DEBT DEAL WITH SPAIN CLEARS WAY FOR CREDIT UPGRADE

UNCLAS SECTION 01 OF 02 GUATEMALA 000107

SIPDIS

DEPT PASS EX-IM BANK

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV PGOV EAGR GT
SUBJECT: DEBT DEAL WITH SPAIN CLEARS WAY FOR CREDIT UPGRADE



1. (U) The GOG and the Spanish government (GOS) signed an
agreement on January 11 laying out the terms for forgiveness
of the twenty-six year old debt that has hampered the
bilateral relationship and complicated Guatemala's treatment
in multilateral financial forums. The deal involved direct
payment of a small portion to private creditors, further
payments to a development fund to be managed by the Spanish in
Guatemala, and a triangular debt arrangement involving
Nicaragua. The 1980 debt dispute has been a priority for the
Berger Administration, which has been working to improve
Guatemala's international image and credit ratings. The
Spanish began negotiating the deal as their bilateral
relationship improved in 2001, but only moved to close the
deal now, in part a reflection of their confidence in the
Berger administration. End Summary.

The Debt
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2. (U) Spain's public export bank backed a 1980 loan to the
private Guatemalan company, Corfina. The $188 million loan,
guaranteed at the time by the GOG, financed construction of a
paper mill in El Progreso. Soon after, the company defaulted
on the loan and the GOG refused to cover it. With interest
and penalties, the debt carried on the books of the GOS and
Spanish private sector creditors, who eventually bought the
debt, grew to almost $1 billion by early 2001. The debt
prohibited the GOG from participating in Spain's bilateral
financial assistance programs. It also held down Guatemala's
credit rating in the OECD, which has follow-on implications in
a variety of private sector credit ratings.

The Deal
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3. (SBU) EconOff met with Carlos Merino, the Economic
Counselor at the Spanish Embassy in Guatemala. According to
Merino, the GOS-GOG bilateral relationship had been difficult
since the burning of the Spanish Embassy in 1982 during the
civil war. However, in 2001, some progress on this and other
issues led to a renewed effort by both sides to come to an
agreement on the outstanding debt. Then Finance Minister
Eduardo Weymann proposed a triangular deal involving $506
million in Nicaraguan debt owed to the GOG. The GOG
transferred the Nicaraguan debt to the GOS in exchange for
forgiveness of much of Guatemala's debt to Spain. The Spanish
preferred the Nicaraguan debt as it could be dealt with in
Paris Club negotiations and ultimately forgiven on better
terms, as Nicaragua is a HPIC country (Guatemala is not).
This creative approach significantly advanced the
negotiations, but the general breakdown of the Portillo
administration and its overwhelming corruption stalled further
progress on the debt talks. Difficulties in liquidating the
largely out-of-date paper mill further complicated
negotiations.


4. (SBU) When President Berger took office in January 2004,
the Spanish were increasingly motivated to remove this long-
standing impediment to the bilateral relationship as a signal
of confidence in the new government. On the Guatemalan side,
a group was formed to improve Guatemala's image and
international credit ratings. The mixed public-private sector
group has been lead by Commissioners for Government Planning,
Richard Aitkenhead and for Competitiveness, Mickey Fernandez,
along with Banco Industrial President, Luis Prado. They met
with EconOffs on several occasions in an effort to lobby for
USG support for improved credit ratings for Guatemala. They
brought their case directly to the OECD, Ex-Im
representatives, Moody's, and Standard and Poor's and heard
from several fronts that the outstanding debt with Spain was
holding back the country's rating.


5. (U) The deal signed on January 11 and announced at a press
conference on January 16 involved a $10 million payment to be
made over the next 60 days to the private Spanish creditors
(covered by the final sale of the Corfina facility); $10.5
million to be paid into a development fund that the Spanish
will administer in Guatemala over the next three years to
support health and education projects; and forgiveness of the
remainder of outstanding debt not covered by the 2001
Nicaragua deal. The Spanish Embassy is now working to develop
financial assistance programs for Guatemala, the only country
in the region that doesn't currently benefit from such
programs.

Comment: A Good Win for Berger's Economic Team
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6. (SBU) The Guatemalans anticipate increased cooperation
with the GOS and are happy to have this black mark removed
from their international reputation. More importantly, the
GOG and the big financial sector players are optimistic that
they will now be able to raise Guatemala's credit rating;
thereby reducing public and private interest rates and
attracting more direct investment. Guatemala is still ranked
below most of their neighbors in spite of their impressive
macro-economic indicators and low debt levels. However, they
may be overselling the importance of their OECD ratings.
Impressively low debt levels not only reflect years of fiscal
restraint, but also the GOG's historic under-investment in
Guatemala's people and infrastructure. Attracting much-needed
direct investment will require the long-term success of
Berger's business climate and social investment initiatives.

DERHAM