Lebanon Businessnews News

Haircut to the haircut:
Government plan rejected
No one has voiced support
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The draft of the 'Lebanese Government's Reform Program’ was 'Dead on Arrival'. It was overwhelmingly rejected by most quarters in politics and the private sector. The draft was authored by government financial consultant Lazard and a number of advisors to the Prime Minister.

The government announced that it will hold consultations with various stakeholders around the plan.


A source at the Presidential Palace expressed surprise at the plan. "It is not within the mission of Lazard in the first place," he said.

Speaker of Parliament Nabih Berri said that any proposal that includes a 'haircut' will be totally rejected. “We can pray for the soul of the haircut just like you did on that of capital controls,” he said.

Prime Minister Hassan Diab has also distanced himself from the plan. A close advisor to Diab said: “This is a draft of a plan that has not yet been completed. Lazard offered some ideas. Haircut and Capital Control are not being advanced.”

The Minister of Finance said that the draft is just a blueprint for discussion. “Everything that has been said about a ‘haircut’ is inaccurate and requires a law. The government did not address it whatsoever.”

Political parties in the opposition have also rejected the plan, including Future Movement, Lebanese Forces, the Socialist Progressive Party, and the Kataeb.


The Association of Banks (ABL), through their advisory firm Houlihan Lokey, sent a letter to Lazard in response. “We are highly disappointed in the government’s approach to this process,” it said. “The government should have prepared a comprehensive and independent analysis of the current financial position and shared this analysis as part of a constructive, good-faith effort to work with major stakeholders towards a comprehensive and equitable plan to address the root-cause issues.”

“Traditional approaches like haircutting debt do not fundamentally address the problem.”

“The proposed solution to impose the financial burden of a restructuring on depositors betrays the fact that it was depositors, through the commercial banks, who have been providing financing to the government (directly, and indirectly through the Central Bank).”


The figures and the extent of the deficit outlined in the plan indicate that we are at a pivotal point, said Fady Gemayel, Chairman of the Association of Industrialists. “This means that drastic measures must be taken, but we are against any haircuts on depositors in general. The government can carry out haircuts on the deposits of people involved in suspect activities and in corruption,” he said.

Gemayel said: “Reforms must be serious and clear. Good intentions are not enough. The government must show credibility that it is able to implement the plan unhindered by parties with vested interests. I didn’t see any concrete stimulus measures for the economy. There is a need to boost GDP in order to improve the debt-to-GDP ratio. The cost of the stimulus is justified by the fact that it will alleviate the debt burden in the future.”

“Imposing new taxes, like the one targeting holding companies, is counterproductive in this deep recession. The impact of such taxes in the best scenarios will be minimal anyway,” he said.


Nicolas Chammas, Chairman of the Beirut Traders Association, agrees with many points in the draft, including the diagnosis and the need for external resources. He also agrees with the paper’s position regarding the exchange rate.

But depositors should not pay the cost. Depositors funded the government for the past 20 years. “Deposits are a red line,” said Chammas. Any process, such as a bail-in, should be a voluntary action by the depositor.

Chammas said that the negative Sovereign rating decreased the possibility of external investment and left the Central Bank as the only source of support for the government. If we lose the deposits at the banks we will not receive new deposits for too many years to come.

“The problem is not in the financial engineering or structure but in the public debt. Debt should be rescheduled. A fund can be established to include all government assets. There is a need to build big banks (with $1 billion in capital) and apply governance as banks need to get the trust of depositors,” he said.


Elie Torbey Chairman of the Association of Insurance Companies (ACAL) said that insurance companies object to haircuts on their deposits in banks because they represent reserves allocated for risks and this money belongs to policyholders. Life insurance companies have already suffered significant losses because of their investments in Eurobonds. Insurance companies are required by law to invest 50 percent of their investment inside the country.

Financial companies as well as insurance funds of State employees and professional bodies like that of lawyers must not be subjected to haircuts either, according to Torbey. Countries that have passed through the same crisis as Lebanon, like Greece, have not carried out any haircuts on insurance companies.

“It is not enough for the government to set targets as percentages of GDP, we want to know the real amounts,” Torbey said.

“In a time of recession the government is not supposed to impose new taxes especially on corporate profits,” he said. “The insurance companies are regularly paying their taxes and they have not carried out layoffs because of the crisis,” he said.


Namir Cortas, Chairman of the Real Estate Developers Association (REDAL) said: “The plan didn’t include any encouraging steps. I didn’t take it seriously. It does not contain a clear plan. It doesn’t stimulate the private sector to grow.”

Cortas said that a reform plan cannot start by a haircut. “It does not help shoring up confidence and trust of investors. The government should provide an option to give depositors part of the banks’ assets or equity in the public sector institutions, such as telecom, instead. The government needs to reform itself, not the banks. The plan should on the short term create an encouraging environment for mergers and help the banks gain back the trust of the depositors,” he said.

Cortas said that the plan should state how it will help businesses survive and exit the crisis. There is a need to involve the private sector.

The role of the government is not to change the economic model to a productive economy. All sectors are important but we can start with what we have. We need the services sectors. The role of the government is to fix public finance.


Maroun El Helou, Chairman of the Syndicate of Contractors of Public Works and Buildings said: “This plan identified the volume of the problem. It identified the amount of the debt. It made a diagnosis. The exchange rate needs to be adjusted according to the real market value of lira.” But Helou saw that the draft plan didn’t provide the needed solution. “The draft said that the depositors and the banks will pay the consequences of the wrong decisions of the government. I totally disagree with this,” he said.

The government should use its assets to solve the problem. The government still has ports, Customs, the telecom network, a promising oil and gas sector, and other assets. This is how the government can find new sources of income and stimulate the economy as it is an opportunity for the private sector.

The plan should state a clear strategy with practical procedures to stimulate the economy.

Facing corruption is great but the plan didn’t mention what are the steps it is going to take.

The plan missed the time factor. A reform plan should include clear steps with specific time intervals to apply them as time is our enemy.


Resorting to the IMF is a point in common among all parties of the private sector. The ABL finds that external funding from the IMF (or other sources) to be absolutely necessary for any effective solution. “Such funding will never materialize unless proper data is produced, analyzed and shared in advance of any substantive proposals. Based on our discussions to date with you, this step has clearly not yet been taken,” read the Houlihan Lokey statement.

Chammas and Cortas agree that IMF assistance is needed: “We need external support and I agree with the needed amount and it is reasonable,” said Cortas.

Helou also agreed with the need for the IMF assistance: “We cannot get out of the crisis without strict and a clear reform,” he said.


Helou said that there is a need to reduce the cost of the public sector by reducing its size, but the plan didn’t mention how.

Cortas agree also with the need to reduce the public sector as half the budget is used to cover salaries.

Torbey said that insurance companies support the government’s plan when it comes to reducing the size of the public sector and rationalizing and cutting public expenditure including personnel cost.
Date Posted: Apr 14, 2020
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