NICARAGUA'S CENIS: A HISTORY AND POLITICS

C O N F I D E N T I A L SECTION 01 OF 04 MANAGUA 000450 SIPDIS SIPDIS STATE FOR WHA/CEN, WHA/AND, WHA/EPSC, INR/IAA AND EEB/OMA STATE PASS TO OPIC AND USOAS DEPT FOR USAID/LAC DEPT ALSO FOR CA/VO/L/C USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR E.O. 12958: DECL: 04/12/2018 TAGS: EFIN ECON PGOV NU SUBJECT: NICARAGUA'S CENIS: A HISTORY AND POLITICS REF: A. MANAGUA 443 ¶B. MANAGUA 373 ¶C. 07 MANAGUA 2564 ¶D. 07 MANAGUA 2185 ¶E. 07 MANAGUA 1719 ¶F. 06 MANAGUA 2611 Classified By: Ambassador Paul A. Trivelli for reasons 1.4 b&d. ¶1. (U) Summary: In an effort to provide context for the current Nicaraguan non-payment of bonds scandal (Ref A),post provides below the history of the CENIs and their use for political ends. ¶2. (C) Between 2000-2001, four Nicaraguan banks failed due to faulty banking practices and money laundering. To ensure that the failures did not destabilize Nicaragua's monetary and financial systems, the Central Bank (BCN) issued USD 450 million in Negotiable Investment Certificates (CENIs) to help three banks acquire the failing institutions. The CENIS were refinanced in 2003 by then Finance Minister Eduardo Montealegre. Since 2005 the Comptroller General (CGR) has attempted to "nullify" the CENIs and to prosecute Montealegre for "crimes" related to the management of these instruments. Throughout the scandal, the CGR has avoided investigating well connected Nicaraguans involved in the original bank failures and the liquidation boards which sold the failed banks' assets. The CENIs have become yet another example of the Ortega-Aleman "Pacto", and only Montealegre was distanced from the real corruption has been tarnished with this case. End Summary. The Origin of the CENIs -------------- ¶3. (SBU) Four Nicaraguan banks, Interbank, Bancafe, Bamer, and Banic failed between 2000-2001 after approving bad loans (many to insiders) and making unwise, if not fraudulent, investments. The first and largest banks to fail, Interbank and Bancafe, were also used by a shell company, Grupo Centeno-Consagro to launder money out of Nicaragua. When Centeno's pyramid scheme fell apart, the collapse took the banks with it. In a normal banking environment Bamer and Banic might have survived their own capitalization issues, but a nervous public took no chances after the first two failures and quickly withdrew their deposits. At the time, there was no government deposit guarantee agency, but the Central Bank (BCN),responsible for ensuring the stability of the monetary system, deemed it necessary to protect depositors and issued short term (2-4 year) bonds, Negotiable Investment Certificates (CENIs),to facilitate the takeover of the failed banks by other Nicaraguan banking institutions. What did the CENIs Cover -------------- ¶4. (U) BanPro, Bancentro, and Banco de Fomento (BDF) acquired the failed institutions through direct sales and auctions. Under the terms of the takeovers, the acquiring banks accepted full responsibility for the deposits of the failed banks' customers. The BCN issued USD 118 million in CENIs to the acquiring banks to cover the deposits of the failed institutions. Given that the principal cause of the failures was the poor quality or overvaluation of the failing banks' assets (loans, government paper carried at face value, real estate, equipment, artwork),the acquiring banks were allowed to decline certain assets of the failed institutions. The BCN issued USD 63 million in CENIs to cover the initial gap between assets and liabilities. ¶5. (U) The acquiring banks were then given six months (plus a three-month extension) to evaluate the value of the assets which they had accepted and reclassify the loans and fixed assets -- if necessary -- with the concurrence of BCN experts. If loans that one of the failed banks had classified as "A" were in fact non-performing, the BCN issued additional CENIs to ensure an adequate level of loan provisioning. The loans and fixed assets that the acquiring banks declined were returned to the "liquidation boards" of each failed bank for disposition. After the evaluation period, the BCN issued an additional USD 269 million in CENIs to the acquiring banks to cover those loans deemed to be non-performing and for the returned fixed assets. Of that amount, USD 248 million covered reclassified loans, of which USD 184 million (74%) was the Grupo Centeno-Consagro portfolio that brought down Interbank and Bancafe. The final value of the CENIs was USD 450 million. Where the Problem