SINIORA PINS GOL SURVIVAL ON GENEROUS PARIS III

S E C R E T SECTION 01 OF 02 BEIRUT 000042 SIPDIS SIPDIS NSC FOR ABRAMS/DORAN/MARCHESE/HARDING E.O. 12958: DECL: 01/08/2027 TAGS: PREL EFIN EAID ECON LE SUBJECT: SINIORA PINS GOL SURVIVAL ON GENEROUS PARIS III COMMITMENTS REF: A. BEIRUT 0016 ¶B. 06 BEIRUT 3914 Classified By: Jeffrey Feltman, Ambassador, per 1.4 (b) and (d). SUMMARY -------------- ¶1. (S) In a 90-minute meeting with the Ambassador on 1/8, PM Fouad Siniora -- in crisis mode and interrupted frequently by security officers working to counter Tuesday's anticipated opposition escalation -- said that Lebanon's political and financial stability depends on a successful Paris III conference. Like Finance Minister Azour (ref a),Siniora favored an IMF post-emergency program (although he hoped to borrow 100-200 percent of Lebanon's quota from the Fund) and expressed hope for USD 7-9 billion in grants and concessional loans at Paris III. His USD 1.5-2 billion estimate for "upfront" cash was lower than Central Bank Governor Salameh's USD 2-3 billion target (ref b). Saying that the Saudi commitment was key to unlocking good amounts from other Gulf donors, Siniora asked for U.S. help in securing donor support from Qatar, Canada, the Europeans, and Japan in particular. He himself planned a trip to the Gulf starting this weekend, he said. (Siniora's comments on security issues discussed septel.) End summary. PARIS III REFORMS HARD SELL, BUT LEBANON HAS NO CHOICE -------------- ¶2. (C) Between fielding phone calls and barking orders to security chiefs whirling in and out of his office trying to deal with the anticipated March 8-Aoun labor demonstrations scheduled to begin on Tuesday (1/9),Siniora expressed pride in the GOL's Paris III reform papers. The 29-page document shared with donors is only a summary of what has actually been done, Siniora said, referring to more detailed reports on, inter alia, the social safety net to be implemented, incentives for SMEs, and development of promising economic sectors. He focused in particular on the marketing effort the GOL has launched, although he admitted severe difficulties in trying to sell future tax hikes during a period when March 8-Aounist forces hoped to use all pretexts to destroy his government. But Lebanon has no choice, he said, but to proceed with credible reforms; already, the GOL is having trouble issuing letters of credit to buy fuel for the power stations. PUSHING FOR LARGE COMMITMENTS -------------- 
 ¶3. (C) "We will be in real trouble without a successful Paris III," he said, making an argument that Lebanon's political and economic stability, "indeed our survival," depends on Paris III. The amounts of grants and concessional loans committed to Lebanon have to be of sufficient magnitude at Paris III to calm the financial markets, release private capital into the system, and convince the majority of Lebanon's population that they must stick with the reform program in order to benefit from the funds announced at Paris III. "Show the people that there's too much to lose," Siniora pleaded. ¶4. (S) Pushed by the Ambassador, Siniora said that he concurred with Finance Minister Azour's estimate (ref A) that Lebanon needs an announcement of USD 7-9 billion at Paris III, in some combination of grants and concessional loans. Most of this commitment can be disbursed in accordance with actual reform performance, incrementally. But Lebanon needs USD 1.5-2 billion upfront, "a sip now from the drink we'll be given later, when we deserve it. But we have to quench some of our thirst now." (Siniora's "sip," we note, is smaller than Central Bank Governor Salameh's USD 2-3 million upfront target covered ref b for upfront funds.) ¶5. (S) Although the issue of expectations came up repeatedly during the meeting, Siniora rejected the Ambassador's questions about whether those figures were too ambitious: Paris II in November 2002 yielded USD 2.5 billion, and far less was at stake than now. Surely you see, Siniora said, that a more generous investment in Lebanon today will be cheaper over the long run than allowing Lebanon to collapse politically and economically. The pro-Syrians BEIRUT 00000042 002 OF 002 want Lebanon to go bankrupt, Siniora argued; Paris III donors can prevent this. SEEKING U.S. HELP -------------- ¶6. (C) Siniora noted that he will travel to the Gulf as early as this weekend in order to build momentum for Paris III. French Foreign Minister Douste-Blazy has been visiting key capitals, while French President Jacques Chirac has been in phone contact with various leaders. Expressing hope for the direct engagement of high-level USG officials, Siniora asked that we concentrate on securing credible contributions from Canada, Japan, the European countries ("where is the UK?" he asked; "where is Germany?"),and -- especially -- Qatar. Siniora argued that the Saudi contribution is extremely important: whatever Saudi Arabia gives, the other Gulf countries will do an informal calculation and give a certain percentage. The higher the Saudi Arabia amount, then the higher the amounts from other Gulf countries. Kuwait, for example, will probably give roughly 40-50 percent of the Saudi donation, Siniora said. FAVORABLY INCLINE FOR IMF EPCA PROGRAM -------------- ¶7. (C) Responding to the Ambassador's question, Siniora said that (like Azour but in contrast to Salameh) he favored a formal IMF program, not merely IMF staff-monitored reforms. The IMF's Emergency Post-Conflict Assistance program (EPCA) seemed most appropriate, he said, given initially relaxed targets en route to a formal Stand-by Arrangement. Moreover, he said, the name will help sell the program locally -- everyone knows that Lebanon had a conflict in summer 2006 that deeply damaged the economy. But even on this, Siniora said, "I need your help." EPCAs typically allow members to borrow up to 50 percent of the quota, which in Lebanon's case would permits only USD 150 million. Siniora said that the IMF board has made exceptions in other post-conflict situations, allowing countries to borrow 100-200 percent of their quota. As IMF staff naturally does not favor such exposure for the Fund, "please help push them," Siniora urged. COMMENT -------------- ¶8. (S) We have tried to lower the expectations of Siniora and Azour about what to expect at Paris III. But they answer by pointing out the windows of the Grand Serail at the white tents housing demonstrators and cite the political stakes, which are enormous for us and for Siniora. Siniora may be citing the opposition against him for opportunistic tactical reasons, but the crisis is real and growing. By all accounts, Lebanon faces major financial difficulties in the weeks ahead, especially as the anticipated labor demonstrations will put a further chill into the financial markets just as energy letters of credit come due and a 1 billion Eurobond issue matures in February. ¶9. (S) Looking back on the financial crisis that accompanied the Israel-Hizballah conflict in summer 2006, we wonder whether there is a way to build up impressive-sounding numbers by encouraging Arab deposits in the Central Bank of Lebanon (CBL). We suggest that we maintain as our first priority encouragement of as many grants and concessional loans as possible, given our interest in helping to avert a political and financial collapse here. But, whatever the cumulative figure is, we could then encourage Arab governments to "park" some of their own cash reserves in the CBL, to increase the gross foreign currency reserves of the country. Financial analysts, of course, are sophisticated to know which funds are available to the GOL and which not. But a large donor commitment at Paris III, even if it includes some smoke and mirrors, has the potential to strengthen the Lebanese government considerably in its efforts to stand firm against the pro-Syrian opposition. FELTMAN