Spotlight: Lebanese gov’t should minimize depositors’ losses even if haircut turns out necessity after debt default

Xinhua Net | 21 April 2020

Even if haircut has turned out an unfortunate necessity after Lebanon defaulted on its 90-billion-U.S.-dollar public debt, a few necessary measures must be adopted to minimize depositors’ losses, experts say.

The controversy surrounding the potential haircut on deposits of Lebanese banks largely arose from a paper proposed by Lazard, a financial advisory firm and the world’s largest independent investment bank.

The paper sparked both anger and concern among Lebanese citizens, political parties and civil societies, which all warned that such a move would be unfair and have dire repercussions on the economy, and eventually bring mass protests back to the streets.

In this paper, experts estimated the total losses at 83.2 billion dollars, saying the haircut on banks’ capital and clients’ deposits is needed to restructure Lebanon’s banking sector.

Patrick Mardini, president of Lebanese Institute for Market Studies, told Xinhua that the government must, in the first place, sell its institutions such as Middle East Airlines, Casino Du Liban, Ogero, Electricite Du Liban and others.

The government should abolish monopoly by inviting new companies providing same services to the market, which would increase tax revenues and in turn help the government provide high-quality services at a lower cost, Mardini explained.

Another step suggested by Mardini is to apply haircut only on big depositors who benefited from high interest rates during the past years, as it would not be fair to apply haircut on people who brought their money to Lebanese banks in 2019.

“These people worked hard for years to save their money in Lebanon with the intention to help the country by depositing their money in Lebanese banks,” the Lebanese expert explained.

Mardini also suggested banks’ owners introduce new capital from their past profits or by inviting new partners to invest.

“All these moves may probably solve 70 percent of the problem which would reduce the haircut that will be applied to depositors,” he said.

Nassib Ghobril, head of the Economic Research Department at Byblos Bank, insists that the top priority for the government is to give a complete overhaul to the public sector.

Political parties employed around 5,000 people in the public sector ahead of the 2018 parliamentary elections in an attempt to win the votes at the expense of an already inflated public sector.

“This is the main factor that led to a deficit in the balance of payments,” Ghobril said.

In the view of Ghobril, measures such as fighting tax evasion, improving fee collection and controlling the borders against smuggling should take priority over imposing haircut.

“The central bank and banks have assumed in the past a huge responsibility by financing the government. Now, it is the turn of the government to implement real and serious reforms instead of confiscating the money of banks and people,” he said. 

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