While We Try to Survive Its Last Scheme, Lebanon's Banking Sector Plots Another Grand Theft

Amid the exhaustion of trying to survive the relentless economic collapse, Lebanon’s future is being determined by the same people who stole its present.

The Association of Banks in Lebanon (ABL) has been busy preparing its “Plan for Economic Recovery,” which may well be the plan the Lebanese government is discussing in its resumed negotiations with the International Monetary Fund (IMF), given the close proximity and mutual interests shared by ABL and Lebanon’s oligarchy. 

On October 11, a confidential draft of the ABL plan was published online by Al Modon, giving us a peek into what is being concocted by the banking system. On November 18, ABL head Salim Sfeir met with corrupt billionaire Prime Minister Najib Mikati to discuss the financial recovery plan. On November 25, Deputy Prime Minister Saadeh al-Shami announced the Lebanese government had concluded technical talks with the IMF and transitioned into negotiations for a bailout.

So what do the architects of the collapse have in store for Lebanon?

Even if unsurprising, the vision in the ABL plan is horrifying in its ambition to extract even more resources from a country gutted by its oligarchy. 

ABL’s Diagnosis of the Crisis: An Insidious Narrative

The ABL plan holds the Lebanese state wholly and solely responsible for the economic and financial collapse, absolving the central bank (Banque du Liban, BDL) and commercial banks from any responsibility. 

Self-described as “one of the largest employers of professionals” and “the country’s largest taxpayer,” ABL attacks the “lack of transparency, corruption and nepotism” of the public sector which it claims “prevented the private sector from growing.” 

The distinction between an antagonistic, bloated, and corrupt public sector on the one hand, and a heroic private sector trying to create jobs and growth on the other, is even more profoundly absurd in the Lebanese context, where politicians dominate key sectors of the economy, especially the financial sector, and where prominent bankers regularly hold ministerial posts.

The Lebanese economy has been managed as a Ponzi Scheme since the 1990s, with banks as main architects of the fraud.
ABL’s plan repeats the banking sector’s narrative on the crisis to date: The trouble started in 2010, when Lebanon began to experience “below par growth and productivity gains,” but it was “[t]he hard default on the sovereign debt” in March 2020 that plunged Lebanon into the abyss.

In reality, the Lebanese economy has been managed as a Ponzi scheme since the 1990s, with banks as main architects of the fraud. As long as foreign currencies poured in — be it through expatriates’ remittances, foreign investment in real estate, international loans, or confidence in the BDL governor who was long-hailed as a beacon of stability — the scheme could sustain itself. Should the scheme collapse, the government could declare bankruptcy and default on its debts, which would be too costly for the Lebanese banks.  

When the government of former Prime Minister Hassan Diab defaulted on the government’s Eurobonds maturities (the foreign-currency denominated debt) in March 2020, what ABL considered a mortal sin was in reality  in the public’s interest.

The default managed to preserve much-needed foreign currency reserves in BDL — a total of $4.7 billion of Eurobond maturities for the year 2020 and $4.5 billion in 2021 — at a moment when foreign currency was sorely needed due to the Lebanese economy’s dependence on imports.

Had the Diab government not defaulted on the Eurobond maturities, “we would have had a rapid depletion of foreign currency reserves, and the crash would have been even greater,” according to Nasser Saidi, a former minister of economy and industry (1998-2000) and vice governor of BDL between 1993 and 2003. 

By scapegoating the Eurobond default, the bankers “are trying to evade responsibility for the biggest historical mistake ever made in terms of central bank policy, monetary policy and banking policy.” —Nasser Saidi, former minister
By scapegoating the Eurobond default, the bankers “are trying to evade responsibility for the biggest historical mistake ever made in terms of central bank policy, monetary policy and banking policy,” Saidi added in an interview with The Public Source. 

According to Saidi, the trigger for the financial meltdown was the banks’ “unprecedented and uncalled for” decision to shutter for two weeks in late October 2019, in the wake of popular protests. “There was no proximate economic or financial reason for shutting down the banks,” and it “automatically created a crisis of confidence, and it came as a confirmation to the general public that things were not as sound as BDL was saying.” As soon as the banks reopened, “the first thing people did was rush to get their deposits.”

Yet sticking to the Eurobonds narrative plays a convenient role in ABL’s plan, laying the groundwork for a new grand theft by the oligarchy — this time of state assets.

