VZCZCXRO2352
RR RUEHLMC
DE RUEHMU #0808/01 1762052
ZNY CCCCC ZZH
R 242052Z JUN 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2798
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1279
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 000808 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/AND, WHA/EPSC, INR/IAA, AND EEB/OMA 
STATE PASS TO OPIC AND USOAS 
STATE PASS TO USAID/LAC FOR D BATTLE 
TREASURY FOR SARA SENICH 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: DECL: 06/24/2018 
TAGS: EFIN ECON PGOV NU
SUBJECT: NICARAGUA: VISIT OF TREASURY DAS O'NEILL COINCIDES 
WITH A CENIS RESOLUTION 
 
REF: A. MANAGUA 764 
     ¶B. MANAGUA 706 
     ¶C. MANAGUA 481 
     ¶D. MANAGUA 450 
     ¶E. MANAGUA 443 
 
Classified By: Ambassador Paul Trivelli for reasons 1.4 b&d. 
 
¶1. (C) Summary: On May 27-29, Treasury Deputy Assistant 
Secretary (DAS) Brian O'Neill visited Nicaragua to 
participate in the Competitiveness Forum (Ref A) and 
privately address the CENIs case.  In his meetings with the 
Nicaraguan Vice President, Central Bank President (BCN), 
Banking Superintendent, and private bankers, DAS O'Neill 
encouraged all parties to come to a resolution on the CENIs 
case as soon as possible.  BCN President Rosales revealed 
that he had the approval of President Ortega to negotiate new 
deals on the CENIs and was close to a resolution with BanPro. 
 (Note: On June 9, Rosales announced the deal, see paragraphs 
9-10. End Note.)  Bankers laid out the consequences for 
Nicaragua's economy and financial system should the CENIs 
case drag out too long, but suggested that President Ortega 
is not interested in resolving the issue.  DAS O'Neill's 
visit relayed USG concern regarding the CENIs situation to 
key Nicaraguan interlocutors.  While the BanPro deal has 
relieved some of the pressure on the CENIs case, it has not 
dissipated the dangers of a country risk downgrade or a 
portfolio revaluation for Bancentro.  End Summary. 
 
The Visit 
--------- 

¶2. (SBU) Treasury Deputy Assistant Secretary (DAS) for the 
Western Hemisphere Brian O'Neill visited Nicaragua May 27-29 
to participate in the Embassy-sponsored Competitiveness Forum 
(Ref A) and conduct meetings regarding the CENIs case and the 
health of Nicaragua's financial system (Refs C-E).  On May 
28, DAS O'Neill met with Vice President Jaime Morales, 
Minister of Trade Orlando Solorzano, Central Bank President 
(BCN) Antenor Rosales, President of the Free Trade Zone 
Commission Alvaro Baltodano (Gen. Ret.), Legal Director of 
the Banking Superintendency Uriel Cerna, private bank 
representatives, and Nicaraguan business leaders.  (Note: The 
Meeting with the Vice President is detailed in Ref A. End 
Note.) 
 
CENIs ) A Partial Resolution 
---------------------------- 

¶3. (C) The principal focus of DAS O'Neill's agenda was to 
receive an update on the status of the CENIs case and to 
encourage all parties involved to come to a resolution as 
soon as possible (Refs C-E).  Central Bank (BCN) President 
Antenor Rosales, Banking Superintendent Legal Director Uriel 
Cerna, and private bank representatives all concurred on a 
long list of serious effects on Nicaragua's financial sector 
should the case drag on.  While BCN President Rosales 
announced the official agreement on a renegotiation with 
BanPro on June 9, the lack of a formal resolution for 
Bancentro means that the potential dangers surrounding the 
BCN's failure to pay out on the CENIs have not abated. 
 
