CABEI SEEKS U.S. PARTICIPATION TO COUNTER

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 001923 SIPDIS SIPDIS STATE FOR WHA, EEB TREASURY FOR WESTERN HEMISPHERE BUREAU MCC FOR FRANCES REID E.O. 12958: DECL: 12/17/2017 TAGS: EAID ECON EFIN HO SUBJECT: CABEI SEEKS U.S. PARTICIPATION TO COUNTER VENEZUELAN INFLUENCE REF: 07 GUATEMALA 000585 Classified By: Ambassador Charles A. Ford, for reasons 1.4 b and d ¶1. (C) Summary: The Head of the Central American Bank for Economic Integration (CABEI) is concerned that certain member states may seek to invite Venezuela to join the bank or to form an association between CABEI and Hugo Chavez's Banco del Sur. He is urging the USG to join CABEI as a member or observer status to preempt such actions. End Summary. ¶2. (C) In a meeting with Ambassador December 11, Harry Brautigam, Executive Director of CABEI, suggested the U.S. involve itself more actively in CABEI to counter what he sees as emerging Venezuelan influence over the institution. CABEI has previously made such appeals from an economic angle, citing key partnerships with USAID and CAFTA capacity-building opportunities and drawing comparisons to the North American Development Bank (NADB). Treasury Secretary Paulson told former Guatemalan President Berger at SIPDIS the annual Interamerican Development Bank (IADB) meeting in March 2007 that the U.S. was committed to working regionally through the IADB (reftel). ¶3. (C) While Brautigam believes this argument is still relevant, his current bid for U.S. membership is based on what he calls "creeping south," the increasing tendency by CABEI founding countries to politically align with Venezuela. Three of the five founding members: Nicaragua, Honduras and now Guatemala, are now inclined to seek partnerships with Venezuela, and an FMLN victory in 2008 in El Salvador would put yet another Central American country firmly in Venezuela's camp. He has heard rumblings those countries may push to open a concessional window with Banco del Sur, Chavez's "alternative" to the IMF, and says there would be very little he could do to stop this action once it is in motion. Brautigam and his Vice President, Nick Rischbieth Gloe, told Econoff they are not interested in cooperating with Venezuela or Banco del Sur, but they must respond to the political preferences of member states. Brautigam suggested observer status by the U.S. would be enough to counteract such a bid, admitting that U.S. capital is not so much important as the need for a demonstration of U.S. political interest. ¶4. (SBU) In addition to the five founding members (all of which are traditionally borrowing countries),the bank now has five extra-regional members: Spain , Mexico, Argentina, Taiwan, and Colombia. Ironically, Venezuela at one time expressed interest but never joined. Brautigam gave Econoff a presentation designed to convince the U.S. to join CABEI, citing vast improvements at the bank, which historically has been known for lack of corporate governance and fiscal discipline. CABEI now provides as much as 70 percent of multilateral financing in Central America. Brautigam commented that because the World Bank and IADB provide only 30 percent of financing combined, the U.S. is missing a huge opportunity to influence the region by failing to join CABEI. Additionally, credit rating houses Moody's, Standard & Poor's, JCR, and Fitch have all recently upgraded CABEI to an "A" rating based on reduction of cost of debt, and a low risk asset coverage ratio. ¶5. (C) Brautigam said there would be clear advantages to the U.S. to joining CABEI, including better oversight, allowing the U.S. to bring better fiscal discipline and standards to the bank, and avoiding donor arbitrage. He cited deep-rooted existing partnerships, such as more than USD 430 million in direct loans, guarantees and grants, and a recent USD 121 million donation to HIPC trust fund for reduction of Nicaraguan debt. Brautigam also believes the U.S. would further strengthen the ratings of CABEI, while providing itself additional financial leverage in Central America. He underscored the need for the U.S. to counteract the draw of Venezuela by demonstrating an "outstanding commitment" toward competitiveness in Central America. ¶6. (C) Brautigam conceded there were disadvantages to the U.S. joining CABEI as well. For example, it could trigger a TEGUCIGALP 00001923 002 OF 002 "domino effect," with other sub-regional banks pushing the U.S. to join for political reasons. Also, he said, the threat posed by Banco del Sur is unclear. And a capital donation from the U.S. is not essential to fortify CABEI's access to callable capital. CABEI's current "A" credit rating from Moody's was based on the presence of Spain, "a highly-rated investment-grade country," as a shareholder, with a USD 200 million capital subscription. ¶7. (C) Comment: It is unclear whether or when Venezuela might look to CABEI as a vehicle to exert political influence in Central America. Brautigam said Venezuela had not yet even approached CABEI. Post would welcome comments and further information from Washington and from other CABEI posts on possible Venezuelan influence over the institution and implications for U.S. interests in the region. End Comment. FORD