VZCZCXYZ0000
RR RUEHWEB

DE RUEHMU #2463 3111835
ZNR UUUUU ZZH
R 071835Z NOV 06
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 8141
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS MANAGUA 002463 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC AND EB/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV NU
SUBJECT: NICARAGUAN LIQUIDITY STRATEGIES COVER JITTERS BUT 
NOT PANIC 
 
REF: MANAGUA 2428 
 
¶1. (SBU) Summary:  Until September, Nicaraguan bank 
depositors defied expectations by keeping their money in 
Nicaragua, with pre-election jitters only manifesting 
themselves in September.  By October 31, deposits had dropped 
4.6% from their August peak of USD 2.2 billion.  To cover 
heavier than usual withdrawals, the Nicaraguan Central Bank 
(BCN) asked banks to maintain liquidity and signed a USD 150 
million contingency line of credit with the Central American 
Bank of Economic Integration (BCIE).  These measures are 
designed for elections jitters, not a major run on the banks 
or a currency crisis.  End Summary 
 
------------------------------------------ 
Depositors Hold Firm in First Half of 2006 
------------------------------------------ 

¶2. (U) In the lead up to the November 5 election pundits 
believed that Nicaraguans would take their money outside the 
country throughout the year.  Until September, however, 
depositors stood firm adding to the banking system's steady 
growth since 2001.  As of October 21, deposits were up 8% 
from 2005 and 16% from 2004.  The peak came in August when 
the system registered USD 2.2 billion in deposits.  The 
continuing profitability of this sector enticed GE Financial 
(in 2005) and Citibank (in October 2006) to buy half of two 
of Nicaragua's largest financial companies, Banco de America 
Central and Banco Uno, respectively.  (Note: The 
Citibank/Banco Uno deal awaits regulatory approval.  End 
Note.) 
 
--------------------------------------------- --------------- 
But were poised for quick exits, which started in September 
--------------------------------------------- --------------- 

¶3. (SBU) These deposits were poised for quick movement, 
however.  66% of deposits are in U.S. dollars, with most set 
to mature in November and December.  The only long term 
deposits in the system belong to the GON.  As November 5 
approached and the outcome of the election got muddier, 
depositors began to demonstrate the jitters the BCN had 
expected since January.  Between September 20 and October 21, 
USD 44 million left the system, a 2% drop.  On October 27, 
deposits had dropped by 3.6% from their peak in August.  As 
of October 31, this number was 4.6%.  (Note: A drop of 10% is 
considered a currency crisis.  End note.) 
 
-------------------------------- 
BCN Measures to Ensure Liquidity 
-------------------------------- 

¶4. (SBU) The IMF ResRep told us that, following the advice of 
the BCN, most banks increased cash holdings in September to 
cover about 40% of deposits.  (Comment: While this allows 
banks to cover the heavier than normal withdrawals by jittery 
depositors, it also means that they are not operating at 
their full earning potential and could quickly take capital 
out themselves if needed. End Comment.) 
 
¶5. (SBU) In the last few years the BCN built up reserves to a 
high of USD 870 million, just over two months of imports, 
which could help them cover some of these election related 
withdrawals.  The BCN also signed a USD 150 million 
contingency line of credit with the BCIE, available once 
total deposits drop 7.5% from their peak in August.  The BCN 
could draw on the line of credit in one or several advances 
until October 9, 2007, to provide liquidity to individual 
banks as needed. 
 
------- 
Comment 
------- 

¶6. (SBU) BCN's measures and the banks' liquid positions will 
only address the heavy withdrawals caused by pre-election 
jitters.  They are not designed to handle the full-fledged 
currency crisis that some predict will develop with Ortega's 
probable victory.  The IMF ResRep told us that his 
institution stands ready to provide bridge financing to the 
GON to help stabilize the economy, but is doubtful Ortega 
will ask the IMF for such help. (reftel)  End Comment. 
TRIVELLI