BEIRUT: Lebanese stocks and economy will indirectly suffer from Standard & Poor’s (S&P) downgrade of France’s triple-A debt ratings to AA Friday, according to Salim Chahine, associate professor of finance at the American University in Beirut.Speaking to The Daily Star, Chahine said, “we may see some negative spillover effects when markets open on Monday,” although he denied any direct links between French markets and Lebanese markets.

According to Chahine, “the negative consequences on Lebanon will emanate more from the expected global slowdown in 2012 rather than the downgrade itself which was already discounted by markets.”

S&P Friday stripped France of a triple-A credit rating it held since 1975, and cut ratings at eight other eurozone nations, including lowering Greece and Portugal to Lebanon’s junk neighborhood, citing what it described as a “largely misguided” policy response to the eurozone’s debt crisis.

Talks of a possible downgrade have been on the rise since S&P first downgraded U.S. debt on Aug. 5, but the move further consolidated fears of a more difficult global economic environment in 2012.

Waning global economic and financial optimism come at a time when the Lebanese economy, especially real estate developer Solidere and banks, grapple with their biggest crisis in over a decade.

After trailing the majority of MENA markets in 2011, Beirut-listed stocks continued their slide into 2012. The BLOM Stock Index was down 0.41 percent to 1,171.86 points in the first two weeks, including 0.6 percent during the week ending Jan. 13.

Solidere A and B lost 2.6 percent and 2 percent respectively week-over-week while BLOM Bank GDR and Bank Audi GDR dropped 2.5 percent and 0.5 percent.

However, unlike previous weeks, average daily trading rose to almost half a million shares as block trades in Bank Audi, and increased trading in BLOM Bank’s GDR and Bank Byblos shares buoyed market activity.

Banking stocks are already suffering from dampened investor confidence ahead of 2011 earnings, as the operating environment in Syria, where many large banks are active through their affiliates, continues to deteriorate.

“Investors are not expecting bank profits to increase year-over-year because they think banks will need to take provisions for 2012 as a result of Syria and Egypt,” said Yves Rahme, head of equities unit at Bank Byblos in an interview with The Daily Star.

Higher provisioning would confirm earlier rumors that the Central Bank advised Lebanese banks in a meeting in 2011 to raise provisions in preparation for a difficult 2012. Investor focus, however, is directed to dividend distributions at Lebanon’s leading banks, especially as their stock prices currently offer handsome 7-8 percent yields based on 2010 distributions.

In the face of slowing sales in 2010, Solidere had paid its shareholders through a combination of cash and stock, resulting in a slide in the stock as investors rushed to cash their new shares. On the other hand, banks’ cash dividends have either remained stable or increased in line with profits since 2005 but it’s not clear yet if the new decade will begin with an exception to that rule.

“If they did, I don’t think it would be a negative. Profits are still sound at the banks and fundamentals are strong, so it would be wise to protect capital during this period for the long-term interest of investors, even if some may sell their shares as a result,” said Rahme.

Regional and international turbulence may also spell trouble at home in 2012. According to Chahine, “a global slowdown would reduce spending by Arab tourists and by Lebanese expatriates, hurting tourism, real estate, exports and services, so I think the new year will be economically similar to 2011 if not worse.”

But weaker growth in Europe and elsewhere carries major benefits to Lebanon’s tiny economy and its mega banks from sustained near-zero interest rates in the U.S. and the likelihood of further declines in European rates.

“Lower global interest rates help banks retain the capital they attracted between 2008 and 2010. They also give the sector an opportunity to decrease its own interest rates and direct capital to the private sector,” said Chahine.

The rough start to 2012 partially resembles the early days of the tumultuous 2009 when the global financial crisis brought tens of billions of dollars into Lebanon’s conservative high-yielding banking industry.

Chahine criticized an ineffective fiscal policy in the face of opportunity. “When interest rates are low, the government should embark on new projects, but we’re not seeing that happen.”