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DE RUEHMU #0450/01 1022102
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R 112102Z APR 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2437
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RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
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C O N F I D E N T I A L SECTION 01 OF 04 MANAGUA 000450 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/AND, WHA/EPSC, INR/IAA AND EEB/OMA 
STATE PASS TO OPIC AND USOAS 
DEPT FOR USAID/LAC 
DEPT ALSO FOR CA/VO/L/C 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: DECL: 04/12/2018 
TAGS: EFIN ECON PGOV NU
SUBJECT: NICARAGUA'S CENIS: A HISTORY AND POLITICS 
 
REF: A. MANAGUA 443 
     ¶B. MANAGUA 373 
     ¶C. 07 MANAGUA 2564 
     ¶D. 07 MANAGUA 2185 
     ¶E. 07 MANAGUA 1719 
     ¶F. 06 MANAGUA 2611 
 
Classified By: Ambassador Paul A. Trivelli for reasons 1.4 b&d. 
 
¶1. (U) Summary: In an effort to provide context for the 
current Nicaraguan non-payment of bonds scandal (Ref A), post 
provides below the history of the CENIs and their use for 
political ends. 
 
¶2. (C) Between 2000-2001, four Nicaraguan banks failed due to 
faulty banking practices and money laundering.  To ensure 
that the failures did not destabilize Nicaragua's monetary 
and financial systems, the Central Bank (BCN) issued USD 450 
million in Negotiable Investment Certificates (CENIs) to help 
three banks acquire the failing institutions.  The CENIS were 
refinanced in 2003 by then Finance Minister Eduardo 
Montealegre.  Since 2005 the Comptroller General (CGR) has 
attempted to "nullify" the CENIs and to prosecute Montealegre 
for "crimes" related to the management of these instruments. 
Throughout the scandal, the CGR has avoided investigating 
well connected Nicaraguans involved in the original bank 
failures and the liquidation boards which sold the failed 
banks' assets.  The CENIs have become yet another example of 
the Ortega-Aleman "Pacto", and only Montealegre was distanced 
from the real corruption has been tarnished with this case. 
End Summary. 
 
The Origin of the CENIs 
----------------------- 

¶3. (SBU) Four Nicaraguan banks, Interbank, Bancafe, Bamer, 
and Banic failed between 2000-2001 after approving bad loans 
(many to insiders) and making unwise, if not fraudulent, 
investments.  The first and largest banks to fail, Interbank 
and Bancafe, were also used by a shell company, Grupo 
Centeno-Consagro to launder money out of Nicaragua.  When 
Centeno's pyramid scheme fell apart, the collapse took the 
banks with it.  In a normal banking environment Bamer and 
Banic might have survived their own capitalization issues, 
but a nervous public took no chances after the first two 
failures and quickly withdrew their deposits.  At the time, 
there was no government deposit guarantee agency, but the 
Central Bank (BCN), responsible for ensuring the stability of 
the monetary system, deemed it necessary to protect 
depositors and issued short term (2-4 year) bonds, Negotiable 
Investment Certificates (CENIs), to facilitate the takeover 
of the failed banks by other Nicaraguan banking institutions. 
 
 
What did the CENIs Cover 
------------------------ 

¶4. (U) BanPro, Bancentro, and Banco de Fomento (BDF) acquired 
the failed institutions through direct sales and auctions. 
Under the terms of the takeovers, the acquiring banks 
accepted full responsibility for the deposits of the failed 
banks' customers.  The BCN issued USD 118 million in CENIs to 
the acquiring banks to cover the deposits of the failed 
institutions.  Given that the principal 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 allowed 
to decline certain assets of the failed institutions.  The 
BCN issued USD 63 million in CENIs to cover the initial gap 
between assets and liabilities. 
 
¶5. (U) The acquiring banks were then given six months (plus a 
three-month extension) to evaluate the value of the assets 
which they had accepted and reclassify the loans and fixed 
assets -- if necessary -- with the concurrence of BCN 
experts.  If loans that one of the failed banks had 
classified as "A" were in fact non-performing, the BCN issued 
additional CENIs to ensure an adequate level of loan 
provisioning.  The loans and fixed assets that the acquiring 
banks declined were returned to the "liquidation boards" of 
each failed bank for disposition.  After the evaluation 
period, the BCN issued an additional USD 269 million in CENIs 
to the acquiring banks to cover those loans deemed to be 
non-performing and for the returned fixed assets.  Of that 
amount, USD 248 million covered reclassified loans, of which 
USD 184 million (74%) was the Grupo Centeno-Consagro 
portfolio that brought down Interbank and Bancafe.  The final 
value of the CENIs was USD 450 million. 
 
