حاكم المصرف المركزي يدقّ ناقوس الخطر بشأن الوضع المالي ويأمل بأموال فورية في باريس 3

S E C R E T SECTION 01 OF 04 BEIRUT 003914 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR ABRAMS/DORAN/MARCHESE/HARDING 
 
E.O. 12958: DECL: 12/29/2026 
TAGS: EFIN, ECON, LE, PGOV 
SUBJECT: CENTRAL BANK GOVERNOR RAISES ALARM BELLS ON 
FINANCIAL SITUATION, HOPES FOR UPFRONT CASH AT PARIS III 
 
Classified By: Jeffrey Feltman, Ambassador, per 1.4 (b) and (d). 
 
SUMMARY 
------- 
 
1.  (S)  In contrast to his usual calm-within-a-storm 
posture, Central Bank of Lebanon (CBL) Governor Riad Salameh 
has sounded the alarm bells -- albeit private alarm bells -- 
on Lebanon's financial and fiscal position.  In a 12/29 
meeting with the Ambassador, Salameh spoke with unprecedented 
candor, saying that the GOL is down to its last USD 300 
million in cash and is relying on unsecured CBL letters of 
credit and overdrafts to pay energy costs.  Financial markets 
are no longer interested in lending to the GOL, Salameh said, 
and will do so only at higher costs.  Salameh argued that the 
GOL will need USD 2-3 billion up front at Paris III in order 
to maintain credibility vis-a-vis the financial markets in 
2007.  Crunch time starts in February, Salameh said, when a 
USD 1 billion bond issue matures.  With mushrooming budget 
deficits plaguing the GOL, Salameh predicted that the GOL 
will need over USD 10 billion in financing in 2007, most of 
which can be raised locally -- if Paris III is successful. 
While saying that he was open to all ideas, he downplayed the 
possibility of an IMF Emergency Post-Conflict Assistance 
program, saying that the financial advantages were minimal 
and the political costs high.  Given the political realities 
of Lebanon today, Salameh stated a preference for an 
IMF-monitored reform program until a credible Lebanese 
president is in place who will facilitate rather than block 
reforms.  Salameh also expressed deep concern about how Paris 
III is marketed, arguing that the international community 
should be seen as embracing Lebanon, not PM Siniora, 
especially as Siniora will benefit in any case from a 
successful conference.  End summary. 
 
GOL DOWN TO LAST $300 MILLION 
(IN LEBANESE POUNDS) 
----------------------------- 
 
2.  (S)  Salameh opened the 12/29 meeting with the Ambassador 
by announcing that, while the foreign reserves of the CBL 
itself remain strong, the GOL "doesn't have a single dollar 
at the Central Bank."  The GOL has only a USD 300 million 
credit balance in Lebanese currency in the CBL, and that is 
"shrinking quickly."  The GOL (which is already about USD 9 
billion in debt to the CBL) is repaying maturing treasury 
bills in Lebanese currency "because the market isn't 
interested in renewing Lebanese bills."  The commercial banks 
are then using the Lebanese currency to buy dollars, because 
"everyone is scared of the situation."  The banks also know 
"the real position of the government," which increases their 
reluctance to roll over treasury bills.  Salameh described 
the fact that "we have been able to keep the exchange markets 
and the banking sector quiet" as "something almost 
miraculous," given the political crisis provoked by the March 
8-Aoun attempts to destabilize the government. 
 
BUYING FUEL BY BORROWING, 
POSTPONING PAYMENT 
------------------------- 
 
3.  (S)  Salameh said that the CBL itself becomes 
"vulnerable" when the GOL asks for Lebanese pounds in order 
to buy dollars to pay its commitments, including Eurobond 
principal and interest and fuel for Electricite du Liban 
(EDL).  "You notice the increasing problems," Salameh said, 
referring to a recent upsurge in rolling brownouts.  "It's 
going to get a lot worse in February, just when people need 
heat."  So far, Salameh said, the GOL has been able to 
continue its fuel purchases by postponing payments to Algeria 
and Kuwait, due to letters of credit that permit a six-month 
delay.  The GOL is already using the CBL to issue more l/c's 
for fuel purchases, even though the treasury has reached the 
legislative limit of how many treasury bills it could issue. 
Parliament Speaker Nabih Berri is in no mood to open the 
parliament in order to lift the GOL's debt ceiling, Salameh 
said. 
 
