The disadvantages of the financial plan: debt remains in dollars and is privatized to satisfy the IMF


The government reform program was designed to be “in line with the requirements of the International Monetary Fund”. This was approved by Prime Minister Hassan Diab yesterday in a chat with invited journalists to discuss the reform program with his adviser, George Chalhoub, and the Director General of the Ministry of Finance, Alain Biffany. This proposition may simulate a pragmatism to keep Lebanon’s options open, but his words settle what was said about the commissioning of the financial advisor, Lazard, to communicate with the International Monetary Fund about the terms of the program. This, in turn, raises the following: If the fund gives its approval of the reform program, what are the items that are in line with its requirements? And if Lebanon requests to engage in a program with the fund, will there be more conditions? How did the program avoid clear reference to “consistent” items?

The foregoing is not the only “hidden” matter in the plan. Privatization is one of the basic conditions of the fund, but the program does not mention this word at all. Rather, it refers to partnering with the private sector, liberalizing communications, or leaves the door wide open to adopting privatization at any time through the “recovery fund”.

Likewise, the program does not mention the word “hirkat” or “cutting deposits” but rather replaces it with the phrase “depositors’ contribution, which will be determined later, ”although“ Lazard ”proposed herkat with rates of up to 173% on deposits over a million dollars, and no one objected to this proposal. More than that, restructuring will not erase Lebanon’s debts, even if he engages in a program with the International Monetary Fund, free the funds of Sidr, cut the money of depositors, sell state property, liberate the exchange rate of the lira, and multiply the incomes of the wage … With all that, There will be at least 17 billion dollars in external debt on Lebanon. We will sell everything we own, and mortgage ourselves to the IMF loans that will be conditional and dropper, and we will search annually for dollars to pay the interest of the debt abroad instead of financing the import of raw materials for the industry and import advanced agricultural machinery and equipment.

“Recovery Fund” or privatization?

In the previous versions of the project, the word “privatization” or the phrase “a fund in which the state’s assets were placed” appeared, but it was modified in the last version, to become a “recovery fund”. On the twentieth page of the last version, under the title “How can depositors be compensated?” The program indicated the following: There is another option instead of uploading depositors an explicit loss. That the target group of the deposits that will be used for the rescue operation (written off against the value of losses achieved in the banks and give the depositors shares in the banks in exchange for this process) be transferred to the recovery fund. This paragraph specifies which deposits will fall and the options that will be given to owners of medium and large deposits. “But this process will restore the balance directly to the banks’ budgets. The depositors selected for this fund will be offered compensation in the long run and receive annual returns within a certain limit. As for the fund, it will be funded from the recovery of the looted funds, and other potential assets of the country. ” What state assets are indicated here? It is the same idea that previously involved placing the assets of the producing country in a fund such as telecommunications, Middle East, casino and others, and using their revenues to pay off part of the losses or subsequent debts.

One day ago, this paragraph stipulated the following: “The senior depositors will be subject to a partial hierarchy based on interest income, and the intermediate depositors and a section of the senior depositors will be transferred to the recovery fund.”

What is this fund, and which state assets will it be placed in? This fund can be linked to what was reported about the government’s pledge to liberalize the telecommunications sector in front of the private sector, and the operations of partnership in the electricity sector (the latest of which was reported by the prime minister yesterday about the possibility of establishing two 900 megawatt power plants each in a BOT method). These are all matters mentioned in the reform program.

“Hercules” or “Depositors Contribution”?

Noticeably not only with regard to privatization, but also with regard to heratages. Why did the authors of the program decide, in the leaked version of it, to change the word “hirkat” to “the depositors contribution”? For any contribution? Is it voluntary or compulsory? Originally, the word “Bail In” does not imply that the matter is voluntary, but rather it is obligatory given the fact that the losses are realized and the search for a way to write them off in exchange for writing off deposits.

In fact, Lazard suggested that the rate of hierarchies be 54% on three layers of deposits: 79% on deposits that exceed $ 100,000, 130% on deposits that exceed $ 500,000, and 173% on deposits that exceed one million dollars. In their opinion, this is the way to cover the large losses of $ 83 billion, which will be achieved through “Herat” on Eurobonds by 75% in order to reduce the ratio of debt to GDP to 70%.

So, what is the difference between the depositors ’contribution“ that will be determined later, ”as mentioned in the program, and the“ hierarchies ”that are mentioned explicitly in previous versions and with some boring details. It is noteworthy that the justification of the private contribution from the depositors to save the banks came through a speech attributed to the Prime Minister about protecting 90% of the depositors. Indeed, the prime minister never said protect 90% of deposits. There is a big difference between the two.

