VZCZCXRO5423
PP RUEHAG RUEHBC RUEHDE RUEHKUK RUEHROV
DE RUEHLB #1713/01 3051320
ZNY CCCCC ZZH
P 011320Z NOV 07
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC PRIORITY 9933
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHNO/USMISSION USNATO 1805
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 001713 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR ABRAMS/SINGH/GAVITO/YERGER/DEMOPULOS, STATE FOR 
NEA/ELA, NEA/FO:KHARRINGTON, MPOPAL, 
 
E.O. 12958: DECL: 11/01/2017 
TAGS: ENIV PGOV PREL PTER LE
SUBJECT: LEBANON:  CENTRAL BANK GOVERNOR SAYS USD FOUR 
BILLION WILL PREVENT FINANCIAL CHAOS 
 
REF: STATE 148539 
 
Classified By: Ambassador Jeffrey Feltman for reasons 1.4 (b) and (d) 
 
SUMMARY 
------- 
 
¶1. (C) Central Bank Governor Riad Salameh is preparing for 
possible financial chaos, if the political situation 
deteriorates.  He is prepared to run a "legitimate" bank from 
anywhere, and can support the Lebanese pound for the short 
term.  In the event of political instability, he believes it 
is critical to secure USD four billion in medium-term 
deposits at the Central Bank in 2008 to stop pressure on the 
pound.  Salameh will not allow the bank to support a "rogue" 
government; however, if he is killed, his deputy (a Shia 
linked to Nabih Berri and Hizballah) automatically takes 
over.  Salameh's meetings with the World Bank went well, and 
he is no longer opposed to the EPCA, although he has 
reservations about a future standby agreement.  End summary. 
 
¶2. (C) The Ambassador, accompanied by Econoff, met with 
Central Bank (CBL) Governor Riad Salameh on October 31, 2007, 
to discuss the World Bank (WB) annual meetings, CBL 
contingency plans, and potential USG reactions to an 
illegitimate second government in Lebanon (reftel). 
 
CENTRAL BANK WILL 
OPPOSE ANY ILLEGITIMACY 
----------------------- 
 
¶3. (C) Salameh came down firmly and immediately on the side 
of legitimacy, or what he called "international legality," if 
the CBL were to be confronted with political chaos.  He said 
that he understood the ramifications of backing a "rogue" 
government, and he would not permit the bank to do so.  The 
BDL would respect international law, and internally would 
continue work as normally as possible.  Salameh admitted to 
carrying a case of computer disks home with him every night, 
which would allow the CBL to operate from anywhere.  He does 
not fear for the money; his signature is required.  He noted 
that his own security is a problem, however:  if he is 
killed, the CBL's First Vice President -- a Shia linked to 
Nabih Berri and Hizballah -- would automatically become 
governor. 
 
CHAOS WILL PUT PRESSURE 
ON LEBANESE POUND 
----------------- 
 
¶4. (C) What does worry Salameh is the market reaction.  The 
CBL currently has a strong balance sheet, but in the case of 
political chaos, rating agencies will downgrade Lebanon. 
Salameh assumes that civil insubordination, resulting in the 
loss of income to the GOL, will be more likely than total 
political collapse.  There will be pressure on the Lebanese 
pound (LL), interest rates will go higher, and banks will 
begin to default.  The BDL will support the GOL, the LL and 
the banks, and for a few months, this will be possible; 
longer term will be a bigger problem. 
 
FOUR BILLION DOLLARS 
IS KEY TO SUCCESS 
----------------- 
 
¶5. (C) The CBL is the cornerstone of stability in Lebanon, 
and in Salameh's opinion, it will keep Lebanon democratic.  A 
run on the LL would impoverish the country, and he considers 
it a real risk; there was a run on the pound three days after 
the assassination of former PM Rafiq Hariri, which the BDL 
was able to stop.  If there is a lingering crisis over the 
presidency, cabinet formation, and government programs, 
Salameh estimated that the CBL would need USD 4 billion in 
deposits during 2008 to maintain financial stability.  If 
there is a quick end to the current political crisis, he 
thought that the current dollarization rate of 76 percent 
would drop to somewhere between 65 and 70 percent, making the 
additional dollar deposits unnecessary.  Salameh stressed 
that there is a big difference between short-term deposits, 
such as those placed by the Saudis and Kuwaitis during the 
war last summer, and deposits which will halt a crisis.  He 
is looking for medium-term deposits -- five years or more -- 
to provide the cushion required.  He pointed out that, with 
current oil prices, what he is asking is not a big amount for 
oil-rich Arab countries. 
 
BEIRUT 00001713  002 OF 002 
 
 
 
WORLD BANK MEETINGS SUCCESSFUL 
------------------------------ 
 
¶6. (C) Salameh was pleased with his meeting with the new 
managing director of the IMF, Dominique Strauss-Kahn. 
Salameh went looking for a promise of backing for the CBL in 
case of chaos, and found not only that, but also a promise of 
a positive attitude towards Lebanon on the part of 
Strauss-Kahn.  Salameh linked this attitude in part to his 
success in pushing the Lebanese banks to diversify outside of 
Lebanon, which has increased deposits by $8 billion over the 
last year.  Salameh has changed his opinion of the Emergency 
Post Conflict Agreement (EPCA) because he felt that it 
imposed discipline on the GOL.  He attributed his initial 
opposition to fears for the LL; when he understood that the 
IMF felt the LL is fairly valued, he changed his mind. 
However, he is certain that the GOL cannot move to a standby 
agreement; the IMF would reject it after a few months, 
because the GOL would "break the rules" and damage the 
reputation of the country. 
 
COMMENT 
------- 
 
¶7. (C) Salameh's message to us was that USD four billion in 
deposits will prevent financial chaos in Lebanon. He also 
told us that he views his chances at the presidency at about 
30 percent.  Whatever his inner feelings, he postured as 
someone much more determined to get the money than the 
presidency.  He also referred to his own reputation and his 
experience at Merrill Lynch in affirming his commitment not 
to fund a rogue cabinet.  He made a convincing case that, 
despite the dangerous political waters, he will steer the 
bank in the right direction.  But his comment about what 
happens if he is killed -- with a Hizballah-allied Shia then 
in charge of the Bank -- was worrying.  End comment. 
FELTMAN