How do you defend a draft law criticized by depositors, banks, and a large share of experts alike? By starting with three essential facts before getting to the heart of the matter.
First, more than six years have passed since the financial and economic crisis began. Deposits remain frozen and the banking system is effectively zombie-like, yet no one has been able, or willing, to confront the core issue: Who will absorb roughly $70 billion dollars in losses — the gap between the financial sector’s assets and what it owes — at a time when banks are effectively insolvent and the public finances are nearly exhausted?
For all its flaws, the plan that Prime Minister Nawaf Salam put forward has the merit of existing and of attempting, for the first time in years, to offer Lebanon a path out of the crisis.
Second, the issue is so sensitive that no plan can possibly command consensus. Ultimately, depositors will have to accept that part of their deposits will not be returned, and banks will have to accept that there can be no revival of the sector without a major cleanup beforehand.
Any plan that claims it can sidestep these two realities is fundamentally misleading.
Third, equally misleading is the idea that Lebanon could receive external assistance to revive its economy without going through a program with the International Monetary Fund (IMF).
Even if Hezbollah were disarmed tomorrow, no one would give Lebanon a single dollar as long as the country is not seen as a credible actor by international institutions.
The IMF is not a cure all. It is an unavoidable gateway to assistance that now appears indispensable.
With all that said, what should we make of the draft law on loss allocation presented to the Cabinet on Monday and set to be discussed again by the same body on Tuesday?
On the positive side, the bill, the product of a consensus between the government and the governor of the Banque du Liban (BDL, central bank), a first since 2019, would allow for the full repayment of deposits for 84 percent of depositors within four years, up to $100,000. It also offers large depositors, those holding more than $100,000, a more realistic prospect of recovery than under previous proposals.
The bill also has the advantage of cleaning up the banking sector by distinguishing between banks that are able to recapitalize — and therefore survive — within five years and those that are not.
Finally, it draws a line between legitimate and illegitimate deposits and forces those who abused the system, notably among bank shareholders, to repatriate part of the funds transferred abroad since April 2019.
The downside of the plan is that it places most of the burden on large depositors and on BDL, rather than on the banks themselves.
It does not ensure transparency through a forensic audit of what took place in the years preceding the crisis, notably the financial engineering operations, and therefore fails to clearly establish responsibility for the collapse.
It also raises several questions about the ability of banks and BDL to meet their commitments. For example, the plan relies heavily on the assumption that between $30 and $34 billion can be deducted from the total amount to be repaid, estimated at about $80 billion.
That reduction would come from canceling interest accrued since 2016, repaying deposits above $100,000 that were converted from Lebanese Lira into dollars after Oct. 17, 2019, at capped rates ranging between LL18,000 and LL50,000 to the dollar, and writing off “illegitimate” deposits that could amount to as much as $10 billion.
But if the share of those deposits is overestimated, as several experts and bankers suggest, the entire structure would be weakened, since the overall bill would automatically increase.
Added to this is the question of how to use the country’s gold reserves, whose value has risen sharply in recent years to nearly $40 billion. The pertinent question is: Is it acceptable, under current conditions, to sell part of that gold to repay the largest depositors, who represent only a very small share of the population? The issue is political and social and at the very least warrants a debate in Parliament.
In short, the law is flawed. But with the Parliament Lebanon has today, can a better one realistically be produced that would also meet the IMF requirements? All the more so because the longer the delay, the higher the cost for depositors and the greater the risk that Lebanon ends up on the Financial Action Task Force blacklist.
Under the current conditions, the priority is for the law to pass through the government, Parliament and above all to satisfy the IMF.
If it does not, it will have to be improved, provided that this does not once again serve as a pretext to sink it. That is where the real stakes lie. For six years, the banking lobby has behaved like a mafia, using every possible means to discredit any attempt to hold banks accountable. That has included propaganda, falsehoods, intimidation and buying off MPs.
In the name of saving the banking sector, the law largely protects it and could, from that perspective, have been far tougher. Yet even in its current form, it is already too much for a sector that had no problem being the main winner of Lebanon’s precrisis financial model for three decades, but now balks at assuming even the smallest share of responsibility for its collapse.
What matters most today is not settling scores with the past but laying out a realistic path forward. That means pushing past populist and misleading rhetoric, a difficult task in a political environment where such narratives remain deeply entrenched.
This editorial was originally published in French in L'Orient-Le Jour and was translated by Sahar Ghoussoub.
