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S E C R E T SECTION 01 OF 04 MANAGUA 002185 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 09/18/2017 
TAGS: PGOV ECON EFIN RELAM KDEM KCOR NU
SUBJECT: SILENCING CRITICS: ATTACKING THE OPPOSITION LEADER 
 
 
MANAGUA 00002185  001.2 OF 004 
 
 
Classified By: Ambassador Paul Trivelli, reason 1.4 (b) & (d) 
 
Summary 
- - - - 
 
¶1.  (S) The anti-democratic forces of the Ortega government 
combined with the corrupt powerbroker Arnoldo Aleman are 
mounting a politically motivated attack against the leader of 
the Nicaraguan Liberal Alliance (ALN) Eduardo Montealegre. 
The Comptroller General's office has accused Montealegre of 
criminal activities related to his effort as Finance Minister 
in 2003 to renegotiate government issued bonds, known as 
Negotiable Indemnization Certificates (CENIs).  It is not 
clear how personally damaging to Montealegre these charges 
will be ultimately, but the threat is real, and there are 
indications that ALN party members are jittery.  On September 
19, ALN National Assembly Deputy Ramiro Silva announced he 
was leaving the party.  With the ALN genuinely shaken by the 
attacks on Montealegre, we need to continue to find ways to 
foster the democratic forces of Nicaragua.  Comment begins at 
paragraph 9.  Extended background on the CENI issue begins at 
paragraph 11.  End Summary. 
 
The Messy Politics 
- - - - - - - - - - 
 
¶2.  (C) Montealegre's involvement in the CENI case became a 
political weapon for his political opponents during the 2006 
election campaign.  One of the most outspoken critics of 
Montealegre's links with the CENI case was PLC National 
Assembly Deputy Enrique Quinonez.  2006 election polling data 
suggests that the CENI accusations did hurt Montealegre. 
 
¶3.  (C) Montealegre has told us before that he expected that 
the "Pacto" alliance formed by President Ortega and former 
President and convicted felon Arnoldo Aleman would continue 
to pursue him on the CENI issue.  The question is, according 
to ALN party strategist Eliseo Nunez, Jr., why has the 
Comptroller General decided to pursue the case against 
Montealegre now?  It could have done so last year before the 
elections.  The answer, it appears, may have something to do 
with the five-year statute of limitations in Nicaragua.  The 
Comptroller General's office September 12 announcement 
indicated that all five members of the Central Bank 
responsible for re-financing the CENIs, including 
Montealegre,  are culpable for acting without a legal basis 
in  refinancing the CENIs; however, the statute of 
limitations  for the other CENI-linked notables -- including 
Arnoldo Aleman and former Central Bank President Noel Ramirez 
-- has  already expired.  The sole real target is clearly 
Montealegre, and the Comptroller General's office had to wait 
until now to avoid any political collateral damage, Nunez 
told us. 
 
¶4.  (C) Nunez doubts that the Ortega regime intends to do 
more than fire a warning shot at Montealegre.  Liberal 
opposition disunity favors the Sandinistas, Nunez argues, and 
as long as Montealegre continues to lead an anti-Aleman 
liberal movement, the Sandinistas benefit -- particularly as 
the country enters the municipal election period.  He 
indicated that the threat to Montealegre was real, however, 
and that Montealegre could face as much as 14 years' 
incarceration, should the Prosecutor's office decide to act 
on the Comptroller's conclusions.  Nunez also noted that if 
the case winds up in the Pacto-controlled courts, 
Montealegre's chances of a fair judicial process are limited. 
 Admitting that the ALN would be leaderless without 
Montealegre (Note:  Nunez's father is a National Assembly 
Deputy and one of the more important ALN politicians.  End 
note.), Nunez added that the CENI case made it all the more 
urgent for the ALN to reach an institutional cooperation 
agreement with the Constitutional Liberal Party (PLC).  If 
something happens to Montealegre, he opined, the only way to 
maintain a separate ALN identity within the liberal current 
of Nicaraguan political life would be through some kind of 
arrangement between the ALN and the PLC. 
 
