Lebanese banks agreed in 2002, following the Paris II donor conference, to help the Central Bank by buying $4 billion worth of bonds in Lebanese- and dollar-denominated currencies with zero-percent interest. This step at that time allowed the government of then-Premier Rafik Hariri to reduce debt servicing by $400 million.

Central Bank Governor Riad Salameh said earlier he would seek the help of the banks in reducing the budget deficit but declined to give more details.

The Central Bank is also expected to discuss mechanisms to help the government in its efforts to reduce the budget deficit.

"The premium or country risk rates slapped on countries with low credit ratings like Lebanon prohibit Lebanese banks from lending the government below these premiums," Bassil said.

The premiums risks are added to the existing rates in Lebanon since the country is still viewed by rating agencies as risky in political and economic standards.

Rating agencies such as Standard and Poor's and Moody's fear that the tense political situation would hamper the government's efforts to reduce the $41 billion public debt.

Lebanese banks hold most of the states' sovereign T-bills and Eurobonds, thus increasing their risk exposure to any future defaulted payments.

Sources told the Central News Agency that the Central Bank may reduce the size of the T-bills which it is holding to help write off part of the public debt. http://www.dailystar.com.lb

These sources said the other scenario is that it borrow money from the Lebanese banks with rates closer to LIBOR (London Inter-bank Offered Rate), a step totally rejected by the banks.

"The premium risk in Lebanon now stands at 35 basis points and we are trying to reduce to 20 basis points if the political situation improves," Bassil said, adding that local banks can only help the government when there is a general consensus among the country's political class.

Bassil said the wide anti-government protests in Beirut Central District and the threat of civil disobedience is exacerbating the economic situation.

"If the political situation deteriorates this year than the GDP growth will reach 1 percent or even less," Bassil added.

He said banks can help the government in other projects such as privatization or helping stimulate the private sector through soft loans.

Another banker told the paper that the government will not have a problem in financing the outstanding Eurobonds this year which is worth $3 billion.

He added that the current Eurobond, which carries a coupon of 6.3 percent, will mature on the 25th of this month.

Apart from the Eurobonds, the government owes banks and other institutions more than $7 billion worth of T-bills.

Bankers say the government and the Central Bank usually roll over the T-bills on yearly basis and on the same rates.

"The economic picture is very bleak at present and I hope that politicians from both divides wake up before it is too late," Bassil said.

But Bassil is confident banks will override the economic and political problems as it did in the past, saying: "We have sufficient liquidity in the banks to weather any problem." -Daily Star