Lies -------------- ¶6. (U) Since 2005, the Comptroller General (CGR - GAO equivalent),and FSLN party stalwart, Luis Angel Montenegro has stated that the second tranche of CENIs are "bad CENIs," claiming that the banks had committed fraud during their evaluations of the failed banks. He claims that the failed banks' assets were seriously undervalued by the acquiring banks and therefore the value of the CENIs the acquiring banks received at the end of the six-month evaluation period was excessive. For example, Haroldo Montealegre, distant cousin and rival of opposition leader Eduardo Montealegre, and former President of one of the failed banks, claimed that several well-known borrowers' loans classified as "A grade" by the failed bank, were reclassified as "C grade" by Bancentro and the BCN, but were subsequently reclassified as "A" again -- leading to a widespread belief that the acquiring banks had somehow pulled a fast one on the Nicaraguan public. ¶7. (U) The BCN and the acquiring banks insist that the process was transparent, and that if loans were reclassified it was because the failed banks had improperly classified them in the first place. Acquiring bank officials have explained that most of the CENIs provided to their institution were, in fact, issued to cover the face value of the assets that they had declined at the start of the process (real estate, Property Indemnization Bonds (BPIs) carried at face value, and obviously hopeless loans),not because of the subsequent reclassification. The banks maintain that the reclassified loans were indeed non-performing when acquired, and only subsequently became effective loans because they restructured and refinanced them. The CGR investigated Haroldo Montealegre's accusations of faulty revaluation, but was never able to prove any fraud. (Note: An August 2006 analysis of the CENIs case by the BCN determined that the revaluations and devaluations were indeed correct. End note.) CENIs ) The Sequel -------------- ¶8. (U) In 2003, when Eduardo Montealegre was serving as Finance Minister, he faced the immediate challenge of meeting the GON's obligation to pay the USD 454 million worth of CENIs maturing between 2003 and 2004. Montealegre determined that refinancing the debt was the best long-term option for Nicaragua. As Finance Minister and ex-officio Chairman of the Board of the Central Bank, he oversaw the this process. Under the arrangement, the GON managed to extended the maturity terms from three-years to ten years, and decrease interest rates on average from 14.5% to 8.29%. With the renegotiation the CENIs ceased to exist and were converted to new debt instruments, known as Bonos Bancarios (Bank Bonds). The new bonds provided the GON with a net present value savings of US 64 million and helped Nicaragua reach Highly Indebted Poor Country (HIPC) completion point, which resulted in a savings of USD 200 million a year in foreign debt payments. The CGR Tries to Build a Case -------------- ¶9. (SBU) In August 2005, the CGR decided that the BCN did not have the authority to issue the original bonds in 2000-2001 and therefore asserted that the CENIs and subsequent Bonos Bancarios were null and void. The CGR reached the decision despite its earlier de-facto concurrence on the plan when it chose not to comment or respond to the BCN's original request for authorization to issue the CENIs in 2000. Unfortunately, in 2005 BanPro and Bancentro did not appear to take seriously the CGR finding, believing that some accommodation would be found to regularize the situation, as they felt that no government would allow the now stable financial system to be jeopardized by wiping out a significant portion of the assets of two of the largest banks in the system. Both the previous and the current BCN presidents have stated that the BCN would honor the Bonos Bancarios, despite the CGR's finding. Both men believed that to not honor the bonds would seriously damage Nicaragua's recently hard-won reputation as a good financial performer. ¶10. (SBU) The CGR also took the lead in investigating circulating accusations that opposition leader Eduardo Montealegre personally profited from the refinancing of the CENIs in 2003, when he was Minister of Finance. When Montealegre became Minister he resigned as General Director of Bancentro and divested his minority shareholding (10%) in the bank. According to Montealegre, the purchaser did not have sufficient funds to pay for the entire holding at one time, so Montealegre agreed to an extended payment