Freezing the assets of a former Turkish minister amid the investment funds crisis and Lebanon’s talks with the IMF

The Turkish authorities froze the assets of the former minister and vice president of the ruling Justice and Development Party, Fatma Betul Sayan Kaya, and her husband, Ilyas Kaya, in the latest development in an investigation related to an investment fund crisis that shook the markets and affected more than 455,000 investors.

The Istanbul Public Prosecution said, in a statement, that it had sent to the relevant institutions a request to freeze all of Kaya and her husband’s assets, as part of ongoing investigations into transactions in the capital markets.

Kaya had resigned from her position in the leadership of the ruling party at the weekend, after accusations launched by the opposition New People's Party that she and her husband had made large profits from stock trading before the outbreak of the investment funds crisis. Kaya denies committing any wrongdoing, and said that her resignation came to bear “political responsibility” and allow the investigation to be conducted in an independent and impartial manner.

According to the accusations reported by the opposition, the couple invested about 63 million liras ($1.3 million) in shares during April, before selling them in September for about 1.3 billion liras ($26.5 million). The authorities have not yet announced that these numbers represent a final result of the investigation. Kaya served as Minister of Family between 2016 and 2018.

The expansion of the investigation coincided with a meeting held by President Recep Tayyip Erdogan, on Tuesday, with his economic aides to follow up on the repercussions of the crisis, after he had previously defended his party’s record, stressing that the “Justice and Development Party” could not be tainted by this issue.

The crisis exploded in mid-September, after a number of investment funds were unable to meet investors' requests to recover their money, which led to a wave of turmoil in the Turkish stock market. The Turkish Capital Markets Authority ordered the liquidation of 131 funds managed by 7 companies, with the value of their assets amounting to about 18 billion dollars, while the authority said that 455,758 individual investors were affected by the decision.

The authorities are investigating transactions related to a number of companies and funds, while previous measures included freezing the assets of individuals and entities and arresting suspects in the case. The government also formed the “Funds Coordination Council,” headed by the Vice President, to supervise and accelerate the liquidation process and protect investors’ rights.

The Director General of the International Monetary Fund, Kristalina Georgieva, has placed the draft financial regulation and deposit recovery law, or what is known as the “Financial Gap Law” draft, at the heart of the path that is supposed to lead Lebanon to a new program with the Fund. She confirmed, after her meeting in Washington with Prime Minister Nawaf Salam and Finance Minister Yassin Jaber, that the progress Beirut has made in reforms has pushed it forward towards a new program, and that the “Gap Law” and the “Medium-Term Public Finance Framework” will be essential for restoring stability and laying the foundation for To grow.

The meeting came at a time when Lebanon was seeking to resume negotiations, as the two sides agreed that a delegation from the International Monetary Fund would visit Beirut after the annual meetings of the Fund and the World Bank, with the aim of resuming negotiations and making progress towards an agreement.

The meeting discussed the course of negotiations, the progress achieved in financial and banking reforms, and the steps required to reach an agreement, while Georgieva affirmed the Fund’s readiness to continue working with the Lebanese government and build on what has been achieved, noting its performance in public finance management and budget preparation, and the steps taken to restructure the banking sector and enhance financial discipline, according to what was published by the Presidency of the Government.

The return of the Fund delegation to Beirut comes after the adoption of the banking sector restructuring law, while the financial regularity and deposit recovery project is still awaiting the completion of its legislative path. The Fund had considered the amendments to the Banking Reform Law an important step, but in September it stressed the need to harmonize legislation related to deposits and losses with international standards, in addition to adopting a credible medium-term financial framework.

Salam: Discussion of the law within days

In an exclusive interview with Al Sharq Bloomberg, Lebanese Prime Minister Nawaf Salam said that the House of Representatives is expected to begin discussing the draft “Financial Gap Law” within days, describing the law as a “cornerstone” that allows Lebanon to reach an agreement with the IMF.

Salam explained that referring the project to the House of Representatives does not necessarily mean its approval in its current form, expecting that some of its provisions and numbers contained therein will be subject to review and amendment during the legislative process.

