Lebanon’s State Council Decision on the Banks’ Deposits: Sanctifying the Profane and Profaning the Sacred


2024-07-15    |   

Lebanon’s State Council Decision on the Banks’ Deposits: Sanctifying the Profane and Profaning the Sacred

On 6 February 2024, the State Council issued its decision on the case that the Association of Banks in Lebanon (ABL) had filed against the state to prevent the “cancellation of the central bank’s [Banque du Liban] debts to the banks” – a clause that appears in the economic recovery plan that the government adopted in 2022. The decision held that deposits, as well as debts, enjoy the sanctity of private property and that the state is required to cover the gap caused by the central bank’s cumulative losses, especially as the state used the banks’ deposits to the central bank to cover public burdens. Strikingly, it was issued on the same day as the leak of a draft bill that was prepared in coordination with the International Monetary Fund and would protect a portion of the deposits while subjecting the remainder to a “haircut” of up to 80%. As soon as the decision was published, the ABL used it as a propaganda tool to defeat the draft bill before the ministers could even debate it.

 

Before discussing the arguments underpinning the decision, I must point out that the State Council relied on its own legal interpretation to justify taking this case. It sought to issue a decision on the legality of the government’s strategy even though its jurisdiction is limited, by law and jurisprudence, to harmful decisions already in force (as opposed to just a plan) and that, in any case, fall within the purview of the administrations subject to its review (as opposed to those that fall within the purview of Parliament, which is subject exclusively to the Constitutional Court). The ruling bench went in this direction based on flimsy arguments and even though the rapporteur judge’s report and the government commissioner’s submission both concluded that the case should be dismissed for this very reason. The State Council’s enthusiasm in this regard reflected the enthusiasm of its president, who had taken the initiative to prepare a draft bill to address the deposits issue months before the decision was issued. This draft, which he promptly deposited with the Parliament Speaker’s Office, contained ideas and views that in some ways constitute a preconceived opinion on the case he would go on to examine, in contravention of the duty of restraint in its classical sense.

 

However, and while I do not wish to downplay the gravity of the aforementioned actions of the State Council and its president, this article will merely discuss the essence of the decision. At the very least, this decision expresses a judicial opinion that will be raised again before the Constitutional Council or other judicial authorities if Parliament ends up putting the government’s plan into effect.

 

Creditors’ Rights Are Property Rights Protected Under Article 15 of the Constitution?

 

In this regard, the State Council discussed the nature of the legal protection for deposits and, by extension, debts. Are they considered property rights, in which case they would, like any public or private property, enjoy the legal protection of Article 15 of the Constitution and could only be appropriated or erased in exchange for compensation and in cases of public interest? Or are debts mere personal rights that do not fall under the definition of property? This question is being raised for the first time in Lebanon as Article 15 has previously only been applied to real estate and rights in rem. No official authority has previously applied it to debts or personal rights, which are by nature tied to the debtor and trust in this person. The State Council stated that it drew its stance from decisions by the French Constitutional Council and the European Court of Human Rights (ECtHR) and from some schools of French legal doctrine, which has split between supporters of the classical theory of property that ties the right to property to rights in rem and supporters of the modern theory of property that takes a broader approach to it. After a lengthy survey of these sources, the State Council decided that the “right to property” mentioned in Article 15 of the Constitution, which has always been interpreted as being limited to in-rem property, also encompasses debts and deposits, which means that states have an obligation to secure the repayment of debts or compensation for the creditors should they be canceled. It never bothered – not even for a moment – to gauge the impact of this stance on a country now languishing under debts many times larger than its national income. Thus, the State Council treated legal principles and concepts as though they are self-existent and totally unconnected to the exigencies of public interest, and as though their understanding and scope can be changed without any consideration of the social harm or risks that could ensue.

 

Even more remarkable is the fact that the State Council justified this leap with a series of material and linguistic errors that included mistranslating the French Constitutional Court’s decisions. These errors undermine and expose the flimsiness of its arguments.

 

The first error was the confusion of the French Declaration of the Rights of Man and of the Citizen (1789) with the Universal Declaration of Human Rights (UDHR). Because of this error, the decision deemed the former’s provisions to be part of the Lebanese legal system. In reality, this document has no legal force in Lebanon, unlike the UDHR, which has constitutional force per the Constitution’s Preamble. This issue constitutes conclusive evidence that the State Council lacks sufficient knowledge of international legal texts and, by extension, texts that have constitutional force. It raises real questions about the State Council’s qualifications to innovate new readings of the concepts and rights that appear in the Constitution.

