Banknotes dry up as Lebanese hoard dlrs under siege

BEIRUT, July 19 (Reuters) Dollar banknotes are running out in Beirut as Lebanese, fearing a prolonged conflict between Israel and Hizbollah, hoard the greenback and an Israeli blockade cuts supplies, bankers say.

Lebanese banks are limiting the amount of dollar banknotes customers are allowed to withdraw from cash machines or branches amid growing demand, though bankers say euros, sterling, yen and other hard currencies are in plentiful supply.

''This is not a dollar shortage, it is a banknote shortage; we cannot bring more dollar notes from outside because of the blockade,'' Shadi Karam, Chairman of BLC Bank, told Reuters.

''People still have access to their dollar accounts. They can use their credit cards and transfer money in, out, right and left. It is just that local expenses like shopping or rent have to be paid in Lebanese pounds while this continues.'' Karam said Lebanon's total flow of banknotes does not usually exceed 150-200 million dollars, so with people withdrawing cash and supply routes severed the shortage is to be expected.

Lebanon's pound has come under pressure since the start of an eight-day-old war between Israel and Hizbollah guerrillas in which the Jewish state has blockaded Lebanon by air, sea and land, and bombed bridges and ports, shaking financial markets.

Central Bank Governor Riad Salameh says the currency will remain stable as Banque du Liban has enough foreign reserves to defend it from pressure and keep it within the its official band of 1,501-1,514 to the dollar. The central bank's gross foreign currency reserves are at all time highs at above 12 billion dollars.

Salameh said the shortage was in banknotes as a commodity not a squeeze on the dollar in terms of broader liquidity.

The pound was trading at the weakest end of its band, around 1,514 to the dollar, in official trade between banks. But small money changers were selling dollars for 1,600 pounds, mainly, bankers said, as they were trading in banknotes rather than broad money.

INTEREST RATES UP? Bankers said Lebanon had weathered the worst of the pressure on the currency but restrictions on the withdrawal of banknotes would stay in place until the siege was over and interest rates on pound deposits would eventually have to go up.

''If we compare activity to the first three days, things are cooling down. This always happens; those who want to convert from pounds to dollars have already done so,'' said Joe Sarrouh, adviser to the chairman of Fransabank.

Salameh said no special measures were being taken to bolster the Lebanese pound. But bankers said the central bank had made it more costly for banks to break long-term deposits before maturity by forcing them to make three-year dollar deposits at 7.5 percent with it to compensate.

In Lebanon, clients tend to hold shorter term deposits with banks and banks longer term deposits with the central bank, causing a crunch in times of pressure.

''When things calm down, we will probably have to raise interest rates on deposits,'' said Karam. ''You have to convince people who moved money out to bring it back.'' Reuters YA GC0056