Towards a dynamic economic and financial policy

Lebanon’s existential crisis cannot be confronted without addressing the economic and financial dimension at its core. Although I recognize the primacy of the political factor in this crisis, as in most others, I will largely set it aside in this discussion.

Impoverishment and despair are the most visible afflictions of the current situation. Addressing them through partial remedies is ineffective, given the urgent need to establish a degree of coherence that creates synergy and amplifies the impact of sectoral policies, while avoiding harmful overlaps and contradictions.

What is expected from economic and financial policy today can be summarized under one overarching objective: recovery. This means reviving economic activity and expanding the productive base while ensuring better social balance. It also means restoring the banking sector, which, despite the criticism it has faced, remains essential to any economic life and to resolving the deposit crisis. The key actors are still present and have preserved the core structures that would allow for a rapid restart. Above all, it means restoring confidence, the central concept that is both a cause and a consequence of recovery. Confidence depends on a comprehensive policy combining security, vision, determination, and credibility, thereby rebuilding the infrastructure necessary for any restructuring process.

The necessary diagnosis and reform foundations

The first major challenge lies in conducting a rational diagnosis of the crisis through the continuation of forensic audits at all relevant levels: the central bank, commercial banks, and the competent state institutions. The results must be disclosed transparently, responsibilities clearly determined, and lessons drawn, whether through holding perpetrators accountable or correcting administrative errors. Only then can a scientific reform plan, grounded in clear facts and data, be developed. This is a fundamental condition.

The second challenge concerns the issue of deposits. This must be addressed as effectively as possible and with full clarity, thereby enhancing credibility and contributing to the rebuilding of trust.

The third challenge is the Eurobond crisis, which represents an imminent and destructive threat.

The eurobond threat

The principal obstacle to any time-bound progress is undoubtedly the Eurobond problem. In 2019, their total amounted to around 32 billion US dollars, approximately distributed as follows: 15 billion held by banks, 5 billion by Banque du Liban, 2 billion by individuals, and 10 billion by foreign funds. These figures are not exact accounting numbers but reflect reality. Including accumulated interest, the total may now approach 45 billion dollars, with foreign funds possibly holding around 50 percent after banks sold part of their holdings to them. Ownership exceeding 25 percent grants these funds blocking power, while a stake above 75 percent would allow them to restructure unilaterally.

This situation represents a permanent Sword of Damocles that must be addressed in parallel with any sustainable solution. Although the Vienna Convention protects state assets, even abroad, the risk remains that certain assets could be reclassified through legal interpretations redefining the relationship between the state and Banque du Liban. Sovereign debt negotiations typically end in settlements of 25 to 30 percent of nominal value, though no fixed rules apply. Hence the urgency of initiating a restructuring process and negotiating with creditors.

The banking sector and market liquidity

Reviving the banking sector cannot mean placing the burden of the crisis solely upon it because of the excesses of certain parties, including inappropriate discretionary transfers reportedly amounting to 10 to 12 billion dollars, albeit formally legal. Doing so would negatively affect depositors.

It is true that banks exceeded prudential rules and overlooked the fact that Banque du Liban, in its dealings outside the framework of the state, is legally considered a commercial bank. This led to excessive exposure to a single client. Circular 311 of 2012 stipulated that banks should not invest more than 20 percent of their own funds, estimated at around 20 billion dollars, with a single client. Yet exposure to Banque du Liban reached approximately 80 billion dollars, in addition to 18 billion dollars in Eurobonds subscribed by the state.

Between 2011 and 2019, profits exceeded 10 billion dollars, and a significant portion was distributed as dividends to shareholders.

Ensuring market liquidity remains essential as a gateway to restoring confidence. This requires recapitalizing banks and having Banque du Liban repay part of its obligations to them. Such measures can only be conceived within a comprehensive approach demonstrating the authorities’ capacity and determination, which is a prerequisite for restoring confidence and defining a coherent mix of measures. Reviving the sector while neglecting large depositors would be an illusion, as they alone can guarantee a restart and the resumption of healthy financial flows.

The path forward

If external factors affecting Lebanon could be neutralized, the path would involve restructuring foreign currency debt and deciding the fate of approximately 16 billion dollars, plus about 4 billion dollars in interest, owed by the state to Banque du Liban, possibly including advances linked to energy subsidies. It would also require managing sovereign affairs through strengthening the legal framework and the political and economic environment, including a credible commitment to settling deposits in order to restore confidence and request bank recapitalization. In addition, unconventional, out-of-the-box solutions based on available reserves and assets should be explored.

The added value accrued to gold over the past five years is nearly threefold, amounting to around 35 billion dollars. Meanwhile, the monetary mass in Lebanese pounds is equivalent to approximately 1.5 billion dollars, while the Code of Money and Credit requires a minimum gold coverage of 30 percent.

It is therefore necessary to calmly consider potential courses of action, such as adopting a monetary policy that does not exclude exchange rate liberalization, or even a gradual revaluation of the Lebanese pound.

This is merely a comprehensive approach aimed at classifying problems and exploring possible paths, without claiming to issue judgments or impose directions on decision-makers facing unprecedented circumstances.