Viewing cable 08SANSALVADOR1364
Title: GOES LIQUIDITY PROBLEMS, LOANS AND CREDIT LINES

IdentifierCreatedReleasedClassificationOrigin
08SANSALVADOR13642008-12-12 14:20:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy San Salvador
VZCZCXYZ0000
OO RUEHWEB

DE RUEHSN #1364/01 3471420
ZNY CCCCC ZZH
O 121420Z DEC 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0452
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC
C O N F I D E N T I A L SAN SALVADOR 001364 
 
SIPDIS 
 
E.O. 12958: DECL: 12/12/2028 
TAGS: EFIN PGOV ECON ES
SUBJECT: GOES LIQUIDITY PROBLEMS, LOANS AND CREDIT LINES 
 
REF: A. SAN SALVADOR 1353 
     ¶B. SAN SALVADOR 1332 
     ¶C. SAN SALVADOR 1238 
 
Classified By: AMBASSADOR CHARLES L. GLAZER, REASONS 1.4(B,D) 
 
¶1. (C) SUMMARY.  El Salvador's fiscal and liquidity problems 
continue, despite Government of El Salvador (GOES) 
negotiations with various international financial 
institutions.  The private banking sector remains liquid and 
prepared for massive post-electoral capital flight, though 
the threat of bank runs continues to be of concern and credit 
markets have tightened (reftel A).  The GOES has also not yet 
resolved how to roll over its short-term debt, with $80 
million needed on December 15 and at least $418 million 
needed before the end of the Saca Administration on June 1 
(reftel B).  Vice President de Escobar has also been seeking 
money from countries in the Middle East. 
 
¶2.  (C) The National Assembly is supposed to vote on a $500 
million Inter-American Development Bank (IDB) loan package on 
December 10.  While that money is earmarked for repaying 2011 
debt and funding new social programs, it could free up other 
funds to cover Letters of Treasury ("Letes").  The Central 
Bank has negotiated a separate $500 million credit line from 
the IDB, though its terms of use remain unclear and it might 
be too costly to use.  Likewise, the Central Bank is 
negotiating a contingency credit line with the International 
Monetary Fund, but political concerns over conditionality 
will likely prevent securing that line except in a crisis. 
An arrangement with the Central American Bank for Economic 
Integration (CABEI) might be the most attractive option for 
GOES, but there is no certainty that CABEI will have 
sufficient funds to meet Salvadoran and other regional 
demands.  In the current financial storm, the country is 
looking to the government to restore confidence in the 
economy, which could prove to be a tough task.  END SUMMARY. 
 
LIQUIDITY PROBLEMS 
------------------ 
 
¶3. (SBU) Salvadoran Private Banking Association (ABANSA) 
President Armando Arias, former Central Bank President Rafael 
Barraza, and Citibank Vice President Francisco Nunez all 
confirmed that the GOES rolled over its November Letters of 
Treasury ("Letes") using funds from various semi-autonomous 
institutions (e.g., the port authority, the water company). 
Removing the institutions' funds from the private banks did 
not, as Barraza had feared (reftel C), have a negative effect 
on the banking system.  By reducing bank deposits, however, 
this maneuver also likely made the banks less likely to roll 
over Letes. 
 
¶4. (SBU) On November 26, Ministry of Finance Director of 
Fiscal and Public Credit Policy Manuel Rosales said that the 
GOES would need $80 million in short-term financing by 
December 15, including rolling over $60 million in Letes and 
issuing $20 million in new Letes to cover tax revenue 
short-falls (reftel B).  According to Ministry of Finance 
figures, the GOES needs to roll over $93.4 million in Letes 
in January, $92.4 million in February, $131.5 million in 
March, $87.4 million in May, and $13.6 million in June. 
These figures do not include any new debt to make up for lost 
tax revenue.  (COMMENT: The Ministry of Finance has shared 
its debt information only reluctantly, and what they have 
provided is often inconsistent or incomplete. END COMMENT) 
 
¶5. (SBU) In addition, the GOES needs to reach an agreement by 
December 11 to reimburse electricity companies $66 million of 
the remaining $93.7 million in electricity subsidies from 
April-October 2008.  The GOES has continued to insist 
publicly that it will receive this money from the Central 
American Bank for Economic Integration (CABEI), though no 
loan has been finalized and the Treasury Ministry's Rosales 
told Econoff that CABEI cut its assistance for Letes from 
$300 million to $150 million, all of which has already been 
allocated.  According to electricity company representatives, 
the GOES will owe at least an additional $40 million in April 
2009 for the electricity subsidies from October 2008-April 
¶2009. 
 