Rampant Privatization to Save the Banksters

“The Eurobonds narrative has two parts: one is to say that [the cause of the crash] was the government defaulting on the Eurobonds; the second is to say that [because the banks] were financing the government, then the government should compensate them by giving them state assets … The Eurobonds narrative is all about state assets... This is what [bankers] are trying to do with the help of Mikati.” This explanation by Nasser Saidi resonates with the content and spirit of the ABL plan. 

Indeed, although the ABL plan is silent on the exact losses of BDL and commercial banks, it outlines grand ambitions for how to cover them. It calls for the creation of the “Lebanese Investment Corporation,” a joint-stock company “that would pool state assets [including real estate]” and “be in charge of managing them to maximize their monetization to discharge [BDL] of all Lebanese-law claims held against the Government of Lebanon.”

BDL would hold the entirety of this company’s preference shares in exchange for all the Lira-denominated debt that the state owes it. Then, BDL would be able to liquidate its obligations to the banks by offering preference shares to them.

By privatizing state assets, the plan would essentially convert debt into state assets, allowing BDL and commercial banks “to clean off their balance sheets while they entice foreign firms and investors to provide the financing to ‘revive’ these assets,” added Saidi. The message to international donors is: “Let’s look at the power sector, transport sector, water, airports, etc.... Let’s buy them on the cheap. You can provide the financing.” 

In plain language, Lebanon’s central bank and commercial banks plan to cover their losses by taking full control, on the cheap, of valuable publicly held assets, including vast swathes of real estate.
In plain language, Lebanon’s central bank and commercial banks plan to cover their losses by taking full control, on the cheap, of valuable publicly held assets, including vast swathes of real estate.

Shock Doctrine: Lebanon Edition

In her influential 2007 book “Shock Doctrine: The Rise of Disaster Capitalism,” Canadian author and activist Naomi Klein highlights how disasters — natural or human-made — are ripe moments for powerful actors to enact policies that increase their own material and political interest at the expense of a general public preoccupied and exhausted by the not-so-simple task of surviving the calamity.

The ABL plan is a perfect example of shock doctrine in action. 

In addition to pushing for rampant privatization, the plan rehashes stale and dangerous austerity measures — policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both — that have been discredited by economists as ways out of crisis and shown to make economies and people suffer further. Even the IMF admits that it massively understated the damage that spending cuts inflict on a weak economy.

Yet these policies continue to be peddled in different guises — whether at the CEDRE conference, or in overpaid slide decks by foreign consultancy firms (such as McKinsey & Co.’s 2018 “Lebanon Economic Vision” for the sum of $1.5 million paid from public funds), and now in the ABL plan. 

ABL pays lip service to the fact that “tax hikes should be calibrated to ensure progressivity and protection for the most vulnerable households,” yet calls for increasing the Value Added Tax (VAT) — which is widely regarded as disproportionately affecting lower classes — from 11 percent to 16 percent.

The ABL plan is a perfect example of shock doctrine in action. In addition to pushing for rampant privatization, the plan rehashes stale and dangerous austerity measures that have been discredited by economists as ways out of crisis and shown to make economies and people suffer further.
As for taxes that would target the wealthiest, ABL calls for a one-time-only tax of between 1 percent and 3 percent to be levied on “real estate, financial assets and mobile assets,” all the while repeatedly stressing the “non-recurrent and exceptional nature” of such a policy. The idea for a one-off wealth tax first emerged in the 2021 Draft Budget Law prepared by the Diab government, but it was never adopted. This “national solidarity tax” would affect depositors with accounts of $1 million or more — or their equivalent in other currencies — whose deposits would be taxed between 1 and 2 percent. 

In terms of government spending cuts, ABL calls for a “redesign [of] the system of state subsidies” so that “targeted smart subsidies [can] protect the poorest groups,” and to eliminate budget allocations to Lebanon’s Electricité du Liban.

At face value, these calls seem inoffensive. The state’s current subsidization policies favor politically-affiliated cartels. And Lebanon’s captured public utilities company is hard pressed to find defenders.

Yet ABL’s criticism of subsidies and state agencies is insidious. Surrounded by vague, half-baked, problematic proposals about handing out cash to the poorest households or expanding the inadequate National Poverty Targeting Programme, the real target of ABL’s proposal is the privatization of publicly held assets.

To add insult to injury, the ABL plan rehashes fantasies of a Lebanon that never was and whose projections got us here in the first place. “Lebanon can realistically aspire to become a Riviera destination offering a combination of entertainment, culture and sea views with niche offerings in business meeting and medical tourism,” reads the ABL draft. 

