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Cablegate: Central Bank Governor Underscores Commitment to Dollar Remains Firm --------------------------------

DE RUEHMK #1089/01 3431438
P 091438Z DEC 07

C O N F I D E N T I A L SECTION 01 OF 02 MANAMA 001089




E.O. 12958: DECL: 12/09/2017

1.(C) Central Bank of Bahrain (CBB) Governor Rasheed Al-Maraj told Treasury Deputy Secretary Robert Kimmitt and the Ambassador December 5 that despite controversy surrounding the decline of the dollar's value in relation to the euro, it remained unlikely that any additional GCC country beyond Kuwait would de-peg from the dollar. Certainly Bahrain would not. Al-Maraj said the euro was incapable of replacing the dollar as a world currency and that the recent squeeze in euro liquidity, even in government bonds, was evidence of this. "That would never happen with the dollar because of the breadth and depth of the U.S. currency's marketplace liquidity," Al-Maraj said.

2.(C) D/S Kimmitt responded that the fundamentals of the U.S. economy remained strong. Inflation and unemployment are low, and beyond present difficulties associated with the sub-prime mortgage issue, future prospects for the U.S. economy remained bright. Al-Maraj agreed, noting that U.S. unemployment, inflation, debt-to-GDP, and unfunded pension liability figures were all more favorable than those of the E.U.

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3.(C) Al-Maraj said Kuwait's May 2007 revaluation of its currency, and further declines in the dollar's value against the euro had fueled speculation over GCC states, next moves. However, Al-Maraj reiterated that Bahrain would not de-peg or revalue its currency. He said pressure to do so was originating from elites who frequented European vacation destinations and bought "Mercedes" cars. "I'm not going to allow these people to set Bahrain's monetary policy. Bahrain has an open economy and consumers have a choice. There are other places to go on vacation and other brands of cars to buy."

4. (C) Nevertheless, Al-Maraj acknowledged that those pushing for Bahraini currency revaluation were a vocal group. These included economic and business columnists in the local press. "If you look, they are all expats. They want Bahrain to revalue the dinar and have even misquoted me in the past to try to make their case. The peg has served us well over the past 30 years. Despite problems with the U.S. economy, we will remain with the peg. There simply is no alternative." ----------------------------- U.S. INTEREST RATES A CONCERN -----------------------------

5.(C) Al-Maraj said the only real problem he saw concerned U.S. interest rates, particularly recent and expected U.S. interest rate cuts. "Our economy is very strong right now. I should be raising interest rates." He said he sought to dampen liquidity and curb access to credit, particularly to cool the real estate sector, which he saw as vulnerable to overheating. "But if we increase our interest rates now, we'll be vulnerable to arbitrage." Al-Maraj said he had already seen an increase in dollar-to-dinar trading. "All of my GCC colleagues have the same problem." ------------------------- HURDLES TO MONETARY UNION -------------------------

6.(C) D/S Kimmitt asked Al-Maraj for any insights on GCC discussions of monetary union. Al-Maraj replied that a 2001 GCC decree had called for any unified currency to be pegged to the dollar. Member states, including Bahrain, had all codified the decree the following year. "My expectation is that there will not be any change to this. This road has no U-turn."

7.(C) However, Al-Maraj pointed to what he saw as major impediments to GCC monetary union in the near-term. He noted that one bloc of GCC countries led by Qatar and the UAE enjoyed per capita GDPs of $30,000 and above (Bahrain's 2006 per capita GDP was $25,600), while another bloc, Saudi Arabia and Oman, had per capita GDPs of only $14,000. Some GCC countries were rich in oil and gas resources, while Bahrain and Oman were relatively poor in these resources. In addition, there were wide disparities in terms of openness of banking and commercial regulation. All of these factors MANAMA 00001089 002 OF 002 represented considerable obstacles to establishing monetary union.

8.(C) The E.U. had addressed these kinds of imbalances among its member states with substantial infusions of capital to southern and eastern Europe. The GCC would have to provide the same kind of assistance in order for monetary union to be viable. "There has to be a level playing field." ----------- FUTURE BANK -----------

9.(C) D/S Kimmitt said that Bahrain's increasingly positive commercial and economic environment, of which the U.S.-Bahrain FTA was a component, coupled with Bahrain's strong regime against terrorist financing had underpinned the USG decision to forego designating Future Bank up to this point. D/S Kimmitt noted that when the U.S. designated Banco Delta Asia in 2005, the Monetary Authority of Macau, as well as Hong Kong, where the holding company is headquartered, had moved quickly to assume direct control of the bank, a useful example of close bilateral cooperation. As events continued along the path toward U.S. action on Future Bank, the USG sought to identify a collaborative solution that would adequately address U.S. concerns and take Bahraini views into account. The U.S. call to action on Future Bank was more about Iran than it was about Bahrain.

10.(C) "It is Bahrain and not Iran that would bear the consequences of a designation," Al-Maraj replied. "Future Bank is locally incorporated and is under our jurisdiction. If there were a run on the bank, our depositors could stand to lose and the CBB would have to bail them out. If it were just a branch of an Iranian bank, we could not care less about it." (Note: Future Bank's capitalization currently stands at roughly $100 million. End Note.)

11.(C) Al-Maraj said the CBB had implemented measures to ensure that Future Bank does not violate U.S. or U.N. sanctions. "We have effectively ring-fenced the bank." He said the CBB has appointed two independent board members and assigned accountants to review the banks activities on a weekly basis.

12.(C) Al-Maraj said other options included trying to reduce Future Bank's Iranian ownership. However, given "the current atmosphere," he doubted that buyers would come forward to acquire any Future Bank shares. He thought that with more time, potential buyers might be found. "I can assure you we will work to reduce Iran's ownership." Al-Maraj agreed to work with D/S Kimmitt and other USG officials in coming days to take appropriate action on Future Bank. --------------------------------- RELATIONS WITH IRAN UNCOMFORTABLE ---------------------------------

13.(C) In answer to D/S Kimmitt's question regarding who might be interested in putting money in Future Bank, Al-Maraj noted that Bahrain hosted a significant population of Persian extraction. "Still, the situation between Iran and Bahrain is not too comfortable. Despite what you may hear, feelings in hearts and minds are different." ------------------------------------ TERRORIST FINANCE - A PERSONAL STAKE ------------------------------------

14.(C) On terrorist financing, Al-Maraj pledged to guard against "anything that would corrupt Bahrain's financial system." He added, "I have a personal stake in this. When I was working in Saudi Arabia I lost three of my people in an attack by Al-Qaeda on our facility." He said that from that time on, he had been dedicated to countering terrorist efforts. "In this position, or in any position I hold in the future, I will take appropriate action to stop them."

15. (U) DepSec Kimmitt reviewed this message. ********************************************* ******** Visit Embassy Manama's Classified Website: XXXXXXXXXXXX********************************************* ******** ERELI

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