TFLE01: LEBANESE CENTRAL BANK GOVERNOR PUSHES FOR

C O N F I D E N T I A L SECTION 01 OF 03 BEIRUT 002551

SIPDIS

SIPDIS

STATE PASS USTR
TREASURY FOR MNUGENT
USDOC FOR 4250/ITA/MAC/OME
NSC FOR ABRAMS/DORAN/SINGH/HARDING

E.O. 12958: DECL: 08/07/2016
TAGS: PGOV EFIN ECON EINV LE IS SY
SUBJECT: TFLE01: LEBANESE CENTRAL BANK GOVERNOR PUSHES FOR
ALLEVIATION OF BLOCKADE

Classified By: Jeffrey D. Feltman, Ambassador. Reason: Section 1.4 (d
).

SUMMARY
--------------


1. (C) In an August 7 meeting with Ambassador Feltman and
TDY poloff, Central Bank of Lebanon (CBL) Governor Riad
Salameh said that the Lebanese financial situation had so far
avoided disaster through some creative "financial
engineering" and other confidence-building measures such as a
$1 billion loan from the Saudis. However, Salameh stressed
to the Ambassador that the situation is not sustainable, and
that public confidence would soon dwindle if the conflict
continues. Salameh said that several factors in particular
would erode confidence: the continued blockade of Lebanon
and the resultant hardships for the Lebanese (Comment: On
the roads en route from the Embassy to the CBL, cars were
seen lined up for several blocks outside of gas stations.
End Comment),as well as the prospect of further Israeli
attacks on critical Lebanese infrastructure, particularly gas
depots and power plants. In this context, Salameh welcomed
the efforts to ship in fuel to power plants, as well as a
plan to truck in gasoline. He said he could even get the
Lebanese business community to support stationing UNIFIL
forces to monitor points of entry if it would allow for these
to be re-opened. Regarding the reconstruction of Lebanon
after the hoped-for ceasefire, Salameh said that prospective
donors would not trust any Lebanese government agency to
handle and distribute assistance funds and to make decisions
on projects. Instead, Salameh plans to recommend to PM
Siniora that an independent mutual fund be set up and
controlled by the donors. The GOL and Lebanese organizations
such as the Council for Development and Reconstruction and
the Fund for the Displaced could present project proposals to
the donors who could then decide on the allocation of funds.
End Summary.

TWO-PHASE RESOLUTION HAS A CHANCE
--------------


2. (C) Salameh touched first on his assessment of the
political situation, which he described as "one big poker
bluff," with the Shi'a -- for whom Nabih Berri is the front
man -- posturing as if they intend to block the resolution
and leave the government in the hopes of getting a more
favorable ceasefire deal. Salameh does not believe this will
lead to a sectarian conflict. "There is no money for a civil
war." Rather, he believes that with the passage of a first
resolution, there will follow a traditional period of
Lebanese sectarian haggling, with Berri in particular hoping
to reassert his Shi'a primacy over Hizballah. In the end,
noone will want to be seen as the obstacle to a ceasefire
that would bring an end to the suffering of the Lebanese
people. "The Shi'a do not have the leverage to quit the
cabinet. But if a second resolution does not come, then all
of Lebanon will be with them." While these internal
discussions are going on, the international community would
be working toward a second resolution authorizing the
stabilization force and calling for the Israeli withdrawal.
So in this sense, according to Salameh, the oft-criticized
tendency of the Lebanese confessional system to work at a
snail's pace may in fact make the two-phased resolution
process workable.


3. (C) Salameh expressed disgust at the feeble maneuverings
of Lebanon's "political class," from President Lahoud on
down. He decried in particular the "lack of muscle,"
including on the part of PM Siniora, which allows Hizballah
to dictate its terms to the Lebanese people. Unable to
disguise his own presidential ambitions, Salameh (a Maronite)
felt that the passage and successful implementation of a
second resolution would weaken Syria and thus President
Lahoud so that he might be deposed. Asked about a future
career for Lahoud, Salameh responded, "he could do TV talk
shows." As for a future president, he needed to be someone
"not from either side" (i.e., neither pro-Syrian nor from
March 14) who can balance the two trends in Lebanon.

