VZCZCXRO5656
RR RUEHGR
DE RUEHBE #0066/01 3482115
ZNR UUUUU ZZH
R 142115Z DEC 06
FM AMEMBASSY BELMOPAN
TO RUEHC/SECSTATE WASHDC 0071
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCNCOM/EC CARICOM COLLECTIVE
RUEHLO/AMEMBASSY LONDON 0008
RUEHCV/AMEMBASSY CARACAS 0005
RUEHME/AMEMBASSY MEXICO 0013

UNCLAS SECTION 01 OF 03 BELMOPAN 000066 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CEN//JASON MACK 
 
PASS TO EXIM//MICHELE WILKINS AND MICHELLE D. MILLER 
 
PASS TO USTR 
 
PASS TO DEPARTMENT OF ENERGY 
 
TREASURY FOR WHA//FRANCISCO PARODI AND JEFFREY LEVINE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID PGOV PREL SOCI BH
SUBJECT: BELIZE: PARLIAMENT APPROVES BROV LOAN AND "SUPER BOND" AS 
DEBT AS DEBT RESTRUCTURING CONTINUES 
 
REF: (A) BELMOPAN 44 
 
 (B) BELMOPAN 40 
 
¶1.  Summary:  The House of Representatives and the Senate met in 
emergency sessions on December 8 and 11, respectively, and approved 
a second USD 25 million loan from the Bolivarian Republic of 
Venezuela (BROV) (ref A) and the issuance of new bonds equivalent to 
USD 565 million.  These two financiing schemes form part of the 
government's debt restructuring plan, originally announced on August 
¶2.  While members of the opposition United Democratic Party (UDP) in 
the House supported the Venezuelan loan, they opposed the bond 
resolution.  In the Senate, however, the opposition, joined by 
senators representing civil society, the Council of Churches, and 
the business community, opposed both resolutions.  This resulted in 
a tie, requiring Senate President Philip Zuniga to cast the deciding 
vote.  End Summary. 
 
---------- 
Background 
---------- 
 
¶2.  On August 2, after a very long time of not admitting that the 
country was facing serious financial difficulties, the government 
finally announced that it was seeking the cooperation of its 
creditors in a program designed to place the Belizean public sector 
debt on a sustainable footing.  In short, the government admitted, 
through an official memorandum to "all holders of external debt 
instruments of Belize and Belizean public sector entities," that it 
could no longer continue to service its foreign debt.  The 
government then proceeded to hire the financial consultancy firm of 
Houlihan, Lokey, Howard and Zukin to come up with a viable debt 
restructuring plan that it could sell to its creditors.  The two 
financial resolutions that were tabled in the House and Senate form 
part of government's debt restructuring plan. 
 
------------- 
The BROV Loan 
------------- 
 
¶3.  The administration of Prime Minister and Minister of Finance 
Said Musa hurriedly convened a House of Representatives meeting on 
December 8 and a Senate meeting on December 11 to approve two 
financial instruments that would assist the government with the debt 
restructuring program it announced on August 2.  The first 
instrument deals with a USD 25 million concessionary loan from the 
BROV.  The second concerns the issuance of new bonds equivalent to 
USD 565 million to be used to exchange most categories of the 
country's outstanding external commercial debt. 
 
¶4.  According to Musa, who presented both resolutions to the House, 
this BROV loan (like the first one for the same amount that was 
approved by the House on June 12) was offered to the government 
under a bilateral program of economic cooperation and development 
between the two countries. 
 
¶5.  The terms and conditions of the loan are: 
 
- Loan principal amount: USD 25 million; 
 
- Disbursement: USD 25 million upon execution and registration of an 
appropriate Promissory Note; 
 
- Loan term: 15 years; 
 
- Grace period: 2 years; 
 
- Repayment period: in 26 equal semi-annual installments commencing 
December 2008; 
 
- Purpose: to support the Government of Belize's external debt 
management program; 
 
- Rate of interest: six month LIBOR rate without any additional 
margin. 
 
----------------------- 
 
BELMOPAN 00000066  002 OF 003 
 
 
The Bond Exchange Offer 
----------------------- 
 
¶6.  In presenting the second resolution, Musa noted that his 
administration consulted extensively for four months with the 
affected creditors before asking the House to approve the exchange 
offer.  Comment: The four-month consultation period that Musa 
referred to commenced on August 2, when the government announced its 
decision "to seek the cooperation of the country's private sector 
creditors in a rearrangement of Belize's approximately USD 960 
million external debt stocks."  End Comment. 
 
