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The Central Bank of Lebanon will lose its immunity, and Lebanon will lose the gold medal and the Middle East

Jun 29, 2021
The Central Bank of Lebanon

The Central Bank of Lebanon will lose its immunity, and Lebanon will lose the gold medal and the Middle East

So far, more than a year and a quarter have passed since the state announced its failure to pay the Eurobonds, more than half of which are held by foreign creditors and investment funds, while about 19 months have passed since the banks stopped making money transfers for the benefit of their depositors abroad. Eurobond holders have yet to strike their legal blow in US courts,

Although the bond subscription contracts give the New York courts the authority to decide any dispute that arises with the Lebanese state, while the state has not yet initiated a credible plan to restructure their debts. As for the holders of deposits abroad, despite some sporadic lawsuits that were talked about in the media, they did not initiate more effective steps, such as targeting the assets of the Banque du Liban abroad through legally empowered collective lawsuits.

Legal experts assert that Eurobond holders have coalesced from the beginning into joint pressure groups to coordinate their next steps. A large part of these investors are actually investment funds that specialize in this kind of thorny paths, namely those funds that buy bonds of troubled countries and companies at low prices in an attempt to collect more of their value later. For this reason, the creditors have so far been stalking Lebanon, waiting for the best moment, either to open legal tracks in the New York courts, or to enter into negotiations with the Lebanese state using the legal track as a means of pressure.

For creditors, the best moment to open the legal paths to Lebanon depends precisely on the immunities that the Lebanese state and its central bank have before foreign courts. These immunities are not a fixed issue over time, but rather change according to the mistakes and missteps committed by the state and the central bank, to the point of completely dropping some of them in some cases.  At the present time, it seems that the Lebanese state and the Banque du Liban have recently committed enough mistakes to facilitate the task of Eurobond holders, if they want to seize the assets of the Banque du Liban abroad, whether with regard to the gold stock in the United States, or the foreign currency reserves deposited. Correspondent banks.

The immunities of the state and the Bank of Lebanon .. and its limits

For Eurobond holders, US law represents the main reference that will settle any dispute that arises between them and the Lebanese state, since the bond contracts have primarily identified New York courts as the courts that have the power to decide on any lawsuit related to these bonds. American law, gave state property related to its diplomatic and military activities almost absolute immunity, In the sense that creditors do not have the ability to demand seizure of these assets against the background of the state’s failure to pay its debts. Since the state does not actually own other assets of an investment or commercial nature, it is difficult to expect any prejudice to the state’s direct assets in general.

The other target of the creditors will inevitably be the assets of the Banque du Liban located abroad, especially since the bank still possesses more than $15 billion in liquidity deposited in foreign correspondent banks, and has gold reserves exceeding $17 billion, a large part of which has been deposited in the United States of America. That is, under the hands of the American judicial system. In addition to all of this, the Banque du Liban owns the Middle East Airlines, which owns a fleet of planes that roam the world’s airports, which can be seized if creditors succeed in convincing foreign courts that it is permissible to target the properties of companies owned by the Central Bank.

American law gives central bank assets relative immunity, that is, non-absolute immunity, in a way that its scope depends on the degree to which these assets are used within the normal tasks of central banks. In other words, if the US courts find that these assets are not used within the business of central banks, but are used as state assets, or as other investment assets, the immunity for these assets will be automatically dropped, and they will be subject to seizure by creditors seeking about their rights.

Noting that legal sources confirm that the problem of immunity owned by the Central Bank is related to the possibility of exposing its liquidity and gold to seizure, whether by Eurobond holders or by deposit holders located abroad, if they were able to link between the aspects of using the assets of the Banque du Liban and the method of squandering depositors’ money.

The immunity of the Banque du Liban is at stake

In principle, the ability of the Banque du Liban to impose immunity on its assets began to decline since October 2019. The reserves that can be used to intervene in the currency market when needed, as is the case in the vast majority of central banks around the world, have turned into one of the permanent sources of financing to support imports. Without any plan to get out of this reality. Rather, these reserves have turned into a source of financing for other issues such as financing cards, industry financing funds, and others. This is not consistent with the tasks usually entrusted to central banks or the assets of these banks. Rather, these tasks seem closer to the roles that governments are supposed to finance during crises. Thus, the Eurobond campaign has been watching the accumulation of these errors during the past months, so that they can use them in any legal lawsuit that could target the assets of the Central Bank, or against the state during any future negotiations.

However, during the past days, the Banque du Liban added to these mistakes and missteps a new issue, represented in its approval to lend the state from the mandatory reserves deposited by the banks with it, based on special articles in the Monetary and Credit Law. Practically, it can be said that the borrowing of any government from its central bank is a regular issue that is consistent with the tasks of central banks. But the use of mandatory reserves, which are supposed to be the last guarantee of depositors in the financial system, for the purpose of financing government spending, means nothing but a lack of separation between the treasury of the Central Bank and the liquidity available for spending by the government. This contradicts the nature of the assets of the central banks, which opens the door to targeting the assets of the Banque du Liban abroad.

The danger of this development lies in the fact that it not only opens the door to targeting the assets of the Banque du Liban by Eurobond holders, but also by foreign creditors of the financial system, i.e. depositors abroad, especially since they are considered legally the owners of the economic right to these reserves, which were Requiring banks to deposit them with the Banque du Liban as a guarantee for depositors. From the legal point of view, these guarantees cannot be used for any purpose other than those on the basis of which banks were obligated to deposit this liquidity with the Banque du Liban, that is, to guarantee the right of depositors to their money.

Creditors and playing with cold nerves

Mystery hangs over the Eurobond holders, who have not yet taken the initiative to make any statement, or express any opinion, and even that the identities of many of them are still completely unknown. Simply put, these investors are good at playing with cold nerves and realize that time is on their side, given the fatal legal errors that are accumulating in the state registry and the Banque du Liban. Knowing that they are also aware that the value of the gold and liquidity reserves located abroad, which are owned by the Banque du Liban, still range at much higher levels than the value of the Eurobonds they hold, which allows them to collect the value of the bonds once the immunity from the assets of the Banque du Liban is lifted in the future.

At the appropriate time, the moment of legal confrontation in foreign courts will come, or at least the moment of negotiation with the Lebanese state using the legal papers available in the hands of the creditors. And at that moment, the country will bear the cost of all those fatal legal mistakes and missteps, which basically started to stop paying without having any clear plan for how to negotiate to restructure the public debt, and then enter the tunnel of collapse without any plan to get out of it. The new dilemma will not only be how to manage liquidity and gold reserves, but perhaps how to preserve and protect them as well.

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