 

While this error’s practical effects on the decision remain limited (because Article 15 of the Constitution and Article 17 of the UDHR, which actually is binding for Lebanon, include similar provisions to the French declaration), the State Council’s second error determined the direction of the whole decision. This error consisted of reversing the meaning of the French Constitutional Council decisions that the State Council declared itself to be following. After mentioning a French source that states that the French Constitutional Council has ruled out the notion that debts could be considered a component of the right to property as intended by Article 17 of the Declaration of the Rights of Man and of the Citizen (lest the state become obligated to ensure the collection of debts or compensation for the creditors), the State Council translated this source into Arabic in a manner contrary to its meaning. Thus, it deemed that the French Constitutional Council has stated that “the state’s constitutional obligations include securing the repayment of debts or compensation for the creditors if the debts are canceled” and then declared its support for this mistranslated stance.

 

This error is especially egregious because it caused the State Council not only to agree that debts are an element of property but also to approve the practical consequence of that determination, namely that the state is responsible for ensuring their repayment, all without even asking itself what could happen if the state is unable to do so. Note that the French Constitutional Council, which exists in a country whose finances are relatively regulated, was apprehensive about making any such declaration because it could cause a burden for the state and so refrained from doing so. As for the Lebanese State Council, which issues its rulings in a country languishing under debts, it had no qualms about rushing toward such a declaration, in a decision issued outside of its jurisdiction, without spending even a moment to ponder the practical consequences, not even the impact on the proper functioning of the justice system to which it belongs.

 

The State Council’s third error consisted of citing old decisions by the ECtHR that added special protection to creditors’ rights while failing to mention the decision that the same court later issued in Mamatas and Others v. Greece (2016) or the guide that it published in 2022. The guide says that states have the power to regulate or impose restrictions on the right to property in accordance with public interest, and that when assessing whether the intervention in property rights is proportionate to its desired goal, a court must determine whether a fair balance was struck between the demands of public interest and protection for the fundamental rights of specific persons. Paragraph 347 states that: “The stability of banks and the interests of their depositors and creditors deserve enhanced protection. The national authorities enjoy a broad margin of appreciation in choosing how to deal with such matters”. This suggests that the court considers monetary stability to be a public interest that justifies restricting the right to property under certain circumstances. Indeed, in Mamatas and Others v. Greece, the ECtHR deemed the state’s intervention via the imposition of property-restricting measures aimed at reducing public debt to be justified because it pursued a legitimate goal, namely “preserving economic stability and restructuring the national debt at a time of a serious economic crisis” (as mentioned by Paragraph 442 of the guide).[1] Following this jurisprudence would invalidate the conclusions that the decision reached even if it were right to protect debts as private property, as restricting the exercise of the right to property is justified in the case of an established public interest, namely addressing the fallout of the financial and social crisis. Unfortunately, the State Council turned a blind eye to this jurisprudence. It thereby deprived itself of the opportunity to assess the efficacy of the governmental strategy in light of the current circumstances, instead of merely unleashing value judgments that are open to debate, at least from the standpoint that they are totally divorced from reality.

 

Given the above, and besides the fact that the decision was rife with legal and methodological errors and contradictions, it in practice exacerbated the problems to the point of incapacitating the state instead of contributing to the development of a methodology for overcoming them. It would have been far better if the decision had merely laid down broad principles to underpin fair and possible solutions for dividing the losses and protecting whatever deposits possible. Such principles could include justifying any derogation from any right on the basis of public interest and after putting it to the proportionality test, withholding protection from illegitimate deposits or obscene interest, strengthening protection for deposits that serve a social purpose or deposits by nonprofessionals, and completing the forensic audit of the financial engineering and similar illegal activities. Instead, the decision raised a yellow card (i.e. the sanctity of deposits) that the banks then rushed to exploit in order to further their influence, to obstruct any solution that pays any minimal regard to public interest, and perhaps to – worst of all – impose a solution that results in the banks taking possession of the state’s property and public utilities (and therefore its inherited, present, and future resources) in order to recover their deposits.

 

Reward Without Risk

 

In addition to the first argument mentioned above, the State Council justified its decision to nullify the erasure of the banks’ deposits with the central bank on the basis that it means, in practice, allocating them to paying the bill of public burdens (the public budget’s deficit in previous years). As a result, the State Council contended, the banks (and by extension their depositors) would be charged with a greater burden than that borne by others, in contravention of the principle of citizens’ equality before the law.

