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CHAMPION OF THE DAY
Banks feeling shunned
offer own financial plan
Focus on avoidance of default
on internal State obligations
The Association of Banks (ABL) said in its ‘Contribution to the Lebanese Government’s Financial Recovery Plan’ that it is ready to make financial and economic concessions conducive to the resolution of the financial and economic crisis.
The plan was announced because banks were not invited to take part in the preparation of the government’s Financial Recovery Plan.
The State must avoid defaulting on the domestic debt because such option would be unprecedented and highly damaging, the ABL said in its paper.
It said it proposes the creation a Government-owned Debt Defeasance Fund (GDDF) to which the government will contribute public assets valued at $40 billion in exchange for the GDDF’s entire shares. The GDDF will then issue long-dated, interest-bearing, covered securities amounting to $40 billion to the Central Bank (BDL) in exchange for the government’s debt to BDL.
The ABL said: “Our approach deploys five strategic priorities allowing a prompt and sustainable economic and financial recovery in the wake of expected IMF balance of payments support requested by the government.”
The proposed strategies involve a debt restructuring process that mitigates the damaging consequences to local depositors and to the economy at large. They also include a sustainable medium-term fiscal strategy that leaves a significant fiscal space to finance much-needed social measures. The strategy calls for a monetary and exchange rate unification policy to address the external imbalances and avoiding hyperinflation. Restructuring the banking sector should happen in an orderly approach on a case-by-case basis when needed. The banks’ strategy advocates a strong diversification of the economy, structural reforms including anticorruption measures, a lower cost of doing business, and reducing the size of the informal sector.
“Should Lebanon choose to default on its internal debt, the damage to economic confidence and to the financial account will be of such magnitude and permanence that Lebanon will be expected to run financial account deficits for the foreseeable future,” the ABL said.
In case of internal default, the external financing requirements would become unsustainable according to the ABL. They would exceed the $28 billion forecast by the government for the 2020-2024 period. “The avoidance of internal default would preserve deposits, hence reducing the financing needs,” the association said.
An internal default would lead to a GDP drop of ten to 12 percent in excess of the 14 percent forecast by the government. Such a default would also worsen the country’s unemployment and poverty rates proportionally.
“Even if Lebanon does not default internally, IMF support will still be needed to finance balance of payment deficits which will remain elevated in the near future, around $8 billion cumulated in the 2020-2024 period,” the ABL said.
According to the ABL, if a consensual reprofiling deal is reached between the government and internal creditors, “the financial account would swing back to a positive balance as soon as 2021 and reach a $1.8 billion average surplus for the 2022-2024 period.”
Reported by Shikrallah Nakhoul
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May 21, 2020
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