Fresh paint on crumbling building: Lebanon bank clean-up raises doubts

London - Domestic banks are told to raise fresh capital.

Bankers and analysts have voiced scepticism about attempts by Lebanon's central bank to clean up the country's banks, warning they must form part of a wider rescue plan to fix its broken financial and economic system.

In a series of circulars on Thursday, the central bank told domestic banks to raise fresh capital, urge their big depositors to move funds back to the country and provision for a 45 per cent loss on their Eurobond holdings.

The move follows a further downward spiral in Lebanon's fortunes since an explosion this month at Beirut's port. Even before the blast, which led to the government's resignation, Beirut was grappling with its worst financial crisis in the wake of protests and a default on its foreign currency debt in March.

"These ad-hoc policy decisions will add to Lebanon's credit and banking woes and risk undermining the little progress made in talks with the IMF," said Alia Moubayed, managing director at Jefferies, referring to already stalled negotiations with the International Monetary Fund over a bailout.

"Nor are they anchored in a revised macro-fiscal and debt restructuring plan that factors in the deteriorating socio-economic context and worsening debt dynamics after the blast."

The bank's initiative comes ahead of a visit next week by French President Emmanuel Macron, who is pressing Lebanese leaders to make political and financial reforms to unlock foreign aid and ease the economic crisis, including by making a full audit of state finances and the central bank.

Lebanon's banks, at the centre of the crisis because of their large holdings of the government's debt, were told by the central bank to raise their capital by 20 per cent by the end of February 2021 or leave the market.

REFORMS

"The necessity to have a cleaning in the banks after the default is there because we want banks to resume their role and activity," Central Bank Governor Riad Salameh told Reuters when asked about the purpose of the circulars.

But lenders wouldn't be able to resume activity without sufficient funds with their correspondent banks, he said.

Several analysts reacted cautiously.

"It is difficult to see why the private sector would pump fresh equity capital into the banking system unless a full asset clean-up has first taken place," said Rahul Shah, head of financials equity research at Tellimer.

Analysts also questioned how the requirement for banks to take a 45per cent loss on Eurobond holdings tallies with a rescue plan released earlier this year by the now-caretaker government that proposed 75per cent haircuts on external debt and 40per cent on domestic debt.

The 45 per cent loss also does not reflect the current market value of the bonds, which plummeted deeper below 20 cents in the dollar on Thursday, in the wake of the circulars and comments from French government officials that aid will not be forthcoming without reforms.

"We do not know how the negotiation between Lebanon and the creditors will end up but we have taken the normal provision that follows such a default," Salameh said, adding the 45 per cent level could be readjusted "in both ways", depending on negotiations.

The source was referring to a practice of Lebanon's central bank that involved siphoning dollars from local banks at high interest rates to keep the government's finances afloat. - Reuters