International Standards Must Support a Fair Solution, not Substitute for One
To the IMF Mission Team to Lebanon,
Your visit to Lebanon comes at a consequential moment. Parliament’s Finance and Budget Committee is preparing to examine the draft Financial Gap Law and, shortly thereafter, the draft 2027 Budget Law. These are not ordinary pieces of legislation. Together, they will determine how the losses accumulated during Lebanon’s financial collapse are allocated, how depositors are treated, what obligations are assigned to the state, the Banque du Liban and commercial banks, and how the social and fiscal costs of recovery will be distributed over the coming years.
The timing of your mission therefore gives it significance beyond technical consultation. The discussions taking place today may materially influence legislation that will define property rights, institutional responsibility and economic security for an entire generation. Lebanon needs a credible agreement with the IMF. It needs fiscal discipline, a viable banking system, sustainable public debt, reliable financial data and restored access to the international financial system. But the legitimacy of any program will depend not only on whether its numbers balance; it will also depend on whether the burden of adjustment is allocated fairly, transparently and lawfully.
International standards can guide bank resolution, loss recognition and financial-sector rehabilitation; they cannot, by themselves, determine what constitutes justice among Lebanese stakeholders. Decisions concerning who absorbs losses, how much each party contributes, which deposits receive protection and how depositors are repaid are not merely technical questions. They are fundamentally distributive choices requiring explicit legislation, public scrutiny and domestic democratic legitimacy. We therefore invite the IMF mission to support the following safeguards.
1. Clearly and Transparently Define and Establish the Losses Before Allocating Them
Lebanon should not distribute a financial gap that has not been independently and credibly established. The implementation of the Financial Gap Law must be preceded by transparent assessments of each commercial bank, the Banque du Liban and the state’s financial obligations. Asset valuations, recovery assumptions, exchange rates, sovereign claims and the treatment of accumulated interest must be disclosed and subjected to independent verification.
The gap should initially be established at the level of each bank. Lebanon’s crisis became systemic in its consequences, but this does not mean that all banks were equally managed, took identical risks or bear the same degree of responsibility. A sector-wide aggregate must not be used to conceal institution-specific losses or dilute accountability.
2. Preserve a Clear and Binding Loss Hierarchy
Deposits are contractual liabilities of banks and private property belonging to depositors; they are not risk capital. The law must therefore establish an unambiguous loss hierarchy under which shareholders absorb losses before subordinated creditors and ordinary depositors. Bank capital, eligible reserves and subordinated instruments must perform the loss-absorbing function for which they were created. Recoveries from misconduct, preferential transactions, illicit enrichment and unjustified transfers should also contribute to reducing the gap, subject to due process and judicial review.
A depositor should not be compelled to absorb losses while bank owners retain economic value or while legally recoverable assets remain outside the resolution framework.
3. Distinguish Depositor Protection from the Extinguishment of Depositor Rights
Lebanon needs an Economic Security Floor that gives small and vulnerable depositors timely access to genuinely liquid funds. This floor should protect livelihoods, medical needs, education, retirement income and the accumulated savings of ordinary families. But the protected amount must not be presented as the full measure of a depositor’s legal entitlement. Receiving an initial protected amount should not extinguish the remaining claim. Therefore, the law must clearly distinguish between:
- the immediate amount made available for economic and social protection; and
- the depositor’s continuing legal claim to the unpaid balance.
The unit of protection must also be stated explicitly. Whether protection is calculated per account, per bank or per depositor across the banking system produces radically different outcomes. This choice cannot be left to subsequent regulations or administrative discretion.
4. Prevent a Disguised Market Haircut
A nominal promise is not necessarily economic recovery. A depositor who receives a long-dated instrument with limited liquidity may be forced to sell it in a secondary market at a substantial discount. The law may claim that the deposit was preserved at nominal value, while the depositor experiences a severe economic haircut. Therefore, any proposed repayment instrument must therefore disclose:
- its maturity and repayment schedule;
- its expected present value;
- its issuer and legal guarantees;
- its interest or indexation terms;
- its priority in repayment;
- the conditions for early redemption;
- its potential use in settling taxes or other public obligations; and
- the rules governing its secondary-market trading.
