Lebanon draft crisis plan sees need for $10 bln-$15 bln and depositor contribution

Lebanon requires net external financing of $10 billion-$15 billion over the next five years to help it through its financial crisis, according to a draft government plan seen by Reuters.

The draft plan, which is being discussed by cabinet, marks the most comprehensive blueprint yet on tackling the crisis. In it, the plan is described as a "good basis" in case of negotiations with the IMF.

Lebanon has yet to decide whether it will go the IMF, though analysts see this as the only way it can get aid.

The plan, which a source said was drafted by Lebanon's financial adviser Lazard, noted investors were expecting Beirut to seek IMF support which would unlock other financing.

While mapping out losses of $83.2 billion in the economy, the plan noted that a "full bailout of the financial sector is not an option".

It sets out a restructuring of the central bank and commercial banks to include "a transitory exceptional contribution from large depositors" and outlines a special fund to compensate depositors’ losses resulting from restructuring.

"As stated by the prime minister, the plan will make sure the assets of 90% of the depositors are preserved," it said.

Parliament Speaker Nabih Berri has come out strongly against any haircut on bank deposits, calling them sacred.

The plan includes other politically difficult steps such as a five-year freeze in state salaries - the value of which is being eroded by inflation - and reforming the costly state pension system. "Lebanese people are faced with several years of economic hardships," it said.

The plan is based on assumptions that include prompt external financial support and successful implementation of reforms - something Lebanon has long failed to do.

It sees the overall government deficit narrowing from 11.3% of GDP in 2019 to 1.3% by 2024 and public debt being cut to 90% of GDP by 2027 from 176% last year.

Lebanon's crisis is rooted in decades of state corruption. Last month, Lebanon defaulted on its hefty foreign-currency debt. A coronavirus lockdown has compounded economic problems which include a weakening currency and capital controls that have denied savers access to dollar savings.

Nafez Zouk, emerging markets strategist at Oxford Economics, said it was encouraging the plan acknowledged the size of the problem. "There's a reform program which sounds like something the IMF would want to see and there's a recognition of the need for consolidation of the banking system," he said.

EXCHANGE RATE TO WEAKEN

The plan indicated the exchange rate weakening to 2,607 pounds to the dollar in 2021, and to 2,979 in 2024 from the current peg of 1,507.5 pounds. The pound has lost more than 40% of its value since October on a parallel market.

The $83.2 billion losses stem from the impairment of assets held by the central bank, the impairment of banks' loans portfolio and government debt restructuring.

The plan estimated $40 billion in embedded losses at the central bank, the result of "years of loss-making financial transactions" to accumulate FX reserves to defend the peg and cover a balance of payments funding gap.

A phased restructuring of commercial bank balance sheets would include a full bail-in of existing shareholders estimated at $20.8 billion in capital write-offs, with the remaining $62.4 billion covered by the "transitory exceptional contribution from large depositors".

"The exact parameters of the contribution will be defined with the assistance of external advisers and in the context of a broad and good-faith dialogue with the commercial banks."

A special fund would compensate depositors' losses, with the proceeds coming from a program that will track and recover ill-gotten assets.