GOL NEEDS OVER USD 10 MILLION IN 2007; 
FINANCIAL CRUNCH BEGINS IN FEBRUARY 
------------------------------------- 
 
4.  (S)  Ticking numbers off from his head, Salameh said that 
the GOL will need in 2007 about USD 3.4 billion in foreign 
 
BEIRUT 00003914  002 OF 004 
 
 
currency for debt and debt service.  Assuming steady or 
slightly declining energy costs, the GOL will need an 
additional USD 700 million in foreign currency to cover the 
letters of credit in the energy sector.  In addition, there 
is about USD 4 billion in local bonds that will need to be 
rolled over.  Given that the 2006 budget deficit is now 
approaching USD 3 billion because of the ongoing political 
crisis and the war, one must assume that the 2007 budget 
deficit will be of similar size.  Add to that, Salameh said, 
about USD 1 billion in anticipated EDL deficits, and the GOL 
will needs over USD 10 billion in financing in 2007 alone, of 
which more than USD 4 billion will need to be in foreign 
currency.  The crunch begins in February, when a USD 1 
billion Eurobond issue matures. 
 
5.  (S)  The Ambassador noted that the Governor had 
previously cited approximately USD 9 billion in financing 
needs for 2007 -- roughly USD 7 billion to roll over existing 
debt and an additional USD 2 billion in GOL and EDL deficits. 
 Yes, Salameh nodded, but the "situation has deteriorated 
considerably" since the March 8-Aoun insistence on changing 
the GOL.  And, because of the uncertainty caused by the March 
8-Aoun demonstrations, bankers will insist on much higher 
interest rates, worsening the situation over the long term. 
The Ambassador noted that local banks have little choice but 
to continue the financial engineering, lest a GOL default 
lead to commercial bank defaults.  Salameh agreed but said 
that "the costs will be very high for us and there's only so 
much we can pressure them (the banks) to do." 
 
ARGUING FOR UPFRONT CONTRIBUTIONS -- 
OF $3 BILLION -- NEEDED AT PARIS III 
------------------------------------ 
 
6.  (S)  Paris III, Salameh said, is "the only way out."  But 
if GOL officials return from Paris without sizable amounts of 
cash upfront, "the monetary situation will be weakened 
considerably.  Everybody is waiting to see what happens at 
Paris III."  Given current realities, Salameh insisted that 
it will not be good enough to have commitments that will be 
disbursed upon performance.  Given the political situation, 
"no one" will trust that the reforms will be forthcoming.  So 
promises of cash based on reform will lead to a loss of 
confidence in the financial markets.  Instead, cash upfront 
will stabilize the situation and lead to the ability of the 
GOL to promote the reforms.  The Ambassador used the example 
of Paris II to express skepticism that cash upfront will lead 
to reform.  Salameh countered that, if the USG and others 
really mean to support Lebanon, "you have no other choice." 
It is certain that a financial and monetary collapse will 
lead to greater instability, he said, and "we will all be in 
worse shape." 
 
7.  (S)  Salameh expressed hope for USD 3 billion in grant 
assistance and concessional loans to be given to Lebanon 
upfront at Paris III.  The Ambassador expressed skepticism 
that the international community would risk that much money 
without better assurances of movement on credible reforms. 
Then USD 2 billion, Salameh countered, "even 1.5 billion, but 
not less."  Such a sum would calm the financial markets and 
"allow us to maintain the current interest rates."  Salameh 
shook his head sorrowfully in recalling that Paris II 
resulted in greatly lowered interest rates, "and now we'll be 
lucky to continue paying the same," even with what he 
anticipated to be lowered interest rates in the United States 
in 2007.  Already, he said, rating agencies are giving 
Lebanon negative ratings, and higher interest rates 
exacerbate financial problems for Lebanon over the long term. 
 Paris III can reverse this worrying trend and "create a 
positive shock for the market."  Given his view that the GOL 
needs about USD 9 billion over the next four years in order 
to bring debt levels down to a sustainable level, Salameh 
argued that significant room remains to provide incentives 
and conditions for reforms, even after the upfront payments. 
 
