VZCZCXRO2352
RR RUEHLMC
DE RUEHMU #0808/01 1762052
ZNY CCCCC ZZH
R 242052Z JUN 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2798
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1279
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RHEHNSC/NSC WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RUMIAAA/CDR USSOUTHCOM MIAMI FL
C O N F I D E N T I A L SECTION 01 OF 04 MANAGUA 000808
SIPDIS
STATE FOR WHA/CEN, WHA/AND, WHA/EPSC, INR/IAA, AND EEB/OMA
STATE PASS TO OPIC AND USOAS
STATE PASS TO USAID/LAC FOR D BATTLE
TREASURY FOR SARA SENICH
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR
E.O. 12958: DECL: 06/24/2018
TAGS: EFIN ECON PGOV NU
SUBJECT: NICARAGUA: VISIT OF TREASURY DAS O'NEILL COINCIDES
WITH A CENIS RESOLUTION
REF: A. MANAGUA 764
B. MANAGUA 706
C. MANAGUA 481
D. MANAGUA 450
E. MANAGUA 443
Classified By: Ambassador Paul Trivelli for reasons 1.4 b
1. (C) Summary: On May 27-29, Treasury Deputy Assistant
Secretary (DAS) Brian O'Neill visited Nicaragua to
participate in the Competitiveness Forum (Ref A) and
privately address the CENIs case. In his meetings with the
Nicaraguan Vice President, Central Bank President (BCN),
Banking Superintendent, and private bankers, DAS O'Neill
encouraged all parties to come to a resolution on the CENIs
case as soon as possible. BCN President Rosales revealed
that he had the approval of President Ortega to negotiate new
deals on the CENIs and was close to a resolution with BanPro.
(Note: On June 9, Rosales announced the deal, see paragraphs
9-10. End Note.) Bankers laid out the consequences for
Nicaragua's economy and financial system should the CENIs
case drag out too long, but suggested that President Ortega
is not interested in resolving the issue. DAS O'Neill's
visit relayed USG concern regarding the CENIs situation to
key Nicaraguan interlocutors. While the BanPro deal has
relieved some of the pressure on the CENIs case, it has not
dissipated the dangers of a country risk downgrade or a
portfolio revaluation for Bancentro. End Summary.
The Visit
---------
2. (SBU) Treasury Deputy Assistant Secretary (DAS) for the
Western Hemisphere Brian O'Neill visited Nicaragua May 27-29
to participate in the Embassy-sponsored Competitiveness Forum
(Ref A) and conduct meetings regarding the CENIs case and the
health of Nicaragua's financial system (Refs C-E). On May
28, DAS O'Neill met with Vice President Jaime Morales,
Minister of Trade Orlando Solorzano, Central Bank President
(BCN) Antenor Rosales, President of the Free Trade Zone
Commission Alvaro Baltodano (Gen. Ret.), Legal Director of
the Banking Superintendency Uriel Cerna, private bank
representatives, and Nicaraguan business leaders. (Note: The
Meeting with the Vice President is detailed in Ref A. End
Note.)
CENIs ) A Partial Resolution
----------------------------
3. (C) The principal focus of DAS O'Neill's agenda was to
receive an update on the status of the CENIs case and to
encourage all parties involved to come to a resolution as
soon as possible (Refs C-E). Central Bank (BCN) President
Antenor Rosales, Banking Superintendent Legal Director Uriel
Cerna, and private bank representatives all concurred on a
long list of serious effects on Nicaragua's financial sector
should the case drag on. While BCN President Rosales
announced the official agreement on a renegotiation with
BanPro on June 9, the lack of a formal resolution for
Bancentro means that the potential dangers surrounding the
BCN's failure to pay out on the CENIs have not abated.
The Banks' Perspective
----------------------
4. (C) During the meeting with Bancentro President Roberto
Zamora, Bancentro Executive Director Julio Cardenas, BanPro
General Manager Luis Rivas, and Banco Uno (Citibank) General
Manager Mercedes Deshon (also president of the Association of
Private Banks- ASOBANP), DAS O'Neill discussed the health of
Nicaragua's banking sector in light of the GON's default on
the CENIs. All agreed that the financial sector's numbers
continue to look strong despite the current economic slowdown
and worsening of the investment climate. However, local
banks have begun to tighten credit to build liquidity to
facilitate a quick response to any downgrade in bank and/or
sovereign ratings by Moody's and Fitch, which could occur by
June 30 if the government fails to pay. Both rating agencies
have Nicaragua on a ratings watch; a downgrade would increase
country risk raise the cost of credit. The banks fear that
should the agencies act, large depositors might transfer
funds to overseas accounts and start a run on the banks. Not
withstanding, Roberto Zamora reported he was not in a hurry
to finalize negotiations for Bancentro.
5. (C) The consequences of the CENIs case will fall first and
most heavily on the private sector and the financial system.
Nicaraguan banks are facing pressure from Panama's Banking
Superintendent, who oversees operations of all banks
incorporated in his country (including all Nicaraguan banks),
to revalue their portfolios and adjust capitalization levels.
The bankers do not believe President Ortega and his closest
advisors understand, or care, about sovereign risk ratings
and the health of the financial system.
6. (C) The most immediate repercussions to the GON for not
paying the CENIs has been donor reluctance to disburse direct
budget support funds (USD 110 million). The World Bank and
IMF are holding USD 36 million in funds in abeyance until
this and other conditionalities are resolved. DAS O'Neill
pointed out that these amounts do not represent much leverage
when compared to the USD 520 million President Ortega claims
Venezuela provided in 2007. (Note: This number is not
corroborated by other reports, which place the figure closer
to USD 130 million. End Note.) Nonetheless, "It is still
money the GON needs and cares about," Zamora noted. In
addition, the BCN and Ministry of Finance have been unable to
place any financial instruments with any private institution
since the April 15 default, losing a key monetary policy
instrument.
