Nicaragua Retires USD 1.4 Billion in Foreign Commercial

UNCLAS SECTION 01 OF 02 MANAGUA 002564

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, AND EEB/IFD
TREASURY FOR SARA GRAY
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR

E.O. 12958: N/A
TAGS: EFIN ECON PGOV NU
SUBJECT: Nicaragua Retires USD 1.4 Billion in Foreign Commercial
Debt

REF: Managua 1672


1. (SBU) Summary: On December 5, the GON announced the successful
completion of its foreign commercial debt buy-back operation,
allowing it to retire USD 1.4 billion in foreign debt claims.
Nicaragua will pay 4.5 cents on the dollar to over 111 commercial
creditors, including all of the vulture funds which held judicial
decisions against Nicaraguan assets overseas. Seven donors,
including the World Bank, contributed USD 71 million to the program.
An essential component of the operation was the agreement by the
vulture funds to vacate their judicial claims on Nicaraguan assets.
This buy back theoretically permits the GON to once again operate
freely in the international financial market. End Summary.

USD 1.4 billion in Debt Retired
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2. (U) On December 5, the GON announced the successful completion of
its foreign commercial debt buy-back operation, allowing it to
retire USD 1.4 billion in foreign debt claims, paying only 4.5 cents
on the dollar. Nicaragua's nominal foreign debt is now USD 3.26
billion, equivalent to 160% of exports (estimated 2007 exports total
USD 2 billion),representing a debt-to-GDP ratio of 60% (estimated
2007 GDP is USD 5.5 billion). This program is the latest step in
Nicaragua's Highly Indebted Poor Country (HIPC) initiative, launched
in 2004. The only remaining external arrears are non-Paris club
bilateral debt, of which Costa Rica and Libya are the largest
creditors (Reftel). When the Sandinistas left power in 1990,
Nicaragua's foreign debt totaled USD 10.7 billion, later reaching
its peak at USD 11.7 billion in 1994. Commercial debt relief will
have no effect on Nicaragua's 2008 budget, as there were no
scheduled payments.


3. (U) Eighteen months since the GON first requested donor
participation in the project, the program will complete its first
closing on December 12 with 111 creditors subscribed, representing
94% of all creditors. Nicaragua will complete a second closing
during the first quarter of 2008, when Ministry of Finance officials
expect to secure further debt relief from creditors currently
finalizing their tenders. They hope to have all foreign commercial
creditors signed up for the program by summer of 2008. Nicaragua's
debt-buy back operation is unique because it is the first time that
all litigating creditors and vulture funds are participating in such
an operation.

Where the Money Came From
--------------


4. (U) The GON completed the buy-back operation with assistance from
the World Bank (WB) and other donors. The WB provided an IDA-Debt
Reduction Facility of USD 32.5 million, and donors deposited USD
28.5 million into a WB trust fund to assist the buy-back operation.
The commercial creditors will receive USD 64.5 million, about 4.5
cents on the dollar (i.e. on principal, interest charges, and
penalties.) (Note: Excess funds will be used to pay for ancillary
expenses such as the audit required by WB; any further excess will
be returned to donors on a pro-rata basis. End Note.)


5. (SBU) Donor contributions to the operation were:
-- Norway USD 9.9 million
-- Sweden USD 5.1 million
-- UK USD 3.5 million
-- Netherlands USD 3 million
-- Russia USD 5 million
-- Finland USD 2 million
-- Nicaragua contributed USD 3.5 million of its own funds.

The Benefits of Completion
--------------


6. (U) Most of the original creditors on this commercial debt,
accrued in the 1970s and 1980s, sold the debt to hedge/vulture funds
when Nicaragua ceased servicing the debt in the 1980s. All four
vulture funds holding Nicaraguan commercial debt subscribed to the
program and have agreed to vacate all legal claims against GON
assets. This buy-back will allo QvIN undertake
international financial transactions and deposit its reserves in
locations that earn better interest. Due to the 2003 judgments held
by the vulture funds, Nicaragua has kept all of its reserves at the
Bank for International Settlements in Basel, foregoing an estimated
USD 3 million in interest a year. To protect funds for its
embassies and consulates in the United States, the GON funneled the
money through accounts held by the Ambassador and consuls. The GON
hopes that this operation will also pave the way for the
normalization of Nicaragua's relationship with the international
financial community and contribute to the improvement of Nicaragua's
credit rating.

Comment
--------------


7. (SBU) While this program was devised by the Bolanos
administration, credit goes to the Ortega administration for not
letting the opportunity drop. The true beQWQod9v-
operations here can only hurt any renewed effort to tap into global
capital markets.

TRIVELLI