Lebanon banking system standing up to crisis

(AFP)

No abnormal currency transfers out of Lebanon have taken place and the banking sector is functioning normally despite the worst civil strife since the 1975-90 war, the country's central bank governor said on Monday.

Violence has engulfed the country since Iranian-backed Hezbollah and its allies launched a campaign during which it has routed supporters of the US-backed governing coalition that backs Prime Minister Fouad Siniora's government.

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Central Bank Governor Riad Salameh told newswire Reuters in an interview the Lebanese pound and interest rates had remained stable throughout the latest violence which has killed 81 people.

There had been no abnormal transfers of currency out of the country, he said, with the banking sector working normally for the past three working days.

"We have seen some demand to exchange Lebanese pounds to dollars but in a very moderate and expected volume," he added.

"The central bank has stated clearly the Lebanese pound will remain stable. We have the means to do it. Interest rates will remain also at present levels."

Salameh said that though the reaction in the exchange market had been "moderate", it was largely stable because negative expectations had already been factored in for a country paralysed by political crisis for 18 months.

The political conflict has been punctuated by assassinations, bombings and sectarian bloodshed. Lebanon also went through a war in 2006 between Hezbollah and Israel.

The crisis, which pits the Western-backed government against the Hezbollah-led opposition, has left the country without a president since November, paralysed government bodies and prevented the cabinet from carrying out economic reforms that would help it reduce a crippling $43 billion public debt.

The debt, equivalent to some 171% of gross domestic product, was mostly accumulated from the costs of reconstruction after the last civil war.

"Overall, we can say the central bank will be providing the necessary liquidity for the servicing of the debt, for the principal of the debt and also for the banks if needed," Salameh said.

But Salameh said the government would wait for a "better environment" to refinance $870 million debt maturing in August.

Spreads between Lebanese government Eurobonds and US bonds had also stayed stable and were not expected to widen. "Spreads have been stable as we've checked them today... they did not go wider with the last events," he said.

Asked if he expected they would widen, he said: "I don't think so now because the risk of the country has already been featured in the prices."

Lebanon raised $875 million in March to refinance maturing debt through a five-year Eurobond. In April, it also completed a voluntary offer to swap more bonds maturing this year for new bonds maturing in 2014.

In that operation, Lebanon exchanged a total of 58.5% of the three other bonds maturing later this year. (Reuters)

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