VZCZCXRO9198
RR RUEHLMC
DE RUEHMU #0443/01 1012154
ZNY CCCCC ZZH
R 102154Z APR 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2427
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RHEHNSC/NSC WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RUMIAAA/CDR USSOUTHCOM MIAMI FL

C O N F I D E N T I A L SECTION 01 OF 04 MANAGUA 000443 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/AND, WHA/EPSC, INR/IAA, AND EEB/OMA 
STATE PASS TO OPIC AND USOAS 
DEPT PASS TO USAID/LAC FOR D BATTLE 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: DECL: 04/11/2018 
TAGS: EFIN ECON PGOV NU
SUBJECT: NICARAGUA TRIES TO SUSPEND PAYMENT ON LOCAL BANK 
BONDS 
 
REF: A. MANAGUA 373 
 
     ¶B. 07 MANAGUA 2564 
     ¶C. 07 MANAGUA 2539 
     ¶D. 07 MANAGUA 2185 
     ¶E. 07 MANAGUA 1719 
     ¶F. 06 MANAGUA 2611 
 
Classified By: Ambassador Paul Trivelli for reasons 1.4 b&d. 
 
¶1. (C) Summary:  On April 4, a Criminal District Court judge 
issued a sequestration order for all of the remaining USD 190 
million in Negotiable Investment Certificates (CENIs), in 
order to stop the Central Bank (BCN) from making a USD 20 
million coupon payment on April 15.  The CENIs have been a 
long standing source of tension between President Ortega's 
political and economic advisors.  When President Ortega 
rejected a refinancing agreement between the BCN and the 
banks holding the CENIs, he told the banks to negotiate a new 
agreement with the Attorney General and Comptroller General, 
FSLN political hardliners.  The banks declined, believing the 
negotiations would not be "voluntary."  Despite the public 
legal and political pressures the GON is exerting on the 
banks holding the CENIs, the BCN staff view the bonds as 
legally binding obligations and absent a Supreme Court 
decision or a new refinancing deal, they continue to prepare 
to make the April 15 payment.  The current political meddling 
in financial policy, if sustained, will do damage to the 
country's creditworthiness, the good operations of the 
banking system, and the prospects of creating a well 
functioning capital market.  Post will present the CENIs 
history and political implications septel.  End Summary. 
 
The CENIs hit the Headlines Again 
--------------------------------- 

¶2. (SBU) At 4:30pm on Friday, April 4, Assistant Prosecutor 
Ana Maria Guido requested that Criminal District Court Judge 
Julio Cesar Arias issue an order to sequester all of the USD 
190 million in "Bonos Bancarios" (aka CENIs) still in 
circulation in order to legally suspend the USD 20 million 
coupon payment due April 15.  The CENIs are held by two of 
Nicaragua's largest banks, BanPro, holding USD 150 million in 
CENIs with a capital base of USD 80.6 million, and Bancentro, 
holding USD 39 million in CENIs with a capital base of USD 
65.8 million.  (Note: In 2003 the original CENIs we 
refinanced and replaced with Bonos Bancarios.  Although the 
GON and public still use the term CENIs, they are referring 
to the replacement instruments, Bonos Bancarios.  We will use 
the same shorthand throughout this cable. End Note) 
 
A Deal Gets Done and Then Undone 
-------------------------------- 

¶3. (C) The CENIs have been a long standing source of tension 
between President Ortega's political and economic advisors. 
Back in January it seemed that Senior Economic Advisor 
Bayardo Arce and Central Bank (BCN) President Antenor Rosales 
had convinced Ortega of the importance of continuing to pay 
the CENIs and to negotiate their refinancing instead of going 
into default.  In February, Rosales, Arce, and the banks 
agreed to replace the bonos bancarios with new 10-year 
instruments at a 1% point reduction in interest rate to an 
average of 7.3%.  In net present value the agreement saved 
the GON USD 20 million; however, it increased nominal 
payments by USD 5 million over the bonds' ten-year life span. 
 The BCN Board of Directors refused to sign off on the 
agreement for fear of judicial attacks as the refinancing is 
exactly the same operation for which opposition leader 
Eduardo Montealegre is being prosecuted. 
 