The Banks' Perspective 
---------------------- 

¶4. (C) During the meeting with Bancentro President Roberto 
Zamora, Bancentro Executive Director Julio Cardenas, BanPro 
General Manager Luis Rivas, and Banco Uno (Citibank) General 
Manager Mercedes Deshon (also president of the Association of 
Private Banks- ASOBANP), DAS O'Neill discussed the health of 
Nicaragua's banking sector in light of the GON's default on 
the CENIs.  All agreed that the financial sector's numbers 
continue to look strong despite the current economic slowdown 
and worsening of the investment climate.  However, local 
banks have begun to tighten credit to build liquidity to 
facilitate a quick response to any downgrade in bank and/or 
sovereign ratings by Moody's and Fitch, which could occur by 
June 30 if the government fails to pay.  Both rating agencies 
have Nicaragua on a ratings watch; a downgrade would increase 
country risk raise the cost of credit.  The banks fear that 
should the agencies act, large depositors might transfer 
funds to overseas accounts and start a run on the banks.  Not 
withstanding, Roberto Zamora reported he was not in a hurry 
to finalize negotiations for Bancentro. 
 
¶5. (C) The consequences of the CENIs case will fall first and 
most heavily on the private sector and the financial system. 
Nicaraguan banks are facing pressure from Panama's Banking 
Superintendent, who oversees operations of all banks 
incorporated in his country (including all Nicaraguan banks), 
to revalue their portfolios and adjust capitalization levels. 
 The bankers do not believe President Ortega and his closest 
advisors understand, or care, about sovereign risk ratings 
and the health of the financial system. 
 
¶6. (C) The most immediate repercussions to the GON for not 
paying the CENIs has been donor reluctance to disburse direct 
budget support funds (USD 110 million).  The World Bank and 
IMF are holding USD 36 million in funds in abeyance until 
this and other conditionalities are resolved.  DAS O'Neill 
pointed out that these amounts do not represent much leverage 
when compared to the USD 520 million President Ortega claims 
Venezuela provided in 2007.  (Note: This number is not 
corroborated by other reports, which place the figure closer 
to USD 130 million. End Note.)  Nonetheless, "It is still 
money the GON needs and cares about," Zamora noted.  In 
addition, the BCN and Ministry of Finance have been unable to 
place any financial instruments with any private institution 
since the April 15 default, losing a key monetary policy 
instrument. 
 
The Central Bank is Committed 
----------------------------- 

¶7. (C) BCN President Rosales was extraordinarily candid and 
forthcoming during the meeting.  He stated that his 
re-anointment by Ortega as lead CENIs negotiator is a sign 
that the GON takes the situation seriously.  Rosales assured 
DAS O'Neill that President Ortega promised to accept any 
renegotiation terms Rosales could get as the condition for 
resuming leadership of the negotiations (Ref D).  Rosales 
also announced that the agreement with BanPro was almost 
finalized, while talks with Bancentro were in early stages. 
The BanPro agreement was publicly announced on June 9. 
(Note: Information recently provided to us from Bancentro 
indicated that those negotiations have advanced. End Note.) 
 
¶8. (C) Rosales assured DAS O'Neill that his legal counsel is 
confident the BCN constitution allows him to sign the 
agreement "to protect the economy," without a corresponding 
approval from his Board.  At the beginning of May, the three 
private sector members of the BCN Board of Directors resigned 
fearing prosecution if they approved a CENIs refinancing. 
(Note: The Comptroller General (CGR) is currently preparing 
cases against former BCN Board members who approved the 2003 
CENIs renegotiation. End Note.)  Rosales emphasized his 
determination to sign, even though he does not enjoy immunity 
from future prosecution.  "Naming a new board will take too 
long and the dangers are worse if I don't," he explained. 
Bancentro and BanPro both fear Rosales' actions will be used 
by the Sandinistas to later backtrack on the agreement and 
force the banks into still another negotiation.  Rosales 
could not provide DAS O'Neill any assurances on this point. 
 
