VZCZCXRO6866
RR RUEHBC RUEHDE RUEHKUK RUEHROV
DE RUEHLB #1534/01 3021556
ZNR UUUUU ZZH
R 281556Z OCT 08
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC 3378
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RHEHAAA/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BEIRUT 001534 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR NEA/ELA 
STATE PASS USTR 
TREASURY FOR PARODI/BLEIWEISS/AHERN 
USDOC FOR 4520/ITA/MAC/ONE 
NSC FOR ABRAMS/RAMCHAND/YERGER/MCDERMOTT 
STATE PASS USAID FOR BEVER/LAUDATO/SCOTT 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID PGOV LE
SUBJECT:  LEBANON:  UNSOPHISTICATED LEBANESE BANKING SECTOR NOT 
AFFECTED BY FINANCIAL CRISIS 
 
REF: BEIRUT 1496 
      BEIRUT 1523 
 BEIRUT 1529 
 
SUMMARY 
---------- 
 
¶1. (U) The Lebanese economy so far seems to have emerged unscathed 
from the international financial crisis.  While part of the reason 
for its immunity to the crisis has been good banking oversight, it 
is actually the unsophisticated nature of the Lebanese banking 
sector, with its assets centered on sovereign debt, some private 
sector loans, and cash deposits, that has protected the economy in 
the recent turbulent weeks.  Consequently, the GOL has not taken any 
steps to counteract the crisis.  Contacts in both business and 
government view U.S. actions to stem the crisis as positive, though 
they wonder if USG measures will be enough to avoid a similar series 
of events in the future.  End summary. 
 
BORING BANKS 
---------- 
 
¶2. (U) Lebanon's sovereign debt stands at a staggering 170 percent 
of GDP, so it is perhaps unsurprising that thirty percent of 
Lebanese banks' assets consist of government debt.  Banks keep 
another forty percent of their assets in cash or other liquid 
instruments, because the Lebanese do not keep their money in the 
banks: the average lifespan of cash deposits in Lebanon is just 45 
days.  The remaining thirty percent of assets is lent to the private 
sector. 
 
¶3. (SBU) In other words, Lebanese banks are what Freddie Baz, Chief 
Advisor at Audi Bank, Lebanon's largest bank, calls "boring banks." 
"Only boring banks have been insulated from the crisis," he said. 
In fact, the boring Lebanese banks are attracting new cash in the 
current climate of uncertainty: deposits in Lebanon's banking sector 
are expected to increase $12 billion in 2008, compared to $7 billion 
growth in 2007, which had been considered a banner year, Baz 
remarked.  This inflow of deposits has come largely from Gulf Arabs 
and the Lebanese diaspora, looking for a quiet place to stash their 
money in the midst of the turmoil. 
 
EXISTING REGULATION SUFFICIENT 
TO WITHSTAND THE CRISIS 
---------- 
 
¶4. (U) As a result, the GOL has taken no recent action to counteract 
what has been more or less a non-event thus far in Lebanon, though 
there is still concern that issues in the Gulf economies may spill 
over to Lebanon, given heavy Gulf investment in the country and 
large numbers of Lebanese expatriates employed there. 
 
¶5. (SBU) In addition, measures taken by the Central Bank of Lebanon 
during past international crises, including a prohibition on banks' 
ownership of derivative products, protected domestic banks from the 
risks of structured products. And as Alain Bifani, Director General 
at the Ministry of Finance, remarked sarcastically, for years 
Lebanon has been implementing many of the measures now being adopted 
by the U.S. and Europe: over the past thirty years, he noted, the 
GOL has nationalized a variety of ailing firms and granted 
facilities to encourage bank mergers. 
 
U.S. RESPONSE POSITIVE 
---------- 
 
¶6. (SBU) Embassy contacts view the U.S. response to the crisis as 
positive, particularly since the other major financial powers also 
responded aggressively, calming markets worldwide.  Many banking 
contacts noted that while the response was not what liberal 
economists might see as ideal, it was crucial to restore confidence 
in the financial system.  Nonetheless, as Makram Sader, 
Secretary-General of the Association of Banks in Lebanon, remarked, 
the USG should undertake better regulation to address the root 
causes of the crisis. 
 
COMMENT 
---------- 
 
¶7. (SBU) While the Central Bank of Lebanon did enact prudent 
regulation in recent years that has helped Lebanon weather the 
 
BEIRUT 00001534  002 OF 002 
 
 
current crisis, the irony is that it is actually the country's 
relatively primitive banking sector, which does minimal investment 
lending and little investment banking at all, that has "protected" 
Lebanon.  While everyone is celebrating the strength of the sector 
in the wake of global weakness, the fact is that the same system 
that limits losses now also limits gains in the good times, and also 
does very little to promote investment in a country that sorely 
needs it.  End comment. 
 
SISON