While the restructuring of the banking sector will possibly commence in 2024, 11 out of 12 members of the Board of Directors of the Association des Banks in Lebanon (ABL) decided to take the Lebanese state to administrative judiciary, in an indirect attempt to recover their deposits with Banque du Liban (BDL).
On Dec. 4, Bank Audi, Bank of Beirut, Bank of Beirut and the Arab Countries (BBAC), Bankmed, Banque libano-française (BLF), BLOM Bank, Byblos Bank, Crédit Libanais, Fransabank, Lebanese Swiss Bank and Société Générale de Banque au Liban (SGBL) sent a formal notice to the Finance Ministry.
Fenicia Bank, a small bank compared to the rest, is the only one that did not join the procedure. Nevertheless, it may do so in the near future, an executive at a bank within ABL told L’Orient-Le Jour on condition of anonymity.
Under the Lebanese administrative law, any person or entity willing to file a recourse against the administration must first send a formal notice in order for their action to be deemed admissible by the administrative court concerned. In this case, it is the State Shura Council.
The notice, which the banks filed, requires the state to pay BDL nearly $68 billion within two months. If the state fails to comply, the banks that are part of this procedure will be able to bring an action before the administrative court in a bid to achieve their objective as of Feb. 5.
The first petition requires that the state repays the $16.5 billion it has borrowed from BDL from 2007 to date.
The second requires that the state plug the shortfall of $51.3 billion recorded in BDL’s balance sheet at the end of 2020. Hassan Diab’s cabinet hired in 2020 the Alvarez & Marsal firm to conduct a forensic audit of BDL’s account. Their final report, submitted in the summer, pointed to this shortfall.
This procedure is designed to force the state to fill the deficit in the balance sheet of BDL, which owes Lebanese banks more than $83 billion. This amount is equivalent to the total deposits they made with the central bank over the years, and which the latter has not paid back. In short, this is a derivative action: The banks are taking this action because BDL has not defended its own rights.
BDL has less than $10 billion in foreign currency reserves, without taking into account the $5 billion in Eurobonds that it holds, which are worth less than a tenth of their value, and without its gold reserves that amount to $18 billion, of which it cannot dispose. These assets are not enough to make up the difference.
In their notice, the 11 banks justified that they are bringing this action in their capacity as creditors of BDL, citing article 276 of the Lebanese Code of Contracts and Obligations. They also invoked article 85 of the Code of Money and Credit, which sets out the terms and conditions under which BDL may lend to the state.
Context of crisis
BDL’s deficit is one of the main reasons behind the financial crisis that has been rocking the country and its banking sector since late summer 2019.
The International Monetary Fund (IMF), from which Lebanon seeks to obtain financial assistance in exchange for undertaking reforms, is demanding that this deficit be addressed, even if it would mean that the banks and some depositors will have to give up part of their claims.
The Lebanese banks have been denying depositors free access to their money since the start of the crisis, due to a lack of liquidity. This restriction has been taking place without authorization from Parliament, which in principle should have forced them to declare themselves bankrupt, as provided for by Lebanese law.
Depositors brought legal action against several banks, with varying degrees of success, both in Lebanese and foreign courts.
The state-owned National News Agency (NNA) reported that a number of outraged depositors demonstrated in front of BDL’s headquarters in Beirut’s Hamra neighborhood on Wednesday, following a call from one of the associations established since the start of the crisis in a bid to pressure the banks either through this type of action or through judiciary.
In a statement issued on the sidelines of the demonstration, the Union of Depositors described the banks’ action as a “smokescreen.” They accused the state of having contributed to robbing depositors and condemned the inaction of BDL, led since the end of July by Acting Governor Wassim Mansouri.
Mansouri took on the responsibilities of former Central Bank Chief Riad Salameh, who took office in 1993 and whose term expired at the end of July. Salameh is the subject of several investigations into financial wrongdoing in both Lebanon and a number of European jurisdictions.
Many of these investigations consider that the state and BDL are entirely responsible for the crisis: The former by accumulating deficits over the years, and the latter by adopting a costly monetary policy and concealing its losses.
But many people in Lebanon believe that these same banks were fully aware of the facts. On the one hand, by investing in Lebanon’s public debt with increasingly high yields as the country’s situation deteriorated. On the other hand, by participating in the financial engineering which BDL launched in the mid-2010s.
These complex debt swaps added considerable weight to BDL’s balance sheet in order to allow the system to gain time and have some banks secure instant profits.
The restructuring of the banking sector, also demanded by the IMF, could begin in 2024, although nothing is set in stone. Caretaker Deputy Prime Minister Saade Chami submitted to the cabinet Nov. 10 a draft law to organize this process.
At least two banking sources confirmed to L’Orient-Le Jour that BDL has been holding discussions with the banks to prepare them to publish their next financial statements, using the exchange rate of LL 90,000 to the dollar, which is close to that on the market, rather than the official rate of LL 15,000. This measure is likely to further imbalances in the large banks’ accounts.
This article was originally published by L'Orient-Le Jour. Translated by Joelle El Khoury.