Prime Minister Najib Mikati, while discussing the ministerial statement in the latest parliamentary session, said that they: “Have begun negotiations with the IMF; and that is no walk in the park. We are obliged to take this step forward.” This raised questions about how such negotiations could take place before any agreement is made on an economic recovery plan that includes realizing losses, assigning the team, and setting dates for these sessions. Did Mikati rush this announcement? Or did he intend to imply that the matter has been previously agreed upon?
Revealing Realized Losses
The President of FFA Privet Bank Group Jean Riachi explains that the current government has successfully merged all parties from both the political and financial institutions into one team. The central bank is no longer opposed to the government following their recent representation in the Ministry of Finance. It is also likely that the new negotiations team will begin negotiations using the same figures provided by the Central Bank and the Parliamentary Finance Committee. These same figures, which bury the answer of how to distribute losses within them, caused the previous negotiation team to implode.
In addition to the “composition” of the new government, the circumstances that helped it overcome the four obstacles faced by its predecessor, mainly related to realized losses, according to Riachi are the following:
- It has become easier to estimate the bank losses in the private sector after the reduction in the real GDP became more apparent.
- There is no longer a dispute over a haircut on deposits denominated in LBP as “Lazard” had previously requested since the devaluation of the currency reduced the debts significantly relative to the dollar.
- The market price of the Lebanese Eurobonds has gone under 20 cents to the dollar. This means that the losses are over 80%. Since the Central Bank holds 5 billion of these bonds, the losses amount to $4 billion. The same applies to the Lebanese commercial banks that carry a little upwards of $10 billion. In all cases, realized losses depend on negotiations with foreign bond holders who will attempt to achieve the biggest return possible. Similar cases usually get settled at around 65-75% losses. Meaning that typically creditors agree to reclaiming 30% of the bond values.
- It remains that the bulk of the losses will be incurred by the depositors who hold around $80 billion worth of local bonds. The problem here is that the Central Bank only holds around $31b that includes $14b in mandatory reserves and around $16bn in gold reserves in the form of an estimated 9221 million ounces. As a result, the losses that will be borne by the banks and their depositors can be estimated to around $50bn.
The Distribution Problem
Based on the current reality, capital owners and depositors are the ones who are going to bear the distribution losses. The state may also cover some of these losses by utilizing its assets. However, according to Riachi, this is a “major controversial issue”. This is because “there are some objections on the use of state assets to cover depositors losses, but others believe that all citizens benefited from the financial engineering and/or the peg which is being paid for by the depositors today. Regardless of this problem, Riachi considers that “it is yet unknown what the position of the IMF will be. Their issue with the use of state assets to cover losses in not based on finding an equitable solution, but it is because maintaining these assets is crucial to maintain a smaller deficit and reducing its own losses through allocating them properly or selling them.
Riachi sees that everyone is anticipating the “distribution” of allocated losses. Proposals range from converting part of the deposits to Lebanese pounds and offering the difference in extremely long term bonds or transforming them into banks shares. However, the negotiations with the IMF will primarily revolve around the mechanisms and the party that will be responsible for undertaking the distribution and the monitoring of the process which must be independent of the Central Bank. It must also resolve the recapitalization of banks and clipping the excesses in the sector, as there is no longer a need for 60 banks which expanded mainly due to collecting free interest from buying central bank bonds.”
In regards to recapitalization, Riachi believes that “if this issue is not addressed, we will no longer be able to convince investors to deposit fresh funds in the banking sector. Hence the role and the paramount importance of the mechanism that will hold the answers for the following questions: Who will take the decisions regarding the merging and liquidation of these banks? According to him, this will require the creation of an independent body that should be powered by legislation that offer it total autonomy.