Cablegate: Lebanon: Unsophisticated Lebanese Banking Sector Not

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

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