¶4. (C) Rosales planned to sign the agreement himself instead 
using his authority as BCN President, but Ortega rejected the 
deal citing the increase in the nominal payments.  Ortega 
created a new negotiation commission comprised of political 
hardliners, Comptroller General (CGR) Luis Angel Montenegro 
and Attorney General (PGR - Procurador General) Hernan 
Estrada, to try and negotiate "a better deal."  However, the 
banks refused to come to the table feeling the negotiations 
would not be truly voluntary. 

The GON Goes on the Offensive 
----------------------------- 

¶5. (C) In response to the banks' non-participation, the GON 
reverted to a tactic that has worked well in the energy 
sector: publicly and financially back the banks into a corner 
forcing them to come to the table and accept any agreement 
offered to them.  The GON successfully used this tactic to 
force Esso to bring in Venezuelan crude in the fall of 2007 
(Ref B).  Supreme Court (CSJ) Vice President Rafael Solis 
(known as Ortega's legal right hand) confirmed this to the 
local media: "Since the banks did not want to sit down and 
negotiate with the new Commission (PGR and CGR), the 
Commission is now pressuring them using judicial means."  The 
GON and banks now have until April 15, when the payment is 
due, to negotiate and agreement.  (Note: The Banks can accept 
a grace period on payments as part of the refinancing, and 
the GON would get out of the April 15 payment. End Note.) 
 
¶6. (U) The payment suspension has been in the works for 
several months.  On February 13, in response to a request 
from Deputy Prosecutor Guido, Judge Arias issued an order to 
stop payment on the CENIs.  On February 14, BCN President 
Rosales filed a request to nullify Arias' order because it 
violated the Capital Markets Law.  The Capital Markets Law 
states that payment on bonds can only be suspended if the 
bonds and/or coupons are physically annotated to that effect. 
 In response, Guido and Arias worked together to issue the 
April 5 sequestration order, allowing the court to physically 
annotate the bonds, thereby stopping the April 15 (and 
possibly the October 15) payment.  On April 7, Arias denied 
Rosales' request for nullification, although that decision is 
more properly the purview of the CSJ.  Continuing with the 
sequestration effort, Judge Arias spent two nights in the 
BanPro central offices trying to gain physical access to the 
bonds to annotate them.  Late on April 9, BanPro had 
retrieved its CENIs and presented them to Arias. 
 
¶7. (C) An observer present during an April 9 GON Financial 
Committee meeting (comprised of BCN and Ministry of Finance 
senior staff) views the media circus as an effort to play 
"good cop/bad cop" with the banks to force them to 
renegotiate the CENIs on terms more agreeable to the 
political arm of the FSLN.  The BCN staff regard the CENIs as 
legally binding obligations of the GON and the rulings of a 
criminal district judge and the actions of a special 
prosecutor as non-binding.  "The GON had the authority under 
the Constitution to issue the bonds and the BCN has the 
obligation to honor them, especially when provisions have 
been made in the budget to honor them."  This view could 
change if the CSJ rules that the CENIs are unconstitutional. 
Though Supreme Court Vice President Solis has repeatedly said 
it is a decision that the CSJ is not yet ready to make. 
Therefore, absent a CSJ decision or a new refinancing deal, 
the BCN staff continues to prepare to make the April 15 
payment.  On April 9, the Finance Ministry stated that they 
will not pay the CENIs until Arias rescinds the court order. 
 
GON Motivations 
--------------- 

¶8. (C) Both Comptroller General Montenegro and Attorney 
General Estrada have made clear their belief that the CENIs 
are illegal and are determined to use them for political 
revenge against former Finance Minister Eduardo Montealegre 
and anti-pacto Liberals.  While they build their cases, 
Montenegro and Estrada also want to stop GON payments to 
"rich, corrupt bankers at the expense of the Nicaraguan 
people."  According to Banking Superintendent Victor Urcuyo, 
FSLN party hardliners have been determined from the beginning 
to make no CENIs payments at all during the Ortega 
administration.  Concentrating attention on payment also 
allows the FSLN hard-liners to divert attention away from 
questions about the role of several prominent Nicaraguans, 
including FSLN party members, in the initial bank failures 
that generated the CENIs. 
 
