PARAGUAY: BCP PRESIDENT BLOCKING HSBC PURCHASE OF

C O N F I D E N T I A L ASUNCION 000743 SIPDIS SIPDIS MONTEVIDEO FOR ICE ATTACHE STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/OMA TREASURY FOR OSIA AND OTA STATE PASS USTR FOR MARY SULLIVAN USAID FOR AA/LAC ADOLFO FRANCO NSC FOR SUE CRONIN SOUTHCOM FOR POLAD BARBARA MOORE E.O. 12958: DECL: 07/18/2016 TAGS: ECON EFIN PA PINR PREL SUBJECT: PARAGUAY: BCP PRESIDENT BLOCKING HSBC PURCHASE OF LLOYDS BANK REF: ASUNCION 495 Classified By: Classified By: ECON Patrick R. O'Reilly for reasons 1.4 (b) and (d). -------------- Summary -------------- ¶1. (C) On July 13, Central Bank President Monica Perez sought a meeting with the Ambassador to explain why she was holding up the ongoing attempt by HSBC Group to purchase the local branch of Lloyds TSB. Perez is insisting that HSBC provide a home office guarantee of the local bank,s operations, as is required by law. Lloyds wants to convert from a branch (with the guarantee) to a locally incorporated entity which would not have the guarantee in preparation for the US$16.4 million purchase by HSBC. Perez expressed concern about inconsistent and unconvincing explanations on the part of Lloyds and HSBC for their resistance to obtain home office guarantees. She also complained about an angry call she got from President Duarte on July 13 after representatives of both banks had lobbied him about the delay. Perez expressed suspicion about the motives behind HSBC,s interest, and asked if the Ambassador had any insights. Perez remains without a full Board of Directors at the BCP. Congress has so far refused to act on the President,s nomination of an economist to provide a third Director, the minimum necessary for a quorum, which has added to the pressure on Perez as she must act in a special emergency capacity. Perez appeared to seek out the Ambassador as a sounding board, and was disappointed the President called her about this since she saw it as a challenge to her independence. End Summary. -------------- -------------- HSBC LOOKING TO PURCHASE LLOYD,S BANK IN PARAGUAY -------------- -------------- ¶2. (C) On July 13, Central Bank President Monica Perez met at her request with the Ambassador and Econcouns to relay her concerns about an ongoing attempt by HSBC Group to purchase the local branch of Lloyds TSB. Both banks are based in the UK. Perez also wanted to know if the Embassy had any insight into the motives for the purchase, and the Ambassador assured her that we did not. Perez has been delaying the approval of the purchase because HSBC wants to purchase Lloyds only after it converts from a branch to a local corporation. Under a Paraguayan law passed in 1998 after a serious financial crisis, foreign banks operating in Paraguay must do so as a branch that enjoys the full and explicit backing of the parent company. Otherwise, local banks can be incorporated under the Commercial law as local, limited liability corporations. ¶3. (C) Perez views HSBC,s intentions skeptically, since it wants to purchase Lloyds and begin operations in Paraguay under the name HSBC Paraguay, S.A., which would be a local corporation without the explicit guarantee of the parent company. Perez believes this would mislead the public, the majority of whom would most likely erroneously believe that HSBC Group would stand behind their deposits. She pointed out that Paraguay has recent experience (in the late 1990s) with locally established subsidiaries of international banks failing at great cost to depositors and the Central Bank. In her capacity as steward of the financial system, she is refusing to allow Lloyds to convert itself to a local cooperation, unless Lloyds TSB explicitly guarantees coverage by the home office until the sale is complete, and HSBC Group explicitly provides its full backing to the new entity once the sale is complete. Alternatively, both entities would at least have to make it clear publicly and to all depositors that the guarantee had been removed. -------------- -------------- TACTICS AND RESISTENCE TO GUARANTEES RAISE SUSPICIONS -------------- -------------- ¶4. (C) According to Perez, Lloyds is reducing its presence in Latin America and has wanted to sell its Paraguay operations for some time. The sale price is only US$ 16.4 million. The group that purchased local bank Sudameris approximately two years ago told Perez that they had wanted to purchase Lloyds and had offered more money, but had been rebuffed. Lloyds and its lawyers have been insisting on converting to a local corporation and have given alternative explanations to Perez ranging from a desire to avoid delays to a reluctance to &offend8 HSBC by asking for the guarantee. Perez said she asked HSBC reps in a meeting on July 12 why they would resist getting a written, Board-approved guarantee from HSBC Group if, as they claimed, HSBC had every intention of standing by the Paraguayan entity in the event of financial problems for reputational reasons. She claimed that the HSBC reps complained that the Board only met every few months. ¶5. (C) Perez was further bothered by a call she received from President Duarte on the morning of July 13 after he met with HSBC and Lloyds reps the previous evening. The bank representatives had also lobbied with Finance Minister Bergen and with the Vice President. She said he was quite agitated and told her he had too many problems as it was and didn,t need another, admonishing her for requiring more than the law requires (the argument of the HSBC and Lloyds reps). Perez explained that she was acting based on her responsibility to safeguard the health of the financial system. The President asked her for a written analysis of the situation. Perez said the intensity of the lobbying, the conflicting and weak explanations for the unwillingness to obtain home office guarantees, and the interest in a business with capital of only US$16.4 million all raised suspicions about whether there were other reasons for HSBC,s interest. The Ambassador offered to inquire with other agencies to see if we had any insights we could share. -------------- BCP BOARD OF DIRECTORS STILL UNDERSTAFFED -------------- ¶6. (C) Although Perez, with the support of President Duarte, won the resignations of the three most troublesome BCP Board members in April (reftel),she remains without a quorum since the Board still consists of her as President and Venicio Sanchez, one of the original Board members who was the most neutral and cooperative. The lack of a quorum (a minimum of three Board members) means that any BCP resolution is done on a special basis under the law and with responsibility squarely on Perez,s shoulders. She commented that the heavy burden was exacerbated by the lack of competent, trustworthy staff at the bank, and the fact that she has to be very careful about the legal justifications of every resolution she signs. The President put forward one candidate to the Congress for confirmation in June, an economist who was part of former Finance Minister Borda,s team, but the current dispute between the opposition and the President has led to the nomination languishing. -------------- COMMENT -------------- ¶7. (C) Perez has taken a reasonable approach with HSBC. The law requires international banks to operate as branches with the full backing of the home office. The commercial law allows for the existence of locally incorporated banks, and everyone knows that the local banks are backed only by local capital. HSBC appears to want the best of both worlds ) a local, stand-alone bank with the cache of an internationally recognized name. The meeting, requested by Perez, went on for nearly 90 minutes. Her lack of brevity, and the fact that she requested the meeting, gave the impression that she values her contact with the Ambassador as a sounding board given her relative isolation at the BCP. Perez appeared disappointed with the President,s call, which she said represented only the second time that he had called to ask her to take a specific action. The other was a recent request to unblock payment for services to the BCP by a politically connected individual. As she was leaving, she asked Econcouns if the Embassy had changed its view of Duarte, as though she were beginning to have doubts. Her concern may be influenced by the freshness of the President,s angry call, but any cracks in her steadfast loyalty to President Duarte would be a negative sign. CASON # CASON