TFHO1: REGIONAL DEVELOPMENT BANK FACES PRESSURE TO

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 000880 SENSITIVE SIPDIS STATE FOR EXIM/MICHELE WILKINS E.O. 12958: N/A TAGS: EAID ECON EFIN HO KDEM PGOV PREL SUBJECT: TFHO1: REGIONAL DEVELOPMENT BANK FACES PRESSURE TO RESTORE LENDING TO HONDURAS REF: A. TEGUCIGALPA 838 ¶B. TEGUCIGALPA 808 ¶C. TEGUCIGALPA 790 ¶D. TEGUCIGALPA 576 Summary -------------- ¶1. (U) Summary: The board of governors of the Central American Bank for Economic Integration (CABEI) will deliberate on September 18 on whether to formally suspend lending to Honduran entities, which it placed on hold following the coup. In response to the pause in lending, the de facto Honduran central bank authorities have stopped paying commissions on undisbursed government funds in the bank and have ordered private Honduran banks to withdraw their deposits. Several former CABEI presidents signed a letter to the bank expressing concern that its involvement in "political" issues could jeopardize the bank's credit rating. A Honduran trade association is considering filing a complaint with the Central American Court of Justice about the bank's refusal to lend to Honduran entities. Those opposed to the bank's cessation of lending have cited an article in the bank's charter that mandates that all lending decisions be made on strictly technical, economic, or financial criteria. End summary. Background on CABEI -------------- ¶2. (U) The Central American Bank for Economic Integration (CABEI, also known as BCIE for its Spanish initials) is a regional development bank that was established in 1960 to promote regional integration and social and economic development. It was founded by the five countries of Central America; other countries have joined as non-regional members. CABEI, which has its headquarters in Tegucigalpa, is the leading source of financing for Central American countries. The highest authority in the bank is the Board of Governors, comprised of the minister of finance, the president of the central bank, or an equivalent from each country. Working under the Board of Governors is an elected Board of Directors. In reaction to the June 28 coup, and following instructions from the Central American Integration System, the directors put loan disbursements to Honduran entities on hold (ref B). De Facto Government Suspends Payment of Commissions -------------- -------------- ¶3. (U) After CABEI announced the suspension in lending, the de facto government in turn suspended payment of commissions to CABEI for undisbursed funds. As a borrower, the GOH pays a 0.75 percent commission on undisbursed funds so that the bank will continue to hold the money. According to Eugenio Sanchez, Coordinator of Institutional Relations at CABEI, the governors of the CABEI have been deliberating on a response to the cessation of commission payments. Sanchez indicated that CABEI was considering making an exception to charging this commission so that the termination of payments would not represent a breach of contract on Honduras' part. A decision of this nature must be made by the Assembly of Governors, which is scheduled to deliberate on the issue at a meeting on September 18. Private Banks Ordered to Withdraw Funds -------------- ¶4. (U) On September 2, local papers ran a story by the regional wire service ACAN-EFE saying that the de facto authorities of the Central Bank of Honduras have given private banks 20 days to withdraw deposits from CABEI. The story quotes de facto central bank president Sandra de Midence as saying that the decision, made on August 28, was in response to the bank's withholding of funds to Honduras for "political" reasons. De Midence is quoted as stating that the bank may have violated the requirement in its charter that decisions must be based solely on technical, financial, and economic criteria and without regard to TEGUCIGALP 00000880 002 OF 002 politics. Ex-Presidents of CABEI and Business Owners Weigh In -------------- -------------- ¶5. (SBU) EconOff spoke with Federico Alvarez, a former president of the CABEI, now a private businessman in Tegucigalpa, who said that he understands why the bank chose to pause its disbursements, but is deeply concerned about the bank becoming involved in politics and the impact this will have on it. He argued that participating countries -- not their governments -- are the founders of the bank. Each country is free to name its bank governor through its own legislative process; neither the board of directors nor the other governors can make that decision nor choose to exclude another country. Like De Midence, he cited the provision in the bank's charter prohibiting involvement in political matters. ¶6. (SBU) Alvarez forwarded to EconOff a pre-release copy of a letter to CABEI that was to be signed by five of its former presidents. In the letter, the bank governors express concern about the effect of the situation in Honduras on the credibility and investment rating of the bank. The letter, in contrast to Alvarez's remarks, does not criticize particular actions by CABEI. Instead, it states in general terms that the bank must comply with all its obligations. It warns against any action that is not based exclusively on technical, financial, and economic criteria. ¶7. (U) The Council of Honduran Private Enterprise (COHEP) and the National Association of Industrialists (ANDI) have both argued that holding back loan disbursements amounts to a breach of contract on the part of the bank. ANDI is considering filing a complaint regarding the matter with the Central American Court of Justice. Effects on the Bank's Operations -------------- ¶8. (U) By its charter, CABEI must hold reserves equaling 38 percent of its lending, a significantly larger amount than the 8 percent capital required for commercial banks under Basel II. This requirement limits the bank's ability to grow from retained earnings. The increasing need for borrowing by member countries due to the recession has created additional pressure to raise capital. The CABEI charter requires the five Central American countries to hold 51 percent of the shares, the rest being held by the non-regional members. Without the participation of Honduras in this call for addition capital (unless another founder country took up the portion of Honduras),CABEI either would have to cut back financing for the other founder members or would have to breach its minimum capital requirement ) a far less likely scenario, since this could impair its credit rating. According to Sanchez, the unpaid commissions, by contrast, would not have a significant impact on the bank's income. Comment -------------- ¶9. (SBU) Complaints by the de facto regime and former CABEI president Alvarez about the bank's non-recognition of the de facto regime's officials have no credibility; the bank is acting consistently with the non-recognition policy of its member countries. Concerns that the bank would be acting in violation of its charter if it suspended lending not only to the Honduran government but to Honduran private entities are likely to be taken more seriously by the bank's governors during their September 18 deliberations. End comment. HENSHAW