BEIRUT 00002551 002 OF 003

KEEPING THE LIRA STEADY
--------------


4. (C) Turning to the financial situation, Salameh lamented
that, "Nasrallah lied. He said he would not do anything to
hurt the economy during the summer." Since the rug has now
been pulled out from what many had hoped would be a booming
tourist season, Salameh now seeks to keep the lira under
control and the banking sector stable, particularly as people
begin to default on bank overdrafts. Salameh admitted that
in the first fifteen days of the conflict, the CBL lost over
890 million dollars. In addition, dollarization had
increased from 72 to 75 per cent which meant that over 1.5
billion dollars had left the country. However, though this
is decidedly gloomy news, public confidence is better than it
was in the period following the Hariri assassination in 2005,
when the CBL used up much of its dollar reserves in order to
stabilize the lira. One reason for this confidence,
according to Salameh, is that people believe the strategy in
2005 worked and so have faith in the CBL.


5. (C) According to Salameh, there are additional factors
contributing to this confidence and keeping the situation
steady. Saudi Arabia only today confirmed a 1 billion dollar
deposit into the CBL's coffers, while discussions are
continuing with the Kuwaitis for a further 500 million
dollars. The Saudis and Kuwaitis have made loans in the past
and have always been repaid with interest and are thus
comfortable that the CBL will not default. The CBL is also
buoying dollar reserves by forcing Lebanese banks which need
Lebanese lira to hand over U.S. dollars in exchange. If the
banks then come looking for U.S. dollars, Salameh is
accepting Lebanese treasury bonds and giving the banks 3-year
U.S. dollar CDs. Salameh noted that interest rates have not
changed.

"Lift the Blockade"
--------------


6. (C) Salameh stressed that these were only stopgap
measures based upon the hope that the conflict will end soon.
"We cannot sustain this for long." The government deficit
is in a "very bad situation" but might be improved if a
permanent solution were found to the conflict. Lebanese
confidence may start to slip if the Israeli blockade does not
let up and people begin to feel the pinch of shortages.
Salameh wasd also worried about an escalation of the
conflict, especially the possibility of attacks on power
plants. He said that the "stupidest thing" the Israelis had
done was to bomb the Jounieh Casino bridge on August 4,
rather than restricting their strikes to the South.


7. (C) Salameh added that any measures which would
alleviate the shortages, including the planned delivery of
gasoline and diesel fuel by land and by sea in the coming
days, would buttress public confidence and stave off any
further capital flight. Salameh pleaded for the reopening of
the airport and ports, and said he could get the business
community to pressure the government to allow UNIFIL forces
to monitor the points of entry to interdict any possible
resupply of Hizballah.

The Aftermath
--------------


8. (C) Salameh urged that the international community step
in quickly to assist with reconstruction of the South. He
warned that if Iran does the lion's share of the rebuilding,
they will make people sign an "allegiance for life." Arguing
that any GOL-directed assistance effort would undercut donor
confidence, Salameh said that he will suggest to Siniora that
an independent agency be established, headed by the donors,
to review proposals and disburse funds. Unfortunately,
Salameh remarked, "I'm sure it won't be accepted."

Comment
--------------


9. (C) Salameh no doubt painted a rosy picture of the

BEIRUT 00002551 003 OF 003

Lebanese financial situation for our consumption, and his
concerns about the blockade of Lebanon and further
bombardments of infrastructure were clearly foremost in his
mind. This is a common refrain among the Lebanese with whom
we are meeting, and we believe that it is in the USG interest
to continue to support initiatives - and help to coordinate
with the Israelis - in order to relieve the psychological
burden of the blockade. We also suggest that we do all we
can to prevent the Israelis from launching any seriously
debilitating aerial attacks on Lebanese power plants and
remaining fuel depots.
FELTMAN