STILL SKEPTICAL ABOUT 
A FORMAL IMF PROGRAM 
--------------------- 
 
8.  (S)  The Ambassador asked Salameh for his views regarding 
an IMF program.  Claiming that he himself hadn't made up his 
mind as to what was best, Salameh said that he looked forward 
to further discussions with Core Group members on this topic. 
 Acknowledging the Ambassador's point that he had not been 
 
BEIRUT 00003914  003 OF 004 
 
 
enthusiastic about an IMF program, the Governor conceded 
that, "given our history," many countries will "feel more 
comfortable" with an IMF program.  Some countries may need an 
IMF program in order to justify politically or even legally a 
contribution to Lebanon.  "Some parliaments require it," he 
said.  Nevertheless, he said that he did not believe that the 
current political situation in Lebanon would permit the 
reform package that would qualify Lebanon for a Standby 
Arrangement (SBA).  As for an IMF Emergency Post-Conflict 
Assistance (EPCA), Salameh claimed that, because amounts are 
linked to a country's quota, Lebanon would only gain about 
USD 300 million in IMF resources, an amount too small to 
justify the political costs an EPCA could entail. 
 
9.  (S)  While admitting that he was far from being an 
expert, the Ambassador responded that he understood an EPCA 
to include relatively soft conditions.  Salameh said that the 
EPCA will move "automatically" to a SBA after a relatively 
brief period, and that the fiscal requirements of an SBA 
remain politically impossible.  After much fairly predictable 
back-and-forth over the need for Lebanon sooner rather than 
later to come to grips with the need for real reform, Salameh 
said -- as he has before -- that he preferred a reform 
program monitored by Fund staff.  Salameh said that he has 
had two recent phone conversations with the IMF Middle East 
and Central Asia Director Mohsen Khan.  Khan, Salameh said, 
"seems to have hardened his position, perhaps under the 
influence of you and the French." 
 
USING POLITICS TO MAKE THE ARGUMENT (AGAIN) 
FOR GENEROUS UPFRONT PARIS III CONTRIBUTIONS 
---------------------------------------- 
 
10.  (S)  Returning to what he attributed as USG political 
goals in Lebanon, Salameh said that he didn't understand why 
the USG would want a "contradiction" between, on the one 
hand, being tough and stingy at Paris III (by conditioning 
all assistance on reforms) and, on the other hand, wanting to 
protect Lebanon during a time of real political and financial 
peril.  After all, Salameh said (jabbing his finger toward 
the official portrait of Lebanese President Emile Lahoud), 
"you know, and I know, that we can't talk about real reform 
until he is gone."  A credible Lebanese president will 
support reform, while Lahoud will continue to block reform 
"until his last day in office."  If the international 
community withholds financial support from Lebanon until 
Lahoud vacates Baabda Palace because Lahoud won't support 
reform, "then we are punished three times" -- first, by not 
getting needed financial resources "to keep going"; second, 
by having to put up with the unpalatable Lahoud; third, by 
not having reforms. 
 
MARKETING PARIS III AS SUPPORT 
FOR LEBANON, NOT SINIORA 
------------------------------ 
 
11.  (S)  Salameh said that he recognizes and welcomes the 
fact that the support of many countries at Paris III will 
derive from the political imperative to support the Siniora 
government during a time of crisis, not because the donors 
are particularly confident about the ability of the Siniora 
government to implement the reform package.  Siniora's 
credibility internationally is "a tremendous asset for us, 
and we should use it."  Nevertheless, he cautioned, the 
donors should not sell Paris III as support for the Siniora 
cabinet per se.  Paris III must be seen as being good for all 
Lebanon, he said.  "Don't look as though you are bailing out 
your friend Fouad Siniora to protect him from Hizballah," for 
that will discredit the conference and further complicate the 
ability to get a reform program implemented.  After all, if 
Paris III is successful, then Siniora and his cabinet will be 
strengthened.  But let that be the natural result of Paris 
III, Salameh urged, rather than the stated purpose of Paris 
III. 
 
COMMENT 
------- 
 
12.  (S)  Salameh, of course, has been a master of financial 
engineering during his long tenure at the CBL.  He is not 
always transparent -- as we understand it, not even the IMF 
knows the real net balance of the foreign currency reserves 
at the CBL -- but he has been remarkably successful in 
calming the financial markets even during times of severe 
 
BEIRUT 00003914  004 OF 004 
 
 
crisis such as Rafiq Hariri's murder and the 
Hizballah-Israeli war.  The recipient of various 
international banking awards and praise, Salameh postures 
himself as professional, calm, even bland.  That is why his 
rather alarmist presentation to the Ambassador today was so 
striking.  A presidential aspirant, he certainly does not 
want to see Lebanon go belly up financially on his watch, but 
we do not believe that he would be sounding these alarm bells 
with us if he saw other solutions.  We will meeting Finance 
Minister Jihad Azour next week to hear his views, which we 
expect to be both rosier and less detailed. 
FELTMAN