CENTRAL BANK GOVERNOR WANTS CASH UP FRONT,

S E C R E T SECTION 01 OF 03 BEIRUT 003656

SIPDIS

SIPDIS

NSC FOR ABRAMS/DORAN/MARCHESE/HARDING

E.O. 12958: DECL: 11/18/2026
TAGS: EFIN ECON PGOV PREL LE
SUBJECT: CENTRAL BANK GOVERNOR WANTS CASH UP FRONT,
CONDITIONALITY LATER


Classified By: Jeffrey Feltman, Ambassador, per 1.4 (b) and (d).

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


1. (S) Central Bank of Lebanon (CBL) Governor Riad Salameh
told the Ambassador in a 11/16 meeting that the IMF team
currently in Beirut confirmed that GDP would have 0 percent
growth in 2006, down from the 6 percent growth projected in
June but considerably better than the 5 percent decline
predicted by some after the summer conflict. He claimed
that, so far, his interventions to shore up the currency in
the ongoing political crisis have been modest and that he had
sent a message to Hizballah to stop frightening the markets.
Reporting that Lebanon needed to repay USD 9 billion in 2007
(USD 3 billion of which in foreign currency),Salameh pleaded
for an upfront payment of about USD 2 billion in grants or
highly concessional loans at the January Paris III conference
to give confidence to the markets. After that initial
payment, conditionality should be imposed on further help, he
said. Using interest rate differentials from Paris II to
argue his case, Salameh downplayed any significant role for
the commercial banks in debt relief. He said that he did not
support a formal IMF program because of the political
backlash that would result. But he wanted to work so closely
with the IMF that Lebanon would have a program in everything
but name. Salameh defended his record on the Bank al-Medina
scandal against recent public criticisms by Minister of
Justice Charles Rizk. While acknowledging his presidential
ambitions, Salameh calculates that his chances are better if
he continues to focus on his current job rather than appear
overly eager. Fellow presidential aspirant Michel Aoun was
falling short of his goals to raise money for Orange TV,
Salameh reported, adding that he was keeping a close eye out
for money-laundering through the Orange TV financing. End
summary.

ZERO PERCENT GROWTH RATE
(BETTER THAN MINUS FIVE)
--------------


2. (C) Salameh said that the IMF technical team currently
in Beirut confirmed that the worst macroeconomic predictions
after the summer's conflict and subsequent blockade, of a 5
percent decline in GDP, were proving not be true. Instead,
Salameh said, Lebanon will have 0 percent growth. That
already is a blow, he said, given that, in June, economists
were predicting 6 percent growth for 2007.

POLITICAL CRISIS NOT YET AFFECTING
FINANCIAL MARKETS SIGNIFICANTLY
--------------


3. (C) Salameh said that the ongoing political crisis
provoked by the March 8-Aoun demand for a blocking minority
in the cabinet had not, so far, shaken the confidence of the
financial markets. Despite claims in the pro-Syrian press
that he had to intervene to the tune of USD 175 million in a
single day to maintain the Lebanese pound, Salameh claimed to
have expended only USD 50 million total to bolster the
currency since the political crisis began several weeks ago.
He credited the relative stability of the financial markets
to "trust in the team" -- himself, Prime Minister Siniora,
and Finance Minister Azour. The CBL in particular has a good
reputation, having steered Lebanon's financial markets
through crisis after crisis over the past two-plus years.

PASSING A MESSAGE TO HIZBALLAH:
STOP FRIGHTENING PEOPLE, KEEP SINIORA
--------------


4. (C) Nevertheless, expressing concern about the impact if
the political impasse continues "for more than a couple of
weeks," Salameh said that he had passed a message to
Hizballah to stop frightening the financial markets with talk
of demonstrations and protests. He claimed to have told
Hizballah that "getting red of Siniora is crossing a red
line," given Siniora's soaring reputation internationally and
especially in the Arab world. The Ambassador asked Salameh
whether he thought Hizballah cared. "They should -- I told
them that, if they shut down the economy by blocking the
airports, ports, and bridges, then they are acting like
Israel." He claimed that Hizballah responded that it would
not go to extremes. Asked whether he had passed a similar

BEIRUT 00003656 002 OF 003


message to Michel Aoun, Hizballah's co-conspirator, Salameh
responded that it would do no good, because "Aoun is crazy.
He will destroy the country to become president."

2007: USD 9 MILLION IN DEBT COMES DUE
AND SALAMEH SEEKS UP-FRONT HELP
--------------


5. (C) On the debt situation, Salameh said that Lebanon
would have to refinance approximately USD 9 billion in 2007.
Of that, USD 3 billion is in foreign currency. Given the
shock to Lebanon from the summer conflict and subsequent
blockade, Salameh argued that Lebanon needs an upfront
contribution at the January Paris III conference of about USD
2 billion in grants (preferably) or highly concessional
loans. This will give confidence to the markets.

