- 13
- Feb.
- 2024
The State Council Delivers a Heavy Blow to Mikati’s Plan!
modified on 11 Apr. 2024 à 15:47 Read : 6 minute(s) A A A
In its final "constitutional" session before transitioning into a caretaker government, on May 20, 2022, Najib Mikati’s Cabinet endorsed a plan for financial and economic recovery. It included a document titled "Strategy for Financial Sector Revitalization," which, in its third clause, outlined the cancelation of a significant portion of the Lebanese Central Bank’s obligations in foreign currencies to banks. This measure aimed to mitigate the deficit in the Banque du Liban’s (BDL) capital, provided it aligned with the state's debt-bearing capacity. Additionally, the government committed to issuing sovereign bonds worth $2.5 billion, with the possibility of an increase. Furthermore, the government pledged to fully recapitalize Lebanese banks internally.
The government's plan explicitly states, "We will write off BDL’s obligations to banks, which essentially represent the depositors' funds that the banks placed at the BDL." That day, the Association of Banks in Lebanon (ABL) exhausted all means to correct the course of the recovery plan approved by the government in the final session before it transitioned to caretaker status. Consequently, the Association decided to appeal to the State Council to halt the government's plan and its disastrous repercussions on depositors, preventing it from implementing measures that would only lead to the writing off of deposits and the banks' capital.
In fact, on June 28, 2022, ABL decided to present an appeal before the State Council to invalidate the provisions outlined in the government's plan. Based on the submitted appeal, the banks had entrusted depositors’ funds to BDL, the regulatory authority of the banking sector and the safest institution in Lebanon for depositing customers' funds. The total amount of depositors' funds held by the banks and deposited with BDL amounted to $70 billion. However, following the 2020 crisis and the subsequent prohibition on depositors withdrawing their funds in foreign currencies, it became clear that between 2010 and 2021, the state had borrowed and spent the depositors' funds that were placed by the banks in BDL. This occurred in the initial phase.
Then, in a subsequent phase, on May 20, 2022, the decision was made to retroactively seize and foreclose depositors' funds, transferring the burden of losses onto them by converting the amounts borrowed by the state and spent from depositors' funds from debt to permanent ownership. This compelled the ABL, in line with its mandate, objectives and responsibilities, to challenge this decision in defense of the banking sector's investments. As a reminder, BDL’s former Governor, Riad Salameh, clarified that between 2010 and 2021, the state borrowed $62 billion from BDL. This amount is equivalent to the Central Bank’s debts to banks on one hand and its foreign currency assets on the other hand; hence it is equal to the funds deposited by customers in Lebanese banks. The Association perceived the contested decision to be an effective administrative ruling allowing the state to retain—or seize—banks' deposits at BDL in foreign currencies, thus unlawfully confiscating depositors' private property and violating the Constitution without accurately labeling the action as an encroachment upon the private property of a category of citizens, namely depositors, warranting its nullification.
Following the appeal filed by the ABL before the State Council, the latter decided on June 22, 2023, to formally accept it, recognizing it as a valid reference to oversee government actions whenever it decides to waive its obligation to reimburse citizens' deposits. Looking back at this approval, the State Council deemed that "the Cabinet decided to endorse the content of the financial sector recovery strategy, an element taken into account in the Council's decision. This decision, made on May 20, 2022, follows the Lebanese state's confiscation of banks' deposits with the BDL between 2010 and 2021, without declaring it at the time. Therefore, the contested decision does not concern a future action that the government intends to take, but it is a retroactive decision aiming to declare and retroactively validate the confiscation of deposits carried out by the Lebanese state. This confiscation was completed without being named at the time. Under this decision, the confiscation of deposits is considered final."
The crucial development that took place on February 6 involves the release of a new ruling by the State Council, which was published today, Tuesday. This ruling stems from a lawsuit filed by the ABL against the Lebanese state. The decision acknowledges the acceptance of the appeal and the annulment of Cabinet Decision No. 3 dated May 20, 2022, which approved the strategy for revitalizing the financial sector. Specifically, it pertains to the cancelation of a significant portion of BDL’s obligations in foreign currencies to banks, aimed at reducing the deficit in BDL’s capital and closing the bank’s net open foreign exchange position.
The decision reaffirms depositors' ownership rights over the debts arising from their bank deposits, consolidating their position regarding these funds. It also solidifies the rights of the banks over their funds held at the BDL. Furthermore, it nullifies a fundamental part of Najib Mikati's government plan concerning the cancelation of BDL’s obligations towards banks, as this cancelation prevents them from reimbursing depositors. Furthermore, based on sources closely monitoring the State Council's decision, the ruling emphasizes two key aspects: first, the sanctity of deposits, and second, the banking sector's commitment to rebuilding depositor confidence in banks. This is evidenced by the fact that the ABL initiated the appeal to overturn the government's decision before the State Council.
In the upcoming days, all eyes will be on the steps that banks will take against the Lebanese government. On December 6, 2023, 11 banks submitted a memorandum of dispute to the Ministry of Finance. The memorandum, presented by attorneys Elie Emile Chamoun and Akram Azouri, urges the Lebanese government to settle its debts and obligations to the BDL so that the latter can fulfill its commitments to Lebanese banks, allowing them in turn to reimburse depositors. The memorandum is based on the BDL’s budgets, findings from the forensic audit conducted by Alvarez & Marsal and the accounting audit carried out by Oliver Wyman, as requested by the Lebanese state. It presents three demands, the first being the state's obligation to repay its debt to the BDL, totaling approximately $16.617 billion. The second demand entails the state's payment of around $51.302 billion to cover BDL’s losses in its 2020 budget, by the Code of Money and Credit, especially Article 113 thereof. The third demand is to cover the increase in BDL’s deficit for the years 2021 and 2022, using the calculation method adopted by Alvarez & Marsal up to 2020. Since the state was notified on December 5, 2023, it must wait until February 5, 2024 to file the lawsuit before the State Council or risk procedural dismissal. Consequently, after the two-month deadline as per administrative law, the focus shifts to the bank's strategy, which may involve suing the Lebanese state to recover rights and, most importantly, to get legal recognition of responsibilities.
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