Lebanon’s bank restructuring offers a ray of light

Reuters/Aziz Taher

Four years after Lebanon defaulted on its Eurobonds and the Ministry of Finance presented its first financial restructuring plan to international investors, the Lebanese government has published detailed proposals on how it hopes to recapitalise the banking system. 

Since the collapse of the Lebanese economy in late 2019, all major banks have been insolvent.

When the crisis began, 70 percent of Lebanese banks’ assets comprised claims on the central bank or the government, and with neither institution able to meet its obligations the true value of banks’ assets was far less than their liabilities. 

• Gunfights on the streets in Lebanon’s electricity Wild West
• Gaza war proves ‘another large shock’ for fragile Lebanon
• Lebanon’s tourism minister hails $9bn revenues

Bank recapitalisation is complex, but it is not intellectually hard. At a simplistic level, it’s a matter of mathematics: what percentage of liabilities need to be written down, or wiped out altogether, so that assets and liabilities balance, and the liabilities include a good tranche of capital? 

But forcing depositors to accept that they will not get some, or all, of their money back is a political issue, and when 80 percent of the population is already living in poverty (according to World Bank figures) the social consequences can be extreme. 

So what is the government proposing?

Firstly, the draft law makes clear that banks which are unable to meet all their liabilities – and that almost certainly means all local banks – will be subject to the government’s restructuring programme. 

Secondly, the draft law makes a distinction between deposits that are protected and those which are not. This is where it starts to get complicated. 

The threshold for protected deposits is $100,000 for those that existed before October 17 2019, the start of the current economic crisis, and $36,000 for those that were created after that date, usually through the conversion of existing balances in Lebanese pounds into dollars. 

However, customers do not have free access to these accounts. The draft law specifies that balances may be withdrawn over 10 to 15 years, in monthly tranches of $300 for pre-crisis balances and $200 for post crisis balances. The monthly withdrawal limit increases over the years to $800 and $400 per month. 

Amounts above those thresholds face direct losses. Balances between $100,000 and $500,000 may be converted into Lebanese pounds, but at a below-market rate. Amounts beyond $500,000 will be subject to conversion to equity, but at a diluted rate that effectively reduces the balance by 80 percent. 

Note that these provisions do not refer to accounts in dollars that have been deposited since the advent of the crisis – known as “fresh dollars”– which should be freely available for withdrawal at any time. 

Just days before the government published its proposals, the central bank issued a new circular changing the rules on withdrawals of funds from bank accounts. Central bank’s circular took effect immediately, whereas the government’s proposals will be subject to prolonged debate and negotiations.

Circular 166, which came into effect on February 3, allows withdrawals of $150 per month from pre-crisis accounts up to a maximum of $4,350: 29 monthly withdrawals. This circular will run parallel with an existing rule – Circular 158 – which enables withdrawals of up to $400 per month from post-crisis accounts.

What hope is there for a solution that enables Lebanon’s banks to become viable again, and citizens to recover at least a portion of their funds?

Confused? You are not alone. The summary above only scratches the surface of the new regulations, both actual and proposed. 

Lebanese citizens that I speak to – including bankers – are usually unable to explain the web of interlocking rules governing how much money can be withdrawn from which accounts (pre or post-October 2019), in which currency, and up to what maximum amount (and at what exchange rate, if the withdrawal entails converting local deposits into dollar cash). 

In the case of central bank circulars, the problem lies in the existence of multiple previous circulars issued as the authorities have scrambled to respond to new developments, and in particular the steep devaluations of the Lebanese pound which have repeatedly undermined the intended benefits of earlier circulars. 

So what hope is there for a solution that enables Lebanon’s banks to become viable again, and citizens to recover at least a portion of their funds? 

There are reasons for optimism. Wassim Mansouri, the acting governor of the Banque du Liban, has established his authority after succeeding the now-discredited Riad Salamé in July of last year.

Mansouri is seen as a technocrat with little political baggage: he joined the Central Bank as a vice governor in 2020.

The publication of the government’s proposals for bank restructuring also offers some hope, even though they exist only in draft form, and will likely be pulled apart by interest groups and factions.

The proposals present a realistic view of the scale of the write-downs that will be needed if banks are to be made viable again,

Finally, the parliament’s approval of the 2024 budget, on January 26, marks another step in the right direction.

The budget has been criticised for ducking important reform measures and for using multiple exchange rates to balance the books, but after four and a half years of crisis and political paralysis, even the passing of a budget represents a significant step forward. 

Lebanon still has a very long way to go before its banks and economy are solvent again, but there is perhaps now a small ray of light to show the way. 

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems