VZCZCXRO7168
RR RUEHLMC
DE RUEHSN #1228/01 3022157
ZNR UUUUU ZZH
R 282157Z OCT 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 0236
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 02 SAN SALVADOR 001228 
 
STATE PASS USAID/LAC 
STATE ALSO PASS USTR 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV ES
SUBJECT: EL SALVADOR EXPERIENCING DIFFICULTIES ISSUING SHORT-TERM 
DEBT 
 
REF: SAN SALVADOR 1084 
 
Summary 
------- 
 
¶1. Because of international financial problems and domestic 
political uncertainty, the Government of El Salvador (GOES) has been 
having trouble issuing short-term debt, known as "Letes," which in 
turn is causing difficulties in complying with its financial 
obligations.  Both banks and foreign investors have been retiring 
their Letes, rather than rolling them over, and the GOES has $424 
million in Letes coming due between November and March.  The market 
problems with Letes have been serious enough to prompt the 
Government of El Salvador (GOES) to request technical assistance 
from the U.S. Treasury.  The initial Treasury visit revealed both 
structural problems in the market and deeper political and 
confidence issues with Letes.  Post will report details on the 
Treasury Office of Technical Assistance (OTA) visit septel.  End 
summary. 
 
BACKGROUND 
---------- 
 
¶2. Letters of Treasury (Letras del Tesoro Publico), known by their 
Spanish acronym "Letes," are short term debt instruments issued by 
the government designed to smooth out temporary fluctuations in 
government revenues.  Letes are non-interest-bearing money-market 
instruments, issued at a discount from face value, with the holder 
receiving face value when the security matures. Generally, Letes 
have terms of 90, 180, 270, or 360 days.  Normally, the interest 
rate offered is based on a spread over the six months LIBOR as 
reported by Barclays Bank on the day of adjudication.  Letes are 
exempted from income tax and have sovereign guarantees. 
 
¶3. The issuer for Letes is the Ministry of Finance, although the 
sale process is carried out by the Central Bank. The committee for 
the adjudication of Letes is formed by officials of the Ministry of 
Finance and the Central Bank, who will either accept or reject 
offers based on the state's current requirements. Investors must be 
registered and authorized by the Ministry of Finance and in the 
stock market. Since 2005, LETES are sold on the Salvadoran stock 
market. New LETES are negotiated every other Tuesday, although, 
depending on needs, extraordinary negotiations may be conducted on 
other days of the weeks. The main buyers of Letes have traditionally 
been pension funds, banks, and investment funds. During 2008, the 
Ministry of Finance has carried out 24 negotiations of Letes and 
expects to have 8 more before the end of the year. The rates 
obtained have varied between 3.7% and 6.42% through September 2008. 
 
 
PROBLEMS IN RECENT EMISSIONS 
---------------------------- 
 
¶4.  According to Carlos Gustavo Salazar, General Treasury Director 
at the Ministry of Finance, the market started drying up in June 
2008, and it has become more and more difficult to sell Letes.  In 
his view, this is driven by a combination of the international 
financial crisis and local uncertainty because of El Salvador's 2009 
elections.  Both the banks, due in part to an increase in their 
reserve requirements (reftel), and foreign investors have begun to 
retire their Letes rather than roll them over. 
 
¶5.  At the end of September, the Ministry of Finance tried to sell 
$25 million in Letes, but was only able to place $228,000. In the 
first week of October, the GOES was able to place $38 million, but 
it had to offer a relatively higher interest rate (7.75%) and a 
shorter 75 day term (to December 23). On October 14, 2008, the 
government decided to suspend the planned Letes negotiation because 
of a lack of interest from banks. 
 
¶6.  Minister of Finance William Handal announced in October that the 
GOES would sell Letes to the Central American Bank for Economic 
Integration (CABEI). CABEI purchased around $50 million during the 
second week of October and has offered to purchase another $50 
million during the last week of October. 
 
MORE PAYMENTS COMING DUE 
------------------------ 
 
¶7. If the GOES continues to be unable to roll over Letes, they will 
have to make several large payments: $65 million in November, $68 
million in December, $97 million in January, $58 million in 
February, and $136 million in March. According to Salazar, the GOES 
only has enough resources to pay the Letes due until November. The 
GOES is investigating a number of different options, but has not 
 
SAN SALVAD 00001228  002 OF 002 
 
 
identified any solutions. 
 
¶8. Comment: The seriousness of the GOES's current fiscal and 
liquidity situation is underscored by their request for "emergency" 
technical assistance from the U.S. Treasury.  OTA's initial visit 
revealed both structural problems in the market and deeper political 
and investor confidence issues with Letes.  Post will report on 
details of the OTA team's visit septel.  End Comment. 
 
Glazer