The Implications of the Sequestration 
------------------------------------- 

¶9. (C) Banking Superintendent Urcuyo does not believe the 
CENIs issue will destabilize Nicaragua's financial sector. 
In the event of non-payment, Urcuyo plans to allow both banks 
to write down the value of the bonds over the course of two 
years.  There will be short term problems with BanPro's 
capitalization, but the Superintendency is determining 
additional ways to help the bank through this period.  (Note: 
A back of the envelope calculation of BanPro's overall 
capital/asset ratio is less than 1%, Bancentro's is 8.7%. 
End Note.)  As well, BAC and Banco Uno, the next largest 
banks in Nicaragua are now wholly U.S.-owned and do hold any 
CENIs.  Therefore, the majority of Nicaragua's banking system 
is not exposed and should be able to weather any storms. 
Urcuyo does not expect any runs on BanPro or Bancentro as 
most Nicaraguans do not understand the connection between the 
payment of the bonds and the financial health of the 
institutions that hold their money.  That said, the 
Superintendency and BCN are laying contingency plans in case 
a run does materialize. 
 
¶10. (C) The GON is avoiding the word "default," claiming the 
sequestration and suspension is allowed by law.  For 
international markets and bankers, however, will likely be 
viewed as default, no matter the vocabulary.  Irrespective of 
whether the CENIs are paid or not, these political games have 
hurt Nicaragua's international credit rating and will make 
future borrowing more expensive.  IMF lawyers are studying 
whether a domestic debt default would have the same 
implications as a foreign debt default for Nicaragua's 
standing with the IMF.  Either way, both the World Bank and 
IMF have made it clear to the GON's fiscal and monetary 
authorities that they will withhold scheduled transfers if 
the GON defaults on the CENIs payments (Ref A).  The World 
Bank has committed to USD 20 million in budget support 
payments in 2008, but has informed the GON it will not 
present the proposal to its Board if there is a CENIs default. 
 
¶11. (SBU) The CENIs scandal has also hurt Nicaragua's nascent 
efforts to create a domestic debt market, assisted by a U.S. 
Treasury advisor (Ref E).  The market is too young for 
Nicaragua's reputation as a debtor to recover soon.  This is 
particularly bad news given that Nicaragua had finally 
resolved its commercial foreign debt problem and was now able 
to offer its instruments to the international financial 
community (Ref B).  A default would also limit the GON's 
sources for budget deficit financing as the institutions 
willing to purchase the newly created Treasury Bonds will be 
limited.  This will force the GON to revert to foreign 
borrowing again; an activity currently limited by the terms 
of the Highly Indebted Poor Country (HIPC) debt forgiveness 
deal. 
 
Comment 
------- 

¶12. (C) At this point many of our contacts still hope that 
the more reasonable members of the GON will prevail and the 
CENIs coupons will be submitted to the BCN and the payment 
will be honored.  Between now and then, however, there will 
be much political hay-making and hand-wringing, and BanPro 
and Bancentro will be roughly handled.  The issue plays too 
well domestically for the GON not to try to get election 
mileage out of the case.  The sad reality is that all of the 
FSLN political hardliners have no understanding of the damage 
they are doing to the country's creditworthiness, the good 
operations of the financial system, and the prospects of 
creating a well functioning capital market. 
 
¶13. (C) This is the first serious case where FSLN political 
leaders have begun to meddle in economic policy and 
operations that have significant ramifications for the larger 
national economy.  Previous FSLN/Ortega economic attacks have 
been against large foreign firms (e.g. Exxon/Esso and the 
Spanish energy firm Union Fenosa).  These economic attacks 
have had little direct impact on the domestic private sector. 
 However, this new action by Ortega proxies, including 
Estrada, Montenegro and judges, seeks to intentionally 
default on sovereign debt obligations and in the process 
severely damage the capital position of two major banks.  We 
are concerned, as we noted after the 2006 election, that this 
is a severe lapse of the GON's responsibility (and Ortega's 
2006 post-campaign promises) to adhere to fiscally 
responsible and sound macroeconomic policy (Ref F). 
TRIVELLI