Lebanese Banks Turn to France to Outflank Government Rescue Plan

Lebanon’s banks are trying to outmaneuver the government before the new premier forms a cabinet, throwing prospects for a bailout further into disarray.

Almost five months after unveiling a rescue plan and turning to the International Monetary Fund for a $10 billion bailout, authorities are contending with a financial industry taking matters into its own hands. The lenders fear their survival would be at stake if the government’s proposals are implemented.

The banks are clinging to fixes including state asset sales that have already been rejected by the IMF and the previous government. But in a change of tack, now they’re focusing their lobbying efforts on France, whose President Emmanuel Macron took charge of an international push for reforms following last month’s devastating explosion in Beirut.

Lebanese Banks Turn to France to Outflank Government Rescue Plan

Last week, the Association of Banks in Lebanon held meetings in Paris with officials including Pierre Duquesne, a French diplomat picked by Macron to oversee funding pledged for Lebanon by international donors in 2018. Alarm over Macron’s calls for a banking-sector audit and restructuring was a key trigger for the lobbying mission, according to a senior banker with knowledge of the matter.

An official at Macron’s office said it wasn’t aware of the meeting. The French Ministry of Foreign Affairs didn’t return a request for comment. The Association of Banks also didn’t immediately respond to requests for comment.

While French officials were initially against the banks’ proposals, they’re recognizing that the government’s own plan may be doomed, a person familiar with the talks said, preferring to remain anonymous because they weren’t public. Meanwhile, negotiations with the IMF have stalled.

Remittances Threatened

It’s not clear if the meetings in France yielded any results. According to a summary of the Paris talks prepared by Global Sovereign Advisory and seen by Bloomberg, the banking group led by Salim Sfeir said the government plan threatens Lebanese expatriate remittances. Sfeir aired similar criticism during a video conference call this summer with a Lebanese diaspora group in the U.S.

The government’s plan, unveiled by then Prime Minister Hassan Diab in April after Lebanon defaulted on its Eurobonds the previous month, envisages debt haircuts that would wipe out the combined capital of Lebanon’s lenders and require a shareholder bail-in, but protect most depositors. The program estimates the central bank’s “embedded losses” as well as those incurred by lenders at around 241 trillion pounds, or $69 billion based on a proposed exchange rate of 3,500 pounds per dollar.

The country’s largest creditors have instead urged the state to sell assets. They want a government-owned but privately manged fund to issue debt or other instruments to the central bank, which would then repay a part of the $80 billion owed to commercial banks.

Officials in the outgoing government and their advisers have resisted that idea, arguing that state assets should not support the shareholder equity of the banks.

The outreach by banks suggests they are “still in denial” over finding a solution that doesn’t inflict losses on their shareholders, according to Dan Azzi, former chairman and chief executive of Standard Chartered Bank in Lebanon. “Banks that were somewhat successful in their local lobbying efforts against a solution which involves a bail-in of their shareholders have realized that the international community will not release any funds until such losses have been recognized.”

©2020 Bloomberg L.P.

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