Lebanon looking into floating peg coupled with banking sector restructuring

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The plan, dated April 6, was drafted by Financial advisory firm Lazard and maps out losses of $83.2 billion in the economy

by Georgi Azar-Source: Annahar

The Banque du Liban in Beirut, Lebanon’s central bank, looked well-capitalized, with $37 billion in foreign reserves at the end of July. Yet the bank’s assets are in fact dwarfed by its liabilities, former bank officials said. (AP)

BEIRUT: Lebanon’s government is looking into officially de-pegging its national currency, securing external financing of $10 billion-$15 billion over the next five years and resorting to a bail-in to off-set commercial banks’ losses.

The plan, dated April 6, was drafted by Financial advisory firm Lazard, sources say. Ir maps out losses of $83.2 billion in the economy with losses incurred by the Lebanese banks in their portfolios of assets reaching a total US$62.4 billion. The central bank, also known as Banque du Liban, has incurred losses of more than $40 billion, “mainly due to the so-called financial engineering operations it began conducting in 2016 and which boosted its reserves,” Bloomberg noted.

First, the plan will “implement a full bail-in of existing shareholders (i.e. a US$20.8 billion capital write-off). Second, the balance of losses (i.e. US$62.4 billion) will be covered by a transitory exceptional contribution from large depositors” to restructure the central bank and commercial banks.

“Conducting a full restructuring of the banking sector will require new legal powers for the government and the relevant supervisory bodies,” the plan noted.

It outlined a special fund to compensate depositors’ losses that result from a restructuring.

The Lira peg, which has been in place since the 1990s, will be dissolved gradually. The exchange rate will be weakened to 2,607 pounds to the dollar in 2021, and to 2,979 in 2024. The official dollar peg has been set at 1,507.5 pounds since 1997 but t has lost more than 40 percent of its value in a mere four months.

The plan also seeks to slash Lebanon’s debt to GDP ratio, steadily declining from its current 176% to 103.1% by 2024.

The budget deficit, meanwhile, would shrink from this year’s 7.2 percent of economic output to 1.3 percent in 2024, the plan says.

Last month, Lebanon defaulted on its payment for the first time in its history, announcing that it would stop paying all foreign currency Eurobonds scheduled for this year.

“External support from various sources are projected to total c. US$10-15 billion over 5 years and will be complemented as needed with contributions from bondholders in the context of the debt restructuring and a strategy of returning to the international capital markets in the medium run,” the report says.

 

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