On Tuesday, the State Council overturned a government decision, part of its “recovery strategy,” which would have destroyed the banking sector and deprived depositors of their funds.
The State Council annulled on Tuesday a decision taken by the Council of Ministers in May 2022 as part of its financial recovery strategy. This decision would have destroyed the banking sector and deprived depositors of their funds.
One of the articles of the strategy briefly provides for the outright elimination of “a large part of the Central Bank’s—that is, the state’s—commitments to banks.”
The aim of this measure, according to the government, is to “reduce the deficit in the capital of the Central Bank (BDL) denominated in foreign currency.” In reality, it is a Machiavellian way of killing two birds with one stone: destroying the banking sector in order to push through its equally contested bank restructuring plan, making depositors bear the full brunt of the financial crisis.
In this way, the measure would aim to absolve the state of any responsibility for the financial crisis and the squandering of public (Treasury revenues) and private (bank and BDL depositors’ money) funds, even though the state is the main culprit due to the failed policies that authorities, still reluctant to implement reforms, unfortunately continue to follow.
Had it been upheld, this measure would not only have dealt the banking sector the final blow but would also have put it at odds with depositors.
The appeal was submitted by the Association of Banks in Lebanon (ABL) to the State Council in June 2022, one month after the Cabinet adopted the recovery strategy.
In its appeal, the ABL called for the suspension and subsequent annulment of the article concerning the abolition of the Central Bank’s foreign currency commitments to banks, “due to its violation of the Constitution and laws.”
In its explanatory memorandum, the Association points out that “when the crisis began in 2020 and depositors were forbidden to withdraw their money in foreign currencies, it became clear that the Lebanese state had drawn on bank deposits to finance its spending for 11 years between 2010 and 2021.”
It recalled that six ministers had opposed the article at the Council of Ministers “because it is prejudicial to the shareholders and depositors who make up the Lebanese banking sector.” The contested article also provides for the closure of the “net open position in a foreign currency,” which is the net balance of all assets, liabilities and off-balance sheet items in that currency.
“The Minister for Displaced Persons Issam Charafeddine had even put his reservations in writing because this article was included, without debate, in the recovery strategy,” the ABL added.
‘Prejudicial’
The State Council ruled that ABL’s appeal was admissible in terms of form and substance despite a lengthy counterargument by the Lebanese government, which shamelessly defended not only its decision to withdraw depositors’ funds but its right to do so. In terms of form, the State Council retained in its decision “the prejudicial character” of this “administrative measure.” It emphasized that the measure does not represent a future act that the government intends to undertake, but a decision taken a posteriori, with retroactive effect, in order to announce that the undeclared appropriation of deposits undertaken by the state between 2010 and 2021 has become definitive and enforceable (…).
It relied on the case law of the State Council to emphasize that “any decision that establishes a rule that contravenes the regulatory power of legal decisions may be the subject of an invalidation appeal.”
It also ruled that the ABL’s appeal was admissible because it “concerns a specific article” and not the government’s strategy, and because it “makes depositors assume the burdens that the state is supposed to assume itself.”
“The fact that an administrative court is reviewing the legality of a contested administrative decision, particularly as it affects private property, falls within the direct prerogatives of that court. It has nothing to do with the negotiations undertaken by the government with the IMF,” the State Council insisted, recognizing the legitimacy of the approach taken by the Banking Association, which it described as “empowered to give its opinion on projects and laws relating to financial and banking affairs.” According to the State Council, the contested article would have “annihilated the banking sector and created, in an irresponsible manner, a conflict between banks and depositors.”
‘Unconstitutional’
The State Council ruled that the disputed article “contradicts the Constitution, in particular Article 15, which states that the executive authority is bound to respect private property and the liberal economic system (…), all the more so as the text in question provides for the seizure of private funds freely disposed of by the state.”
‘A Fraud‘
It also “contradicts articles 85, 90 and 113 of the Code of Money and Credit, which prohibit the state from incurring debts with the Central Bank and imposes the duty to cover any losses accumulated by BDL on the state.”
“The state has borrowed more than $60 billion, which come from the funds of depositors in Lebanese banks, and it has violated its legal obligation to cover the losses it has caused the Central Bank to incur. The contested article tends to legitimize these two offenses,” the State Council stressed, bluntly accusing the state of “fraud.”
“The disputed article is vitiated by fraud. It transforms the nature of the act by which the state disposed of depositors’ funds, which is a loan, into a definitive appropriation,” the State Council noted before explaining that the text in question “also contravenes the principle of equality in the process of assuming burdens, (….) which are not even distributed equitably among all citizens. They are borne solely by the depositors.”
‘Misuse of Powers’
The State Council also pointed to a “misuse of powers” in the contested article, “the announced objective being a recovery plan for the financial sector, whereas the real aim is to confiscate deposits illegally borrowed by the state from the Central Bank.” It also highlighted the fact that “in dispossessing depositors of their funds, the government has not provided for any measures or plans to compensate them, and this constitutes a flagrant infringement of property right, which is enshrined in the Constitution and the International Declaration of Human Rights.” It additionally accused the government of failing to comply with “the laws passed by Parliament,” particularly as relates to the financing of the Treasury deficit over the past 10 years and the settlement of the consequences of the policy followed by the state.