 

In reality, this argument does not hold up to an examination of the conditions under which these deposits with the central bank were generated or of their cost, which was probably the direct cause of the financial collapse that the state is still languishing under. The forensic report by Alvarez & Marsal found that the deficit in the central bank’s budget only occurred after the financial engineering commenced and that the cost of this engineering is almost equal to the bank’s total losses. Note that the report also mentioned that the audit firm was unable to conduct the investigations needed to determine the circumstances under which this engineering was accomplished, how the beneficiary banks were chosen, the terms of the contracts with them, or the source of the exorbitant commissions that the banks paid in the context of these transactions to parties sometimes unknown. The firm stated that the report should be complemented with these investigations. Furthermore, economist Tawfiq Kasbar has established that the banks distributed USD25 billion in profits made through financial engineering to their shareholders during the pre-crisis years. This data shows that there is strong suspicion that this engineering (along with the generation of the banks’ deposits to the central bank) occurred as part of a criminal scheme that witnessed several banks partner with the central bank’s governor, in what could constitute a criminal association, to commit one of the biggest crimes to have occurred in Lebanon. This scheme has placed the heaviest public burdens in Lebanese history onto the central bank’s shoulders, ultimately appropriating depositors’ money, impoverishing broad sections of the population, and destroying public utilities, services, and functions.

 

Despite all these suspicions, the State Council had no qualms about declaring all the deposits generated amidst this engineering sacred or – worse – declaring the banks a victim of an unequal distribution of public burdens. In this regard, the decision is especially egregious and absurd because State Council President Fadi Elias (who also presides over the chamber that issued the decision) was fully aware and convinced of the illegitimacy of the financial engineering, as is clear from the bill that he drafted for the purpose of preserving the deposits and that was then adopted and presented by the Development and Liberation bloc. This bill explicitly states that the banks must repay their revenue from financial engineering that occurred from October 2015 onwards. Apparently, the State Council consciously chose to separate the principle of equality before public burdens from the inequality represented by the effective appropriation of public funds through financial engineering. It chose to declare, almost explicitly, that the party reaping the rewards – i.e. the banks – need not shoulder any of the risk, which in practice falls on the people.

 

Harnessing the State to Pay the Deficit in the Central Bank’s Accounts

 

The third argument that the decision made is derived from Article 113 of the Money and Credit Code, which obliges the state to cover the deficit in the central bank’s budget using resources from the public treasury. According to this argument, the government must work to secure the necessary resources to repay all the central bank’s losses (a gap of USD60 billion, according to the decision), rather than write off these losses by erasing the banks’ deposits.

 

In reality, this stance conflicts with the text of the article itself, which talks unequivocally about the deficit in the outcome of a given year. This accords with the principles of public accounting, which dictate that the state budget be decided year by year via a law issued by Parliament after the losses that occurred in the central bank’s accounts are ascertained. In other words, the state must, according to this text, cover the deficit in the central bank’s budget year by year via the annual public budget. As for the State Council’s interpretation that this article requires the state to assume the burden of losses that the central bank’s governor chose to conceal and cover up for years while declaring a profit in the bank’s records (as the forensic audit report established), it is just as absurd as the arguments discussed above.

 

Besides contradicting the Lebanese system and the principle of annual budgets, charging the state with covering billions of dollars of losses deprives it of the ability to source the resources that it needs to perform all its other functions, including guaranteeing civil, social, and economic rights, ensuring the proper functioning of the public services, and protecting the nation.

 

Conclusion

 

The State Council endeavored in its decision to sanctify the banks’ deposits, irrespective of whether they are legitimate, while laying great burdens on a state already languishing under debts. It is thereby preventing the state from performing the noble functions related to guaranteeing socioeconomic rights that it exists to fulfill. In other words, the decision sanctifies the banks’ deposits that stem from “suspicious” financial engineering while profaning the state and its functions.

[1] European Court of Human Rights, “Guide on Article 1 of Protocol No. 1 to the European Convention on Human Rights: Protection of property, Updated on 31 August 2022”. Note that the guide has since been updated in a manner that changes the numbering of the paragraphs cited.

 

This article is an edited translation from Arabic.

Share the article

Mapped through:

Articles, Banks, Economy, Industry and Agriculture, Lebanon, Public Properties



For Your Comments

Your email address will not be published. Required fields are marked *