VZCZCXRO2289
PP RUEHLMC
DE RUEHMU #0481/01 1092102
ZNY CCCCC ZZH
P 182102Z APR 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC PRIORITY 2469
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/DEPT OF COMMERCE 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 03 MANAGUA 000481 
 
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: 04/19/2018 
TAGS: EFIN ECON PGOV NU
SUBJECT: NICARAGUA'S CENIS- A POTENTIAL FINANCIAL CRISIS 
 
REF: A. MANAGUA 450 
 
     ¶B. MANAGUA 443 
     ¶C. MANAGUA 373 
 
Classified By: Amb. Paul Trivelli for reasons 1.4 b&d 
 
¶1. (C) Summary:  On April 15, the Nicaraguan Central Bank 
announced the creation of an escrow account in which the 
Ministry of Finance deposited payments due on bonds issued as 
part of a bail-out of the financial sector in 2000-2001, 
generally known as CENIs.  The account would be frozen until 
a judge lifts the sequestration order on the bonds.  While 
such escrow accounts have been used in other countries, this 
account does not meet international standards (and may not 
exist as all), so Nicaragua finds itself in default on its 
domestic debt obligations.  GON officials publicly insist 
that refinancing negotiations are taking place; but both 
BanPro and Bancentro, the banks holding the CENIs, say this 
is not true.  Our interlocutors believe that all potential 
GON negotiators are waiting for President Ortega to decide on 
the next steps and issue orders.  The crisis is already begun 
to have an effect on Nicaragua's financial system.  According 
to both Bancentro and BanPro, Fitch rating service is 
considering downgrading Nicaraguan banks soon.  Transactions 
in Nicaragua's bond market have fallen over 90% in the last 
two weeks.  It is clear that for Ortega, the CENIs are 
essentially a political issue.  He may well be indifferent to 
the costs to Nicaragua's financial sector.  End Summary. 
 
The Government Claims Good Intentions 
------------------------------------- 

¶2. (SBU) On April 15 Nicaragua was due to make USD 20.6 
million in bond payments on the CENIs bonds to local banks 
BanPro and Bancentro.  (CENIs are bonds issued to facilitate 
the rescue of four failed banks in 2000-2001 - Ref A).  In 
order to stop the payment, on April 4, a district criminal 
court judge issued a sequestration order for the CENIs so 
they could be annotated as "payment suspended" (Ref B).  The 
sequestration forced the banks into bond refinancing 
negotiations with a GON commission made up of the Attorney 
General Hernan Estrada and the Comptroller General Luis Angel 
Montenegro, with no representatives of the Central Bank or 
Finance Ministry. 
 
¶3. (SBU) When the GON and the banks did not announce a 
refinancing deal by April 15, the Ministry of Finance (MHCP) 
and Central Bank (BCN) called a press conference to report 
that they had taken steps to signal to the international 
markets that the GON intends to honor its debts despite the 
judicial suspension.  According to BCN President Antenor 
Rosales, MHCP deposited the April 15 payment in a specially 
created escrow account at BCN.  He also stated that as soon 
as the sequestration order is lifted, the payment will be 
transferred automatically to BanPro's and Bancentro's 
accounts. 
 
¶4. (C) According to international finance experts we have 
consulted, such escrow accounts have been used in the past in 
other countries when bond payments are caught in litigation 
-- the measure signals to international markets that the 
government intends to pay.  However, escrow accounts are 
complicated, and usually require the local government to 
consult with representatives from international financial 
markets, rating agencies, banks, and lawyers, to gain their 
buy-in before the account is set up.  Neither Fitch, nor the 
international financial institutions (IFIs), nor the regional 
bank superintendents were consulted in the creation of this 
particular account.  By all objective standards Nicaragua is 
now in default on the CENIs and on all other GON paper and 
credit facilities due to cross-default clauses contained in 
most of these financial instruments.   (Note: All Central 
American bank superintendents have a stake in the CENIs 
events because both BanPro and Bancentro are part of regional 
banking groups based in Panama.  End Note.) 
 
The Banks: No Where to Turn 
--------------------------- 

¶5. (C) Both Bancentro President Roberto Zamora and BanPro 
General Manager Luis Rivas told the Ambassador that the 
escrow account is a "sham."  They claim MHCP has no money 
deposited at BCN and that the GON has no intention of paying. 
 Zamora stated that when Bancentro tried to redeem USD 1 
million in coupon payments, his officials were turned away 
empty handed.  From the banks' perspective, the GON has 
defaulted on its bonds. (Note: According to both bankers, 
only the CENIs reaching maturity in 2008 were sequestered. 
Although the judge's order indicated coupons from later 
maturity bonds should be sequestered, the judge did not 
understand the instruments and only sealed the bonds maturing 
in 2008.  This allowed Bancentro to try to redeem 
non-sequestered coupons from bonds due to mature from 2009 to 
¶2013.  End Note.) 
 
¶6. (C) Both Zamora and Rivas expressed serious concerns about 
the effect of this default on their Fitch credit risk 
ratings.  Both Bancentro and BanPro have been in constant 
contact with Fitch over the last week.  Fitch has had 
Nicaraguan banks under a "ratings watch" for the last couple 
of months, but may soon decide to downgrade all Nicaraguan 
banks holding GON paper.  Lower credit risk ratings could 
result in international banks cutting lines of credit, a rise 
in interest rates charged to local banks, and credit 
facilities being recalled.  These shifts would change the 
capitalization requirements of the banks, leading to a 
reassessment on interest rates for deposits and loans.  If 
the crisis snowballs quickly, and the banks do not appear to 
be responding well, depositors could flee.  The majority of 
depositors in both Bancentro and BanPro are large 
institutions; for BanPro 15% of their depositors represent 
80% of their deposits.  A higher cost of doing business will 
also affect Nicaraguan borrowers, the majority of whom hold 
USD variable rate loans. 
 
