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Lebanon ‘haircut’ possible as billions in rescue funds await Cabinet formation

What are the latest financial news grabbing headlines in Lebanon? Haircuts, currency devaluation, cabinet formation, and funds on hold

It might be difficult for Lebanon’s banks to prevent savers from losing some of their deposits Citigroup projects a 65% Lebanon haircut in a favorable scenario Lebanon will not obstruct the relationship between Lebanon and the IMF

France “regrets” that Lebanon has been unable to form a new government, President Emmanuel Macron’s office said on September 16th.

Without the formation of a cabinet detached from the political power plays in Lebanon, financial assistance to the country may never arrive, plunging the nation into a deeper abyss.

Lebanon’s leaders are under intense international pressure to revive stalled talks with the IMF and impose reforms, as well as appoint a new Cabinet after the catastrophic Beirut port explosion drastically worsened the country’s overlapping economic, financial and monetary crises. 

French President Macron has even dangled the threat of sanctions if Beirut’s slow-moving political class fails to make progress.

What are the latest financial news grabbing headlines?

Read: Kuwait lends a hand to Lebanon despite dire finances

Haircuts

According to Reuters, a French official said it might be difficult for Lebanon’s banks to prevent savers from losing some of their deposits, according to the minutes of a meeting in which France outlined steps to help the crippled banking industry.

The comments were made during Sept. 10 talks in Paris between senior French officials and a delegation from the Association of Banks in Lebanon (ABL).  

Lebanon’s central bank and commercial bankers have sought to prevent a “haircut”, or formal reduction in balances held on deposit accounts. Meanwhile, Citigroup projects a 65% Lebanon haircut in a favorable scenario, but not as a base-case scenario, as more risks await. Lebanon may write off two-thirds of its Eurobonds, and a fifth of the local debt, once it overcomes political differences hindering an economic overhaul, Citigroup says.

Here’s a roundup of Citigroup’s assumptions for an orderly outcome, backed by an overhaul plan and debt restructuring:

2020

2021

2022

2023

2024

Real GDP change

-23.8%

+6.2%

+2%

+3%

+3%

Annual inflation

185%

45%

45%

8%

5%

Year-end LBP exchange rate

4,300

6,400

7,400

8,000

8,300

Debt/GDP

186.9%

132.8%

116.9%

108.5%

101.4%

  • Sees a 65% haircut on foreign-currency debt and a 20% write-off of local notes
  •  Sees initial devaluation of the Lebanese pound to 4,300 per dollar, followed by another period of strong depreciation
  • Forecasts exchange rate of 8,300 by end-2024
  • Expects an agreement with the International Monetary Fund on a loan deal this year, even if such an outcome is “highly uncertain”
  • The debt/GDP ratio may fall below 100% with inflation eroding the value of local-currency debt

A French diplomatic source said France was also pressing for an audit of Lebanon’s Central Bank and the financial sector without delay, the swift implementation of capital controls and bank consolidation in a country with 64 banks.

Read: Lebanon’s cash crunch now faces a trash crisis, again!

Central Bank to cooperate 

According to the Financial Times (FT), Lebanon’s Central Bank (BDL) governor Riad Salame has said he will “align” with the government in negotiations with the IMF, appearing to end over a month’s long standoff that has stalled crucial talks on a bailout for the crisis-hit country.

Salame has been widely criticized for holding up IMF negotiations by disagreeing with the government’s assessment of past banking losses. Lawmakers are also accused of dragging their feet on necessary reforms.

Speaking to FT, he denied intending to “obstruct the relationship between Lebanon and the IMF”, saying that “for the future, we will align our position on the government position . . . Even if there are losses, we’ll agree.” 

The government and the IMF have put the BDL’s losses at around $50 billion. 

Macron has called for banking transparency.

But even as he promised to co-operate with the government, Salame said he could not promise that BDL would hand over all the information requested by the forensic auditor because he is bound by Lebanon’s powerful banking secrecy laws.

The country’s foreign currency assets have dropped by almost a quarter since January to $28.5 bn in August, reserves were so low that it can only provide dollars to subsidize vital imports, such as wheat, until the end of the year.

Funds and the hunt for stolen money 

The French draft proposal aims to initially raise a modest $5 bn from US banks which will be pumped into key sectors, which France will supervise but not own. 

The proposal, which asks for not even one euro from the French state, allows French companies to clean up on reconstruction contracts worth up to $15 bn. 

In the electricity sector alone, a French Giant, Allstrom, is expected to be given up to a $5 bn contract to build gas turbines.

Part of the blueprint also includes using US intelligence agencies and private sector operators similar to Blackwater to hunt down the billions removed from Lebanon, either from decades back or more recently when the October 17 protests started.