Where the Problem Lies 
---------------------- 

¶6. (U) Since 2005, the Comptroller General (CGR - GAO 
equivalent), and FSLN party stalwart, Luis Angel Montenegro 
has stated that the second tranche of CENIs are "bad CENIs," 
claiming that the banks had committed fraud during their 
evaluations of the failed banks.  He claims that the failed 
banks' assets were seriously undervalued by the acquiring 
banks and therefore the value of the CENIs the acquiring 
banks received at the end of the six-month evaluation period 
was excessive.  For example, Haroldo Montealegre, distant 
cousin and rival of opposition leader Eduardo Montealegre, 
and former President of one of the failed banks, claimed that 
several well-known borrowers' loans classified as "A grade" 
by the failed bank, were reclassified as "C grade" by 
Bancentro and the BCN, but were subsequently reclassified as 
"A" again -- leading to a widespread belief that the 
acquiring banks had somehow pulled a fast one on the 
Nicaraguan public. 
 
¶7. (U) The BCN and the 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.  Acquiring bank officials have 
explained 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 the 
subsequent reclassification.  The banks maintain that the 
reclassified loans were indeed non-performing when acquired, 
and only subsequently became effective loans because they 
restructured and refinanced them.  The CGR investigated 
Haroldo Montealegre's accusations of faulty revaluation, but 
was never able to prove any fraud.  (Note: An August 2006 
analysis of the CENIs case by the BCN determined that the 
revaluations and devaluations were indeed correct.  End note.) 
 
CENIs ) The Sequel 
------------------ 

¶8. (U) In 2003, when Eduardo Montealegre was serving as 
Finance Minister, he faced the immediate challenge of meeting 
the GON's obligation to pay the USD 454 million worth of 
CENIs maturing between 2003 and 2004.  Montealegre determined 
that refinancing the debt was the best long-term option for 
Nicaragua.  As Finance Minister and ex-officio Chairman of 
the Board of the Central Bank, he oversaw the this process. 
Under the arrangement, the GON managed to extended the 
maturity terms from three-years to ten years, and decrease 
interest rates on average from 14.5% to 8.29%.  With the 
renegotiation the CENIs ceased to exist and were converted to 
new debt instruments, known as Bonos Bancarios (Bank Bonds). 
The new bonds provided the GON with a net present value 
savings of US 64 million and helped Nicaragua reach Highly 
Indebted Poor Country (HIPC) completion point, which resulted 
in a savings of USD 200 million a year in foreign debt 
payments. 
 
The CGR Tries to Build a Case 
----------------------------- 

¶9. (SBU) In August 2005, the CGR decided that the BCN did not 
have the authority to issue the original bonds in 2000-2001 
and therefore asserted that the CENIs and subsequent Bonos 
Bancarios were null and void.  The CGR reached the decision 
despite its earlier de-facto concurrence on the plan when it 
chose not to comment or respond to the BCN's original request 
for authorization to issue the CENIs in 2000.  Unfortunately, 
in 2005 BanPro and Bancentro did not appear to take seriously 
the CGR finding, believing that some accommodation would be 
found to regularize the situation, as they felt that no 
government would allow the now stable financial system to be 
jeopardized by wiping out a significant portion of the assets 
of two of the largest banks in the system.  Both the previous 
and the current BCN presidents have stated that the BCN would 
honor the Bonos Bancarios, despite the CGR's finding.  Both 
men believed that to not honor the bonds would seriously 
damage Nicaragua's recently hard-won reputation as a good 
financial performer. 
 
