Shocking prosthetic solutions in front of Lebanese banks

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Bankers and analysts are skeptical of attempts by the Central Bank of Lebanon to clean up the country’s banks, warning that this should be part of a broader rescue plan to fix the ailing financial and economic systems.

In a series of circulars issued last Thursday, the Central Bank told local banks to collect new liquidity and urge their major depositors to return funds from abroad, and to avoid provisions to cover a 45% loss in their holdings of international bonds.

This came after a new deterioration in the situation in Lebanon, following the explosion of the Beirut port earlier this month, but even before the explosion, which led to the resignation of the government, Beirut was facing its worst financial crisis, following protests and a default on debt in hard currency in March.

The Beirut port explosion has deepened Lebanon’s chronic economic difficulties

“These partial decisions will increase credit and banking problems in Lebanon and may undermine the little progress that has been achieved in the IMF talks,” said Alia Al-Moubayed, managing director at Jefferies, referring to the already stalled negotiations with the International Monetary Fund to obtain assistance.

“Nor is it based on a modified economic and financial vision or on a debt restructuring plan that takes into account the socio-economic context that is deteriorating and the worse situation of debt dynamics after the explosion,” she added.

The central bank’s move comes ahead of a visit next week by French President Emmanuel Macron, who is pressuring Lebanese leaders to implement political and financial reforms that will allow foreign aid and alleviate the economic crisis, including a comprehensive audit of the state’s finances and the central bank.

Lebanese banks are in the midst of the storm because of their huge holdings of government debt, and the Central Bank has asked them to increase the capital by 20% by the end of February 2021 or to exit the market.

repairs

Central Bank of Lebanon Governor Riad Salameh told Reuters when asked about the purpose of the circulars: “It is necessary to clean up banks after defaulting on debt because we want them to resume their role and activities.”

He added that banks would not be able to resume activity without sufficient funds with correspondent banks.

However, several analysts took these statements cautiously.

“It is difficult to know why the private sector might inject new liquidity into the banking system unless this was preceded by a complete clean-up of the assets first,” said Rahul Shah, director of equity research at Talimer Shah.

Analysts also wondered how the banks ’demand to bear a 45% loss on international bond holdings would be consistent with a rescue plan proposed earlier this year by the current caretaker government, which included a 75% reduction on external debt and 40% on domestic debt.

A loss of 45% is not in line with the current market value of the bonds, which plunged below 20 cents in the dollar on Thursday, following the issuance of circulars and statements from French government officials saying that there is no aid without reforms.

Salameh said, “We do not know how the outcome of the negotiations between Lebanon and the creditors will be, but we have taken the usual precautions that follow such default,” adding that the level can be adjusted from 45% “by increase or decrease”, depending on the progress of the negotiations.

Tellimer economist Patrick Curran said that the level of provisions may indicate a desire for lower devaluations or a different treatment of bank holdings than foreign holdings of international bonds.

The banks were informed that the provisions, which also include a loss of 1.89% on their hard currency deposits with the central bank, should be set aside within five years, which could be extended to ten, subject to the approval of the central bank.

Analysts suggested that the aim of the time limit would be that the banks, which are struggling to maintain the solvency, violate the international regulations for liquidity rates.

“This is a camouflage … they are trying to beautify the situation, a new coat of paint on top of a dilapidated building,” says a former senior central bank official.

There are also concerns about the central bank’s attempts to compel large depositors to return some of their money from abroad, which is what some analysts see as an introduction to charging some depositors part of the financial losses.

Incentives

Banks have been informed that they urge depositors who have transferred more than $ 500,000 abroad since July 1, 2017 to deposit funds into a special account inside Lebanon that has been frozen for five years, equivalent to 15% of the transferred value.

The percentage increases to 30% in the case of “bank clients who are politically exposed persons”.

The new directive sparked panic among some bank clients who have large holdings abroad, according to a source working in financial services, while other sources in the sector asked about the incentives that could be provided to persuade people to return the money.

A source in the financial services sector said, “This is not how things are managed … the government, not the central bank, should decide the matter because it is a legal issue. It is not fair to ask citizens to return some of their money from abroad, and if there are concerns about the exposed people.” Politically, they should first check their accounts to see if they have benefited from financial engineering. ”

The source was referring to a central bank practice involving borrowing dollars from local banks at high interest rates in order to maintain the government’s solvency.







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