LEBANON: CENTRAL BANK GOVERNOR SAYS USD FOUR

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 001713 SIPDIS SIPDIS NSC FOR ABRAMS/SINGH/GAVITO/YERGER/DEMOPULOS, STATE FOR NEA/ELA, NEA/FO:KHARRINGTON, MPOPAL, E.O. 12958: DECL: 11/01/2017 TAGS: ENIV PGOV PREL PTER LE SUBJECT: LEBANON: CENTRAL BANK GOVERNOR SAYS USD FOUR BILLION WILL PREVENT FINANCIAL CHAOS REF: STATE 148539 Classified By: Ambassador Jeffrey Feltman for reasons 1.4 (b) and (d) SUMMARY -------------- ¶1. (C) Central Bank Governor Riad Salameh is preparing for possible financial chaos, if the political situation deteriorates. He is prepared to run a "legitimate" bank from anywhere, and can support the Lebanese pound for the short term. In the event of political instability, he believes it is critical to secure USD four billion in medium-term deposits at the Central Bank in 2008 to stop pressure on the pound. Salameh will not allow the bank to support a "rogue" government; however, if he is killed, his deputy (a Shia linked to Nabih Berri and Hizballah) automatically takes over. Salameh's meetings with the World Bank went well, and he is no longer opposed to the EPCA, although he has reservations about a future standby agreement. End summary. ¶2. (C) The Ambassador, accompanied by Econoff, met with Central Bank (CBL) Governor Riad Salameh on October 31, 2007, to discuss the World Bank (WB) annual meetings, CBL contingency plans, and potential USG reactions to an illegitimate second government in Lebanon (reftel). CENTRAL BANK WILL OPPOSE ANY ILLEGITIMACY -------------- ¶3. (C) Salameh came down firmly and immediately on the side of legitimacy, or what he called "international legality," if the CBL were to be confronted with political chaos. He said that he understood the ramifications of backing a "rogue" government, and he would not permit the bank to do so. The BDL would respect international law, and internally would continue work as normally as possible. Salameh admitted to carrying a case of computer disks home with him every night, which would allow the CBL to operate from anywhere. He does not fear for the money; his signature is required. He noted that his own security is a problem, however: if he is killed, the CBL's First Vice President -- a Shia linked to Nabih Berri and Hizballah -- would automatically become governor. CHAOS WILL PUT PRESSURE ON LEBANESE POUND -------------- ¶4. (C) What does worry Salameh is the market reaction. The CBL currently has a strong balance sheet, but in the case of political chaos, rating agencies will downgrade Lebanon. Salameh assumes that civil insubordination, resulting in the loss of income to the GOL, will be more likely than total political collapse. There will be pressure on the Lebanese pound (LL),interest rates will go higher, and banks will begin to default. The BDL will support the GOL, the LL and the banks, and for a few months, this will be possible; longer term will be a bigger problem. FOUR BILLION DOLLARS IS KEY TO SUCCESS -------------- ¶5. (C) The CBL is the cornerstone of stability in Lebanon, and in Salameh's opinion, it will keep Lebanon democratic. A run on the LL would impoverish the country, and he considers it a real risk; there was a run on the pound three days after the assassination of former PM Rafiq Hariri, which the BDL was able to stop. If there is a lingering crisis over the presidency, cabinet formation, and government programs, Salameh estimated that the CBL would need USD 4 billion in deposits during 2008 to maintain financial stability. If there is a quick end to the current political crisis, he thought that the current dollarization rate of 76 percent would drop to somewhere between 65 and 70 percent, making the additional dollar deposits unnecessary. Salameh stressed that there is a big difference between short-term deposits, such as those placed by the Saudis and Kuwaitis during the war last summer, and deposits which will halt a crisis. He is looking for medium-term deposits -- five years or more -- to provide the cushion required. He pointed out that, with current oil prices, what he is asking is not a big amount for oil-rich Arab countries. BEIRUT 00001713 002 OF 002 WORLD BANK MEETINGS SUCCESSFUL -------------- ¶6. (C) Salameh was pleased with his meeting with the new managing director of the IMF, Dominique Strauss-Kahn. Salameh went looking for a promise of backing for the CBL in case of chaos, and found not only that, but also a promise of a positive attitude towards Lebanon on the part of Strauss-Kahn. Salameh linked this attitude in part to his success in pushing the Lebanese banks to diversify outside of Lebanon, which has increased deposits by $8 billion over the last year. Salameh has changed his opinion of the Emergency Post Conflict Agreement (EPCA) because he felt that it imposed discipline on the GOL. He attributed his initial opposition to fears for the LL; when he understood that the IMF felt the LL is fairly valued, he changed his mind. However, he is certain that the GOL cannot move to a standby agreement; the IMF would reject it after a few months, because the GOL would "break the rules" and damage the reputation of the country. COMMENT -------------- ¶7. (C) Salameh's message to us was that USD four billion in deposits will prevent financial chaos in Lebanon. He also told us that he views his chances at the presidency at about 30 percent. Whatever his inner feelings, he postured as someone much more determined to get the money than the presidency. He also referred to his own reputation and his experience at Merrill Lynch in affirming his commitment not to fund a rogue cabinet. He made a convincing case that, despite the dangerous political waters, he will steer the bank in the right direction. But his comment about what happens if he is killed -- with a Hizballah-allied Shia then in charge of the Bank -- was worrying. End comment. FELTMAN