NICARAGUAN LIQUIDITY STRATEGIES COVER JITTERS BUT

UNCLAS MANAGUA 002463

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/CEN, WHA/EPSC AND EB/OMA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV NU
SUBJECT: NICARAGUAN LIQUIDITY STRATEGIES COVER JITTERS BUT
NOT PANIC

REF: MANAGUA 2428


1. (SBU) Summary: Until September, Nicaraguan bank
depositors defied expectations by keeping their money in
Nicaragua, with pre-election jitters only manifesting
themselves in September. By October 31, deposits had dropped
4.6% from their August peak of USD 2.2 billion. To cover
heavier than usual withdrawals, the Nicaraguan Central Bank
(BCN) asked banks to maintain liquidity and signed a USD 150
million contingency line of credit with the Central American
Bank of Economic Integration (BCIE). These measures are
designed for elections jitters, not a major run on the banks
or a currency crisis. End Summary

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Depositors Hold Firm in First Half of 2006
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2. (U) In the lead up to the November 5 election pundits
believed that Nicaraguans would take their money outside the
country throughout the year. Until September, however,
depositors stood firm adding to the banking system's steady
growth since 2001. As of October 21, deposits were up 8%
from 2005 and 16% from 2004. The peak came in August when
the system registered USD 2.2 billion in deposits. The
continuing profitability of this sector enticed GE Financial
(in 2005) and Citibank (in October 2006) to buy half of two
of Nicaragua's largest financial companies, Banco de America
Central and Banco Uno, respectively. (Note: The
Citibank/Banco Uno deal awaits regulatory approval. End
Note.)

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But were poised for quick exits, which started in September
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3. (SBU) These deposits were poised for quick movement,
however. 66% of deposits are in U.S. dollars, with most set
to mature in November and December. The only long term
deposits in the system belong to the GON. As November 5
approached and the outcome of the election got muddier,
depositors began to demonstrate the jitters the BCN had
expected since January. Between September 20 and October 21,
USD 44 million left the system, a 2% drop. On October 27,
deposits had dropped by 3.6% from their peak in August. As
of October 31, this number was 4.6%. (Note: A drop of 10% is
considered a currency crisis. End note.)

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BCN Measures to Ensure Liquidity
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4. (SBU) The IMF ResRep told us that, following the advice of
the BCN, most banks increased cash holdings in September to
cover about 40% of deposits. (Comment: While this allows
banks to cover the heavier than normal withdrawals by jittery
depositors, it also means that they are not operating at
their full earning potential and could quickly take capital
out themselves if needed. End Comment.)


5. (SBU) In the last few years the BCN built up reserves to a
high of USD 870 million, just over two months of imports,
which could help them cover some of these election related
withdrawals. The BCN also signed a USD 150 million
contingency line of credit with the BCIE, available once
total deposits drop 7.5% from their peak in August. The BCN
could draw on the line of credit in one or several advances
until October 9, 2007, to provide liquidity to individual
banks as needed.

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Comment
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6. (SBU) BCN's measures and the banks' liquid positions will
only address the heavy withdrawals caused by pre-election
jitters. They are not designed to handle the full-fledged
currency crisis that some predict will develop with Ortega's
probable victory. The IMF ResRep told us that his
institution stands ready to provide bridge financing to the
GON to help stabilize the economy, but is doubtful Ortega
will ask the IMF for such help. (reftel) End Comment.
TRIVELLI