VZCZCXRO2513
RR RUEHLMC
DE RUEHMU #1719/01 1942022
ZNR UUUUU ZZH
R 132022Z JUL 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 0792
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RHEHNSC/NSC WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC 0847

UNCLAS SECTION 01 OF 02 MANAGUA 001719 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/CEN, WHA/EPSC, AND EEB/OMA 
STATE PASS TO EX-IM 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV PREL NU
SUBJECT: UPDATE ON NICARAGUA'S DOMESTIC DEBT 
 
REF: MANAGUA 371 
 
¶1. (SBU) Summary: Working with the U.S. Department of Treasury's 
Office of Technical Assistance (OTA), Nicaragua is taking the first 
steps in addressing its excessive domestic debt burden.  The OTA 
designed National Debt Management Strategy aims to develop an 
internal market for government debt to serve as a strong financing 
alternative for the GON once HIPC/IDA-only concessional terms are 
phased out.  The 2007 auction schedule calls for USD 40 million in 
one- and three-year instruments and USD 40 - 60 million a year for 
the next three years.  The issuances will have staggered maturity 
dates, hopefully creating a domestic yield curve and promoting a 
domestic secondary bond market.  While at this point, bond-based 
government debt is more expensive than the concessional loans 
currently available, establishing a regular market for these 
domestic instruments will provide Nicaragua with a cheaper financing 
alternative in the future.  End Summary. 
 
¶2. (U) Nicaragua is taking the first steps in addressing its 
excessive domestic debt burden.  In 2006, Nicaragua's internal debt 
reached USD 1.2 billion (equivalent to 23% of GDP).  Despite 
President Ortega's rhetoric regarding "foreign and domestic 
oligarchic creditors," the GON has kept its domestic debt repayment 
schedule.  In February, it paid USD 124.3 million in Property 
Indemnification Bonds (BPI - bonds issued as compensation for lands 
seized in the 1980s).  In May, it paid USD 21.7 million in bank 
bonds (CENIs - used to cover costs of four bank failures in 2001-2). 
 
 
¶3. (SBU) Since 2002 the U.S. Department of Treasury's Office of 
Technical Assistance (OTA) has been working with the Central Bank 
(BCN) and the Ministry of Finance (MHCP) to create a National Debt 
Management Strategy (DMS) to develop a more sustainable program for 
domestic public debt and to address the problem of ballooning debt 
payments in 2008 and 2009.  (Note: Nicaragua's debt service will 
increase to USD 187.2 million in 2008 and USD 175 million in 2009 
due primarily to the maturation of BPIs. End note.)  In 2004-5, in 
an attempt to develop a local market for government debt 
instruments, MHCP issued USD 16 million in short-term bills 
("letras") but detected a lack of demand for medium-term bonds. 
This lack of demand in the medium-term instruments was most likely 
due to the controversy surrounding the CENIs and the lack of 
consistency and transparency in the 2004-5 issuances. 
 
A New Debt Management Strategy 
------------------------------ 

¶4. (SBU) In 2007 the GON prioritized the OTA-designed DMS, whose 
primary objective is the development of an internal market for 
government debt to serve as a strong financing alternative for the 
GON once HIPC/IDA-only concessional terms are phased out for 
Nicaragua.  In May the Economic Cabinet approved the MHCP domestic 
debt auction calendar for 2007, allowing MHCP to raise USD 40 
million this year.  (Note: These include both competitive and 
non-competitive auctions. End note.) 
 
¶5. (SBU) An essential part of the DMS will be a regular dialog 
between MHCP and investors in order to improve demand and liquidity 
for government bonds, increase transparency in the process, and 
promote the development of an active secondary market.  Five basic 
components of the DMS are: 
 
-- MHCP will only issue standardized bonds. 
 
-- Issues will be concentrated in fewer series in order to increase 
their liquidity. 
 
-- Time periods for the bonds will be extended gradually. (i.e. in 
2007, MHCP will only issue one and three-year bonds.) 
 
-- MHCP will issue a quarterly report on the auction plan and 
calendar. 
 
-- Communication with investors will be improved by creating a 
government-investors consultation mechanism; they will meet 
regularly with the principal market players. 
 
¶6. (SBU) The auction schedule for 2007 includes USD 10 million in 
Treasury Bills and USD 30 million in Republic of Nicaragua Bonds. 
The Bills will be in denominations of USD 10,000 and mature in one 
year with payment in cordobas at the prevailing official exchange 
rate.  The Republic of Nicaragua Bonds will be in denominations of 
USD 10,000 and will mature in three years.  Payment will be in 
cordobas with interest paid out every six months. 
 
 
Bond Issuances in 2007 
---------------------- 

¶7. (SBU) The Central Bank will continue to issue its own paper, all 
with maturities of less than one year (one, three, and six months.) 
As of May 23, BCN had placed short-term bills valued at USD 80.6 
million for 2007.  The growing demand for BCN paper has allowed it 
to start lowering the rates it accepts for its bonds (i.e. cutoff 
rates.)  (Note: The DMS calls for a gradual phase-out of BCN issued 
paper and increased use of MHCP's bonds to support monetary policy. 
End note.) 
 
¶8. (SBU) MHCP has already begun implementing the DMS.  In May it 
issued USD 10 million in one-year bills.  All but 800,000 were 
placed.  (Note: The final bonds were sold in June. End note.)  65% 
was placed in a non-competitive auction and 35% through a 
competitive process.  In both auctions the rates came in at under 
10%, lower than expected.  MHCP will auction USD 30 million in 
three-year Republic of Nicaragua Bonds in the fall, with private 
banks among their target audience.  The current plan is to issue USD 
40 - 60 million a year for the next three years, with staggered 
maturity dates, to create a domestic yield curve and promote a 
domestic secondary bond market.  (Note: Nicaragua has a securities 
exchange where bonds are traded, and the National Assembly passed a 
Capital Markets Law in 2006, both of which will facilitate this 
process and eventually lead to a commercial debt market. End Note.) 
 
 
¶9. (SBU) To address the upcoming balloon payments, MHCP plans an 
additional auction to raise the funds to buy back BPIs with 10-15 
year maturities, which currently trade at about 40 cents on the 
dollar.  BPIs currently represent over 80% of the domestic 
government debt and the buy-back would represent a huge savings for 
the GON.  OTA is focusing MHCP on issuing only standard paper for 
all of the GON's financial needs and avoid past habits of special 
types of bonds for different situations (i.e. BPIs, CENIS). 
 
¶10. (U) OTA and MHC believe that this additional auction to cover 
the BPIs should be successful as private banks currently have excess 
liquidity due to high deposits, but lower demand for credit. 
 
¶11. (U) Information on BCN and MHCP bonds can be found at: 
http://www.bcn.gob.ni/titulos_valores/ 
 
Conclusion 
---------- 

¶12. (SBU) While at this point, bond-based government debt is more 
expensive than the concessional loans currently available under 
HIPC/IDA terms, establishing a regular market for these domestic 
instruments is essential for the time when Nicaragua no longer 
qualifies for concessional loans.  An established bond market will 
provide the GON with a much cheaper alternative to raising needed 
funds than the regular loan market.  Success of this plan will 
depend on presenting a coherent economic plan and keeping stable 
macroeconomic policies in place. 
 
TRIVELLI