¶7.  Musa explained the terms and conditions of the bond: 
 
- Maximum transaction size: USD 565 million; 
 
- Rate of Interest: the new bonds will accrue interest, payable 
semiannually in arrears at the interest rates per year as set forth 
below: 
 
  Years after issuance Interest Rate 
       (per annum) 
 
   Years 1-3   4.25 percent 
   Years 4-5   6.00 percent 
   Years 6-22  8.50 percent 
 
- Issue Date: the U.S. dollar bonds are expected to be issued by 
March 31, 2007; 
 
- Maturity date: the maturity date is expected to be 22 years from 
the date of issuance; 
 
- Interest payment dates: the U.S. dollar bonds will pay interest 
semi-annually.  The first interest payment date will be 
approximately six months after the date of issuance; 
 
- Status of the U.S. dollar bonds: the U.S. dollar bonds will be 
general, direct, unconditional unsubordinated and unsecured 
obligations of Belize and will rank at least equally among 
themselves and with all of Belize's existing and future unsecured 
and unsubordinated external indebtedness; 
 
- Use of the U.S. dollar bonds: the U.S. dollar bonds will be given 
in exchange for eligible claims held by certain existing security 
holders. 
 
¶8.  Mark Espat, Minister of National Development and Investment, and 
the government's lead negotiator in its debt restructuring 
discussions, explained that his team of negotiators had met with 
creditors holding close to 80 percent of Belize's private sector 
debt and that one of the creditors' most "nagging" issues was the 
right coupon structure of the new bond.  Espat added that his team 
agreed to a step-up approach after realizing that the government 
would be able to make fairly early coupon payments. 
 
----------------------------------------- 
The Opposition: Belize a Vagabond Nation 
----------------------------------------- 
 
¶9.  Opposition leader Dean Barrow, as well as the other seven 
opposition members, supported the BROV loan, but opposed the bond 
resolution.  Barrow retorted that the government's bond exchange 
offer amounted to a default and that the reason the government has 
been "forced" to go this way is because of the level of "corruption" 
that has come to characterize the Musa administration since 1998. 
He reasoned that had his party supported the resolution, Belizeans 
would have taken it to mean that the UDP was sanctioning the 
government's "legacy of corruption."  For him, from now on Belizeans 
would be living in "infamy," because the country will be known as an 
"economically failed state ... a vagabond nation" for its inability 
to pay its creditors.  Musa argued, however, that the new bond offer 
is in keeping with the government's fiscal stabilization and debt 
restructuring program. 
 
------------------------------- 
 
BELMOPAN 00000066  003 OF 003 
 
 
Strong Opposition at the Senate 
------------------------------- 
 
¶10.  Although the Senate approved the BROV loan and the bond 
exchange offer, it was certainly not as smooth sailing for the 
government as it was three days earlier in the House.  In fact, 
Monday's session was one of the few times when the Senate President 
has ever had to break a tie.  (Note: All six government senators 
voted in favor of the resolution, while the three opposition 
senators were joined by the three non-government senators 
representing the Council of Churches, civil society, and the 
business sector to vote against.  End Note.) 
 
¶11.  In opposing the bond resolution, Senator Godwin Hulse, 
representing the business community, lamented the government's 
decision to call a Senate meeting on very short notice and its 
failure to provide the non-government senators information that 
could have persuaded them to support the resolution.  Hulse 
explained that in the absence of such information he had to look 
elsewhere, particularly to the Central Bank of Belize (CBB). 
According to him, he compared three debt repayment scenarios from 
the CBB and none of the payment totals matched with the bond 
exchange offer of USD 565 million. 
 
--------------------- 
Analysis and Comments 
--------------------- 
 
¶11.  The Government of Belize's October 2006 revised medium-term 
projections and indicative debt restructuring scenarios reveal that 
the country's projected foreign debt obligation for 2007 is USD 
203.4 million (six million less than what was reported in Ref B). 
This figure dips to USD 143.3 million in 2008, climbs again to USD 
155.7 million in 2009, continues climbing to 194.1 million in 2010, 
dips once more to USD 163.9 million in 2011, and then skyrockets to 
USD 419.6 million in 2012, resulting in an estimated financing gap 
of USD 321 million. 
 
¶12.  With these massive debt payment obligations staring at the 
country, and its bail-out options rapidly disappearing, it is easy 
to see why the Musa administration hurriedly went to the House and 
the Senate to seek approval for what the local media has dubbed the 
"super bond" -- equivalent to USD 565 million.  Bear Stearns has 
publicly stated that it considers favorably the terms and conditions 
of this "super bond" and would encourage its clients to accept the 
swap.  However, not all underwriters are following Bear Stearns 
lead.  Zurich Emerging Markets Solutions has rejected the 
government's latest offer as unacceptable and seems unwilling to 
compromise under the existing terms and conditions. 
 
¶13.  Cabinet ministers have repeatedly stated that the government 
will try hard to successfully conclude this exchange offer by the 
first week of February 2007.  An unsuccessful offer, therefore, 
would mean that Musa would have to present the new budget for fiscal 
year 2007/2008 to the House of Representatives (before the end of 
next March) without any provisions for savings that the failed 
exchange offer would have potentially realized.  At a time when the 
Musa administration's popularity is at its lowest, with polls 
forecasting his party's defeat at the next general elections, it 
will be interesting to see what other options the administration 
will propose in 2007 to service Belize's seemingly unsustainable 
external debt.  How the government will be able to protect the 
2-to-1 exchange rate peg with depleted foreign exchange reserves is 
another interesting question.  End Analysis and Comments. 
 
DIETER