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
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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