Lebanon’s banks, facing US$80 billion in losses amid the evaporation of national reserves, are calling on the government to sell off state assets as compensation.
“Lebanon’s banking sector is sound and doesn’t need a bailout,” the Association of Banks in Lebanon said on Wednesday. “Banks just need the government to pay back its dues.”
Privatizing the entirety of Lebanon’s assets, worth a purported $40 billion, would in their estimation be enough to settle what the government owes them and stabilize the banking sector.
In March, Lebanon defaulted for the first time in its history on a $1.2 billion Eurobond maturity, and is now in talks with the International Monetary Fund (IMF) for a $10 billion relief package.
“Lebanon is a cash-poor but asset-rich country that owns assets worth well in excess of what is needed to restore financial stability,” the ABL said.
Public lands such as the coastline were among those suggested to privatized into a Government Debt Defeasance Fund, whose shares would be owned by the government.
That fund would supposedly enable the government to settle its debts to the central bank, which in turn could settle its debts to the banks.
The blueprint, released mid-week, was a reply to the government’s plan, which allows for the possibility of some state asset privatization, but which calls for the top 2% of depositors to play a major role in covering the banks’ losses.
The banks argue that this would threaten the life savings of Lebanese who have toiled abroad all their lives, and that putting the burden on them will be detrimental to the rebound of the sector.
The banks’ argument, however, does not represent the full picture.
La-la land
A Lebanese banker speaking to Asia Times on condition of anonymity says the Association of Banks’ insistence on protecting depositors represents a call for a gradual reform of the sector, versus a painful, immediate surgery.
“The reality is, [the banks] know very well this money will never be returned in dollars. It’s not possible because it doesn’t exist,” he said.
Asked for comment on the state of the financial system and on its plan, the Association of Banks in Lebanon declined to speak to Asia Times.
Already, a de facto Lirafication is happening, as residents with US dollar accounts are only able to withdraw in local currency, the Lebanese lira, also known as the pound.
“Basically you either tell people your dollars are not dollars, so you have to convert them to lira to get your money back, which is a problem. Or you say there are not enough dollars, and I’m gonna haircut you.”
It is a genuine debate, he acknowledges, as to whether a gradual shift or sudden surgery would do less harm.
As for the plan, he says. “It’s crazy. It’s la-la-land.”
Most glaringly, the plan addresses the money owed by the government of Lebanon to the banks, which is mostly in Lebanese pounds, but not the money owed by the central bank to the private banks, which is almost exclusively in dollars.
“You have a huge gap between the liabilities in dollars due to the financial sector, and the assets in dollars owned by the central bank,” he said.
This gap, he says, translates to losses in the vicinity of $40 billion, which “is not taken into account.”
In addition, the banker says, the plan does not address internal but only foreign debt, something which he believes the IMF will not accept.
Lebanon’s assets, in his estimation, are meanwhile worth nowhere near the $40 billion stated, even in the unlikely event the parliament and public at large would agree with their sale.
Nafez Zouk, an emerging markets strategist at Oxford Economics, says the ABL plan has gaping holes.
“Where is the part where they plan to deal with losses incurred by dollar liabilities from the central bank to the banking sector? How do those get settled?”
He also questions the proposal to offer state assets. Such a privatization, he warns, could lead to a detrimental post-USSR style internal transfer of wealth.
Negotiation tool
The plan is more of a basis for discussion than a realistic proposition, in the view of the Lebanese banker.
It communicates to the government: “Can’t you do something that’s milder for us, that hits our equity less and that does not touch deposits? Maybe when the confidence is back and the state reforms, things will improve.”
Zouk agrees the banking sector, which will be needed for Lebanon’s recovery, is taking a hard line to set the stage for negotiations.
“There needs to be a way for losses not to be excessively burdensome,” he acknowledges.
But given the close relationship between Lebanese political elites and the banking sector, the economist says it is not logical for the banks to now distance themselves from past government mismanagement.
“You put 70% of peoples’ money in the government bonds, and they’re your friends. This isn’t an independent banking sector that did its due diligence.”
In the end, the two sides will have to make compromises should they hope to bring Lebanon out of its crisis.