¶7. (C) BanPro's position is more severe than Bancentro's. 
While both have acceptable capital to asset ratios, 
Bancentro's at 8.37% and BanPro's at 8.57%, BanPro holds USD 
150 million in CENIs vs. only USD 40 million at Bancentro. 
(Note: This capitalization rate for BanPro is a correction 
over the rate presented in paragraph 9 of Ref B.) 
 
Negotiations? 
------------- 

¶8. (C) While GON officials publicly insist that negotiations 
are taking place, both Zamora and Rivas claim to us in 
private that this is not true.  Both bankers told us they 
stand ready to negotiate, but the GON commission is a 
constantly moving target.  Although ostensibly comprised of 
Attorney General Estrada and Comptroller General Montenegro, 
Estrada has told the bankers he is no longer part of the 
commission, and their most recent main interlocutor has been 
Supreme Court (CSJ) Justice Chicon Rosales.  The bankers feel 
that only negotiating with BCN President Rosales makes sense, 
because he is one of the few FSLN leaders who understands 
financial instruments and international markets, and of 
course, the CENIs were in fact issued by the BCN. 
 
¶9. (C) BCN President Rosales has assured the Ambassador that 
the BCN intends to honor its debts, and he hopes that a 
serious commission will be named that can negotiate both a 
legal and financial solution to the issue.  Both Zamora and 
Rivas believe that GON members are waiting for Ortega to make 
a decision on next steps and issue orders accordingly. 
 
¶10. (C) GON objectives for the refinancing negotiations are 
unclear.  Zamora believes the political hardliners such as 
Estrada and Montenegro are determined that the Ortega 
administration will not pay the CENIs at all.  An observer of 
debt issues at the BCN stated that the objective of the GON's 
economic team is to pay the CENIs, but under terms that do no 
increase the nominal payment amount.  Proposed terms being 
bandied about include replacing the current CENIs bonds with 
bonds maturing in 10-20 years and interest rates of 4-4.3%. 
Current CENIs expire in 2013, and pay an average annual yield 
of 8.3%.  Rivas has said BanPro is willing to consider any 
deal that allows them to recover principal, the cost of 
funds, and administrative charges (about 2%.) 
 
Staving Off Disaster 
-------------------- 

¶11. (C) IMF ResRep Humberto Arbulu has conveyed the dangers 
of the situation to the GON's economic team and is seeking a 
short-term solution.  On April 9, IMF Deputy Managing 
Director Murillo Portugal sent a letter to President Ortega 
registering the IMF's concern regarding the potential impact 
the CENIs scandal will have on Nicaragua's financial sector 
and economy.  The letter notes that the two banks involved 
hold 60% of the deposits in Nicaragua.  Portugal encourages 
Ortega to find a way to contain the risk to the financial 
system.  On April 18 Arbulu will meet with BCN President 
Rosales to convey the IMF Board's concern about the issue and 
its impact on the banking system, and request the GON's plans 
for settling the issue.  We understand the IMF Board cannot 
complete the current six-month review by mid-May because of 
this situation, delaying a USD 16 million disbursement (Ref 
C).  The World Bank Board has also put on hold approval of a 
USD 20 million disbursement for direct budget support. 
 
¶12. (C) While the other shoe has yet to drop for Bancentro 
and BanPro, Nicaragua's bond market has taken a serious hit. 
Transactions fell more than 90% from USD 3.6 million on April 
7, to USD 140,000 by April 9, to an average of USD 104,000 
during the last week.  On April 16, no one bought any GON 
paper during an open market auction. 
 
¶13. (C) BanPro's Rivas states that several depositors have 
asked questions and expressed some nervousness, but there has 
been no withdrawal of deposits.  BanPro is already exploring 
ways of isolating its Nicaraguan operations from the regional 
group.  The regional superintendents are exploring possible 
joint actions with regard to Bancentro and BanPro. 
 
¶14. (C) Bancentro's Zamora believes this attack on the two 
banks is all part of a coordinated plan to destroy the banks 
and the CENIs.  He showed the Ambassador a March 28 letter 
from the Nicaraguan Tax Administrator claiming Bancentro owed 
USD 8.7 million in back taxes and fines due to underreporting 
going back to 2002.  In his view the ultimate goal is to 
destroy opposition leader Eduardo Montealegre, Finance 
Minister during the 2003 refinancing of the CENIs, by blaming 
any problems caused to Nicaragua's financial system by the 
CENIs on him.  "It's war," Zamora said. 
 
Comment 
------- 

¶14. (C) Nicaragua's financial sector is holding its breath. 
For the moment markets are stable, but it is an uneasy calm. 
If it becomes clear that the GON is making no effort to 
refinance the CENIs and complete its payments, financial 
events could quickly snowball.  For President Ortega, the 
CENIs are essentially a political issue.  He may well be 
indifferent to the costs to Nicaragua's financial sector that 
this default will engender. 
TRIVELLI