Not everyone may be aware, but my home country, Lebanon has recently suffered an economic crash.  The World Bank has classified it as one of the 10 worst economic crises globally since the 19th century.

My family, along with most other Lebanese have suffered huge losses. There are many different stories around what has happened to Lebanon, once known as the Paris of the Middle East. In this blog, I offer my views on what happened and look at what you, as an individual, could do in the future, to not be in the same position as many people in Lebanon find themselves today.

I’d like to preface this by saying that many people would not have been able to mitigate against this disaster, as a lot of my suggestions require some access (whether financially or otherwise) to different markets and wider opportunities. Please also note that none of what I write is to be construed as financial advice or recommendations.

Let’s start with some history around Lebanon’s economy.

Historically, the Lebanese banking sector was one of the corner stones of the Lebanese economy. In the last 50 years, the banking system in Lebanon withstood many hits, including economic crashes that impacted the west, and was voted Central Banker of the Year in 2009 by The Banker.

The continuous success has attracted money from the domestic, regional and international markets, which in turn gave depositors extreme confidence in the banking sector of the country and thus increased deposits further, creating a virtuous circle. 

Although on the surface the economy was booming, the central bank reserves were in fact dwindling. Despite some unease around the situation, depositors didn’t expect the situation or outcome to be so sudden or dramatic, and therefore no real changes were made.

What actually happened?

At the start of 2020 a rumour that Lebanese banking system would not be able to repay some treasury bonds started to circulate and when proven certain, it created a crisis of confidence and the downward spiral began:

• Banks, withheld payments to their customers
• Lebanon defaulted on repaying their debt
• Slowly, banks started issuing their own rules and regulations around who, when and if they would pay
• The local currency, the Lebanese Lira, started to depreciate dramatically, losing up to 90% of its value

Unfortunately, the situation was exasperated by allegations of corruption and complicity of the government and politicians that gave bankers and the central bank full authority, by not enacting any laws to protect the depositors or people of the country. Furthermore, while most people weren’t able to withdraw even $100 of their existing cash, there were stories that people with influence were able to transfer their millions and billions abroad.

Banks were able to block depositors from withdrawing money and, with no action from the politicians, this meant that even those with USD deposits were prevented from having access to their money.

All of the above created the perfect black swan event.

What this meant for the average person

1. Whether you had money in the banks in LL or USD, you were no longer able to access it at all at its original purchasing value, nor were you able to transfer it out of the country
2. Withdrawals in USD were giving at the “set rate of 1,500 LL per USD”, despite the true exchange rate, which, at its worst, was 100,000 LL per USD, so you were given a lot less than what you actually had
3. Cost of living was increasing, while the value of money was decreasing, so people could no longer afford basic food and housing
4. All savings you had, any pension you were relying on, was suddenly worthless and inaccessible

So, what have I learned from this?

After losing most of my savings, and seeing my friends lose almost all of their life capital, I thought of re-evaluating my current finances, and looking at how we could have limited the damage to our individual finances.

I will preface this section by re-iterating that certain circumstances around this collapse had never been heard of before, and therefore, one could not have mitigated against the banks blocking money from being withdrawn. However, a few precautions could have reduced the individual impact.

1. Look out for warning signs

• For a currency that was pegged to the USD, the interest rates that the banks in Lebanon were giving were higher than banks in other USD pegged countries
• The fact that the central bank reserves were dwindling fast made it clear that something had to give
• Alleged corruption of the system in Lebanon would have been an indicator to a non Lebanese, but to a Lebanese it was life as usual. For example, according to Transparency International’s 2022 Corruption Perceptions Index, Lebanon ranks 150 out of the 180 ranked in the world. Iran is ranked better and was better even in 2017.

2. Do your research:

A solid banking system depends on the protection of the depositors by the laws of the country and the seriousness of the government to uphold those laws. It’s important to not only look only at the banking system when you invest, but the corruption levels of government and/or solidity of the system of laws in the country. For example, among others, the US and UK laws mean that your bank-based investments are protected up to £85K per entity.

3. Diversify your investments:  

I know people who lost everything they’ve ever made, all because their life savings were in the bank in Lebanon. They went from being middle class, living a decent life to being on the brink of poverty.

4. Invest in Real Estate:

Although the real estate market in Lebanon is currently down, there are more chances of seeing this category rebound and increase in value than the banks releasing deposits in full.

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Lastly, if you suspect an economic crash, you can hedge against this and benefit from it, by borrowing money from the local bank, in local currency and paying back later with a stronger currency. Some people benefited from the situation, if their mortgage was in LL, suddenly instead of owning $300,000 USD worth, they now owed $5,000 USD only.

In a world where anything is possible and nothing is guaranteed, it is very difficult to hedge against an economic crash, like the one in Lebanon. But with a few careful considerations, you can perhaps limit a potential loss.

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