plan for the sale. The CGR has tried to link the 2003 renegotiation of the CENIs with the terms of Montealegre's sale of his shares. The CGR argues that because the purchaser was still making payments for the Bancentro shares while Montealegre was in office, Montealegre's refinancing of the CENIs resulted in direct personal financial benefit. In fact, the CGR has even claimed that the payments were disguised dividends and that the "purchaser" did not really own the shares. The CGR has never been able to establish proof of this accusation. ¶11. (SBU) However, the CGR's 2005 finding of CENIs illegality did provide Montenegro with the basis for his current politically-motivated attack on Montealegre. While Montealegre can not be held responsible for the original decision in 2000 to issue CENIs, the CGR's 2005 finding allows Montenegro to charge Montealegre with exceeding his authority in renegotiating the bonds' terms. As Montenegro and CGR lawyers either did not understand or ignored the concept of net present value, nor the other tangential benefits of the refinancing plan, they also decided to pursue fraud allegations against the former Finance Minister, claiming that by extending the life span of the bonds, Montealegre had actually increased the GON's nominal indebtedness. ¶12. (SBU) In 2007, Montenegro's political attacks became substantially more effective when Attorney General Hernan Estrada, as part of the new FSLN administration, joined in. On September 12 of that year both Montenegro and Estrada announced to the press that Montealegre should face criminal charges for his role in the 2003 refinancing of the CENIs. So far Montealegre benefits from immunity as a member of the National Assembly and no formal charges have been filed. The Issues Ignored -------------- ¶13. (SBU) Throughout the CENIs scandals and accusations, the CGR has studiously avoided investigating three key groups of players: the bank liquidation boards, Centeno-Consagro, and the Boards of Interbank and Bancafe. Both the 2006 BCN report on the CENIs as well as by several independent investigators have claimed corruption by the liquidation boards charged with selling the non-performing loans and fixed assets of the banks. The liquidation boards were only authorized for a term of six months, with a possible six month extension, in which to liquidate the banks' assets. Board members were to have no ties to either the failing or benefiting institutions and could only earn up to 2% of the value of assets sold as honorariums. In reality, the liquidation boards operated for two years. Many board members had ties to financial institutions and obtained their positions due to political connections. The boards received USD 267 million (book value) in assets to sell. At the end of two years the liquidation boards returned to the BCN USD 398 million (book value) in assets and USD 21.6 million in monies received from sales. (Note: The Boards provided no written explanation for the increase in the book value of the assets. End note.) The boards charged USD 16 million in honoraria and "expenses." In less than six months, the BCN, with technical assistance from USAID sold the USD 398 million in assets for USD 29 million. ¶14. (SBU) The CGR has also never investigated the fraudulent activities of the Centeno-Consagro Group that led to the failures of Interbank and Bancafe. The Boards and managers of Interbank and Bancafe, which include several prominent Sandinistas including Foreign Minister Samuel Santos, have also been spared any investigation as to their knowledge and/or role in Centeno-Consagro's activities or any of the other financial impropriety that led to this string of failures. Comment -------------- ¶15. (C) The entire CENIs scandal has always conveniently ignored two salient facts, first, that the BCN's fast actions in 2000-2001 saved Nicaragua's economy and its banking system and second, that the most blatant financial crimes took place during the first two bank failures and within the liquidation boards. A few independent economists and Vice President Morales have mentioned that the CGR should focus on the bank failures, the actions of Centeno-Consagro, and the liquidation boards. The last two governments have avoided such investigations, however, due to the PLC and FSLN connections of the persons involved. So the CENIs become yet another example of the Ortega-Aleman Pacto, and only Montealegre the outsider who really had no role in the corruption has been tarnished with this case. TRIVELLI