LEBANON: BANKS COMMISSIONER FRUSTRATED WITH GOL

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 000408 SIPDIS SIPDIS NSC FOR ABRAMS/DORAN/MARCHESE/HARDING E.O. 12958: DECL: 03/19/2017 TAGS: PGOV PREL PTER ECON EFIN LE SUBJECT: LEBANON: BANKS COMMISSIONER FRUSTRATED WITH GOL INACTION ON CAPITAL MARKETS REGULATION Classified By: Ambassador Jeffrey D. Feltman for reasons 1.4 (b) and (d ). SUMMARY -------------- ¶1. (C) Banking Control Commissioner Walid Alameddine in early March expressed his concern that the GOL is not doing enough to promote financial stability. He argued that Lebanon urgently needs a more proactive government, and argued that that if the present stalemate is allowed to continue, financial vulnerabilities will worsen. He also argued that a proactive, business-savvy GOL would enable Lebanon to "outgrow" its problems with debt and Hizballah. We suspect Alameddine was also trying to convince the Embassy that removing the current Prime Minister and cabinet team and electing Bank du Liban Governor Salameh as President would end the political stalemate. End Summary. GOL DAMPENING CONFIDENCE, WEAKING FINANCIAL SECTOR WITH INACTION -------------- ¶2. (C) Head of the Banking Control Commission (BCC) Walid Alameddine in early March requested a meeting with DCM and Econoff to express his concern that the GOL is not doing enough to promote banking sector stability. GOL mismanagement and a lack of transparency are making international investors less interested in buying Lebanese debt. Paris III did nothing we expected, Alameddine explained, because the political stalemate continues and the GOL does not inspire confidence anymore. The current political leaders are acting like a political party fixated on a few sensitive issues, Alameddine complained. ¶3. (C) Lebanon needs a proactive leader to address its economic problems, Alameddine told us, but Prime Minister Siniora is a procrastinator. He said that Siniora has been known for the sign on his desk, "It can be done." Now the joke around town is, "OK, just do it." In contrast, Alameddine said, Banque du Liban (BDL) Governor Salameh is one of the most serious presidential candidates because he is proactive, has business instinct, understands the economic problems, and gets things done. Showing some confidence in the current administration, Alameddine suggested that Finance Minister Azour should be among the candidates to replace Salameh as BDL governor if Salameh moves to the Presidency. ¶4. (C) Alameddine explained that Lebanon's Eurobonds are on the verge of junk status, and the BCC believes that Lebanon needs a functioning, confidence-inspiring government able to borrow internationally, not just from Lebanese banks. Instead, the Prime Minister demonstrated unacceptable interference when he called the BDL in late February to ask that it pay off a tranche of $1 billion in Eurobonds for the cash-strapped Ministry of Finance (MOF). In contrast, Governor Salameh enabled the MOF to pay off market-held Eurobonds by reissuing the full tranche on the BDL's books. Lebanon needs a strong government with ample financial management skills to pay off another $1 billion in maturing Eurobonds this year and cover an expected 2007 deficit of $2 billion, Alameddine urged. About $19 billion in GOL debt is at the BDL, half in foreign and half in local currency; can the GOL reasonably ask the BDL to take on another $3 billion in GOL debt? ¶5. (C) Alameddine cited a second area of consternation with the GOL; several small banks need to be bailed out, but the Prime Minister has delayed issuing the new bank merger law. Alamaddine explained that he has taken the unusual step of sending a letter to Siniora -- on behalf of the banking community -- requesting cabinet approval of the pending bank merger law. On a broader level the government's procrastination and distraction are hurting the financial system, Alameddine went on. For example, the late February global stock market instabilities did not affect the Beirut stock market at all, indicating that unlike the banking system, the Lebanese financial system is not internationally linked. In addition, vigilant GOL supervision is needed to curb bank and business "mischief." VULNERABILITIES -------------- ¶6. (C) Lebanese banks are increasingly frustrated with the government; they have reached a turning point and no longer BEIRUT 00000408 002 OF 002 want to hold so much Lebanese debt, Alameddine told us. "We can't talk about it because that would undermine the system." Siniora, Haddad, and Azour understand the vulnerabilities, but seem to mistakenly believe that the banks will continue to roll over GOL debt indefinitely. ¶7. (C) Luckily, opposition economists don't understand the sensitivity of the debt situation, Alameddine said, or they could have exploited the situation. The opposition mistakenly targeted those connected to Hariri and Solidere with their sit-in, but those wealthy entities are losing at most 10 percent of their net worth, and they can easily withstand that kind of shock. Instead the opposition is hurting small businesses in Solidere. ¶8. (C) Major vulnerabilities now center on the exchange rate mismatch and potential illiquidity in the system if a continued decrease in confidence cause people to move their dollars and deposits overseas. Several small banks that have already been disproportionately hit by a flight to quality will need to be merged with stronger, larger banks. The BDL can always take these banks over and appoint a manager at a small cost to the BDL based on collateral, but this takes its toll on confidence. The merger law would provide a soft loan to the purchasing bank -- which would then buy high yield t-bills and use the resulting subsidy to compensate the employees it must lay off. The merger law probably makes the process more costly, but a clearly transparent merger would be a business success. (Note: In a separate, mid-March meeting, Governor Salameh commented that despite a spate of 33 bank mergers a few years ago, 10 more bank mergers are needed. He criticised the Prime Minister for holding up cabinet approval of the mechanism for implementing the new merger law. Of the 33 mergers performed earlier, one -- Wedge Bank, owned by Issam Fares -- triggered a political scandal when President Lahoud and others accused the BDL of giving Fares a preferential merger package. Despite passage of a new bank merger law two years ago, Siniora has feared further scandals if the bank merger process is allowed to proceed. End Note.) ¶9. (C) It is a good thing that the opposition does not understand the banking system enough to challenge the fixed currency, Alameddine said. The BDL has only the Lebanese commercial banks' money with which to defend the local currency, because it has nearly no net reserves. Of $13 billion in gross foreign currency assets, roughly $11 billion consists of commercial bank deposits at the central bank, and $1 billion is a long term Saudi deposit, or loan. FINANCIAL GROWTH KEY TO OVERCOMING HIZBALLAH, DEBT -------------- ¶10. (C) Lebanon needs a political solution to reach its potential prosperity; financial reform and economic growth are essential because they could destroy Hizballah economically. If the minimum wage rose beyond $200 a month, Hizballah would have a harder time paying protestors or supporters a higher monthly wage. Lebanon doesn't need a Paris III to address the debt to GDP ratio -- it just needs growth. The financial boom before the July war saw $1.2 trillion in contracts signed with the Gulf and bank capitalization increased 30 percent in 9 months, something unprecedented in a country with a B rated financial sector. COMMENT -------------- ¶11. (C) Alameddine has expressed to us before his enthusiasm for Riad Salameh as Lebanon's next president. So has at least one other senior figure at the Central Bank, Head of the Special Investigation Commission, Mohamed Baasiri. The source of Alameddine's antipathy for Siniora may be Alameddine's own long-rumored links to the Syrians. Alameddine spent 22 years with a major U.S. international bank, serving in mostly in the region, and while his political views may be suspect, we find that his financial analysis is worth tracking. End Comment. FELTMAN