The banking blame game stifling Lebanon’s IMF deal

Reuters/Mohamed Azakir

• Banks and government clash
• $70bn losses must be shared
• Liabilities dwarf size of GDP

Lebanon’s proposed International Monetary Fund deal, agreed two years ago and designed to put the country on the road to recovery, seems no closer to realisation.

One of the key stumbling points is reform of the banking sector.

The combined liabilities of the country’s banks amount to more than three times the size of Lebanon’s post-crisis GDP.

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Between the commercial banks and the central bank (BDL), which was accused of running a Ponzi scheme under former governor Riad Salameh, around $70 billion of depositors’ money is missing. 

With the economic crisis now entering its fifth year, disagreements over how to divide these losses continue to prevent progress towards a settlement.

In February a potential breakthrough appeared following the leak of a draft law to restructure the banking sector.

The law laid out a plan for repaying most dollar depositors over time in a manner that one of the main proponents of the law, deputy prime minister Saade Chami who also leads Lebanon’s negotiations with the IMF, said is “compatible with the basic principles that we agreed on in the context of the IMF staff level agreement”.

But those with knowledge of negotiations say that the law, which is currently with the Council of Ministers, is unlikely to pass to Parliament for approval, largely due to opposition from the banking sector.

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The proposal would see private banks taking the lion’s share of the losses. This is likely to force some into liquidation.

Chami said that he does not deny the role the government played in the liquidity crisis. “But, at the same time,” he said, “we are saying that the depositors trusted the banks with their money, and if the bank misused this money, then it is their responsibility in the first place.”

A chief economist of a major Lebanese bank, who asked not to be named, said the proposed law is too harsh on the banks. “The distribution of the responsibilities for the losses is not fair,” he said.

“It’s not just the banks that caused the crisis.”

The Association of Banks in Lebanon (ABL) is among those that has suggested the state, as the ultimate beneficiary of billions of dollars borrowed from BDL and other banks, must find the money to reimburse depositors, even if it means selling off state assets. 

In 2020 it released a proposal for a $40 billion “Government Debt Defeasance Fund” to refloat the central bank. 

ABL’s figures were criticised in a 2021 American University Beirut study that concluded that even a “bullish” state asset sell-off – in which the government sold all its telecoms companies, Middle East Airlines in its entirety, and 70 percent of its real estate – would raise no more than $13.4 billion.

Under the current terms of the draft law the government would give $2.5 billion to help recapitalise the central bank, which Chami said is “the maximum the state can afford at this time”. 

The distribution of the losses is not fair. It’s not just the banks that caused the crisis

Chief economist of a major Lebanese bank

The Lebanese government is currently pursuing a policy of austerity and has drastically reduced spending in line with its revenue for the 2024 budget. 

Former minister of economy and industry Nasser Saidi has accused bankers of acting in their own private interests and torpedoing the law “since it would imply repatriating their deposits and profits they accumulated over the years”. 

He told AGBI that the banking sector is “trying to shunt the cost of restructuring the banking system onto the state by liquidating or transferring state assets”.

In addition to opposition from the banks, some politicians are reportedly unnerved by stipulations in the draft law that appear to write off portions of the largest deposits.

The draft law does not protect deposits over $100,000 in their entirety. Instead, depositors are given the option of converting their dollars into Lebanese lira or equity in the bank with a haircut of 75 percent to 80 percent, or converting their deposits into securities, the details of which remain unclear.

The prospect of removing billions of dollars in customers’ deposits from the banks’ ledgers has proved unattractive to legislators low on political capital.

Chami said that while he believes depositors “deserve every penny” of their money, writing off some of the debt may be unavoidable, and indeed is already taking place.

The size of pre-2019 dollar accounts has dropped steadily over the last four years. Central bank circulars have permitted only small monthly withdrawals with subsequent withdrawals subject to a haircut rate between 70 percent and 83 percent, which has helped trim the bank’s liabilities. 

In September Bank of Beirut stirred controversy when it began charging $100-a-month management fees on lollar accounts – deposits denominated in US dollars. This policy was quickly blocked by BDL.

“If we move fast enough, if we do all the necessary reforms, I think we can recover deposits faster,” Chami said. “If you don’t do much, then of course the depositors will lose more money.”