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French Version

Lebanese banks double interest on pound (Daily Star)

Move to stop recent rush to buy dollars

Many Lebanese banks are offering an average 12 percent interest on one
month Lebanese pound deposits to absorb U.S. dollars, bankers said on Wednesday.

"This move is only temporary due to the delicate situation in Lebanon," one banker said, adding that banks are stipulating that customers must convert their dollar accounts into pounds.

The shocking assassination of former Prime Minister Rafik Hariri created a panic in the market, prompting the Central Bank to sell some of its foreign currency reserves to absorb the rush on the dollar.

Some of the banks are even offering 15 percent on one month Lebanese pound deposits but analysts say that rates will return to normal once the political crisis is over.

Interest rates on the Lebanese pound fell by more than 600 basis points after Hariri secured $2.5 billion in soft loans from donor states in November 2002 in an attempt to reduce the country's debt servicing.

With gross foreign currency reserves of more than $11 billion, the Central Bank is in a good position to control the market.

But Central Bank governor Riad Salameh warned earlier that if the political crisis continued indefinitely, the economy and local currency will suffer.

Lebanese banks, which finance the government's $35 billion public debt, have more than $55 billion in customer deposits.

Bankers reported varying instances of deposit withdrawals, adding that the bulk of non-Lebanese residents' deposits are still the same.

Bankers added that interest rates on treasury bills will not be changed for now but warned that the Central Bank may be compelled to raise rates on T-bills if the situation worsened.

Traders said the currency market was calm on Wednesday, despite a huge rally called the previous afternoon by Lebanon's Hizbullah group, which highlighted deep splits among the Lebanese over Syria's influence in Lebanon.

The Central Bank has since made it very difficult for commercial banks to liquidate treasury bills, forcing them to turn to the inter-bank market for Lebanese pounds to meet demand as jittery investors switch to the greenback.

The resulting shortage of local currency in the markets has also driven overnight inter-bank rates up. They were around 12-15 percent on Wednesday compared to about 4 percent usually.

Overnight inter-bank rates briefly exceeded the 20 percent mark last week, before settling again.

"The overnight rates are very high right now because the market is very squeezed on Lebanese pounds. Everyone wants dollars but there is a shortage of pounds to buy them with," said one Lebanese trader.

To ease the squeeze, the Central Bank has devised a complex mechanism whereby it is effectively both buying dollars to up reserves and selling them to steady the currency.

"The bottom line is we are giving them pounds and getting dollars," a Central Bank official said.

The Central Bank promised after Hariri's assassination to defend the pound and keep interest rates on its debt unchanged.

Traders say the Central Bank has enough foreign exchange reserves to keep the pound stable for the time being. Bankers said the interest rate rise was normal given

the scale of the political shake-up that followed Hariri's death. They said rates had risen much higher during previous crises.

Beirut 13-03-2005
Osama Habib
The Daily Star

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