VZCZCXYZ0000
PP RUEHWEB

DE RUEHDG #3308/01 2961134
ZNR UUUUU ZZH
P 231134Z OCT 06
FM AMEMBASSY SANTO DOMINGO
TO RUEHC/SECSTATE WASHDC PRIORITY 6462
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHWN/AMEMBASSY BRIDGETOWN PRIORITY 1980
RUEHCV/AMEMBASSY CARACAS PRIORITY 0682
RUEHGE/AMEMBASSY GEORGETOWN PRIORITY 0906
RUEHKG/AMEMBASSY KINGSTON PRIORITY 2657
RUEHPO/AMEMBASSY PARAMARIBO PRIORITY 1040
RUEHPU/AMEMBASSY PORT AU PRINCE PRIORITY 4372
RUEHSP/AMEMBASSY PORT OF SPAIN PRIORITY 1728
RHEHNSC/NSC WASHDC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RHEFDIA/DIA WASHDC PRIORITY
RUEHC/DEPT OF LABOR WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY 1578

UNCLAS SANTO DOMINGO 003308 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR WHA, WHA/CAR, WHA/AND, INR, EB/ESC/IEC/EPC; 
TREASURY FOR OASIA-JLEVINE; DEPT PASS USDA FOR FAS; USDOC 
FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION 
USDOC FOR 3134/ITA/USFCS/RD/WH 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD DR
SUBJECT: DOMINICAN PLAN TO RECAPITALIZE CENTRAL BANK SEEN 
AS CRITICAL TO IMF PROGRAM 
 
 
1.(U) In its April 2006 Letter of Intent to the IMF, the 
Dominican government committed to formulate by July a plan to 
recapitalize the Central Bank as part of its structural 
reform agenda. The need stems from the overhang of 
quasi-fiscal debt issued and managed by the Central Bank in 
order to cover the hasty government guarantee of the 
equivalent of nearly US$3 billion in deposits lost in a 
series of bank frauds that came to light in 2003. The 
recapitalization plan was originally to have been completed 
by March but was delayed, according to the letter, to allow 
the government time to "incorporate the recommendations of 
international experts." The subsequent July deadline was also 
missed. On August 31, Central Bank Governor Hector Valdez 
Albizu announced that the Bank would use a ten year Treasury 
bond to recapitalize itself and to "cover all of its losses 
since it was established in 1947." 
 
2.(U) When the Fernandez government took office on August 16, 
2004, the Central Bank stock of CDs (called "Valores en 
Circulacion" in CB statements)to bailout the 2003 bank 
failures was 94.8 billion Dominican Pesos. As of August 31, 
¶2004. By Oct-09 of this year the figure had risen to 157.4 
billion Dominican Pesos. Compared with the extremely short 
term debt issued in the early days following the bank crisis 
(with maturities of as little as one week), maturities have 
been stretched to three years and interest rates have been 
reduced from over 50 percent to an average of 11 percent 
today. The monthly cost of servicing the outstanding stock of 
certificates has fallen from 3.4 billion pesos (about 4 
percent of GDP) per month to 2 billon pesos (less than 3 
percent of GDP). 
 
3.(U) Albizu's announcement of the Bank's plan was met with 
criticism primarily due to the lack of details regarding how 
it would work. Albizu had referred to the issuance of a bond, 
but no terms or other information was given. In early 
September Central Bank General Manager Pedro Silverio 
confirmed that a government bond would be used to 
recapitalize the bank and said that under no circumstances 
would any funds associated with the bond be substituted for 
those in the CDs, which would continue to be honored. 
 
4.(SBU) The IMF Resrep told economic officer in September 
that the IMF had worked with the Dominicans to develop this 
recapitalization proposal. He said the plan calls for the 
Ministry of Finance to place a  series of bonds in the 
Central Bank over a period of 10 years. The bonds are unusual 
in that they are not being sold publicly. The central 
government will create the bonds as an accounting tool that 
will serve as an asset to offset the Central Bank's debt and, 
thereby, transfer that debt to the Ministry of Finance. 
Interest earned will be used by the Bank to cover interest 
payments on its stock of outstanding CDs. The Resrep said 
that this strategy is not uncommon and has been used 
successfullly in other countries where the IMF has programs. 
 
5.(SBU) Central Bank Deputy Technical Manager Rolando Reyes 
told economic officer on October 13 that the bonds to be 
deposited in the Central Bank would be keyed to match the 
interest rates of the outstanding CDs. As existing CDs come 
due, the Central Bank will continue to issue new CDs to 
payoff the old debt, and new bonds will be issued by the 
Finance Ministry and transferred to the Central Bank 
periodically to cover the new debt. What has apparently not 
yet been decided is how the Central Bank and central 
government plan to stop the cycle of issuing new public debt 
to pay off the outstanding interest and principal, something 
that must happen to eliminate the debt once and for all. 
 
6.(SBU) Reyes commented that the public has misunderstood the 
Central Bank's plan because the concept of the government 
(Treasury) issuing a bond that is not sold in the market is 
 
not common. He said the plan is critical for the government 
to comply with its IMF obligations and added that the Central 
Bank wants to see the IMF standby agreement extended beyond 
the current March 2007 end date. Comment: Another reason why 
the plan has been misunderstood--by both the general public 
and by economists--is that the Central Bank has not made 
details widely known. In public statements by Silverio and 
other Central bank officials, the concept of a bond that is 
issued and bought by the same central government has not been 
discussed. The plan has merit. Unlike a line item in the 
annual budget that could be used to achieve the same transfer 
of funds from the central government to the Central Bank, the 
bond is a promise to pay that will be more difficult to erase 
under a new presidential administration than would be a 
budget line item. End comment. 
 
 
HERTELL