The Eurobond tax dispute risks taking cash from the very banking system expected to repay depositors.
Lebanon’s latest banking dispute raises a question that reaches far beyond taxation: when the state seeks money from banks still struggling to repay their customers, who ultimately pays?
The Finance Ministry presents its position as enforcement of existing tax law. Banks argue that the treatment of their Eurobond losses risks creating a tax burden disconnected from their financial condition. For depositors, the concern is simpler: could another payment to the Treasury leave less money available to return their savings?
On this issue, there is a strong economic case for supporting the banks’ objection. A government should be exceptionally careful about extracting liquidity from institutions damaged by its own unpaid debts.
But that argument must begin with an accurate account of the dispute.
In its 3 November statement, the ministry said banks should correct tax returns that deducted unrealized Eurobond losses. It cited a January 2025 legal opinion supporting its interpretation. It also said it had not yet examined the relevant banks’ tax files and issued assessments. The widely reported $600 million should therefore not be presented as a final, established bill.
The ministry’s example is straightforward. A bond falls from one dollar to six cents. Banks deduct the decline when calculating taxable results. The bond later recovers to around 25 cents, so according to the ministry this paper recovery is taxable.
From the banks point of view, the recovery from six cents to 25 cents still leaves an asset worth a quarter of its original face value and a bond 75 cents in the red or at a loss. For a bank that bought at par (100), this is a partial recovery within a severe loss. For a buyer that acquired the same bond at six cents, the economics would be very different.
Acquisition cost matter and the audacity is staggering: the Lebanese state defaults on its own bonds, fails to repay its creditors, then seeks to tax them on a partial paper recovery of the very debt it refuses to honour. It does not pay what it owes—but expects cash from those it has left unpaid.
Banks have also argued that the collapse of the Lebanese pound inflated the local-currency value of their dollar bonds without restoring their dollar value.
Their underlying concern is compelling. A larger number in Lebanese pounds does not necessarily mean greater capacity to repay a dollar depositor. Nor does an accounting recovery automatically produce cash.
2. What happens when the bonds recover some value?
The ministry gives this example:
|
For a bond originally worth $100 |
Value |
|
Value after its collapse |
$6 |
|
Loss banks deducted, according to the ministry |
$94 |
|
Value after a subsequent recovery |
$25 |
|
Recovery the ministry says was not added back to taxable results |
$19 |
Its argument is that banks cannot deduct a paper loss and then ignore a paper recovery. These figures illustrate the ministry’s position; they are not a calculation of every bank’s liability.
Why are banks objecting? They say they still face substantial dollar losses and have received no cash from an unsold bond’s recovery. They also challenge exchange-rate calculations that, they argue, recognise historical losses at around LBP1,500 per dollar while calculating certain gains at LBP89,500—potentially producing taxable lira profits despite dollar losses.
For depositors, the concern is liquidity: paying additional tax could leave banks with less cash available for repayments. $600 million remains the banks’ estimate of the exposure, not a confirmed final assessment.
That distinction should guide public policy.
A tax adjustment can be legally justified while its immediate collection creates an economic problem. If a bank funds payment by selling assets that would otherwise support customer repayments, the Treasury gains liquidity while the pool available to creditors shrinks.
The strongest defence of the banks is therefore a demand for a coherent recovery policy. Fiscal enforcement, sovereign debt restructuring and deposit repayment should be designed together. Otherwise, one arm of the state can collect money (the finance ministry) while another (BDL) promises that the same damaged institutions will restore savings.
Supporting the banks on this issue does not require overlooking their responsibilities. It requires recognising that weakening their capacity to repay creditors can hurt the very people reform is supposed to protect.
Coming from a state that, by BDL’s estimate, owes its central bank well over $50 billion yet refuses to repay, this has a Machiavellian logic to it: reach the banks’ remaining cash through taxation before it can be mobilised for depositors. The state demands payment from its creditors while withholding its own—leaving savers to bear the consequences yet again.
Lebanon should judge this dispute by the cash ultimately returned to depositors. A Treasury receipt is a poor measure of success if it comes at the expense of another family’s savings.
The state should not turn the damage from its unpaid debts into another claim on the people still waiting to be repaid.