Lebanese lenders have warned the IMF that a proposal to seize their assets from the central bank as part of a $3bn rescue plan for the country is illegal and risks causing severe damage to the economy.
In a letter to the head of the IMF’s Middle East mission, Carlos Abadi of DecisionBoundaries, a New York financial restructuring advisory firm acting for the Association of Banks in Lebanon (ABL), said the proposed expropriation without compensation of their dollar deposits held at the Banque du Liban was both unlawful and unconstitutional. Some Lebanese banks have sought to distance themselves from the letter.
Lebanon has been devastated by a years-long economic crisis so severe that the World Bank has said it could be one of the world’s worst in 150 years. Over the past two years, at least 80 per cent of its population has been pushed into poverty. At the root of its financial collapse is the debt accrued over decades by successive governments.
The fund reached a preliminary agreement with Lebanese authorities for a $3bn extended fund facility in April. The terms of the rescue plan remain private, but a person familiar with the matter said it included the appropriation of $60bn out of $85bn in banks’ foreign currency deposits held at the central bank.
The ABL’s objections threaten to throw the finalisation of the rescue plan — already moving slowly because the country remains in the hands of a caretaker government after May elections — off course.
In the letter, seen by the Financial Times and dated Tuesday, Abadi said the ABL had “serious reservations”. He said the result of seizing banks’ deposits at the central bank would be the expropriation, without compensation, of deposits held at commercial banks by large customers, resulting in “widespread damage to universities, hospitals, factories [and] professional, labour, social security and social welfare institutions”.
In turn, this would lead to a reduction in output and in potential economic growth, the letter stated. “Overall, the equilibrium achieved by ‘zeroing-out the books’ will be unstable and shortlived,” it said.
The ABL later on Wednesday clarified that it did not “absolutely oppose” the agreement. It stressed that “any solution must reconcile the hierarchy of responsibilities and the distribution of losses, so that the banking sector and depositors are not responsible for all the losses”. The IMF did not respond to a request for comment.
The release of $3bn in IMF funds will require the reform of the banking sector and the central bank, widely criticised for its handling of the crisis.
Prior to its collapse in 2019, the country’s economic model had relied on a supply of dollars to its commercial banks, which deposited them at double-digit interest rates in the central bank, which in turn bought government debt. But a severe foreign currency shortage led the fragile system to crash. As Lebanon’s parliament repeatedly failed to pass capital controls, banks instead imposed severe restrictions on withdrawals and foreign transfers to stem the haemorrhage of hard currency.
Banks have been calling for the Lebanese state to assume the losses in the financial sector, estimated to be greater than $70bn. In its letter, the ABL suggested alternative measures to revive Lebanon’s economy and plug the financial gap, including investment in tourism, agriculture and the knowledge economy, and a recapitalisation of the central bank. Such a recapitalisation would include the mobilisation of state assets worth $20bn, the use of an estimated $15bn in gold reserves and the reversal of recent foreign exchange transactions.
The letter sparked anger from some of Lebanon’s biggest banks. Bank Audi said it had not approved its content and that “the only way out of Lebanon’s acute crisis is an IMF programme”. The bank also said in a statement that it had reservations about the IMF plan and that these were “being channelled to the concerned parties”.
Marwan Kheireddine, chair of Al-Mawarid Bank, also said his bank had not been made aware of the letter and had not approved its content before it was sent. He said that more information on the IMF’s position “should, in my opinion, be publicly available to any interested party”.