There has been more evidence that Lebanese banks have contributed to the prolonged crisis of 2019 as a leaked report disclosed staggering evidence of transfers amounting to Usd3.5bln. The judicial report was made public as the association of banks of Lebanon issued a strong worded statement threatening to sue the government on the Eurobonds default.
Another episode in the showdown between ABL and the government
The board of directors of the Association of Banks in Lebanon (ABL) is preparing to sue the Lebanese state over unpaid interest on Eurobonds, estimated to be around USD10 billion, a statement by the secretary general quoted. Earlier The State Council has overturned the Council of Ministers’ decision to cancel a significant portion of the Central Bank’s (BDL) foreign currency obligations to the banks.
This decision was initially part of the government’s financial sector recovery strategy, aimed at reducing BDL’s equity deficit and closing its net open foreign exchange position. The State Council’s ruling came in response to a request from the Association of Banks (ABL) to annul the Cabinet’s decision. According to a top executive at one of the largest banks, the banks’ foreign currency placements with BDL—including deposits, certificates of deposit (CDs), and current accounts—total nearly $82 billion. These placements represented 71 percent of their total assets by the end of 2023. The ABL has been actively lobbying against the Lebanese government’s financial sector recovery plans. They have been working with politically connected allies to influence decisions and have even submitted a 14-point counterproposal to the government. This counterproposal emphasizes the “sanctity of deposits” and seeks to transform deposits into state debts and obligations. The sanctity of deposits is a principle that underscores the inviolability of depositors’ funds. In Lebanon, the total deposits in commercial banks amount to approximately $90 billion. These deposits are classified into various categories, including demand deposits, savings deposits, and time deposits. The classification is based on factors such as the duration of the deposit and the interest rates offered. The authorities has yet to engage with bondholders, since its default in March 2020, in debt restructuring negotiations. Resolving the Eurobonds issue is key to negotiating a fresh program with the International Monetary Fund (IMF) as part of efforts to tackle the country’s prolonged financial crisis, according to a policy statement approved by the cabinet last week. The government pledged to address the financial default and mounting public debt while pursuing an economic revival—an effort that, it stated, hinges on restructuring the struggling banking sector. A draft funding agreement was reached with the IMF in 2022, but it remained unimplemented due to the authorities’ failure to pursue its implementation. The Minister of Finance Yassine Jaber of said that an IMF mission is expected to visit Lebanon in March.
The legal position on Eurobonds
The risk of legal action by foreign creditors against the State remains uncertain. On March 7, 2020, the government decided to suspend payment of a Eurobond due on March 9, 2020. Shortly afterward, it suspended payments on all foreign-currency treasury bonds due to the country’s severe financial, economic, political, and security crises.
Under New York State law, bondholders have a six-year statute of limitations to claim interest and principal payments, beginning from the maturity date of each tranche. This deadline, along with other contractual deadlines, raised concerns among bondholders and financial institutions. The Mikati caretaker government unanimously approved a decision to suspend the statute of limitations for claims by Eurobond holders for three years until March 9, 2028.
Failing to address the former deadlines could have led to lawsuits against the Lebanese state, further complicating efforts to restructure its public debt. Last week Banks were reiterating their position to ditch any government plan on the restructuration of the sector. Banks proposal for restructuration and suggestions for closing the financial gap, are namely the eligibility factor, the Deposit Recovery Fund, the recuperation of Illicit funds, the optional lirafication, the Bail In framework, the clawback of excessive interest, or potential privatization, sovereign funds or use of gold reserves and potential gas output. The ABL open statements left no doubt as that banks are ready to be proactive at all those levels with the State that should itself drive a constructive forward looking restructuring approach at large. The consolidated balance sheet of banks suggests there is fresh free liquidity of USD 3 billion in the banking sector today (USD 5.2 billion in correspondent banks abroad plus USD 0.8 billion of cash in vault, less USD 3 billion of fresh deposits). To this could be added USD 2 billion of fixed assets, USD 2 billion of investments and USD 1.5 billion of Eurobonds portfolio. The aggregation is close to USD 8.5 billion for banks, with a potential similar burden that could rest on the Central Bank, leading to a financial sector contribution (BDL and Banks) of circular USD 17 billion. The caretaker government had previously authorized the Minister of Finance to take all necessary measures to implement the decision, including amending the terms of Eurobond issuances. Without this measure, Eurobond holders would have been compelled to file lawsuits to preserve their rights to interest and principal payments on the bonds. The decision also paves the way for orderly negotiations to restructure the Eurobonds. While the move reduces the urgency for bondholders to file lawsuits, it does not eliminate the possibility entirely.
