Lebanon to Haircuts?

Are we heading for capital control and haircuts in the coming few months?

Apparently Lebanese officials have finalized their decision and are going for official negotiations to name the future prime minister, most probably Samir Al Khatib, that will head and form the future government cabinet in Lebanon.

The drastic decline of the economic situation in Lebanon has reached an unprecedented situation and the hopes that a new government can rescue us from drowning are highly inaccurate. Why is that?

Lets consider a simple financial view: 

• Lebanese bank deposits are around $170 billion. 
• Bank Du Liban (BDL) has borrowed from the banks $110 billion.
• Government debt is around $90 billion. 
• Local loans and international investments are around $40 billion, thus they won't be able to liquidate them easily.
• The law requires a bank to keep only 10% of their deposits, meaning banks in Lebanon have no more than $20 billion in their safes.

Yes, we are heading for a crisis, banks cannot get their money from the central bank as this money has been spent by irresponsible and corrupt governments and ministers for the past 30 years.

Right now we stand against two options, bankruptcy or haircuts.

Bankruptcy means that the government will fail to pay it's dues for investors thus will reach out for the help of the world bank who will definitely demand highly increasing taxes in order to guarantee and secure the payment of its loans. 

Haircuts means the government along with the central bank will chose to cut a certain percentage from large bank accounts. For example if a 40% cut was to be made on a $1 million account, it will become $600 thousand. Knowing that $90 billion are within 1% of the depositors. Such an action would have a good effect in enhancing the economy and reducing the dept.

If it was up to me, I would definitely vote for haircuts.

Wissam