbollah on an ongoing and recurring basis, including on behalf of Hezbollah’s Conflict Diamond Money Laundering Network … and knowingly aided and abetted Hezbollah and its Islamic Jihad Organization, provided them with substantial assistance and agreed to participate in The System and to help facilitate the transit of illicit proceeds through the United States for the benefit of Hezbollah and its IJO.” (Pages 32 – 64 of the Amended Complaint).

Damages from this federal case could easily reach into the billions of dollars.  A “finding of liability could result in the termination of correspondent bank relationships in the dollar payments system and the freezing of assets,” Rickards writes. Parallel investigations by the U.S. Intelligence Community could lead to U.S. sanctions.

Rickards believes that Lebanon’s entire banking sector is insolvent.  He calculates that the capital needed to cover existing losses and to recapitalize the 14 banks analyzed in the report is a staggering $67 billion – perhaps more, as the exchange rate measured as pounds-to-dollars continues to climb.  A rescue of that size is unrealistic, the author writes.  The problem is compounded by the fact that many of the banks analyzed stand accused of financing Hezbollah and money laundering.

The FDD report notes that Lebanon’s banks have one source of leverage: gold.  Lebanon is the 20^th largest holder of gold reserves among countries reporting to the IMF, according to Rickards.  At the market price of $1,800 per ounce (as of June 2020), Lebanon’s gold reserves are worth approximately $16.5 billion.  “This is likely the largest and perhaps only liquid asset left in the hands of the Lebanese government,” Rickards writes.

The report notes that the U.S. could “easily hasten the collapse of the Lebanese financial system (and, by extension, the Lebanese government and civil society) by imposing sanctions and terrorist designations on major Lebanese commercial banks.”  At that point, Rickards writes, the money laundering activities of “The System” in Lebanon would come to a halt because Lebanese banks could not facilitate the scheme without dollar deposits.  However, he notes that U.S. officials understand that sanctioning Lebanese banks would “destroy the Lebanese banking system and economy, collapse the current government, spark social unrest, and precipitate a major humanitarian crisis.”

In May of this year, the Lebanese government, Hezbollah and the leader of the Future Movement endorsed a plan and negotiations began with the IMF. The $21 billion from the IMF and CEDRE, combined with fiscal, monetary and other legal reforms by the Lebanese government, were expected to recapitalize the BdL and the commercial banks, restructure the Eurobond debts, encourage exports, and revive the Lebanese economy. Rickards says the reforms and funds will not be enough. Lebanon’s total debt likely exceeds $93 billion. This includes $67 billion in bank debt, $22 billion in BdL debt, and $4.2 billion in Eurobond debt.

With any bailout less than the full sum, the Lebanese collapse will be postponed for a year or two, at most. Any new money would simply be added to the unpayable debt “once the fraud plays out.” A real reform plan, Rickards notes, “would require a complete transformation of Lebanese society and politics in a way that transcends the confessional system, which is powered by self-interest, which has prevailed since the 1940s.”

About Foundation for Defense of Democracies (FDD)

FDD is a Washington, DC-based non-partisan policy institute focusing on foreign policy and national security.  FDD’s Center on Economic and Financial Power (CEFP) studies national economic security, with a focus on how the U.S. can leverage its economic and financial power to achieve its national security objectives. Experts at CEFP track and analyze changes in the international economy and how allies and rivals are adapting to these developments. CEFP also promotes greater understanding of how the U.S. government can employ its economic and financial authorities to best counter its adversaries. Visit our website at www.fdd.org and connect with us on Twitter, Facebook, and YouTube.

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