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Lebanon: Politics puts last functioning sector at risk

Lebanon still has no president, and now its public debt has been downgraded.

At CCC+, Lebanon is the lowest-rated country monitored by Standard & Poor’s. It is two notches away from default and deemed more risky than Ecuador, Bolivia and Grenada, all rated B–.

General government debt in Lebanon stands at 170% of GDP. The country’s banks hold about 75% of that debt, of which $20 billion is in local currency and $21 billion in foreign currency.

Over the past three years, the Lebanese pound has been remarkably resilient in the face of a series of political crises. But as political stalemate persists, Standard & Poor’s says the likelihood is increasing that depositors in local banks will take fright and prevent those banks propping up the pound.

Last pillar

So far, Lebanon’s financial sector has been the last remaining pillar of a faltering economy. Deposit growth in 2007 was about 8%, in part thanks to high levels of remittances and booming economies in other parts of the Middle East where Lebanese banks have branches. Ratios of dollar to local-currency deposits have also been stable.

It helps that the Lebanese pound’s peg to the dollar has an implicit guarantee from oil-rich Gulf states. In 2006, Kuwait and Saudi Arabia deposited $1.5

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