LEBANON: HOW TO HELP LEBANON FINANCIALLY NOW

C O N F I D E N T I A L BEIRUT 002008

SIPDIS

SIPDIS

NSC FOR ABRAMS/SINGH/YERGER

E.O. 12958: DECL: 12/31/2027
TAGS: EAID ECON EFIN EINV LE PGOV PREL PTER
SUBJECT: LEBANON: HOW TO HELP LEBANON FINANCIALLY NOW

Classified By: Ambassador Jeffrey Feltman for Reasons: Section 1.4 (b)
and (d).

SUMMARY
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1. (C) According to Finance Minister Jihad Azour, Lebanon's
deficit situation is under control because tax revenues are
up, but that the GOL faces problems paying its foreign
currency debt in the first quarter of 2008. Contriubuting to
Lebanon's first quarter debt crunch are the problems of
reduced investor confidence and the GOL's inability to issue
new foreign-currency debt because that requires parliament's
approval and the parliament has not functioned for 14 months.
Asked for specific suggestions for what the international
community could do now to help Lebanon, Azour had suggestions
for actions that Saudi Arabia, Kuwait, UAE and Egypt could
take in the short term that would give the Lebanese
government a financial boost at a politically sensitive time
(paras 7-10). He asked also that the USG consider offering a
guarantee on an upcoming Lebanese USD 960 million Eurobond
issue. End Summary.

A USG GUARANTEE OF GOL DEBT ESSENTIAL
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2. (C) The Charge, accompanied by Econoff, met with Finance
Minister Jihad Azour and his advisors Rola Rizk and Nadine
Abou Khaled on December 28. Azour said that Lebanon's
deficit situation was under control because tax revenues were
been the highest in 12 years. However, Lebanon has close to
USD 3 billion debt coming due in 2008, 50 percent of which
comes due by the end of the first-quarter.


3. (C) Most notably, Azour said there is a USD 960 million
Eurobond payment due in the first quarter of 2008 that he
wants to refinance. However, the GOL does not have the legal
authority to issue any new foreign currency debt because
parliamentary approval is required and the Lebanese
parliament has not met for 14 months due to the ongoing
political impasse. USD 860 million of the payment is
principle and the remaining USD 100 million is interest.
Only the USD 860 can be rolled over. The USD 100 must be
paid by the end of March 2008.


4. (C) Azour suggested the USG consider guaranteeing this
USD 960 million Eurobond issue. A USG guarantee would lower
borrowing cost and help attract investors. (Note: The GOL
floated a similar idea previously. One problem that arose
when this was considered before is that USG rules require
budgeting for the costs to the U.S. and payment of that cost
by the beneficiary country. For example, if the U.S.
guaranteed a USD 1 billion ten-year government debt, the USG
would have to pay a budget cost of about USD 340 million in
year one and Lebanon would have to pay that cost. End Note.)


5. (C) Azour also asked about a guarantee from the Overseas
Private Investment Corporation (OPIC) on the GOL debt,
similar to what OPIC provided with some foreign currency debt
held by Egypt. (Comment: In Embassy's experience, to do
this the GOL would need to partner with a U.S. corporation in
order to receive a guarantee from OPIC. OPIC has provided a
USD 120 million guarantee on a Citibank operation in Lebanon
and we expect would not be receptive to taking on another
huge project in Lebanon at this time. End Comment.)

MORE FINANCIAL AID NEEDED FROM ARAB STATES
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6. (C) Azour mentioned the GOL's importance of the USD 2
billion pledged at Paris III by Arab nations. He suggested
that those states provide more funding, preferably in the
form of grants rather than loans, which would require
Lebanese parliamentary approval. However, he said that the
GOL would accpet loans as well. He had specific suggestions
for several countries in the region.


7. (C) SAUDI ARABIA: Azour said Saudi Arabia pledged over
USD 1.1 billion to Lebanon as part of its Paris III
commitment (Note: USD 100 million of the donation is a grant
for budgetary support and the remaining USD 1 billion is in
the form of a loan, intended for project financing. End
Note.) However, it has not been disbursed because new
legislation is needed in order for the GOL to utilize the USD
1 billion loan. Because parliament is currently inactive and
will be officially closed as of tonight (12/31),the needed
legislation has yet to be introduced and therefore the money
is frozen. Azour suggested the USG ask Saudi Arabia to
re-program its USD 1 billion pledge into a grant or some
other form of payment that does not require parliamentary
approval so that the GOL can utilize the donation now.


8. (C) KUWAIT: Azour mentioned that Kuwait did not make a
donation at the Paris III conference. He suggested that
Kuwait provide a USD 500 million grant or loan. Kuwait
provided some funds after the 2006 war but made no pledge in
Paris III. Azour noted that Lebanon was the first Arab
country to condemn the invasion of Kuwait by Saddam Hussein.


9. (C) UAE: Azour also suggested the United Arab Emirates
(UAE) provide a $500M grant or loan. Unlike Kuwait, UAE both
made and disbursed a Paris III pledge for USD 300 million but
might be willing to provide more to help Lebanon during the
difficult first quarter.


10. (C) EGYPT: Egypt has signed an agreement to provide
Lebanon natural gas, which will help the GOL save close to
USD 200 million. Azour suggested that Egypt deliver the
natural gas earlier than expected and that Egypt allow a
grace period for payment.

ADDITIONAL FINANCING NEEDS IN EARLY 2008
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11. (C) In addition to the USD 860 million dollar principle
on the Eurobond debt, Azour said there is USD 100 million of
interest on the debt that cannot be rolled over and that must
be paid by February 2008. The GOL has close to USD 240
million of Paris II loan payments due the first-quarter of
2008, which it is unable to rollover without parliamentary
approval, Azour said. He added that Lebanon will also have
to pay close to USD 300 million in Electricite du Liban (EDL)
costs for fuel and debt servicing in early 2008.


12. (C) The EU recently made a USD 350 million dollar
donation to Lebanon. This will finance part of the USD 640
million needed in first-quarter 2008. Therefore, the GOL has
a shortfall of around USD 300 million for the first-quarter
of 2008. Even after the first quarter, there will be an
additional USD 1.5 billion due that the GOL will be unable to
handle without international community support.

ECONOMIC CRISIS WILL HELP THE OPPOSITION GAIN SUPPORT
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13. (C) Azour mentioned that he is receiving pressure from
March 14 members to do something to find a solution to the
economic crisis. The majority realizes that it will be
blamed if an economic collapse occurs next year and that
March 8 opposition would use such a situation to its
advantage.

COMMENT
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14. (C) The best first step in a solution to the looming
economic crisis is a resolution to the political impasse. If
the market views Lebanon as a politically stable country, it
will lower the Lebanon's borrowing cost and attract more
investors. That is seen as increasingly less likely to occur
in the fist quarter of 2008, so some of the immediate
assistance that Azour suggests may help Lebanon get through a
difficult political period. We suggest that Washington
consider whether President Bush and other USG officials
traveling in the region in the next few weeks might be able
to raise the need for monetary support to help stabilize the
Siniora cabinet and prevent a financial crisis. End Comment.
FELTMAN