ALN Supporting Their leader? 
- - - - - - - - - - - - - - - 
 
¶5.  (C) Kitty Monterrey, ALN Chief Advisor, told us on 
September 19 that the situation is dire.  The ALN party 
members are rattled by the possibility that Montealegre may 
not survive the CENI issue.  "They are looking for other 
 
MANAGUA 00002185  002.2 OF 004 
 
 
options," she argued.  On September 19, ALN Deputy Ramiro 
Silva Gutierrez announced that he was leaving the party, to 
become an independent National Assembly Deputy.  Monterrey 
told us that the ALN leadership knows that the Sandinistas 
have been courting Silva.  She doubted however, that it was 
money alone that tempted Silva away.  She told us that Silva 
and his family have received personal threats.  "They are 
attacking Eduardo (Montealegre) on all fronts.  The party is 
on the verge of complete disintegration," Monterrey warned. 
 
¶6.  (C) On September 17, PLC Whip Maximino Rodriguez and PLC 
heavyweight Enrique Quinonez both told the press that they 
would not support removing Montealegre's immunity as a 
Deputy, if CENI-related criminal charges are eventually 
brought against him.  "It's not a good sign," Monterrey 
argued, "when members of the PLC are out there defending 
(Montealegre) and the ALN itself is silent."  On September 
18, PLC Chief Spokesman Leonel Teller "clarified" the PLC 
position, claiming that PLC wants what's best for the nation, 
and that Montealegre should concentrate on liberal unity and 
not on attacking PLC leader Aleman. 
 
Next Steps 
- - - - - - 
 
¶7.  (C) The Comptroller General's Office does not have the 
ability to bring charges against any individual.  At this 
point it is up to the Prosecutor General (Fiscal).  It is not 
clear what steps the Prosecutor General will take, and that 
office has announced that it would conduct its own 
investigation into the CENI issue.  Monterrey told us that 
despite his close ties to Aleman, she doubted that Prosecutor 
General Julio Centeno Gomez would directly attack 
Montealegre, given the strong personal relationship between 
the two.  However, if there is sufficient pressure on him, 
Monterrey guessed that Centeno would find away to excuse 
himself from the action, letting others in the 
Aleman-dominated Prosecutor's Office take the lead. 
 
¶8.  (C) Monterrey outlined for us the three choices 
Montealegre faces:  cut a deal with Ortega; cut a deal with 
Aleman; or, go it alone.  Going it alone will fail, she 
opined.  Without the solid backing of a united ALN, 
Montealegre has neither the financial resources nor the 
political capital to take on the Pacto.  However, she said 
that there was no chance that Montealegre would cut a deal 
with either Ortega or Aleman.  "Eduardo (Montealegre) doesn't 
have a plan," Monterrey lamented, and as one of the ALN's 
chief financial officers during the 2006 campaign, "they will 
be coming after me next." 
 
Comment 
- - - - 
 
¶9.  (S) Monterrey is correct that the ALN is facing its most 
serious challenge.  Montealegre has known for some time that 
the FSLN/Aleman Pacto would come after him on the CENI issue 
and neither he nor his party have developed an effective 
strategy to counter it.  We also note that even the 
Comptroller's findings alone could conceivably bar 
Montealegre from being certified as a municipal candidate in 
2009 or as a Presidential candidate in 2011.  Further, we see 
no reason to discount Monterrey's assertion that the 
weaker/less loyal members of the ALN are scouting for options 
should Montealegre, and thus the ALN, go down.  Silva's 
departure from the party has the potential to be the first of 
several such defections and is exacerbating existing tensions 
within the ALN and with ANL's coalition partner, the 
Conservative Party.  Montealegre may be the best 
representative for a democratic future in Nicaragua, but he 
is under serious attack and will need to go on the offensive 
internally and externally to maintain his party and his 
position.  The CENI case has the potential to substantially 
weaken Montealegre's ability to be the leader of any united 
democratic front for the 2008 elections. 
 
