This record is a partial extract of the original cable. The full text of the original cable is not available.

201626Z Jan 06

UNCLAS SECTION 01 OF 02 GUATEMALA 000107 
 
SIPDIS 
 
DEPT PASS EX-IM BANK 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV PGOV EAGR GT
SUBJECT: DEBT DEAL WITH SPAIN CLEARS WAY FOR CREDIT UPGRADE 
 
 
¶1.  (U) The GOG and the Spanish government (GOS) signed an 
agreement on January 11 laying out the terms for forgiveness 
of the twenty-six year old debt that has hampered the 
bilateral relationship and complicated Guatemala's treatment 
in multilateral financial forums.  The deal involved direct 
payment of a small portion to private creditors, further 
payments to a development fund to be managed by the Spanish in 
Guatemala, and a triangular debt arrangement involving 
Nicaragua.  The 1980 debt dispute has been a priority for the 
Berger Administration, which has been working to improve 
Guatemala's international image and credit ratings.  The 
Spanish began negotiating the deal as their bilateral 
relationship improved in 2001, but only moved to close the 
deal now, in part a reflection of their confidence in the 
Berger administration.  End Summary. 
 
The Debt 
-------- 
 
¶2.  (U) Spain's public export bank backed a 1980 loan to the 
private Guatemalan company, Corfina.  The $188 million loan, 
guaranteed at the time by the GOG, financed construction of a 
paper mill in El Progreso.  Soon after, the company defaulted 
on the loan and the GOG refused to cover it.  With interest 
and penalties, the debt carried on the books of the GOS and 
Spanish private sector creditors, who eventually bought the 
debt, grew to almost $1 billion by early 2001.  The debt 
prohibited the GOG from participating in Spain's bilateral 
financial assistance programs.  It also held down Guatemala's 
credit rating in the OECD, which has follow-on implications in 
a variety of private sector credit ratings. 
 
The Deal 
-------- 
 
¶3.  (SBU) EconOff met with Carlos Merino, the Economic 
Counselor at the Spanish Embassy in Guatemala.  According to 
Merino, the GOS-GOG bilateral relationship had been difficult 
since the burning of the Spanish Embassy in 1982 during the 
civil war.  However, in 2001, some progress on this and other 
issues led to a renewed effort by both sides to come to an 
agreement on the outstanding debt.  Then Finance Minister 
Eduardo Weymann proposed a triangular deal involving $506 
million in Nicaraguan debt owed to the GOG.  The GOG 
transferred the Nicaraguan debt to the GOS in exchange for 
forgiveness of much of Guatemala's debt to Spain.  The Spanish 
preferred the Nicaraguan debt as it could be dealt with in 
Paris Club negotiations and ultimately forgiven on better 
terms, as Nicaragua is a HPIC country (Guatemala is not). 
This creative approach significantly advanced the 
negotiations, but the general breakdown of the Portillo 
administration and its overwhelming corruption stalled further 
progress on the debt talks.  Difficulties in liquidating the 
largely out-of-date paper mill further complicated 
negotiations. 
 
¶4.  (SBU) When President Berger took office in January 2004, 
the Spanish were increasingly motivated to remove this long- 
standing impediment to the bilateral relationship as a signal 
of confidence in the new government.  On the Guatemalan side, 
a group was formed to improve Guatemala's image and 
international credit ratings.  The mixed public-private sector 
group has been lead by Commissioners for Government Planning, 
Richard Aitkenhead and for Competitiveness, Mickey Fernandez, 
along with Banco Industrial President, Luis Prado.  They met 
with EconOffs on several occasions in an effort to lobby for 
USG support for improved credit ratings for Guatemala.  They 
brought their case directly to the OECD, Ex-Im 
representatives, Moody's, and Standard and Poor's and heard 
from several fronts that the outstanding debt with Spain was 
holding back the country's rating. 
 
¶5.  (U) The deal signed on January 11 and announced at a press 
conference on January 16 involved a $10 million payment to be 
made over the next 60 days to the private Spanish creditors 
(covered by the final sale of the Corfina facility); $10.5 
million to be paid into a development fund that the Spanish 
will administer in Guatemala over the next three years to 
support health and education projects; and forgiveness of the 
remainder of outstanding debt not covered by the 2001 
Nicaragua deal.  The Spanish Embassy is now working to develop 
financial assistance programs for Guatemala, the only country 
in the region that doesn't currently benefit from such 
programs. 
 
Comment: A Good Win for Berger's Economic Team 
--------------------------------------------- - 
 
¶6.  (SBU) The Guatemalans anticipate increased cooperation 
with the GOS and are happy to have this black mark removed 
from their international reputation.  More importantly, the 
GOG and the big financial sector players are optimistic that 
they will now be able to raise Guatemala's credit rating; 
thereby reducing public and private interest rates and 
attracting more direct investment.  Guatemala is still ranked 
below most of their neighbors in spite of their impressive 
macro-economic indicators and low debt levels.  However, they 
may be overselling the importance of their OECD ratings. 
Impressively low debt levels not only reflect years of fiscal 
restraint, but also the GOG's historic under-investment in 
Guatemala's people and infrastructure.  Attracting much-needed 
direct investment will require the long-term success of 
Berger's business climate and social investment initiatives. 
 
DERHAM