¶10. (SBU) The CGR also took the lead in investigating 
circulating accusations that opposition leader Eduardo 
Montealegre personally profited from the refinancing of the 
CENIs in 2003, when he was Minister of Finance.  When 
Montealegre became Minister he resigned as General Director 
of Bancentro and divested his minority shareholding (10%) in 
the bank.  According to Montealegre, the purchaser 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.  The CGR has tried to link the 2003 renegotiation 
of the CENIs with the terms of Montealegre's sale of his 
shares.  The CGR argues that because the purchaser was still 
making payments for the Bancentro shares while Montealegre 
was in office, Montealegre's refinancing of the CENIs 
resulted in direct personal financial benefit.  In fact, the 
CGR has even claimed that the payments were disguised 
dividends and that the "purchaser" did not really own the 
shares.  The CGR has never been able to establish proof of 
this accusation. 
 
¶11. (SBU) However, the CGR's 2005 finding of CENIs illegality 
did provide Montenegro with the basis for his current 
politically-motivated attack on Montealegre.  While 
Montealegre can not be held responsible for the original 
decision in 2000 to issue CENIs, the CGR's 2005 finding 
allows Montenegro to charge Montealegre with exceeding his 
authority in renegotiating the bonds' terms.  As Montenegro 
and CGR lawyers either did not understand or ignored the 
concept of net present value, nor the other tangential 
benefits of the refinancing plan, they also decided to pursue 
fraud allegations against the former Finance Minister, 
claiming that by extending the life span of the bonds, 
Montealegre had actually increased the GON's nominal 
indebtedness. 
 
¶12. (SBU) In 2007, Montenegro's political attacks became 
substantially more effective when Attorney General Hernan 
Estrada, as part of the new FSLN administration, joined in. 
On September 12 of that year both Montenegro and Estrada 
announced to the press that Montealegre should face criminal 
charges for his role in the 2003 refinancing of the CENIs. 
So far Montealegre benefits from immunity as a member of the 
National Assembly and no formal charges have been filed. 
 
The Issues Ignored 
------------------ 

¶13. (SBU) Throughout the CENIs scandals and accusations, the 
CGR has studiously avoided investigating three key groups of 
players: the bank liquidation boards, Centeno-Consagro, and 
the Boards of Interbank and Bancafe.  Both the 2006 BCN 
report on the CENIs as well as by several independent 
investigators have claimed corruption by the liquidation 
boards charged with selling the non-performing loans and 
fixed assets of the banks.  The liquidation boards were only 
authorized for a term of six months, with a possible six 
month extension, in which to liquidate the banks' assets. 
Board members were to have no ties to either the failing or 
benefiting institutions and could only earn up to 2% of the 
value of assets sold as honorariums.  In reality, the 
liquidation boards operated for two years.  Many board 
members had ties to financial institutions and obtained their 
positions due to political connections.  The boards received 
USD 267 million (book value) in assets to sell.  At the end 
of two years the liquidation boards returned to the BCN USD 
398 million (book value) in assets and USD 21.6 million in 
monies received from sales.  (Note: The Boards provided no 
written explanation for the increase in the book value of the 
assets. End note.)  The boards charged USD 16 million in 
honoraria and "expenses."  In less than six months, the BCN, 
with technical assistance from USAID sold the USD 398 million 
in assets for USD 29 million. 
 
¶14. (SBU) The CGR has also never investigated the fraudulent 
activities of the Centeno-Consagro Group that led to the 
failures of Interbank and Bancafe.  The Boards and managers 
of Interbank and Bancafe, which include several prominent 
Sandinistas including Foreign Minister Samuel Santos, have 
also been spared any investigation as to their knowledge 
and/or role in Centeno-Consagro's activities or any of the 
other financial impropriety that led to this string of 
failures. 
 
Comment 
------- 

¶15. (C) The entire CENIs scandal has always conveniently 
ignored two salient facts, first, that the BCN's fast actions 
in 2000-2001 saved Nicaragua's economy and its banking system 
and second, that the most blatant financial crimes took place 
during the first two bank failures and within the liquidation 
boards.  A few independent economists and Vice President 
Morales have mentioned that the CGR should focus on the bank 
failures, the actions of Centeno-Consagro, and the 
liquidation boards.  The last two governments have avoided 
such investigations, however, due to the PLC and FSLN 
connections of the persons involved.  So the CENIs become yet 
another example of the Ortega-Aleman Pacto, and only 
Montealegre the outsider who really had no role in the 
corruption has been tarnished with this case. 
TRIVELLI