As we continue to witness the flight of professionals in the medical sector, as we suffer the medicine shortages and hoarding, as we mourn the mountains destroyed by illegal quarries to make way for grotesque real estate, as we are poisoned by the pollution in the sea and rivers, ABL’s fantasies are criminal.

Punctuating our misery, the ABL plan was reportedly prepared by Carlos Abadi, an investment banker and adviser to the ABL, who still believes that “BDL has done a masterful job at avoiding the full-blown explosion of the crisis in the absence of a government capable to respond.”

Abadi, who specializes in debt restructuring, has been involved in a series of controversies. In 2007, a leaked video of his meeting with Ecuador’s finance minister led to accusations they were deliberately mani­pulating international bond markets for financial gain. In 1995, Abadi was among a group of New York-based bankers indicted by the Manhattan District Attorney for “fraud and larceny” on several American, European and Latin American banks that had lent money to Brazilian banks and trading companies — though he was released from all charges, except that of improper tax reporting. Abadi openly supports normalization with the Zionist state and has overt ties to Israeli businessmen.

Admission by Silence

For all its opinions on how to make us pay more while the state gives us even less, the ABL plan is practically mute on the things it should know most about: How will the financial sector be transformed? And how do we solve the liquidity crisis? 

What little it says is alarming.

On reforms in the financial sector, it calls to “strengthen the Special Investigation Commission [SIC]” and “review the oversight arrangements [...] between the [Central Bank] and the Banking Control Commission [BCC].” The SIC, responsible for investigating money laundering and other financial crimes, is headed by none other than BDL governor Riad Salameh, a close ally of the ABL who is facing accusations of money laundering in France, Switzerland, Luxembourg and Liechtenstein. 

For all its opinions on how to make us pay more while the state gives us even less, the ABL plan is practically mute on the things it should know most about: How will the financial sector be transformed? And how do we solve the liquidity crisis?
For its part, the BCC, responsible for supervising banks and other financial institutions, has long been headed by cronies who, according to Nasser Saidi, the former minister, allowed banks to contravene international voluntary banking regulation agreements meant to reduce the risks and macroeconomic costs of financial instability. 

As for unifying the countless exchange rates since the Lebanese Lira began devaluating, the ABL is in no rush. The plan calls for the rate to be unified “within the next 18 months,” which in practice means that small depositors will continue to face indirect “haircuts” as they are faced with no choice but to continue to withdraw their “local dollar” (or “lollars”) in the form of increasingly worthless Liras. 

Meanwhile, banks can continue to speculate on the Lira and to swallow US dollars coming from abroad intended for humanitarian aid to refugees and impoverished communities.

As Mike Azar, a Beirut-based debt advisor and commentator on Lebanon’s financial crisis, told The Public Source: “NGOs and international organizations and the like can’t go to the exchange shops on the streets. They need receipts, they need [their foreign exchange transactions] to be official… They need to do it through the banks, so they are selling their dollars below the parallel market rate to the banks. It's basically a transfer of value from the NGOs and international organizations to the banks and BDL.”

BDL seems to be playing a similar game through its electronic platform Sayrafa, launched in May 2021. According to a BDL circular, Sayrafa is “intended to record all Lebanese [Lira] foreign exchange transactions into any other currency” and to “allow BDL to supervise and intervene when needed” to stabilize the Lira. The “Sayrafa rate” is essentially an average rate of all the recorded transactions.

In a recent interview, Riad Salameh stated that BDL “might recoup” between $300 and $500 million through the Sayrafa platform in the next twelve months.

“If BDL is buying dollars anywhere near the Sayrafa rate, then it’s buying dollars for below market price. It is taking advantage of international organizations and NGOs, and anyone forced to sell their dollars below market, so that it can boost its foreign currency reserves,” according to Azar. 

But given the opacity that shrouds BDL and its governor, Azar noted, “We don’t know at what rate BDL is buying dollars. For all we know, it could only be buying dollars from [financial services company] OMT.”

Either way, regardless of whether BDL is buying dollars close to the market rate, this has an adverse effect on the Lebanese Lira. “[The Central Bank] can sell foreign currency to support their local currency, or they can buy foreign currency which keeps their local currency weak,” Azar explained. “If BDL is buying dollars off the market, then this is going to cause the Lira to devalue, because BDL is selling Liras and buying dollars. Especially if it is to the tune of $500 million a year. This is a huge number.”

The Worst Option Yet

It is likely that ABL’s shock doctrine plan is the blueprint for Mikati’s negotiations with the IMF. And in the short, undistinguished history of official plans to save the Lebanese economy, ABL’s version is the worst option yet. 