Despite Lebanon’s ongoing challenges, the country remains committed to reaching an amicable and fair resolution regarding the restructuring of Eurobonds. The extension of the statute of limitations ensures that bondholders will not need to resort to legal action to preserve their claims while participating in an organized and consensual restructuring process
The Ministry of Finance, supported by financial advisor Lazard and legal advisor Cleary Gottlieb, recommended suspending the statute of limitations and other deadlines until March 9, 2028, to mitigate risks.
The government’s decision included sspending Lebanon’s right to invoke the statute of limitations under New York law or any other deadlines for claims related to Eurobonds until March 9, 2028 and retaining the government’s right to raise other defenses in case of lawsuits.
Prosecting capital flight actors
The prosecutor general issued his verdict on the issue disclosing the names of the banks and the chairman of their board at that time who proceeded to the flight of capital after October 17th , 2019 .These are Banque Audi ( Lp 1.096 billions and Usd500,000) Bank Med ( Usd 523mln), SGBL ( Usd933.600mln), Bank of Beirut (Usd466.500mln) and Credit Bank ( Usd87mln).
That said, earlier this month, Goldman Sachs (GS) published a report titled Revisiting Lebanon Debt Recovery Values, in which it revisits its previous January 2019 estimates of Lebanese debt recovery values. In its base case scenario, GS expects Lebanese Eurobonds to be worth 24.6 cents, around double their current prices. The report presented various scenarios with bond prices ranging from 12.3 cents to 36.4 cents.
Eurobonds accounts
The inclusion of Eurobonds as liquid assets under Intermediate Circular No. 707 is nothing short of accounting manipulation. These distressed assets are far from being quickly liquidatable, and their inclusion in the reserves is a blatant attempt to artificially inflate the numbers. Meanwhile, the Lebanese Ministry of Finance continues to deposit its tax revenues into the accounts of the Banque du Liban, without these funds being used to provide essential services to citizens or support the local economy. This mismanagement of public funds only serves to embellish the financial situation of the central bank, while the real needs of the people are ignored.
To be noted that the inclusion of Eurobonds as liquid assets under Intermediate Circular No. 707 is considered accounting manipulation that contradicts international Basel standards, as these bonds are considered distressed assets and not quickly liquidable. Including them as liquid assets aims to artificially inflate the reserves.
To be noted that the value of Eurobonds – dollar-denominated bonds issued by the state – have recently improved, to exceed the average price recorded in 2020. The recent recovery in Lebanon’s D3.1 billion face value stock of Eurobonds has been strong, as Lebanon was the best performer of the EMBI Global Diversified Index last year due to the positive developments and the supportive global risk environment.
Still to be seen whether future performance will be tied to the risks to political stability in the country and the hurdles that need to be overcome before restructuring negotiations can begin.Eurobonds’ restructuring will require a comprehensive debt sustainability analysis, but it estimated that based on current levels, the market pricing is pointing towards a 70% haircut with a 10-year maturity extension. Lebanon’s economy is highly dollarized with dollar-denominated banknotes accounting for about 95% of the volume of cash in circulation and deposits outside banks.
Authorities need to prioritize restoring the financial sector’s stability, recapitalization and a depositor bail-in over the restructuring of the sovereign Eurobonds, given the respective relative size of liabilities.The IMF’s 2022 scenario suggests that debt sustainability could be achieved by calibrating the restructuring to deliver an 80% debt to GDP ratio by 2027, and gross financing needs averaging no more than 9% per year in the 2024–27 period. Such targets would, however, need to be tightened to the extent that the government’s balance sheet is used to support the bank restructuring.
While determining the exact magnitude of the overall losses in the financial system requires a comprehensive bank-by-bank asset quality review and the completion of the debt restructuring, IMF said staff and the authorities estimate them at about D70 billion, suggesting that the Central Bank will end up with negative equity of some D60 billion.
About 80% of commercial bank assets are deposited with the Central Bank of Lebanon. Lebanon’s journey with Eurobonds has been tumultuous, marked by economic crises, political instability, and a significant default. Lebanon issued its first Eurobonds, raising D1.5 billion with a 7-year maturity in 2011 followed in 2017 with a D950 million 15-year bond. In 2018 and amid growing economic challenges, Lebanon issued more Eurobonds, including a D700 million 15- In year bond.
In March 2020 Lebanon defaulted on its Eurobonds, discontinuing payments on D31.3 billion in outstanding debt.