The Central Bank is Committed
-----------------------------
7. (C) BCN President Rosales was extraordinarily candid and
forthcoming during the meeting. He stated that his
re-anointment by Ortega as lead CENIs negotiator is a sign
that the GON takes the situation seriously. Rosales assured
DAS O'Neill that President Ortega promised to accept any
renegotiation terms Rosales could get as the condition for
resuming leadership of the negotiations (Ref D). Rosales
also announced that the agreement with BanPro was almost
finalized, while talks with Bancentro were in early stages.
The BanPro agreement was publicly announced on June 9.
(Note: Information recently provided to us from Bancentro
indicated that those negotiations have advanced. End Note.)
8. (C) Rosales assured DAS O'Neill that his legal counsel is
confident the BCN constitution allows him to sign the
agreement "to protect the economy," without a corresponding
approval from his Board. At the beginning of May, the three
private sector members of the BCN Board of Directors resigned
fearing prosecution if they approved a CENIs refinancing.
(Note: The Comptroller General (CGR) is currently preparing
cases against former BCN Board members who approved the 2003
CENIs renegotiation. End Note.) Rosales emphasized his
determination to sign, even though he does not enjoy immunity
from future prosecution. "Naming a new board will take too
long and the dangers are worse if I don't," he explained.
Bancentro and BanPro both fear Rosales' actions will be used
by the Sandinistas to later backtrack on the agreement and
force the banks into still another negotiation. Rosales
could not provide DAS O'Neill any assurances on this point.
BanPro's CENIs Deal
-------------------
9. (SBU) The CENIs deal with BanPro involves the exchange of
the current bonos bancarios (10-year coupon bonds with an
interest rate of 8.29%) for 20 year bonds at 5% for the first
15 years, then 5.25% for the last five. BanPro will receive
two payments per year on each bond. As a result, in 2008
Nicaragua will pay the bank USD 4.88 million, a reduction of
USD 36.25 million in the budgeted payment. While the result
is a reduction of USD 30-40 million in terms of net present
value, nominally the GON will pay USD 90 million more to the
banks over the life of the bond issuance. These terms are
far longer than any current government debt instruments and
significantly below market rates (currently 10-12% for dollar
denominated debt payable in cordobas at the official exchange
rate at on the day of redemption.)
10. (C) This final deal contains only minor differences from
the one Rosales presented to DAS O'Neill on May 28 -- an
exchange of the current bonds for 15-year zero coupon bonds
at 5%. The bonds would have varying maturity dates, starting
with October 2008. Payments would start small and build over
time (i.e. the larger payment burden would fall to future
governments.) Rosales also stated that, at the insistence of
the Panamanian Superintendent of Banks, the new bonds would
be tradable, with BanPro agreeing to being selling the bonds
upon receipt, starting with the longest maturities. DAS
O'Neill conveyed at the May 28 meeting that he was in favor
of the bonds being traded and the holders of the bonds
selling them in order to create a market. (Note: It is
unclear at this time whether the coupon bonds linked to the
June 9 agreement will be tradable. End Note.)
11. (C) Meanwhile the political accusations surrounding the
last CENIs restructuring continues. The Comptroller General
(CGR) has indicated that he will file formal charges against
opposition leader Eduardo Montealegre and other BCN board
members by July. Per Ref B, the CGR is probably waiting for
the most opportune time to influence the November 2008
municipal elections (in which Montealegre is running for
mayor of Managua) to file criminal charges.
Banking Superintendent
----------------------
12. (C) The Legal Director of the Banking Superintendency
Uriel Cerna and Banking Intendent Soledad Balladares informed
DAS O'Neill that Nicaragua is about to complete an agreement
with other central American superintendencies for a
consolidated supervision format, information sharing, and
joint inspections. As part of this modernization process,
the Superintendent is shifting to supervision based on risk
analysis and is modernizing its asset assessment capabilities
so it can better supervise the new micro-finance institutions
coming under Superintendence authority. Cerna also detailed
Nicaragua's advances in fighting money laundering, including
revision of the penal code, issuance of new banking norms
that meet Egmont and Basil standards, and increased police
investigations of financial crimes.
Talking Infrastructure
----------------------
13. (SBU) In separate meetings with the Minister of Trade
Orlando Solorzano and President of the Free Trade Zone
Commission Alvaro Baltodano, DAS O'Neill's presentation of a
new infrastructure development initiative for Latin America
was well received. The initiative, funded by the U.S.,
Brazil, the Inter-American Development Bank (IDB), and the
International Finance Corporation (IFC), helps identify
projects and pays for feasibility studies. Both Solorzano
and Baltodano stated that Nicaragua has a desperate need for
infrastructure and lots of ideas, but needs assistance in
transforming the ideas into proposals that could attract
serious investors. DAS O'Neill also presented the
initiative, along with the Treasury SME financing initiative,
to all of the participants at the Nicaraguan Competitiveness
Forum.
Comment
-------
14. (C) DAS O'Neill's visit was important in relaying USG
concern regarding the CENIs situation to a broad range of
public and private Nicaraguan contacts. It also allowed his
interlocutors to clearly lay out the consequences of
non-payment. The resolution of the largest part of the CENIs
has caused many to feel that the pressure is off, and
consequently negotiations with Bancentro have slowed.
Nevertheless, the danger of a risk downgrade and portfolio
revaluation by the Panamanian Superintendent have not abated.
15. (U) DAS O'Neill cleared on this cable.
TRIVELLI