The International Monetary Fund (IMF) said that Lebanon’s losses amount to 49 billion USD. (See “IMF reports $49bn losses at Lebanon central bank as bailout talks drag” by Chloe Cornish, The Financial Times, June 25, 2020). It has confirmed that this is in line with the loss estimates and the rate used in the government’s financial recovery plan[1]presented on April 30, 2020 and forming the basis of negotiations with IMF (Gerry Rice, IMF Spokesperson, on his Twitter account on June 19, 2020).
By contrast, the Lebanese Parliament’s Finance and Budget Committee disagrees.
Firstly, it considers the losses to be much smaller, based on a calculation at the rate of 1 USD = 1,507.5 LBP rather than the rate of 3,500 LBP used by the government plan. For technical reasons explained below, this is an accounting trick that hides the losses. By hiding the losses, they protect the bank shareholders. Without losses, there is no longer any reason for the capital put up by bank shareholders to be used to cover the losses. Instead, the current situation of zombie banks will continue, people will not have access to their money in the bank, and as a result, it is the people who will be the losers. Meanwhile, politicians and other powerful people will be able to force the banks to give them preferential access to their deposits and to international transfers.
Secondly, the Committee publicly suggests a smaller haircut on Eurobonds and T-bills than what is sought by the government in its ongoing negotiations with foreign holders. What wonderful news for foreign owners of Lebanese debt, who can now cite Lebanon’s parliament in order to demand better terms from Lebanon!
It is interesting that this Committee gathers representatives of most of the Lebanese political parties: Ibrahim Kanaan (the head) and Salim Aoun from the Free Patriotic Movement founded by President Michel Aoun and led by Gebran Bassil, Nicolas Nahas (the rapporteur) from the Azm Movement of former PM Najib Mikati, Michel Moawad from the Independence Movement, Dima Jamali and Tarek Merehbi from the Future Movement of former PM Fouad Siniora and former PM Saad Hariri, Eddy Abilama from the Lebanese Forces Party of Samir Geagea, Anwar Khalil, Ayoub Hmayed, Ghazi Zaiter and Yassine Jaber from the Amal Movement of Parliament Speaker Nabih Berri, Hassan Fadlallah and Ali Fayad from Hezbollah, Tony Frangieh from the Marada Movement of Sleiman Frangieh, Jihad Samad from the Sunni Consultative Gathering and close to the Marada Movement (however, he did not vote for the Diab Government during the confidence vote at the Parliament), Salim Saade from the Syrian Social National Party and Henri Helou from the Parliamentary Bloc of the Progressive Socialist Party of Walid Joumblatt.
Henri Chaoul resigned from his advisory role. He accused the committee of wasting time in accounting (while losses are increasing daily as well as unemployment and poverty) in order to protect Association of Banks in Lebanon (ABL)’s interests, to sabotage the Government’s negotiations with IMF in order to avoid the implementation of reforms and a real banking and financial restructuring and to not look for macro solutions on how to address, allocate and finance the losses. According to him, the plan of BdL (Banque du Liban, Lebanon’s Central Bank), ABL and the committee will generate more inflation, depreciate more the Lebanese Pound and “lirafy” completely the USD deposits because the IMF will not support an alternative plan with another diagnostic than the one presented by the Government and with no reforms and a real banking and financial restructuring.
The Lebanese Parliament is supposed to represent the Lebanese and their general interests and this committee its financial interests. They also bear responsibility in Lebanon’s bankruptcy as they did not hold the previous governments and BdL (which does not publish its Profit & Loss accounts) accountable for it, voted for their budgets, approved their financial and monetary policies and did not push for implementing reforms and restructuring the banking and financial sector. They should be then held accountable. That may be the reason why the committee is trying to hide or minimize the losses.
The committee disagrees on the estimates in LBP because it converts from USD to LBP at the rate of 1,507.5 LBP for 1 USD (official peg) in 2027 and shows better profit and loss accounts for BdL and the banks (by converting the liabilities of BdL at official peg and the corresponding assets in the balance sheets of the banks at 3,500 LBP for 1 USD while conversion rate should be the same!). As a result, real losses are in this case transferred directly to the depositors. Compare this with how the Government has identified a solution which protects most depositors. BdL’s debts (liabilities) and losses being mostly in US dollars it is the loss as measured in USD that matters. Such accounting tricks with the conversion rate do not matter, they do not change the reality. Like ABL’s plan (probably prepared with BDL), the committee’s accounting doesn’t address and doesn’t solve the main issue: BdL’s dollar losses. This issue is the reason why bail-in and recapitalization are required in the banks. The committee and ABL rather endorse BdL’s concept of local dollar (or lollar) and capital controls and don’t offer a strategy for depositors to recover the value of their deposits.
Alain Bifani also resigned from his position (Finance Ministry Director General). In a press conference he held afterwards, he said that “forces of darkness and injustice banded together to abort a rescue plan that truly addresses the crisis from being implemented”. In his statement, he said that these forces (without naming them, he meant BdL, ABL and the committee) do everything to foil attempts to reform required for an IMF program, to avoid recovering and “equitable loss allocation”, to deny the losses and to evade responsibility. He explained that depositors would only have to cover around 3 billion USD under the government rescue plan, equal to 3% of deposits in accounts over 10 million USD and that there are only 931 accounts of that size out of total 2.77 million. This means the campaign against “haircuts” was only trying to protect 13% of the value of a few hundred big depositor’s accounts, at the expense of all the others. He also explained that the Lebanese were subjected to haircuts as a result of failure to implement the government rescue plan and not the other way around. “The only party responsible for people’s lost deposits Is the bank. Whatever the bank has done with the depositors’ funds is not the depositors’ problem.” He condemned ABL’s call for the selling of state assets which he said “belong to the people of Lebanon”: “The intentions have been clearly exposed, and today we are witnessing a new stage of seizure of Lebanese assets in parallel with a previously known result which is crushing the lower class and forcing some communities to bear the high prices”. He explained that depositors face a haircut every day not because of the government’s plan but because the government’s plan is not being implemented. He also said: “Some claim that we cannot recover stolen funds, but we can do this by raising bank secrecy and revealing real estate properties. Banking secrecy must be fully lifted off the accounts of corrupt officials and cooperation must be made with the authorities of any country in which the embezzlers of public funds might find a safe haven; real estate wealth must be determined and its sources must be tracked”.
[1] Prepared by Alain Bifani (at that time Lebanon’s Finance Ministry Director General), his team, the Government’s international financial adviser Lazard and Finance Ministry’s advisers Charbel Kordahi, Georges Chalhoub, Henri Chaoul and Talal Salman and endorsed by Finance Minister Ghazi Wazni, Prime Minister Hassan Diab and his Government and President Michel Aoun. The Government is currently negotiating with IMF on the basis of this financial recovery plan for finalizing a financial support program.