The newspaper "Asharq Al-Awsat" reports that the Lebanese government is racing against time ahead of the upcoming parliamentary elections scheduled for mid-next month, aiming to expedite the conclusion of a financing program agreement with the International Monetary Fund (IMF). This comes in accordance with the preliminary agreement signed earlier this month with the IMF's special mission that visited Beirut and was bolstered by broad political support evident in public commitments made by the presidents of the Republic, the Parliament, and the Council of Ministers.
The economic team, led by Deputy Prime Minister Saadeh al-Shami, is finalizing the rescue and recovery plan, which will be the basis for the executive council’s final approval of the financing program set at $3 billion for a duration of 46 months. Efforts continue to enhance the current Parliament's response to passing a package of reform bills demanded by the IMF in the financial and banking sectors, particularly those concerning exceptional capital and transfer controls (capital control) and proposed amendments to key provisions in the banking secrecy law. Additionally, there are plans related to restructuring the central bank’s budget, the banking system, unifying the exchange rate, and restructuring public debt.
In an intriguing development, "Asharq Al-Awsat" has detected signs of a significant impending conflict between the government and the Banking Association, as bankers have become wary of the state's reluctance to take responsibility for the accumulation of public debt and the exclusion of the central bank from its obligations to fill the substantial gap in its budget. There are concerns that the government will seek to shift most of the losses, estimated to be around $72 billion according to initial estimates, onto banks' deposits at the central bank and on accounts of depositors exceeding the full protection threshold of $100,000.
While Prime Minister Najib Mikati stated after meeting with a delegation from the Banking Association that "everything said about compromising depositors' rights and undermining the banking sector aims to create confusion and escalate tensions," and that the recovery plan prioritizes preserving people's rights and revitalizing various productive sectors as well as maintaining the banking sector, sources indicated that the atmosphere of the meeting was not comfortable after discussing the truth regarding the deletion of about $60 billion from banks' deposits at the central bank to cover losses in its budget, contrary to existing laws stipulating state responsibility to compensate these losses.
It has been learned that bankers have not hesitated to warn of the "catastrophic" implications of the proposed plan to distribute the financial gap, which they believe will lead to lawsuits by banks, their shareholders, and depositors against the Lebanese state and the central bank for benefiting from depositors' funds while refusing to find satisfactory solutions. Notably, the IMF admits that its suggestion of burdening banks with losses is an unfair distribution and proposes shifting a significant portion of these losses onto depositors, effectively exempting the debtor, represented by the state and the central bank, from debt and losses, transferring the burdens to creditors, namely the banking sector and depositors.
Banks base their arguments on the erroneous premise suggesting the state’s insolvency, whereas the reality lies in the low liquidity and cash flows available to the state; the state’s assets could cover many times the total losses if they are well invested. These assets, in addition to the rights that the state can grant to the private sector or through its partnership with the public sector in operating public utilities such as electricity, water, airports, ports, telecommunications, transportation, and railways.
"Asharq Al-Awsat" obtained a copy of the proposed recovery plan that has provoked the banks, with expectations of significant backlash from depositors. The financial section, which is of utmost importance, reveals the government's commitment to restoring soundness to the financial sector and ensuring its sustainability. It reaches a critical point, acknowledging that current estimates indicate the need for recapitalizing the banking system exceeds $72 billion; without accounting for these losses and implementing a strategy aimed at reinforcing the system, restoring confidence in the sector will not be possible.
While this introduction explicitly refers to the banking system, it is objectively referring to the financial sector. The subsequent clause clearly indicates the priority of reconstructing the central bank's budget to a sound level, given that estimates show the enormity of the accumulated negative capital can reach up to $60 billion, in addition to expected losses resulting from restructuring public debt and unifying exchange rates.
In detail, based on the preliminary review conducted by the international firm KPMG, the results of which were shared with the IMF delegation, the plan proposes writing off an amount equivalent to $60 billion from the central bank’s obligations to commercial banks and subsequently contributing partially to its recapitalization via issuing sovereign bonds valued at $2.5 billion, potentially increasing later, with plans to amortize the remaining losses over a period of five years.
With this massive burden placed on the banking system likely to face fierce opposition, the plan acknowledges the necessity to recapitalize viable commercial banks and resolve non-viable ones to create a banking system compatible with a robust economy that supports its recovery. The plan addresses additional losses related to the central bank's obligations, resulting from the restructuring of sovereign debt (Eurobonds), non-performing loans, and the implications of unifying exchange rates on the banks' budgets. Such changes will require substantial contributions from shareholders and significant contributions from large depositors.
Perhaps the most anticipated point for both resident and non-resident depositors lies in determining the full protection threshold, which the plan proposes should reach a maximum of $100,000. Notably, this protection will not cover any increases in deposit accounts after March 31 of this year. Meanwhile, amounts exceeding the protection threshold will be subject to liquidity caps, allowing repayments in both dollars and lira or either, based on market rates.
The next phase of bank recapitalization implicitly includes deposits that exceed the protection ceiling, converting them into ownership shares or writing off part of them, along with converting a portion of foreign currency deposits into lira at exchange rates that do not align with market rates, thereby automatically applying a haircut on conversions from dollars to lira.
To determine the required recapitalization amounts, the government has begun assessing losses and the structure of deposits through a banks' regulatory committee for each of the largest 14 banks holding 83% of the sector's total assets, with results expected by the end of September.
The government will request former or new shareholders, or both, to commit to injecting new capital into banks designated as "viable" based on the regulatory analysis of business plans, while insolvent banks will be resolved through immediate measures implemented under the emergency law for bank restructuring, noting that the structural criterion will be completed by the end of November this year. In the longer term, there are commitments to enhance the regulatory framework of the banking sector, including reviewing core banking legislation, supervisory frameworks, resolution, and deposit insurance, to maintain the soundness of the banking system and restore confidence to its previous levels.
