Rachel

Lebanon has had an insolvent banking system since 2019, officially. Over $86 billion in deposits have been mostly frozen and inaccessible to account holders since then, while the country's GDP is < $20 billion. A bank restructuring law is back on the Government of Lebanon's agenda now for some reason. I haven't really looked at this issue in a year, but I wanted to see what's changed since then. General Observations 1. The plan is overly complicated, and the Govt may not have the technical capabilities to implement it. Remember, BDL and the MOF have not published economic statistics in a year. They are not being run by serious people. 2. The plan grants the bank restructuring committee, essentially the BDL governor and vice governors, too much discretion over critical matters, including decisions that could impact future Gov't debt and payment obligations. These decisions should be reserved for the Gov't and parliament. 3. The plan leaves banks, BDL, and the Gov't with unsustainable levels of debt, creating a high risk of subsequent defaults. This perpetuates the current cycle of no confidence in the banking system/LBP, weak investment, and stagnating economic growth. 4. No post-restructuring balance sheets are simulated, no macroeconomic and fiscal forecasts are provided, etc. This is the minimum required to evaluate any plan. Not sure anyone has done this work. 5. Depositors are presented with an illusion of recovering more money by waiting 11–15 years. However, the cost of waiting outweighs the additional promised recovery. For example, receiving $0.20 per dollar today is often better than a promise of $0.40 in 15 years. Treatment of Deposits Deposits are classified as either Eligible or Ineligible: Eligible Deposits: Defined as the lesser of (i) the current balance of the “old” account or (ii) the balance as of 2019, adjusted for withdrawals, transfers, and the repayment of FX loans exceeding deposit rates at the time. Ineligible Deposits: Include everything that does not meet the criteria for eligibility. The restructuring plan outlines five sequential steps for depositors: Eligible Deposits Step 1. Protected Amount: Up to $100,000 per customer is protected and repaid over 11–15 years, with monthly installments of at least $400 (subject to adjustment by BDL). Funding is split 50/50 between banks and BDL (but only up to the amount of the bank's deposit with BDL -- the bank covers any shortfalls). Step 2. Interest Clawback: Interest earned above 1% from 2015–2020 is clawed back, reducing the Eligible Deposit amount to not less than $100,000. Step 3. Lirafication: The next $400,000 is repaid in LBP over 11–15 years at a rate no less than 50% of the market exchange rate (details to be determined by BDL). This is fully funded by the Gov't, granting BDL further discretion to increase government obligations. Step 4. Bail-in: A portion of the deposit is converted into bank shares and subordinated debt at a 5:1 ratio. This amount is limited to ensure depositors and (existing) preferred shareholders and subordinated debt holders collectively own no more than 33% of the restructured bank. Step 5. ZCB and DRF: Remaining deposits are transferred to a 'Deposit Recovery Fund', which is funded as follows: a. Contribution of zero coupon bonds. BDL finances the Gov't purchase of ZCBs issued by a third party (amount to be determined by the bank restructuring committee in the future). The Gov't will repay this amount to BDL over 10 years with interest. You already know how I feel about the nonsensical ZCB. There doesn't appear to be an option to take the cash upfront; and b. Recovery of corrupt funds and discretionary future Gov't contributions (amounts unknown). Ineligible Deposits Ineligible Deposits are treated similarly to Eligible Deposits but some of the amounts differ. Step 1. Protected Amount: Up to $36,000 per customer is protected and repaid over 11–15 years at $200/month (subject to adjustment by BDL). Funding is as follows: (i) 75% is split evenly between banks and BDL (up to amount of the bank's deposit with BDL); and (ii) 25% is funded entirely by the Gov't in LBP at the market exchange rate. Step 2. Interest Clawback: Unclear if it applies; Gov't presentation conflicts with the draft law. Step 3. Lirafication: The next $464,000 is repaid in LBP over 11–15 years at no less than 40% of the market exchange rate. This is fully funded by the Gov't. Step 4. Bail-in: Same as Eligible Deposits but at a 10:1 conversion ratio. Step 5. ZCB and DRF: Same as Eligible Deposits. Allocation of Deposit Liabilities by Party The bank restructuring committee and BDL retain significant discretion over deposit allocations. A Gov't analysis from July 2024 provides indicative figures, but their accuracy is uncertain. All payments to depositors will span 11–15 years without accruing interest. The time value of money-inflation and forgone interest-represents an unacknowledged cost borne by depositors. Eurobonds The legislation provides limited details about Eurobonds. Previously, the government anticipated debt relief of 75–85%. Bondholders may resist such a steep haircut, especially while the government assumes an additional $16.4 billion (plus potentially uncapped amounts) in debt to repay depositors. Liquidated Banks Banks that fail to meet restructuring criteria will be liquidated. Depositors in liquidated banks will receive: (a) a share of the bank's liquidation value plus coverage by national deposit insurance (together, up to 9 billion LBP); (c) remaining amounts transferred to the DRF, subject to the same haircut as Eurobonds. Corrupt Deposits Deposits over $500,000 will be scrutinized to prove their legality. Politically Exposed Persons with accounts above $300,000 are subject to the same. Good one but the logistics of it seem challenging as proposed. No clawback of dividends and compensation to senior bank managers, but the possibility of legal action against them is included in the draft law. Other Unclear how this fits into a broader Gov't fiscal program, macroeconomic reforms, economic program, political reform, etc. It's just a standalone bank restructuring proposal. Not a serious attempt to fix the country.

Lebanon’s annual inflation in July hits 168%, government data show. Water, electricity, gas costs jumped 460.5% Transportation prices rose 353% Health expenses grew 284% Food, beverages prices up 240% Inflation is expected to rise in August after slashing subsidies on fuel.

Lebanon’s annual inflation in June surged to 210% despite a series of dollars injections to curb mounting prices, according to government data. Water, electricity, gas costs jumped 594% Health expenses grew 492% Transportation prices rose 462% Food, beverages prices up 332%

A really interesting, important paper.