PHILIPPINE STATE-OWNED FINANCIAL INSTITUTION IN

C O N F I D E N T I A L SECTION 01 OF 02 MANILA 002135 SIPDIS PASS USTR FOR KEHLERS E.O. 12958: DECL: 09/15/2028 TAGS: ECON EFIN PGOV PREL RP SUBJECT: PHILIPPINE STATE-OWNED FINANCIAL INSTITUTION IN ARREARS TO GE MONEYBANK Classified By: Economic Counselor Larry Memmott, reasons 1.4(b) and (d) . ¶1. (SBU) Summary: EconCouns met with Secretaries of Finance, Trade and Agriculture to express concern about the failure of a Philippine state owned enterprise to make required principal payments on its bonds, $20 million of which are held by GE Moneybank. GE is requesting that the government establish a timetable for becoming current on the payments, which are now $3 million in arrears. The government has expressed a commitment to resolving the issue, though it is not clear yet how or when it will do so, and some officials suggest that GE may register some losses on its investment. End Summary. ¶2. (SBU) In several conference calls and meetings, executives of GE Moneybank have asked the Embassy to reach out to Philippine officials to ensure they understood the importance of resolving an issue of overdue principal payments on bonds GE purchased from a government-owned and -controlled corporation, Quedancor. GE Moneybank holds $20 million in Quedancor paper. Quedancor failed to make a payment of some $3 million in principal in April, although it has continued to make interest payments since then. ¶3. (U) Quedancor was established in 1978 for the purpose of guaranteeing loans to rice and corn farmers. In the 1992, Republic Act 7393 empowered it to make loans itself by raising funds via the issuance of bonds. ¶4. (U) The Agri-Agra Law, or Presidential Decree 717 of 1975, requires that banks allot 25% of their loanable funds for agricultural and agrarian reform credit. Many banks do not have the branch network, the technical capacity, or the desire to enter into retail rural lending, a field which is particularly difficult in the Philippines given severe problems with land titles. Foreign banks are especially handicapped in this regard as they are legally barred from owning land in this country, making it difficult or impossible for them to make loans collateralized by real estate. ¶5. (U) Republic Act 7393 stipulates that investments in Quedancor bonds represent loans to small farmers and qualify as a mechanism for compliance with the Agri-Agra Law. GE Moneybank is the largest holder of these bonds. Other larger holders are MayBank of Malaysia and the Bank of China. Many Philippine banks hold smaller amounts of the bonds. Other foreign banks, however, choose to violate the Agri-Agra law. Instead of complying, they pay a non-compliance fine of PHP 100 (USD 2.15) per day. ¶6. (SBU) Quedancor missed its first principal payment of some $2.7 million on April 7. It has continued to make interest payments. Creditors have met with officials of the government, the Central Bank, and Landbank (another government-owned corporation, and the trustee) on several occasions, but no progress has yet been made toward solution. GE believes the solvency of Quedancor is highly questionable and a government bailout will be necessary. ¶7. (SBU) EconCouns met with Secretary of Finance Gary Teves on August 28 to express USG concern about this issue and ask for his views on the way forward. Secretary Teves expressed a great deal of concern himself and had a large team from both the Department of Finance and Landbank with him. Teves committed to looking for a solution and members of his team suggested that a 2009 appropriation from the Philippine Congress may be sought to deal with the crisis. He did suggest, however, that given that there is no direct Government of the Philippines credit guarantee on these bonds, GE and other investors might be expected to share some of the burden. ¶8. (C) EconCouns raised the issue with Secretaries of Trade Peter Favila and Agriculture Arthur Yap in separate meetings the week of August 1. Each evinced a full understanding of the issues and seemed to take our concern seriously. Favila promised to take the issue to the next meeting of the economic managers (a meeting of the members of the cabinet dealing with economic matters). He said that it was his position (strictly protect) that the GRP should make all the investors whole, given the nature of Quedancor as a state-owned enterprise. Yap (strictly protect) was quite critical of Quedancor, suggesting that it had acted illegally by operating beyond its mandate in issuing bonds and entering the retail credit market. He suggested it might be MANILA 00002135 002 OF 002 abolished. He also argued that private investors were responsible for due diligence and should share the burden if they did not act responsibly. ¶9. (C) Comment: The Philippine government is now fully aware of our concern over this issue. While GE feels strongly that it should take no losses on this transaction, there are arguments on both sides. Bad government policies (the lending requirement, for one) and probably bad government actors are partly responsible. On the other hand, it is notable that other U.S. banks (and most other foreign banks) found other ways of dealing with this situation. LINDBORG