Riad Salamé has told Lebanese banks that they should assume a loss rate of 45% on their holdings of Eurobonds issued by the Lebanese government, but that they should assume no loss on their holdings of local-currency denominated treasury bills. He said banks should initially recognise a loss of 1.89% on their foreign currency deposits with the central bank, on the assumption that the government will establish an asset management company to manage and then privatise state-owned assets. (The creation of such a company is part of the economic reform plan the previous government announced earlier this year.) In the absence of such an asset management company, Salamé estimates that losses on foreign currency deposits with the central bank could reach 9.45%.
More information on what Salamé said to the banks is provided by Byblos Bank in their most recently weekly bulletin on Lebanon, a copy of which is attached below.
In an interview with Arab News on 25 August, Salamé said that he was opposed to imposing a hair-cut on bank depositors (as a way of recapitalising the banks) but he warned that it would take some time for depositors to have access to all of their funds. In the same interview, he welcomed a proposal by French President Emmanuel Macron that experts from the Banque de France conduct an audit of the Banque du Liban. In recent weeks, Salamé has been accused of using his influence to inflate the value of the Banque du Liban’s assets.
The Lebanese authorities have been in discussion with the IMF over a financial support package. On 9 August, IMF Managing Director Kristalina Georgieva said that, “Those who benefitted from past excessive returns need to share the burden of bank recapitalisation, to protect the life savings of the vast majority of ordinary Lebanese.” She did not elaborate, but the the statement implies that the IMF is expecting large depositors who benefitted from the high interest rates offered by Lebanese banks (and ultimately, by the central bank) as part of the authorities’ efforts to attract foreign currency into the banking system, to suffer a significant write-down in their deposits.
Another issue highlighted by the IMF has been the problem of multiple exchange rates. The official rate remains $1 = LP 1,500 but in practice the rate is around $1 = LP 4,000, although it fluctuates significantly in response to immediate events. The question has therefore arisen of the exchange rate should be used when customers make repayments in local currency on foreign currency loans. In troubled economies, different exchange rates are often used to favour certain economic activities or sectors over others, by enabling some to use low exchange rates that are unavailable to others. Once established, such different exchange rates, and the privilges they confer, are difficult to dismantle.
Lebanon’s government resigned on 10 August following the explosion at Beirut’s port that is believed to have killed more than 200 people. In recent years, it has taken many months for new governments to be formed.
President Macron is due to return to Lebanon on 1 September. On his previous visit, immediately following the 4 August explosion, he stressed the need for the Lebanese authorities to undertake serious financial reforms.