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Sanctions for Lebanon Over STL Funds?

Moody's warned Lebanon that failure to fund the STL could result in crippling sanctions for its banking sector.
By Gabe Kahn.
First Publish: 11/14/2011, 10:33 PM

Moody’s Investors Service warned Monday that the failure of the Hizbullah-dominated government of Prime Minister Najib Mikati to fund the Special Tribunal for Lebanon could lead to international sanctions on Lebanon.

The STL was established in March 2009 with the purpose of holding trials for the people accused of carrying out the 14 February 2005 assassination of Prime Minister Rafiq Hariri in a bombing that also killed 23 others.

In June the STL indicted four Hizbullah members in a move that sharpened already tense relations between rival political and social factions in Lebanon.

Opposition leaders maintain Hizbullah's terror militias and large stockpiles of arms have undermined the will of Lebanon's people - and that the terror group has sought to legitimize political assassination by refusing to let the government fund the STL.

Moody's noted that the current Lebanese government has to manage competing pressures from its Hizbullah-driven domestic political base, which rejects the STL’s role and findings, and concerns about possible international sanctions.

The Mikati government has faced monthly cabinet crises since its inception in July - most of them related to the STL - leading Moody's to conclude that even modest sanctions could topple the government.

Hizbullah and its political allies have called the STL a "Zionist plot" aimed at undermining the terror organization.

The country is required to transfer $32 million or 49 percent of the STL’s annual budget to the United Nations. Failure to fund the STL could lead to economic or financial sanctions from the international community.

Moody’s considered that sanctions appear unlikely, but both Lebanese Prime Minister Najib Mikati and President Michel Sleiman have both advocated funding the STL saying they fear sanctions are a likely result of failing to do so.

According to Lebanon This Week, sanctions - especially if they target Beirut's banking sector - would be credit-negative for Lebanon given that the country relies on its banks’ capacity to attract deposits and buy government debt.

Customer deposits fund 83 percent of Lebanese banking system assets and are supported by remittances – which accounts for over 20 percent of Lebanon’s GDP.

Lebanon This Week, citing a report from the Byblos Bank Group, added sanctions that reduce the inflow of remittances or deposits could pose a threat to the stability of the banking system and the sovereign’s finances.

Lebanese banks are the main lenders to the highly indebted Lebanese sovereign and their capacity to fund government debt depends on the stability of their depositor base. 

Hizbullah, which entered politics via its allies in the March 8 Alliance, has found itself under a level of public scrutiny and criticism for its policies of governance it did not have to endure when it was perceived as only being a 'resistance movement.'

Analysts say Hizbullah would likely face an unprecedented public backlash – probably strong enough to return its rivals to power – if its obstruction of funding for the STL resulted in a collapse of the country's banking sector.