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

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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