LEBANON: WITH DAS HALE, CHATAH SHARES THOUGHTS ON

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 001787

SIPDIS

DEPT FOR NEA/FO, NEA/ELA
ALSO FOR IO A/S HOOK, PDAS WARLICK
P FOR DRUSSELL AND RRANGASWAMY
USUN FOR HKALILZAD/WOLFF/GERMAIN/SCHEDLBAUER
NSC FOR ABRAMS/RAMCHAND/YERGER/MCDERMOTT

E.O. 12958: DECL: 12/23/2018
TAGS: PGOV EFIN MASS IS LE SA QA RU
SUBJECT: LEBANON: WITH DAS HALE, CHATAH SHARES THOUGHTS ON
MIGS, TALKS WITH ISRAEL

Classified By: Ambassador Michele J. Sison for reasons 1.4
(b) and (d).

SUMMARY
--------------


1. (C) Joking that, in addition to his continued role as
advisor to PM Siniora, he was "moonlighting" at the Ministry
of Finance, Finance Minister Mohamad Chatah met with visiting
NEA Deputy Assistant Secretary (DAS) David Hale, Ambassador,
visiting NEA Lebanon Desk Officer Matthew Irwin, and acting
Political Counselor late on December 18. Chatah shared his
recommendation that the cabinet take the politically
unpopular but fiscally responsible decision to raise taxes in
order to cover a shortfall in reconstruction funds as well as
his analysis that Lebanon's fragile economy was best
protected by reducing the risk of another conflict with
Israel via indirect talks aimed at a renewed armistice.
Chatah guessed that the United States was uncomfortable with
Russia's offer of MiG-29 fighter jets to the Lebanese Armed
Forces (LAF) because they would challenge Israeli
overflights, but said he expected the deal to fall through.

BUDGET IMBROGLIO
--------------


2. (C) Noting he would submit the government's draft budget
to parliament within a week, Chatah said his biggest problem
was the Higher Relief Council (HRC),the body within the
prime minister's office charged with emergency humanitarian
and reconstruction aid in the aftermath of the 2006
Israel-Hizballah war. "Even with Saudi Arabia's $500M
donation, the HRC is $500M short," Chatah confided, noting
that the first of two payments had been made to residents of
destroyed villages not already supported by Saudi Arabia or
Qatar, but that there were insufficient funds for the second
round of aid. "We can either not pay, borrow at market
rates, or raise taxes. It will be politically unpopular, and
could hurt March 14 in advance of the elections, but from a
financial perspective, the best move is to raise the
value-added tax by two percent."


3. (C) While Lebanon was weathering the international
financial storm, bank deposits were beginning to fall.
Nonetheless, Chatah assured Hale that he planned to move
forward with at least one of two reforms discussed as
possible new benchmarks for the final $125M tranche of the
$250M cash transfer approved as part of the U.S. aid package
to Lebanon after the 2006 war: electricity tariff
restructuring or a gas excise tax increase. "So let's not
sign anything on the cash transfer benchmarks just yet,"
Chatah suggested.

CHATAH SKEPTICAL ON MIGS
--------------


4. (C) Wondering aloud why the United States seemed
uncomfortable with the Russian offer to supply the LAF with
10 MiG-29 fighter jets, Chatah asked whether the United
States worried that the planes would complicate Israeli
overflights. "The Russians must know they will." DAS Hale
opined that the discomfort and confusion sewn by the MiG
offer had probably pleased Russia immensely, adding that MiGs
were neither necessary nor affordable for the LAF, and that
Defense Minister Murr's acceptance of the offer would
complicate efforts to build support for the LAF in Congress
and with the Israelis. "I understand," said Chatah, "but it
would be bad for the United States to react negatively in
public, especially with the media implying that Hizballah is
unhappy. Personally, I don't see the planes materializing."

TALKING TO ISRAEL
--------------


5. (C) "But the overflights remain a major problem," Chatah
added, noting his desire to resolve the issue via dialogue
with the Israelis, perhaps with the help of the incoming U.S.
Administration. DAS Hale noted that the United States

BEIRUT 00001787 002 OF 002


supported the idea of indirect Israeli-Lebanese talks, but
that neither President Sleiman nor PM Siniora seemed
interested. Chatah disagreed, citing discussions with PM
Siniora, March 14 leader Saad Hariri, and March 14
parliamentarian and eminence-gris Nassib Lahoud. "They favor
the idea, but need something to help sell it. We'd like to
make it part of March 14's electoral platform, but right now
there's nothing on the table from the Israelis to give a
Lebanon-Israel track any credibility."


6. (C) Chatah noted that while economic issues will be
important to voters in Lebanon's upcoming parliamentary
elections, security issues were paramount. In his analysis,
economic problems would solve themselves as employment and
foreign investment increased once the risk of hostilities
with Israel had decreased. "We know what a deal with Israel
would look like: full implementation of UN Security Council
Resolution 1701 and a new armistice," Chatah said. "The
problem is that, whereas the Palestinians have a process
without a final status, we have a final status without a
process." DAS Hale noted that Israel would want to know that
talks with Lebanon would lead eventually to Hizballah's
disarmament. "Even if they don't, we'd be better off," said
Chatah. "Hizballah wouldn't be able to start another war."
"Or they'd do precisely that when forced into a corner,"
replied DAS Hale.


7. (U) DAS Hale has cleared this message.

SISON