¶10.  (S) Nonetheless, there are many liberal supporters for 
democratic change at the municipal and local level, people 
who want to see an end to Aleman's corruption of the liberal, 
anti-Sandinista movement and Montealegre remains massively 
popular among them.  Recent public opinion polls give 
Montealegre a 64 percent approval rating, higher than any 
other political figure in the country.  Montealegre's 
difficulties make it all the more imperative that we find 
 
MANAGUA 00002185  003.2 OF 004 
 
 
ways to promote this democratic movement from the ground up 
by aiding them with the resources and the training they need 
to strengthen their institutions and to resist the combined 
forces of the Pacto.  End Comment. 
 
Convoluted Background - The Cliff Notes Version 
- - - - - - - - - - - - - - - - - - - - - - - - 
 
¶11.  (SBU) Accusations that Montealegre abused his former 
capacity as Finance Minister for personal profit have been 
circulating since before the 2006 Presidential elections. 
The charges stem from Montealegre's association with 
BANCENTRO, one of the banks that, critics argue, benefited 
unduly during Nicaragua's 2000-2001 banking crisis.  On 12 
September, the office of Nicaragua's Comptroller General's 
office announced to the press that Montealegre should face 
criminal charges for his role in the 2003 refinancing of 
certain sovereign Nicaraguan bonds, known as Negotiable 
Indemnization Certificates (CENIs). 
 
¶12.  (U) Four Nicaraguan banks failed in 2000-2001 after 
approving bad loans (many to insiders) and making unwise, if 
not fraudulent, investments.  Most of the board members of 
the first and largest bank to fail were Sandinistas, who were 
never charged with the financial impropriety that led to this 
string of failures.  The first two banks to fail were also 
used by a shell company to launder money out of Nicaragua. 
When the company's pyramid scheme fell apart, it took the 
banks with it.  At the time, there was no government deposit 
guarantee agency, but the Central Bank, responsible for 
ensuring the stability of the monetary system, deemed it 
necessary to protect depositors and issued short term (2-4 
year) bonds, CENIs, to facilitate the takeover of the failed 
banks by other Nicaraguan banking institutions.  The final 
value of these CENIs was approximately USD 450 million.  USD 
118 million were issued to cover deposits and an initial USD 
63 million were issued to the banks to encourage their 
purchase of the failed banks, assets. 
 
¶13.  (U) Under the terms of the takeovers, the acquiring 
banks accepted responsibility for the deposits of the failed 
banks' customers (e.g. liabilities for the banks).   Given 
that the cause of the failures was the poor quality or 
overvaluation of the failing banks' assets (loans, government 
paper carried at face value, real estate, equipment, 
artwork), the acquiring banks were given the option of 
declining certain assets of the failed institutions.  The 
Central Bank issued CENIs to make up the difference with an 
initial payment of USD 63 million in CENIS to cover the gap 
between assets and liabilities.  The deposits from the failed 
banks passed to the acquiring banks overnight, but the terms 
of the acquisition gave the acquiring banks six months (plus 
a three month extension) to evaluate the value of the assets 
(loans) which they had accepted, and reclassify the loans -- 
if necessary -- with the agreement of Central Bank experts. 
If loans that one of the failed bank had classified as "A" 
were in fact non-performing, the Central Bank issued 
additional CENIs to ensure an adequate level of loan 
provisioning.  The assets that the acquiring banks had 
declined were returned to the "liquidation boards" of each 
failed bank for disposition.  After the evaluation period, 
the Central Bank issued an additional USD 269 million in 
CENIS to the acquiring banks to cover loans deemed 
non-performing. 
 
¶14.  (U) BANCENTRO, of which Montealegre had been General 
Director and a minority (10 percent) shareholder, was one of 
the successful bidders on the assets and liabilities of the 
failed banks.  Critics charge that the failed banks' assets 
were seriously undervalued and that the value of the CENIs 
that BANCENTRO and the other acquiring banks received were, 
therefore, excessive.  Haroldo Montealegre, distant cousin 
and rival of Eduardo Montealegre, and former President of one 
of the failed banks, leaked the names of several well-known 
borrowers whose loans had been classified as "A grade" by the 
failed bank, then reclassified as "C grade" by BANCENTRO and 
the Central Bank, but were subsequently reclassified as "A" 
again -- leading to a widespread belief that BANCENTRO had 
pulled a fast one on the Nicaraguan public. 
 
