A long-awaited plan to restructure the debt strangling Lebanon's economy could go before the cabinet within weeks, a source briefed on the issue said, but some economists said it may not help secure a vital International Monetary Fund loan.
Decades of profligate spending by the country's ruling elite sent the economy into a tailspin in late 2019, with depositors locked out of their accounts as debt-laden banks shut down.
Reforms required to access IMF funding to bring government debt out of default were repeatedly derailed by political and private interests until a new president and prime minister both pledged this year to prioritize them.
Key to the process is a law on the distribution of financial losses between the state, the central bank, commercial banks and depositors. The legislation was being finalized and would be submitted to cabinet for review "within weeks," and then to Lebanon's parliament for possible amendments, the source said.
HOW WILL THE RECOVERY MECHANISMS WORK?
The government's initial estimate of losses from the financial collapse was around $70 billion, a number expected to have grown over the six years the crisis was left unaddressed. Damage inflicted by last year's war between Israel and Lebanese armed group Hezbollah has compounded the problem.
The plan foresees a combination of write-offs, clawbacks and repayment to depositors, the source said, without providing figures. Those who had less than $100,000 at the start of the crisis in 2019 - around 85% of the total number of depositors - would be repaid in cash installments over three to five years.
Depositors with more than $100,000 would have a longer recovery timeframe, the source said.
The plan foresees using "asset-backed bonds" in its repayment scheme, according to the source, who floated the idea of relying on Lebanon's gold reserves, which the central bank said this month are valued at $30.28 billion.
But officials are still debating key elements, the source said, including mechanisms to claw back interest earned on deposits in the years leading up to the crisis.
From 2016 to 2019, commercial banks offered extraordinary interest rates in a bid to shore up their deposits at the central bank, which were in turn being swiftly used for public expenditure. Some big depositors managed to pull their money out before the system, compared with a Ponzi scheme, collapsed.
The source said it had not yet been decided whether smaller depositors would also be subject to the clawbacks.
Passing the plan would be a key step towards determining the "recovery value" of Lebanon's defaulted government bonds, which have nearly quadrupled in price over the past year as investors bet on signs of economic recovery.
WHAT ARE THE POSSIBLE DRAWBACKS?
Timothy Kaldas, deputy director of the Tahrir Institute for Middle East Policy and a researcher on regional political economies, said relying on gold reserves runs against IMF requirements to limit recourse to public resources.
Such a law "would also shield Lebanese banks from financial accountability for their role in Lebanon's devastating financial crisis and undermine the government's ability to finance reconstruction and an economic recovery," he told Reuters.
"The additional harm caused by such a law would be felt in Lebanon for generations," Kaldas said.
Other observers are concerned that clawbacks from small depositors would breach international standards on hierarchy of claims and Lebanon's own pledges to protect the most vulnerable.
The country remains consumed by political tensions: Israel continues to strike the country's south, the powerful Hezbollah militant group has refused to disarm in line with Lebanese cabinet decisions and upcoming parliamentary elections in May could make lawmakers unwilling to pass unpopular reforms.
Lebanon has so far had mixed progress on reforms required by the IMF. It took parliament three attempts to pass a law lifting banking secrecy that met international standards.
It passed a bank restructuring law in July, but the IMF shared concerns with the Lebanese government that the law deviated from international best practices and did not include adequate buffers against conflicts of interest.
