Cablegate: Nicaragua's Cenis: A History and Politics

VZCZCXRO0426
RR RUEHLMC
DE RUEHMU #0450/01 1022102
ZNY CCCCC ZZH
R 112102Z APR 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2437
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RUEAIIA/CIA WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RHEHNSC/NSC WASHINGTON DC
RUMIAAA/CDR USSOUTHCOM MIAMI FL

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

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