This comes as the Parliamentary Finance and Budget Committee has not yet begun discussing the project as expected, amid disagreements regarding the formula on which the committee should begin work, and the government’s role in introducing amendments before the start of the parliamentary debate.

What does the project address?

The project bears the name “Financial Regularity and Deposit Recovery Law,” and constitutes the legislative framework to address the accumulated losses in the Lebanese financial system since the collapse of the banking sector in 2019.

The project is not limited to organizing the return of depositors’ money, but rather defines the framework through which losses will be dealt with and distributed between the state, the Bank of Lebanon, banks, shareholders, and creditors, in parallel with developing a mechanism to gradually recover deposits.

The Lebanese government estimates losses due to the financial crisis at about $70 billion in 2022 estimates, while Finance Minister Yassin Jaber told Reuters that the size of the losses that must be distributed between the state, the Bank of Lebanon, banks, and depositors may be higher now. He said that the adoption of the gap law represents a condition for moving towards a full program with the IMF.

The sensitivity of the project lies in the fact that the law cannot return the money lost by the financial system, but it determines who will bear the losses, in what order, and how a portion of the deposits can be returned to their owners over a time frame commensurate with the capacity of the banking sector and public finances.

The order of losses at the heart of the dispute

The arrangement for bearing losses is one of the most sensitive points in Lebanon’s negotiations with the Fund. In September, the IMF stressed the need to respect the hierarchy of claims, and that depositors should not bear losses before shareholders and creditors of lower rank. He also called for the deposit repayment mechanism to be consistent with the ability of banks to continue and with the sustainability of public debt.

The Fund thus links the protection of depositors with the rebuilding of a viable banking sector, as the recovery of deposits cannot be separated from the ability of banks to rebuild their capital and from the size of the obligations that the state can bear without undermining the sustainability of public finances.

The Fund had confirmed in February that the draft “Financial Stability and Deposit Recovery Law” represents a first step towards rehabilitating the banking sector and granting depositors gradual access to their funds, but it stressed the need to respect the order of priorities, and that depositors should not bear losses before shareholders and secondary creditors.

Disagreements delay project approval

In Beirut, the project faces disagreements over the wording, numbers, and distribution of losses, while the Finance and Budget Committee has not begun its meetings to discuss it as expected. Reports indicate a difference in views between the government, the Bank of Lebanon, and the committee regarding introducing amendments to the text, in addition to the inconclusiveness of the participation of the Association of Banks in Lebanon in the committee’s meetings.

The Governor of the Bank of Lebanon, Karim Saeed, said that he does not expect the law to be approved before six to eight months, although he expects that the agreed-upon formula will be before the House of Representatives by the end of September.

He added that the Bank of Lebanon's obligations to banks and depositors amount to about 79.5 billion dollars, indicating that determining the repayable amounts and the mechanism for distributing losses are still among the most prominent outstanding issues.

From the “Staff Agreement” to the full program

At the same time, Lebanon is seeking to move towards a staff-level agreement with the IMF, provided that this constitutes a step towards a complete program that requires the approval of the Fund’s Board of Directors.

Jaber told Reuters that Lebanon hopes to reach an agreement at the employee level soon, but he acknowledged that the full program requires completing legislation on financial losses and their distribution.

Lebanon had reached a staff-level agreement with the Fund in April 2022, but failure to implement the required reforms prevented it from moving to a full program.

The financial framework is the other side of reform

The Fund does not consider addressing bank losses in isolation from public finances. He stressed the importance of adopting a credible medium-term financial framework to restore stability and sustainability of finance and public debt, in parallel with banking reforms.

This means that addressing the crisis is not only about identifying the parties that will bear the losses, but also about ensuring that the new obligations on the state do not lead to the reproduction of the public debt problem.

Next test

With the agreement that the Fund delegation will return to Beirut after the annual meetings, the file moves to a stage more related to implementation. The gap law will be at the heart of this stage, in addition to completing the restructuring of banks and setting a medium-term financial framework.

While Salam expects to begin discussing the project within days, resolving the distribution of losses and the deposit recovery mechanism remains the most prominent test before the government and Parliament, as well as one of the main keys to Lebanon’s transition from the reform path to a new agreement with the International Monetary Fund.