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Lebanese lenders claim IMF plan to seize assets breaks the law

Lebanese lenders have warned the IMF that a proposal to seize their assets from the central bank as part of a $3 billion bailout for the country is illegal and could cause serious damage to the economy.

In a letter to the head of the IMF’s Middle East mission, Carlos Abadi of DecisionBoundaries, a New York financial restructuring consultancy acting for the Association of Banks in Lebanon (ABL), said the proposed expropriation without offsetting their dollar deposits with the Banque du Liban was both illegal and unconstitutional.

Lebanon has been devastated by a years-long economic crisis so severe that the World Bank has said it could be one of the world’s worst in 150 years. In the past two years, at least 80 percent of the population has been pushed into poverty. At the root of the financial collapse is the debt built up over decades by successive governments.

The fund reached a preliminary agreement with the Lebanese authorities in April for a $3 billion expanded fund facility. The terms of the bailout remain secret, but a person familiar with the matter said it involved the appropriation of $60 billion of the $85 billion in banks’ foreign exchange deposits with the central bank.

The objections of the ABL naturally threaten to disrupt the completion of the rescue plan – which is already moving slowly because the country will remain in the hands of a caretaker government after the elections in May.

In the letter, seen by the Financial Times and dated Tuesday, Abadi said the ABL had “serious reservations”. He said the result of the seizure of bank deposits at the central bank would be the expropriation, without compensation, of deposits held by major customers in commercial banks, which would result in “widespread damage to universities, hospitals, factories.” [and] vocational, employment, social security and welfare institutions”.

This, in turn, would lead to a reduction in output and potential economic growth, the letter said. “In general, the equilibrium achieved by ‘setting the books to zero’ will be unstable and short-lived,” it said.

The IMF did not respond to a request for comment.

Freeing $3 billion in IMF funds will require reform of the banking sector and the central bank, which has been widely criticized for its handling of the crisis.

Prior to the country’s 2019 collapse, the country’s economic model relied on a supply of dollars to its commercial banks, who deposited them at double-digit interest rates into the central bank, which in turn bought government debt. But due to a severe shortage of foreign currency, the fragile system collapsed. As the Lebanese parliament repeatedly failed to approve capital controls, banks instead imposed strict restrictions on withdrawals and foreign transfers to stem the hard currency bleed.

Banks have called on the Lebanese state to shoulder losses in the financial sector, estimated to be more than $70 billion. In its letter, the ABL suggested alternative measures to revitalize Lebanon’s economy and close the financial gap, including investment in tourism, agriculture and the knowledge economy, and a recapitalization of the central bank. Such recapitalization involves the mobilization of $20 billion of state assets, the use of an estimated $15 billion in gold reserves, and the reversal of recent foreign exchange transactions.

Mike Azar, a Lebanese expert in international finance and former lecturer at Johns Hopkins University in Washington, said the ABL’s proposals were “nothing new” and had been dismissed as unfeasible by independent economists and the IMF.

“It’s the same ABL discussion points from two and a half years ago,” he said. “They weren’t workable then and they’re not workable now.”

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