So, out of a loss of $ 83.2 billion, banks will pay a cost that is limited to $ 20.7 billion that is their capital and will not provide any new capital. Instead, depositors will be paid all their money and may be forced to bring in additional dollars from abroad in order to participate in this process, which will be Long-term return does not guarantee capital recovery. Why would we exempt banks from returning some of the profits made and transferred abroad? Of course, there are many depositors who benefited from public money just like banks, but there are many depositors whose deposits exceed $ 100 thousand, which are pension compensation or savings that the banks have seized to become a hostage of the disguised masked “hierarchy” referred to.

A discussion of bank ownership
In any case, talking about the “privileges” of compulsory depositors ’contributions to banking capital, is taking us towards another kind of debate that is widely traded today among bankers and others. Out of a loss of $ 83.2 billion, banks will incur their entire capital at $ 20.7 billion, but bringing in the fresh dollars needed to advance the economy will be the responsibility of large depositors who will turn into compulsory shareholders in bank capital, and perhaps they will receive returns from the “recovery fund”.
The contributions of the current bankers will dissolve to “almost nothing”, then the contributions of the largest depositors will become the most heavy and weighted in the ownership of a bank and taking decisions in it. There will be fundamental changes in the structure of banking ownership in Lebanon. The traditional families who control this sector will never want it. But, in return, it refuses to bring any additional dollars from abroad over the current capital.

Debt in dollars continues!
Because it is not possible to obtain from the depositors the full amounts required to cover the losses, there is a debt that will remain with the Lebanese state. The size of the debt that the Lebanese state will pay in the Lebanese pound is not important, given its ability to easily liquidate this debt and create additional pounds to cover any losses that could result from it. But the basic and vital issue relates to the debt in dollars, especially those carried by external parties or it can be sold to external parties. In practice, after deducting the value of the “herpes” on the Eurobonds by 75%, there will remain 8 billion dollars, in addition to which 2 billion dollars are bilateral and triple debts whose service amounts to 257 million dollars, and there are interest on the debt value after the state gets a grace period for a period of five Years with a total value of at least $ 7 billion … In total, we will have to secure $ 17 billion to pay off external debt. Is this the goal of all this process? That there remain debts on Lebanon in foreign currency and we continue to search for ways to bring in dollars through new financial engineering invented by Riad Salama or others? If internal investment in infrastructure projects depends on external financing, and if the internal solution requires more external financing, and if the import depends on external financing, then where is the solution? And if we are preparing to negotiate with the International Monetary Fund, then why don’t we resort directly to the International Monetary Fund instead of obtaining government approval for a program that the fund may not agree to or request to amend later? Should we be hostage to the box and go to kneeling?

For the eyes of the IMF
It is no longer necessary to prove the participation of the International Monetary Fund in preparing the government reform program, but it is useful to recall what was mentioned in this plan in a manner that intimidated and pushed into the arms of the International Monetary Fund: “It is difficult to imagine that Lebanon could emerge from this crisis without the support of the external community on a large scale. It is widespread, and it is not real to think that the flight of deposits at this pace will be reflected, and that international markets will be opened to Lebanon, especially after the Corona crisis, without the widespread commitment to understanding the recovery plan made by international experts. It is necessary to break this vicious circle by announcing substantial external financial support (…) We expect external support from various institutions. Investors and monitors remind the government that the International Monetary Fund in particular was created to assist members during crises of balance of payments, and they expect Lebanon to request the fund in order to face the current crisis as many countries have done (…) We believe that this plan constitutes a good basis for negotiations with International Monetary Fund. The repercussions of an IMF program will be positive. Investors (Eurobonds) will be more likely to reduce the value of their debts if they find value added to recovery. Any plan without the fund will not be able to cope with all the inherited imbalances. ”

Recover stolen money
Some of the discussion related to the hierarchies revolved around recovering the looted funds that would be put into the “recovery fund”. The committee and the financial advisor found that there are thousands of accounts belonging to employees in the public sector that have more than 3 million dollars and up to 7 million dollars, and that a large part of these funds can be recovered through a “hirkat” process to put them in a fund where the banks ’losses are extinguished. The money that can be recovered from these accounts may reach $ 2 billion. Of course, this matter does not include looking at the accounts of politicians or those related to them. A section of the young corrupt will be sacrificed, to cover the escape of the senior corrupt.

Half of the income “flew”
One of the basic conditions of the IMF, in addition to privatization, is the liberalization of the exchange rate of the lira. In fact, the “government reform program” singled out three pages for the exchange rate of the lira and talk about liberating it to 2,600 pounds in 2021, and to continue this path so that the price of the dollar in Lebanon becomes 3,000 pounds in 2024. Would this matter not have broad repercussions on Lebanese incomes? Should this option, which erases 50% of the Lebanese income, be accepted in recognition of the plan itself?


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