Three top banks in Lebanon were downgraded below the sovereign by S&P Global Ratings, which warned that the country’s economic crisis is draining liquidity from lenders that have stayed shuttered for much of the past month because of anti-government unrest.

S&P said on Thursday that it lowered its long-term issuer credit ratings on Bank Audi, Blom Bank and Bankmed by two notches to CCC, the fifth-lowest junk level, and kept them on “credit-watch negative.” Last month, the rating company placed Lebanon’s B- grade on negative watch for a possible downgrade.

“Lebanese banks are experiencing rising liquidity pressures,” S&P analysts Pierre Hollegien and Stephanie Mery said in a report. “The deposit erosion that started in first-half 2019 has recently intensified.”

Banks have long been crucial to how Lebanon managed to make ends meet and sustained its currency peg by raising deposits from diaspora investors, the country’s financial lifeline. Bled by capital flight and a dearth of dollars, banks have now also been enlisted to pay a one-off tax on revenues as part of the government’s emergency measures rolled out to cope with one of Lebanon’s most serious crises since the end of the 1975-1990 civil war.

As protest sweep the nation, banks have tightened restrictions on withdrawals in Lebanese pounds and dollars and banned transfers abroad. Central bank Governor Riad Salameh said Monday that he asked lenders to ease those measures to prevent shortages of goods and serve the needs of clients. Banks have been shut since that day as their employees union decided to go on strike until management provides them with needed protection against angry customers.

Political Logjam

Prime Minister Saad Hariri resigned late last month in the face of mass protests and President Michel Aoun has yet to announce the start of parliamentary consultations to name a new premier. Protesters accuse the political elites of corruption and want a government of experts capable of addressing urgent fiscal and economic issues.

Salameh said $2 billion were withdrawn since the unrest began on Oct. 17 but didn’t specify whether the funds were pulled in cash or transferred abroad. He also offered lenders an unlimited credit line in foreign currency at a 20% interest rate as banks have rationed their supply of dollars to the market.

Last week, the central bank instructed local lenders to raise their capital by 20% by next June and refrain from distributing dividends for 2019 to boost their liquidity and prepare for possible credit downgrades.

The request came nearly a week after Fitch Ratings downgraded two top Lebanese lenders, Bank Audi and Byblos Bank, to CCC-, the fourth-lowest rank and one level below the sovereign. Its so-called support rating for both is “No Floor,” meaning it believes the state’s “ability to support” banks “cannot be relied on given the low sovereign rating.”

Less Flexibility

S&P also warned Lebanese banks are less agile because they are attracting short-term deposits from customers and then park much of the money with the central bank by using instruments with medium- to long-term duration.

“Large maturity mismatches on the banks’ balance sheets limit their flexibility to respond to major deposit outflows in times of liquidity stress,” the rating company said in the report.

S&P said it would further lower the ratings should there be “additional pressure on banks’ liquidity positions or if the banks impose further restrictions on specific transfers and operations.”