Depositors must not be driven by necessity into selling their claims to better-informed or better-capitalized investors at distressed prices.
5. Reject Compulsory Conversion of Deposits into Equity
No depositor should be transformed involuntarily from a creditor into a shareholder of the institution that failed to repay the deposit. A voluntary debt-to-equity conversion may be offered to a properly informed depositor as one option among several. It should not be imposed as a substitute for repayment. Consent must be genuine, documented and based on adequate disclosure of the bank’s financial condition and the risks attached to the shares offered.
6. Apply Claw-backs Through Law, Evidence and Due Process
Lebanon must investigate unlawful gains, insider advantages, preferential transfers and exceptionally abusive interest arrangements. But legitimate depositors must not be treated collectively as suspects.
A transfer should not become unlawful merely because it occurred before the crisis or because the beneficiary exercised a legal right. Claw-backs must rely on defined legal criteria, evidence, proportionality and access to judicial appeal. The proper objective is to recover unjust enrichment and the proceeds of misconduct, not to retroactively criminalize lawful financial behavior.
7. Pursue Repayment and Accountability in Parallel
Depositors should not have to wait for years until every judicial proceeding is concluded before receiving meaningful access to their money. At the same time, repayment mechanisms must not close the file of responsibility. Therefore, efforts should be directed towards two parallel tracks:
- a timely bank-resolution and deposit-recovery process; and
- an independent accountability process covering bank boards and executives, external auditors, public officials, Banque du Liban decision-makers and beneficiaries of unlawful preferential treatment, wherever responsibility is established.
Recovered assets should be directed toward depositor recovery rather than absorbed into general public expenditure.
8. Keep Essential Rights in the Law
The Financial Gap Law must itself determine the matters that directly affect property rights. Definitions of eligible deposits, protection thresholds, loss hierarchy, repayment periods, claim classification and appeal rights should not be delegated to future decrees or central-bank circulars.
Secondary legislation may regulate implementation; it must not be allowed to rewrite the substance of depositor rights.
A Request for Distributional Transparency
For every major version of the proposed law, the Lebanese authorities, with the technical support of the IMF, should publish a distributional-impact statement answering five basic questions:
- Who bears the losses?
- How much does each stakeholder contribute?
- In what form and over what period?
- What is the present economic value of what depositors receive?
- How does the plan perform under adverse liquidity, fiscal and economic scenarios?
At least three scenarios (baseline, adverse and favorable) should be disclosed. A recovery plan that works only under optimistic assumptions is not a credible recovery plan.
A Program Must Be Financially Sound and Socially Legitimate
The IMF properly seeks a banking strategy consistent with available liquidity, fiscal sustainability and international resolution principles. Lebanon, however, must also protect constitutional rights, social stability and the economic security of its citizens.
These objectives are not mutually exclusive. A program that ignores liquidity will fail financially. Equally important, a program that ignores justice will fail politically, socially and ultimately economically.
Lebanon does not need an agreement that merely distributes accounting losses. It needs a framework that restores a functioning banking system, establishes accountability, gives depositors a credible path to recovery and rebuilds trust.
We therefore ask the IMF to judge the Financial Gap Law not only by whether it closes balance sheets, but also by whether it:
- preserves the loss hierarchy;
- protects small and medium depositors;
- prevents disguised or involuntary haircuts;
- preserves legal claims to unpaid balances;
- avoids compulsory conversion into equity;
- establishes credible accountability; and
- creates a transparent and executable path toward restoring deposits and normal banking activity.
The IMF negotiates to protect the credibility and financial integrity of the program it may support. Lebanon’s constitutional institutions must negotiate to protect the Lebanese public. A successful agreement must satisfy both responsibilities.
International standards should help Lebanon identify a workable solution; they must not be used to conceal who pays, who is protected and who is released from responsibility.