The Diab government’s financial recovery plan, circulated in April 2020, was far from ideal, but it at least included a modicum of protection for the most vulnerable. 

For example, it introduced a progressive taxation scheme that raised taxes on interest income for deposits over $1 million, increased income tax on high salaries, and instituted VAT only on luxury goods.

That plan did not sugarcoat the financial health of the banking sector, noting L.L. 64 trillion in direct aggregated losses for commercial banks and L.L. 177 trillion for BDL. 

In what disquieted Lebanon’s oligarchs, the plan stated that “a full bail-out of the financial sector is not an option,” and that “the restructuring of the public debt [...] will incur [...] heavy losses on banks’ capital position.” Critically, it also warned that “[s]tripping Lebanon of all of its remaining assets” to cover the losses of the financial sector “would not be fair on the vast majority of citizens” and “does not solve the solvability issue.”

Critically, the Diab plan warned that “[s]tripping Lebanon of all of its remaining assets” to cover the losses of the financial sector “would not be fair on the vast majority of citizens” and “does not solve the solvability issue.”

It did not take long for a well-orchestrated counter-attack. Oligarchs lambasted the Diab government’s plan, claiming it would “destroy” the economy and the country’s “liberal economic system.” 

In June 2020, the ABL released their “Contribution to the Lebanese Government’s Financial Recovery Plan,” which sought to discredit Diab’s plan and obfuscate the enormity of the financial sector’s losses. It called for settling the “intra-public sector debt with existing [state] assets that are poorly exploited, or not exploited at all” by placing these assets in a “Government Debt Defeasance Fund” to pay off the state’s debt to BDL and the commercial banks.

Parliament’s Finance and Budget Committee, representing virtually all establishment parties, positioned itself firmly on the side of ABL and BDL, forming a “fact-finding” sub-committee to compare the numbers in the government and ABL plans and “assess” the actual size of the financial sector’s losses. Ultimately, the sub-committee concluded that the losses amounted to “between a quarter and half” of the amount mentioned in the Diab government’s plan.

Key politicians, such as deputy speaker of parliament Elie Ferzli, were among ABL’s staunchest allies in parliament, vowing to bring down the Diab government’s plan because it sought to “bankrupt the banks.” Ferzli, who is not the only banker-politician, is a shareholder in IBL Bank and a former member of its board of directors.

By early July 2020, negotiations with the IMF “hit the rocks” due to the oligarchy’s resistance to the Diab government’s plan.

The Diab plan left much to be desired. It prescribed draconian austerity measures, ignored the need to end monopolistic and oligopolistic practices in the Lebanese economy, and had little to say about holding to account banksters and all those who profited from the Ponzi scheme.

Since Diab's plan was presented, the goalpost has been moved so far to the right that the only plan being circulated at the highest levels is the ABL plan. 

Resisting False Choices, Reclaiming Politics

Bounding our sense of possibility by the Diab and ABL plans is an unenviable choice.

For Viviane Akiki, a critical economic journalist, researcher, and translator based in Beirut, it is a false choice imposed on us by those in power. 

She sees the differences between the Diab and ABL plans as relatively minor: The plans squabble over the magnitude of the losses and whether the bankers or the government should bear the brunt, yet they both “erase everyone else in society… as if all of society is just the banks and their losses.”

For Akiki, the radical task at hand is not to propose alternative economic recovery plans. “The solutions are political, not technical… There are a thousand plans we can come up with… we can easily say theoretically we need to do ‘x y z,’ but without the power to impose this, we cannot do anything… There is no solution unless we can work politically.”

The plans show “that the 0.5 percent at the top can impose their demands and interests on everyone, and 99 percent of the people are ignored politically.”

And if we look beyond the losses distribution phase, Akiki argues that neither plan mentions fundamental changes to Lebanon’s economy.

For Akiki, the radical task at hand is not to propose alternative economic recovery plans. “The solutions are political, not technical… There are a thousand plans we can come up with… we can easily say theoretically we need to do ‘x y z,’ but without the power to impose this, we cannot do anything… There is no solution unless we can work politically.” 

As such, “We need to think about how people can impose their will and interests on the political agenda…to be politically active; not to sit on the sidelines and wait for salvation from abroad… The IMF is a fund; it doesn’t care about how you spend your money, all it cares about is for you to pay it back… They don’t care about us. This is a long struggle. People need to realize that the struggle is a class struggle and move beyond sectarianism. We need class consciousness. If not, exploitation will continue unabated. We need to fight for our rights! Nobody will give us these rights as a gift!”