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Cablegate: Lebanon: Bankers Value U.S. Assistance to Lebanon

VZCZCXRO1899
RR RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHROV
DE RUEHLB #0581/01 1211136
ZNR UUUUU ZZH
R 301136Z APR 08
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC 1674
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BEIRUT 000581

SIPDIS

SENSITIVE

SIPDIS

STATE FOR NEA/ELA
TREASURY FOR MNUGENT AND SBLEIWEISS
OPIC FOR RMOSBACHER/JSIMON/RDRUMHELLER/CHOSTETLER
EEB FOR EDIBBLE/RDEMARCELLUS
NSC FOR ABRAMS/SINGH/YERGER/DEMOPOLOUS

E.O. 12958: N/A
TAGS: EAID ECON EFIN ENIV PGOV SY SA LE
SUBJECT: LEBANON: BANKERS VALUE U.S. ASSISTANCE TO LEBANON

SUMMARY:
-------

1. (SBU) Senior officials from a cross-section of Lebanese banks
told Charge that USG financial assistance, especially where it shows
confidence in the banking system, is critical. OPIC loans, managed
by Citibank, of $108 in early 2007 and $153 in 2008, are popular
with the banks and the borrowers. In the same way the $1 billion
deposit promised by Saudi Arabia is necessary to boost confidence in
the Lebanese financial situation and reduce the cost to the GOL of
new borrowing. Bankers also pointed out that USAID micro financing
offers a cheaper alternative to Hizballah-backed loans, and should
be continued. Lebanese banks, undervalued and with limited
opportunities in Lebanon, are rapidly expanding outside of Lebanon,
and Syria is proving to be an attractive and profitable market. End
summary.

LEBANESE BANKS STEADILY
INCREASE IN VALUE
-----------------

2. (SBU) Charge, Econoff, and Econstaff met on April 29 with senior
officials from the Lebanese Banking Control Commission (BCC), and a
cross-section of important Lebanese banks. Bank Audi, Byblos Bank,
BLOM Bank, Fransabank, Lebanese Canadian Bank, and Intercontinental
Bank were all represented. Lebanese banks are proud of being the
only banks in the region left unscathed by the global sub-prime
crisis, due to an early Central Bank of Lebanon (CBL) circular
banning investments in sub-prime instruments. These banks have high
liquidity and a low cost of deposits. This allows them to offer
interest rates now above LIBOR, and that, plus the continuing
confidence by investors, means that deposits are growing steadily.
With only small dips following the Hariri assassination in early
2005 and the July 2006 war, deposits have grown from $43 billion in
early 2003 to $69 million by the end of April 2008. Since the
beginning of what Bank Audi refers to as "domestic political
bickering" in early 2007, deposits have increased by $9 billion.

OPIC LOANS POPULAR, AND
CHEAPER THAN "HIZBO-BANK"
--------------------

3. (SBU) According to the luncheon participants, Lebanese banking is
successful due to investor confidence, and outside enhancements,
such as U.S. OPIC funds and the deposits of Saudi Arabia and Kuwait
in the CBL during the July 2006 war, boost that confidence. The
OPIC loans, $108 in 2007 and $153 in 2008, are not large or even
critical; Lebanese banks are experiencing very high liquidity.
However, they are a concrete measure of investor confidence, as well
as being a popular instrument with banks and borrowers alike. Like
the USAID-funded micro credit, these loans to small and medium-size
enterprises (SME) can offer a cheaper alternative to what the
bankers referred to as "Hizbo-bank," or Hizballah.

SAUDI DEPOSIT CRITICAL
FOR CONFIDENCE
--------------

4. (SBU) In 2008 the GOL will need $3 billion in foreign currency
financing. Lebanese banks will provide about 90 percent of that
through Euro-bond issues, but the quality of the credit package they
can provide will be superior if the elusive $1 billion deposit
promised by the Saudis earlier this year is implemented. None of
the bankers know why the Saudis have not acted on their promise to
PM Siniora, nor are there even rumors of the cause. However, all
believe that the deposit, which will be an interest-bearing deposit
in the CBL, will both cut borrowing costs and enhance investor
confidence significantly. BCC Chairman Walid Alameddine bluntly
asked Charge to do what she could to convince the Saudis to make
good on their promise, and quickly.

SYRIA IS AN ATTRACTIVE
MARKET FOR BANKS
----------------

5. (SBU) Lebanese banks, which "suffer" from too much liquidity and
few investment opportunities within Lebanon, are expanding rapidly
outside of the country. One fertile territory is Syria, open now to
private banking. They pointed out that the Syrian diaspora is twice
as wealthy as the Lebanese diaspora, and the latter provides most of
the foreign investment in Lebanon and 25 percent of the GDP. It is

BEIRUT 00000581 002 OF 002


the bankers' opinion that the Syrians, anxious to replace dwindling
income from oil and agriculture, are looking for and finding foreign
direct investments (FDI.) This is an opportunity cost to Lebanon,
and in 2007 that loss amounted to $3-4 billion FDI. Bankers point
out that the GOS follows the "Chinese model" whereby the government
does not interfere in banking.

BANKS UNDERVALUED,
COULD EXPLODE IN VALUE
------------------

6. (SBU) Bankers point out that Lebanese banks, valued at only 1.5
times book, are undervalued, and handicapped by the political
situation. Stability would allow for an explosion, to more than
twice the $7.5 billion in book value. Even a slight improvement in
outlook, such as this week's announcement of a visit by Arab League
SYG Amr Moussa, can cause an increase in the value of bank GDRs. In
fact, according to the bankers, Moussa has a bigger impact on bank
share value than on solving the political crisis.

COMMENT
-------

7. (SBU) It is generally understood that the Lebanese banks carry
the Lebanese economy; if bankers at this level believe that the
promised Saudi deposit is critical, no effort should be spared in
making it a reality. End comment.

SISON

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