1/ In the absence of an agreement with the IMF, a comprehensive legislative framework for banking resolution is impossible given the resistance of the various lobbies. The path taken by the monetary authorities is to achieve a gradual correction of the deficit of dollars

2/ assets in relation to dollar liabilities (deposits) in the Lebanese financial system. Through the various circulars of the BDL, a solution to the insufficiency of dollar assets is emerging which can be seen at two levels: 1-forced conversion of dollars into

3/ Lebanese pounds as withdrawal are made and 2- conversion of dollars deposits into capital instruments. BDL therefore opted for a path that combines two “haircut” techniques as solutions to the losses in the financial sector: conversion into Lebanese pounds and bail in.

4/ Forced conversions on withdrawals below a certain monthly threshold are made at the rate of 3900, more favorable than the official exchange rate, but with a haircut of 50% compared to the market rate. For bigger withdrawals, available conversion rates lead to haircut of above

5/ 65%. On the other hand, in accordance with BDL circulars, banks will have to resort to voluntary bail-ins i.e. conversion of deposits into capital instruments. This mesure will reduce the imbalance between their real dollars assets and their dollars liabilities.

6/ However as such capital instruments are intended to cover losses, it is expected that the fair value of these instruments will be way lower than their nominal value thus imposing a significant haircut on converted deposits.

7/ Voluntary bail ins have two fundamental flaws: 1- they create inequality between savvy depositors who will refuse to participate and less financially literate depositors who will accept the offer. 2- Banks might be unable to raise the necessary capital and will be taken

8/ over by the central bank, thus transferring their losses on BDL’s balance sheet and leaving it with the duty of recapitalising them. On another note, BDL credit loss assessments are obviously underestimated and the time frame (5 years) for raising the capital is overstretched.

9/ Therefore the path chosen by BDL is to gradually resolve the imbalances. The IMF and the international community preference is for more decisive actions through a legislative framework which will force immediate recognition of losses for the system and its creditors including

10/ depositors. While foreign funding is conditioned by an agreement with the IMF, the next government will have to make a hard choice between Lebanese way “practical” expertise (to paraphrase the ABL chairman) or internationally accepted financial orthodoxy.

11 / The depletion of BDL reserves leads to hyperinflation and a greater economic collapse and might prevent the domestic solution from proceeding, thus forcing the next government to resort to the IMF and its views regarding reforms including financial sector restructuring.