Lebanon and the Freefall Scenario

The financial influence of the banks forced the Lebanese government to blame the people for its losses (getty)

Lebanese caretaker Prime Minister Najib Mikati has briefed parliament on his intention to make some changes to his government’s plan for financial recovery, in response to the Association of Banks’ reservations about the plan.

The amendments Mikati spoke of specifically included the creation of a “recovery fund” to be financed by the Lebanese state from its budgetary surpluses, allowing the use of these funds to pay part of banks’ obligations to large depositors .
According to media leaks, Mikati told the delegates that the idea would be to transfer the obligations of the banking sector to this segment of depositors from the balance sheets of the banks to the budget of this fund, with the responsibility to deal with these obligations. on the shoulders of the state in the future.
The prime minister therefore conceded to the priorities of the Association of Banks, which had previously waged a fierce war against the government’s plan when it was approved, because the plan did not include clauses covering public money or state assets. wear of it. bank losses, or the burden of paying depositors.
Since the Association of Banks has extraordinary influence over the course of events, specifically through the active parliamentary lobby that works for it, it was clear in addition to its influence in the media circles that the Association’s attack on the government plan would be enough to hinder it, or at least delay its implementation.
For this reason, it seems clear that the provisional prime minister has decided to compromise, by including items in his government’s plan that will satisfy the Association of Banks, instead of waging a bone-breaking battle. with a financial elite exercising influence within the political system.
Mikati in any case accepted the demand to use public money to deal with bank losses, as requested by the Association of Banks under the slogan “hold the state responsible”, but according to a different mechanism than the one the association talked about.
During the last period, the association marketed a proposal locally called the “sovereign wealth fund” project, an idea based on the integration of a group of public utilities and assets into a special fund, with the aim of invest it and use the proceeds to eliminate bank losses and pay depositors. As for the idea of ​​a “recovery fund” that Mikati put forward, it is based on pledging the public budget’s surpluses directly to finance the fund, which will impose a set of savings measures and tax increases to ensure these surpluses.
But apart from the mechanism, the result remains the same. Instead of allocating public resources and assets during the financial correction period to deal with social losses due to the collapse, i.e. losses related to the collapse of social protection networks, the deterioration of the infrastructure, and the loss of the value of residents’ compensation and wages, the state will, according to these proposals, have allocated these resources to deal with losses The private sector is the banking sector.

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In this case, the beneficiaries of this expenditure will be a narrow circle of bank owners and large depositors, especially since the squandering of public money comes in this way with the aim of specifically neutralizing them by reducing the burden of losses due to the bank collapse. wear. .
Note that the value of the remaining assets within the banks today is sufficient to pay the value of each deposit to the extent of an amount ranging between $ 100,000 and $ 150,000, which will be sufficient to cover the membership fees of 88% of depositors to pay in full. (representing owners of small and medium deposits).
In fact, it was clear that there was a compromise between Miqati and the Association of Banks that was expanding, which led to Miqati submitting this proposal to Parliament. After weeks of escalation in the media by the Association of Banks, in the light of the government’s financial plan and the understanding of the level of employees held at the IMF, and after a call for the idea of ​​a “sovereign fund “and seizure of state assets to deal with losses, the Association returned in its latest statements to calm down and stress the importance of Understanding with the IMF.
The association also went on to replace the claim to the Sovereign Fund and seized the state’s assets and invested them within the fund, with the idea of ​​mortgaging the state’s future income.
Mikati’s proposal therefore complied with the calm stance taken in the latest statements of the Association of Banks, so Mikati adopted the idea of ​​a “recovery fund”, which is specifically based on the pledging of public budget surpluses and future government revenue, just as the meeting’s last statement requested.
In any case, the seriousness of the developments is no longer limited to the repercussions of Mikati’s proposals on the state’s fiscal policy in the future. The concept of principle agreed at staff level between Lebanon and the International Monetary Fund is rather relevant, as a consequence of these proposals.
The financial plan approved by the government represented one of the pillars of this initial understanding, which was linked to several conditions before the country moved to the stage of a final agreement with the IMF.
In the event that this plan is amended, it is certain that the Fund will reconsider the same initial concept, which means the possibility of reversing it if the amendments conflict with the Fund’s criteria for restructuring the banking sector.
It is known that from the outset the IMF has been strict in rejecting any plan that could involve the waste of public funds, in order to wipe out bank losses, which has essentially encouraged the government to prevent the proposals previously the Association is required to be included in the basic financial plan. of Banks. Mikati’s new idea in particular is therefore expected to be one of the reasons for blocking the path of the agreement with the IMF.
The biggest problem lies in the fact that the Lebanese state is currently limiting all its bets in accordance with the fund, which is supposed to represent the certificate of good conduct that Lebanon needs to return to the global financial markets, and to negotiating with its domestic and foreign creditors, not to mention attracting investment at the stage of financial correction.
In the absence of any other bet not related to the agreement with the Fund, the fallout from the course of negotiations with the IMF will trigger a long period of free economic downturn, in the absence of any idea of ​​how the fiscal and to initiate monetary correction. process.

Banks of Lebanon / Hussein Beydoun

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Note that the process of formulating a comprehensive structural correction plan that was not linked to an agreement with the IMF was possible at the beginning of the crisis, but the Lebanese government has turned a blind eye to this path.
Therefore, the IMF was forced today as the only solution after the decline of all monetary and financial indicators, and after the state lost market confidence in its ability to formulate solutions that the IMF does not monitor.
In short, what Mikati is doing today in the direction of amending his government’s financial plan, and following what the Association of Banks requires, would be nothing more than an expensive adventure with unpredictable results.
All these dangerous developments today are driven by the refusal of major shareholders in the banking sector to carry the idea of ​​carrying their share of losses out of their capital, and to try to place the burden of dealing with these losses on public money.
So, what happened in 2020 is repeated today, when these accounts and interests abandoned the government’s financial plan, and the country continued in the phase of uncontrolled downfall for more than two years.

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