¶15.  (U) The Central Bank, BANCENTRO and the other acquiring 
banks insist that the process was transparent, and that if 
loans were reclassified it was because the failed banks had 
improperly classified them in the first place.  BANCENTRO 
 
MANAGUA 00002185  004.2 OF 004 
 
 
officials have explained in the past that  most of the CENIs 
provided to their institution were in  fact issued to cover 
the face value of the assets that they  had declined at the 
start of the process (real estate,  Property Indemnization 
Bonds (BPIs) carried at face value,  and obviously hopeless 
loans), not because of subsequent  reclassification.  With 
respect to the cases leaked to the press, BANCENTRO maintains 
that they were indeed non-performing loans when acquired, and 
only subsequently became loans in good standing because 
BANCENTRO restructured and refinanced them.  The Comptroller 
General's Office investigated these accusations of faulty 
revaluation, but it was never able to prove any fraud or to 
tie it to Montealegre.  (Note: An analysis by the Central 
Bank in August of 2006, determined that the revaluations and 
devaluations were correct.  End note.) 
 
The Montealegre Puzzle Piece 
- - - - - - - - - - - - - - 
 
¶16.  (U) In January 2003, Montealegre became Finance Minister 
in the newly elected Bolanos administration.  At that time, 
he resigned as General Director of BANCENTRO and divested his 
minority shareholding of BANCENTRO.  The purchaser of 
Montealegre's BANCENTRO holding did not have sufficient funds 
to pay for the entire holding at one time, so Montealegre 
agreed to an extended payment plan for the sale. 
 
¶17.  (U) In his capacity as Finance Minister, Montealegre 
faced the immediate challenge of how to deal with the fast 
approaching maturity dates of the CENIs issued by the 
previous administration.  There was no possibility that the 
Nicaraguan government could have repaid the maturing CENIs. 
As Finance Minister and ex officio Chairman of the Board of 
the Central Bank, Montealegre oversaw the process of 
renegotiation of the payment terms and interest rates of the 
CENIs.  The maturity terms were extended to ten years, and 
the some of the interest rates were substantially decreased, 
on average from 14.5% to 8.29%.  At this point the bonds 
renamed Bonos Bancarios and CENIs as such ceased to exist. 
 
¶18.  (SBU) In August 2005, the Comptroller General's office 
issued a finding that the Central Bank did not have the 
authority to issue the bonds and therefore the CENIs were 
null and void.  At the time, the financial institutions did 
not appear to take the finding seriously, believing that 
some accommodation would be found to regularize the 
situation, as no government would allow the now stable 
financial system to be jeopardized by wiping out a 
significant portion of the assets of half of the banks of the 
system.  Both the previous and the current Central Bank 
presidents have stated that the Central Bank will honor the 
Bonos Bancarios, despite the Comptroller General's statement. 
 They both felt that not to honor the bonds would seriously 
damage Nicaragua's recently hard won reputation as a good 
financial performer. 
 
¶19.  (C) However, the 2005 finding by the Comptroller General 
did provide the basis for what appears to be the current 
politically motivated attack on Montealegre.  Montealegre can 
not be held responsible for the original decision in 2000 to 
issue CENIs, but by extension of the Comptroller General's 
2005 finding on the legality of the CENIs, the charge is that 
Montealegre exceeded his authority in renegotiating the 
bonds' terms.  To add to the gravity of the charges, 
according to Nunez, the Comptroller General's office may seek 
to link the 2003 renegotiation of the CENIs with the terms of 
Montealegre's sale of his shares in BANCENTRO.  The argument 
is that because the purchaser's payments to Montealegre for 
the sale of his minority BANCENTRO holding were still being 
made when he was in office, his renegotiation of the CENIs as 
Minister of Finance resulted directly in personal financial 
benefit. 
TRIVELLI