Lebanon’s Eurobond prices continued to trade at distressed levels in 2021, reflecting investor concerns about the country’s economic stability.
Last year recent reports indicate that Lebanon’s Eurobonds have traded near their highest levels in years, driven by investor optimism about potential stability and reforms
Depositors Money in the bubble
There are 1260000 accounts in the Lebanese banking sector, with a total value of 86 billion dollars.
According to previously published data, 61 percent of these bank accounts were identified as accounts with balances of less than Usd3,333, which were settled under the initial circulars issued by the Banque du Liban since the beginning of the financial crisis in 2019. This means that approximately 768,600 accounts are classified as small accounts, while only 491,400 accounts remain in the larger categories.
On December 27, 2024, the Banque du Liban issued a statement regarding Circulars 158 and 166, indicating that since the application of the circulars until 30/11/2024, the number of beneficiaries reached 431,448 depositors, with a total paid amount of Usd3,241,894,179.
According to these circulars, a depositor can only benefit from one account, which means that the remaining unprocessed accounts do not exceed 59,952 accounts. These numbers are based on official data from the Banque du Liban and are not mere speculation. Moreover, the Banque du Liban, through former governor Riad Salameh, issued “Circular 939” to banks on May 5, 2021, almost three years ago, asking banks to provide the balances of customers’ deposits in Lebanese pounds and foreign currencies as of 31/10/2019, and the balances of the same accounts as they became on 31/3/2021, with an emphasis on excluding any accounts opened after 31/10/2019 and any new funds (Fresh Accounts) in the existing accounts. The central bank also requested to provide the balances of customers’ deposits in Lebanese pounds and foreign currencies as of 31/12/2015 and 31/03/2021, including all accounts existing on the mentioned dates except for new funds (Fresh Accounts). Thus, it is clear that the classification of accounts and determining their details have been clear and specified since 2021.
Despite populist statements, the Banque du Liban still lacks a clear and effective monetary policy. The measures taken are scattered and uncoordinated, and have not led to an improvement in the economic situation or alleviation of burdens on depositors. In reality, there is no stable exchange rate, but rather a politically determined exchange rate set at 89,500 Lebanese pounds to the dollar, which is illegal and does not reflect the economic reality, but serves the interests of banks at the expense of Lebanese pound account holders.
SOLIDERE saga
The dramatic inflation of Solidere’s stock price on the Beirut Stock Exchange is interpreted by some experts as illusory, reflecting the “lollar” rather than the cash dollar. This is due to significant trading being conducted through dollar deposits held in Lebanese banks, priced at 10%-20% of market dollar value.
Mansouri’s announcement is nothing more than a facade, a desperate attempt to paint a rosy picture of an economy that is teetering on the edge of collapse. The formation of a new economic bubble, fueled by the use of Lollars and the unrealistic rise in Solidere’s share prices, is a ticking time bomb. When it bursts, the consequences will be dire, and the true cost of these misguided policies will be laid bare for all to see
The Lebanese economy bubble is bound to burst due to several factors that have led to unsustainable economic practices and financial instability. One of the main reasons is the over-reliance on the real estate sector. A rapid economic bubble is characterized by a rapid escalation in asset prices, significantly exceeding their intrinsic value, followed by a swift contraction or “burst.” This phenomenon typically arises from exuberant market behavior, where investors buy assets not based on their underlying fundamentals but on speculation and herd mentality.
Lebanon needs no deceitful facelifting announcements. Former Minister and Vice governor Nasser Saidi say that the thorough overhaul of Banque du Liban’s governance structure is essential to bring about meaningful change and restore confidence. To achieve accountability, the appointment of a new governor and deputy governors by June 2025, along with radical governance reforms, is crucial. Additionally, the Banking Control Commission of Lebanon, the Special Investigation Commission, and the Capital Markets Authority must operate as independently governed institutions.
Furthermore, the establishment of an independent Bank Resolution Authority is vital to restructure the banking system. This authority should focus on recapitalization, starting with existing shareholders, and employ strategies such as mergers and acquisitions, as well as bail-ins of large depositors to maximize deposit recovery.
Implementing political reforms, a comprehensive restructuring agenda, and significant institutional and structural changes will lay the groundwork for a revised International Monetary Fund programme and renewed engagement with the Gulf Cooperation Council (GCC).
Maan Barazy is an economist and founder and president of the National Council of Entrepreneurship and Innovation. He tweets @maanbarazy
The views in this story reflect those of the author alone and do not necessarily reflect the beliefs of NOW