BanPro's CENIs Deal 
------------------- 

¶9. (SBU) The CENIs deal with BanPro involves the exchange of 
the current bonos bancarios (10-year coupon bonds with an 
interest rate of 8.29%) for 20 year bonds at 5% for the first 
15 years, then 5.25% for the last five.  BanPro will receive 
two payments per year on each bond.  As a result, in 2008 
Nicaragua will pay the bank USD 4.88 million, a reduction of 
USD 36.25 million in the budgeted payment.  While the result 
is a reduction of USD 30-40 million in terms of net present 
value, nominally the GON will pay USD 90 million more to the 
banks over the life of the bond issuance.  These terms are 
far longer than any current government debt instruments and 
significantly below market rates (currently 10-12% for dollar 
denominated debt payable in cordobas at the official exchange 
rate at on the day of redemption.) 
 
¶10. (C) This final deal contains only minor differences from 
the one Rosales presented to DAS O'Neill on May 28 -- an 
exchange of the current bonds for 15-year zero coupon bonds 
at 5%.  The bonds would have varying maturity dates, starting 
with October 2008.  Payments would start small and build over 
time (i.e. the larger payment burden would fall to future 
governments.)  Rosales also stated that, at the insistence of 
the Panamanian Superintendent of Banks, the new bonds would 
be tradable, with BanPro agreeing to being selling the bonds 
upon receipt, starting with the longest maturities.  DAS 
O'Neill conveyed at the May 28 meeting that he was in favor 
of the bonds being traded and the holders of the bonds 
selling them in order to create a market.  (Note: It is 
unclear at this time whether the coupon bonds linked to the 
June 9 agreement will be tradable. End Note.) 
 
¶11. (C) Meanwhile the political accusations surrounding the 
last CENIs restructuring continues.  The Comptroller General 
(CGR) has indicated that he will file formal charges against 
opposition leader Eduardo Montealegre and other BCN board 
members by July.  Per Ref B, the CGR is probably waiting for 
the most opportune time to influence the November 2008 
municipal elections (in which Montealegre is running for 
mayor of Managua) to file criminal charges. 
 
Banking Superintendent 
---------------------- 

¶12. (C) The Legal Director of the Banking Superintendency 
Uriel Cerna and Banking Intendent Soledad Balladares informed 
DAS O'Neill that Nicaragua is about to complete an agreement 
with other central American superintendencies for a 
consolidated supervision format, information sharing, and 
joint inspections.  As part of this modernization process, 
the Superintendent is shifting to supervision based on risk 
analysis and is modernizing its asset assessment capabilities 
so it can better supervise the new micro-finance institutions 
coming under Superintendence authority.  Cerna also detailed 
Nicaragua's advances in fighting money laundering, including 
revision of the penal code, issuance of new banking norms 
that meet Egmont and Basil standards, and increased police 
investigations of financial crimes. 
 
Talking Infrastructure 
---------------------- 

¶13. (SBU) In separate meetings with the Minister of Trade 
Orlando Solorzano and President of the Free Trade Zone 
Commission Alvaro Baltodano, DAS O'Neill's presentation of a 
new infrastructure development initiative for Latin America 
was well received.  The initiative, funded by the U.S., 
Brazil, the Inter-American Development Bank (IDB), and the 
International Finance Corporation (IFC), helps identify 
projects and pays for feasibility studies.  Both Solorzano 
and Baltodano stated that Nicaragua has a desperate need for 
infrastructure and lots of ideas, but needs assistance in 
transforming the ideas into proposals that could attract 
serious investors.  DAS O'Neill also presented the 
initiative, along with the Treasury SME financing initiative, 
to all of the participants at the Nicaraguan Competitiveness 
Forum. 
 
Comment 
------- 

¶14. (C) DAS O'Neill's visit was important in relaying USG 
concern regarding the CENIs situation to a broad range of 
public and private Nicaraguan contacts.  It also allowed his 
interlocutors to clearly lay out the consequences of 
non-payment.  The resolution of the largest part of the CENIs 
has caused many to feel that the pressure is off, and 
consequently negotiations with Bancentro have slowed. 
Nevertheless, the danger of a risk downgrade and portfolio 
revaluation by the Panamanian Superintendent have not abated. 

¶15. (U) DAS O'Neill cleared on this cable. 
TRIVELLI