"NOT WORTH" APPROACHING COMMERCIAL BANKS
--------------


6. (C) The Ambassador asked about the contributions of the
Lebanese commercial banks, the holder of well over half of
Lebanon's debt. Salameh said that, unlike at Paris II in
November 2002, the banks should not be involved. "It's not
worth it," he said. Heading into Paris II, he argued,
interest rates on the debt averaged 14 percent. By offering
USD 4 billion at 0 percent, the commercial banks at that time
saved the GOL USD 700-800 million a year. Now, with interest
rates averaging only 8 percent, the savings to the GOL would
only be about USD 300 million. "The banks will scream," and
deposits might drop in the resulting hullabaloo. The
Ambassador noted that the banks have something like USD 65
billion of deposits and surely can be expected to play some
kind of role. Salameh suggested approaching the banks after
Paris III, not before, when it was clear that there would be
some conditionality on the GOL. Then, the banks might be
willing to do voluntary contributions.

SEEKING SOMETHING SHORT OF AN IMF PROGRAM
--------------


7. (C) The Ambassador asked about conditionality and an IMF
program. Salameh said that the USD 2 billion he believes
Lebanon needs upfront at Paris III should be unconditional --
or presented as a down payment on future conditionality. But
a program should be agreed upon by which future contributions
are conditioned on realistic reform goals. This, he said,
will provide discipline and incentives. The Ambassador asked
whether Salameh now supported an IMF program. Giving a long
explanation, Salameh said that he thought that, in the
current political climate, trying to go for an IMF program
would be counterproductive. Pushing an IMF program would be
giving Hizballah and Michel Aoun a "gift," as they will
surely promote populist resentment against it and use it to
attack the GOL. An IMF program will make real reforms
harder. Salameh said that, nevertheless, he agreed that
IMF-monitored benchmarks were essential for donor confidence.
Eventually, he explained that what he had in mind was a
"partnership" with the IMF that would be essentially a "soft
IMF program" without the name.

DEFENDING HIS RECORD ON BANK AL-MEDINA
--------------


8. (C) The Ambassador asked Salameh's reaction to Minister
of Justice Charles Rizk's claim that Salameh should have used
a 1967 law passed in the aftermath of the IntraBank collapse
to lift bank secrecy on Bank al-Medina. How does Salameh
respond to Rizk's charge that Salameh's failure to use this
law had hindered judicial investigation of the scandal and
protected many criminals? Salameh responded that the law
Rizk cited depends on declaring the bank bankrupt. That
would have put 14,000 depositors at the mercy of court
proceedings in Lebanon, which can take decades. Salameh's
approach was to take over the bank and find ways to pay off
the depositors. That happened: none of the individual
"little depositors" lost savings. Surely that was a
preferable approach. The fact that only one person -- Rana
Qoleilat, the bank's director -- has been prosecuted for the
scandal is a reflection of slow action by Rizk's ministry,
not because of Salameh's actions.

PRESIDENTIAL AMBITIONS, YES
--------------

BEIRUT 00003656 003 OF 003




9. (C) Like most observers, Salameh ascribed Rizk's Bank
al-Medina references to Rizk's presidential ambitions: Rizk
hoped to eliminate Salameh as a competitor. In Salameh's
view, Rizk had put the stake through his presidential
ambitions with his televised Bank al-Medina statements, as
Rizk appeared opportunistic and too eager. Acknowledging
that his name is circulating with increasing frequency as a
potential presidential candidate, Salameh said that he does
not deny that he believes his management of the CBL should
make him eligible. But he said that he had concluded that it
is not worth fighting for the presidency, that his chances
are better if he keeps concentrating on his current job.
Perhaps, he laughed, the presidency will simply land in his
lap. The Ambassador noted that he and Prime Minister Fouad
Siniora do not like each other: with the Hariri camp perhaps
renominating Siniora as premier when a new president takes
office, would Salameh be able to work with Siniora? Salameh
claimed that, whatever their personal differences, both
recognized after watching the Rafiq Hariri-Emile Lahoud spats
that, for Lebanon to be successful, the president and prime
minister must act as partners. After his experience with
Lahoud, Siniora certainly must know that now, Salameh said.

MICHEL AOUN: DISAPPOINTING RESULTS
IN RAISING CAPITAL FOR ORANGE TV
--------------


10. (S) The Ambassador asked Salameh about rumors that
Michel Aoun's attempt to raise capital for his proposed
Orange TV network masked an elaborate Hizballah-Qatari
money-laundering operation. Salameh acknowledged the rumors,
saying that he, too, was concerned about the methods Aoun was
using to get cash: call-in numbers, publicized bank accounts
to which people can contribute money, etc. Aoun has opened
Orange TV accounts in three banks, Salameh said, and he has
given strict warnings to the banks to scrutinize the accounts
quite closely. So far, Salameh said, he is confident that
the accounts are not being used for money-laundering.
Perhaps the best evidence of this, he said, is that, after
weeks of a high-profile campaign for "the people" to buy
shares, Orange TV has garnered only USD 14 million. That is
far less than the USD 50 million that Aoun needs to operate
the station each year, Salameh estimated.


FELTMAN