A Financial Crisis with Deep Political Roots

The Lebanese crisis, which officially emerged in the autumn of 2019, has been explained almost exclusively through technical factors: the financial engineering of the Banque du Liban, bank profits, the lira-dollar peg, interest rates, capital transfers, and the trade deficit and consumption. These factors do indeed warrant scrutiny, but they are not sufficient on their own to fully explain the collapse.

The political, security, and administrative causes — looting of the public sector, chaotic hiring in the state administration, spending without regular budgets, clientelism, the politicization of the judiciary, smuggling, the shadow economy, and involvement in regional conflicts — have been largely overlooked. Hassan Diab's government is not solely responsible for a crisis that had been building for decades. Nevertheless, certain decisions made or endorsed during his tenure accelerated the breaking point.

First, no coherent emergency capital control law was enacted. This vacuum allowed for arbitrary restrictions, deepened inequality among depositors, and let a portion of liquidity drain away. An exceptional law — similar in principle to the measures applied after the 1967 war, the Intra Bank crisis, or the destruction of civilian aircraft on the ground during the raid of December 28, 1968 — would have limited the damage.

Second, the Diab government chose to default on its Eurobonds in March 2020, refusing to meet a $1.2 billion payment. At the time, the Banque du Liban's reserves were estimated at nearly $29 billion. Lebanon could have honored its immediate obligations while negotiating an orderly restructuring with creditors and the IMF. The unprepared default destroyed the country's sovereign credibility, shut off access to markets, and deepened its financial isolation.

Third, the government at the time subsidized more than 300 products rather than providing direct support to households. The system encouraged hoarding, entrenched monopolies, and above all, fueled smuggling into Syria. Its cost is estimated to have reached $12 to $14 billion. This irrational expenditure directly contradicts the argument that reserves had to be preserved by refusing to pay $1.2 billion in March 2020.

Fourth, the plan drawn up with Lazard risked placing the bulk of the losses on depositors and the existing banking sector, with the stated goal of replacing current banks with five new banking institutions. The promise to return deposits remained without any concrete answer as to the funding, the assets to be mobilized, or the timeline.

These choices accelerated the depletion of reserves, the liquidity crisis, the shift to a cash economy, and Lebanon's international marginalization. Acknowledging them does not mean absolving the Banque du Liban, the banks, or previous governments. All responsibilities must be established according to actual powers held and legal obligations, without turning any single sector into a scapegoat.

Recovery requires restoring state authority, securing borders, combating smuggling, ensuring judicial independence, enacting a fair and fully funded deposit recovery law, pursuing transparent banking restructuring, negotiating the debt, and reforming public administration.

The allocation of losses must respect the legal nature of each obligation. The state's claims, those of the Banque du Liban, the banks' liabilities, and depositors' rights are interconnected — but they are not the same. Conflating them would automatically shift the burden onto ordinary citizens.

Priority must be given to small depositors, with clearly defined amounts, timelines, and funding sources. Public assets can contribute to the recovery through their future revenues, provided they remain protected, properly inventoried, and managed transparently. They must neither be sold off at a loss nor entrusted to structures that fall outside democratic oversight.

Likewise, shareholders must bear their share of responsibility within the bounds of the law, while illicit transfers and unjustified enrichment must be subject to serious judicial investigations. Restructuring before determining available resources would be putting the cart before the horse. The crisis is financial in its manifestations, but political at its roots — no lasting solution can afford to ignore this reality.

The restoration of confidence will ultimately depend on rebuilding Lebanon's relationships with its Arab and international partners, adhering to global financial standards, and placing economic policy exclusively at the service of the national interest.