¶6. (U) According to November 30 and December 3 press reports, 
Vice President Ana Vilma de Escobar asked the governments of 
Qatar, Kuwait and Bahrain to buy Letes during bilateral 
sidebars at a United Nations conference in Qatar.  CABEI 
Director for El Salvador Miguel Angel Siman was with VP de 
Escobar on the trip and confirmed the request to Econoff on 
December 8.  He was unaware of any commitments from those 
governments to purchase Letes or other Salvadoran debt, but 
said they were sending the three Arab governments additional 
information. 
 
¶7. (C) The GOES has established a liquidity commission, and 
according to former Finance Minister Hinds, President Saca 
took Hinds' suggestion to include former Central Bank 
President Barraza on the commission.  Hinds had not, however, 
seen the commission actually do anything.  When asked what 
the commission did, Central Bank President Luz Maria de 
Portillo replied only that "it meets every Tuesday."  Arias 
expressed his frustration when he told Econoffs that ABANSA 
had not been consulted or asked to participate in the 
liquidity commission. 
 
IDB-WB LOAN PACKAGES 
-------------------- 
 
¶8. (SBU) The Inter-American Development Bank (IDB) approved a 
$500 million loan on November 25, part of a $950 million 
package of IDB and World Bank loans.  While the GOES had been 
given approval to negotiate the loan by unanimous vote in the 
National Assembly, the final loan must still go to the 
Assembly for ratification by a 2/3 majority.  Ministry of 
Finance Director Manuel Rosales said that the GOES planned to 
present the loan to the Assembly on December 10.  According 
to local IDB representative Carmenza McLean, the first 
tranche of $200 million should be available before the end of 
¶2008.  Central Bank President Portillo said the GOES does not 
expect action on the World Bank's $450 million loan until 
sometime in January 2009. 
 
¶9. (C) To secure opposition support for the $950 million loan 
package, the GOES negotiated an agreement with the FMLN that 
$650 million ($200 from IDB, $450 from WB) would go to pay 
off El Salvador's 2011 Eurobond debt and $300 million (IDB) 
would be used to fund new social programs.  Initial reports 
from the agreement were that the money for social spending 
would not be used until after the next government took office 
in June 2009.  On November 26, however, Ministry of Finance 
Director Rosales said that the GOES would use the first 
tranche of $200 million on social spending. 
 
¶10. (C) IDB Rep. McLean contradicted Rosales, telling 
EconCouns that the loan documents specifically provided for 
the first $200 million to go to 2011 Eurobond debt repayment. 
 In addition, she lamented that the GOES had been slow to 
provide needed information to the IDB and had not done much 
to educate the National Assembly to assure passage of the 
loan package by the needed super majority.  McLean said the 
Assembly had to approve the package on December 10 and haveit published in the 
official gazette on December 1, in order 
to give the IDB time to process the lan before it closed its 
books for the year on Deember 18.  Though, she left open the 
possibilitythat other arrangements could still be made to 
diburse the first tranche of $200 million by year's nd, if 
the deadline was missed by only a few day. 
 
¶11. (C) Most of El Salvador's 2011 Eurobond dbt is held 
domestically, primarily by the semi-autonomous institutions. 
Banco Agricola Executive President/former Central Bank 
President Roberto Orellana and former Finance Minister Hinds 
have suggested that the GOES pre-pay some of its 2011 
Eurobond debt, which would free funds that could be used to 
buy Letes.  Hinds said Central Bank President Portillo had 
affirmed that the GOES could pay off the Eurobond early 
without penalty, but when Hinds suggested this plan to 
Minister of Finance William Handal, he told Hinds that they 
"had to wait until they could get the best possible deal for 
the government."  When asked on several occasions whether 
this idea was feasible, Ministry of Finance Director Rosales 
replied "no" but could not articulate why.  (NOTE. According 
to the 2011 Eurobond offer, the Eurobonds are not callable, 
but the GOES is permitted to buy and retire them on the open 
market. The 2011 Eurobonds were recently trading at about 94% 
of face value in the Salvadoran market.  END NOTE.) 
 
IDB Credit Line 
--------------- 
 
¶12. (SBU) The Central Bank has also negotiated a $500 million 
line from the IDB liquidity facility to be used for 
short-term lending for "working capital" to the "productive 
sector." (NOTE: This line is still pending final approval 
from the IDB board. END NOTE.)  Central Bank President 
Portillo stated that the credit line was for 5 years (with a 
3 year grace period) at LIBOR plus 4% (with an additional 
1.75% in commissions and fees).  Portillo added that the 
Central Bank had not yet received guidance from the IDB on 
how, exactly, the credit line may be used.  The Central Bank 
was likely, however, to channel the money through the 
state-owned Multi-Sector Investment Bank (BMI), which has 
"more experience" in this type of lending. 
 
¶13. (SBU) Participation by the banking sector will be 
optional, and ABANSA President Arias expressed doubt that 
many banks would opt to participate.  While the banks had not 
received the final details, the terms they had heard so far 
were so restrictive and would require so much documentation 
that Arias thought it would not be worth the banks' time. 
Citibank VP Francisco Nunez noted that, from Citi's point of 
view, the credit line was "very expensive at LIBOR plus 500 
to 600 basis points" and very limited in what areas it could 
be used.  For instance, both Nunez and Central Bank President 
Portillo did not think the credit line could be used for 
construction projects.  Nunez also stated that the GOES did 
not seem to understand the difference between liquidity risk 
and credit risk, and was attributing the tightening of credit 
markets entirely to liquidity risk.  Nunez was unsure whether 
most banks would actually use the credit line for lending, or 
if they would treat it as a contingency credit line. 
Citibank, he said, had enough liquidity to meet all of its 
lending needs through December, but would reevaluate its 
position in January in the event of election-related capital 
flight. 
 
¶14. (SBU) According to Central Bank President Portillo, 
because the credit line would pass through the Central Bank 
to the private sector, it did not need to go to the National 
Assembly.  This also meant, however, that those funds could 
not be used to buy Letes or other government debt.  On 
December 2, FMLN presidential candidate Mauricio Funes stated 
that, in his view, the Central Bank did not have the 
authority to obtain this credit line without approval by the 
National Assembly. 
 
IMF Credit Line 
--------------- 
 
¶15. (C) The Central Bank is also discussing with the 
International Monetary Fund (IMF) a contingency credit line 
of up to $1.2 billion, but Central Bank President Portillo 
said the GOES is still trying to decide what kind of IMF 
assistance would be most effective.  In former Central Bank 
President Rafael Barraza's view, however, the decision is 
actually political.  Barraza stated that El Salvador likely 
did not qualify for the IMF's short-term liquidity facility 
and had to look at other options which require more 
conditionality.  Barraza said that the Saca Administration 
was unlikely to sign off on anything that required 
conditionality before the January and March 2009 elections, 
for fear of political backlash, but the GOES would likely 
complete negotiations to the point where something could be 
signed immediately.  This would make the assistance available 
to address an emergency, but would not provide the same 
confidence boost to the banking sector. 
 
CABEI Assistance 
---------------- 
 
¶16. (SBU) According to CABEI Director for El Salvador Siman, 
CABEI has provided the Central Bank of El Salvador with a 
$200 million credit line, $195 million of which has already 
been disbursed.  Siman said that CABEI had an additional $150 
million contingency line to the Central Bank ready that the 
GOES could accept should negotiations with the IMF break 
down.  In Siman's view, the Central Bank of El Salvador is 
the most solid in Central America. 
 
¶17. (SBU) In order to purchase GOES Letes, CABEI had 
established a local trust (fideicomiso) and was inviting 
other investors, including the IDB, to participate.  Siman 
stated that CABEI thought this was the "most transparent" way 
to buy Letes, and hoped that a CABEI-backed trust would boost 
confidence and attract other, new investors.  When asked 
whether CABEI could provide more funds to buy Letes beyond 
the $150 million that it already provided, Siman replied that 
CABEI would consider any new request from the GOES, but it 
would have to be weighed against the numerous requests they 
were receiving from the other Central American countries.  El 
Salvador currently ranks 4th out of the 5 member countries in 
terms of assistance received, with less than $900 million in 
total debt. 
 
¶18. (SBU) Siman confirmed that the GOES and state-owned 
utility CEL had not secured a loan from CABEI to cover the 
outstanding electricity subsidy.  CABEI and the GOES were in 
talks, and CABEI was reviewing CEL's latest financials, but a 
loan proposal had not gone to CABEI's directors and would not 
"before January at the earliest."  While CABEI normally lends 
for infrastructure projects, Siman stated that they also do 
"working capital" loans, which could be used to pay 
subsidies.  He added that, in the event CABEI did not approve 
a new loan to CEL, the GOES had the right to request part of 
the existing $140 million loan for the El Chapparal dam be 
diverted to "working capital."  "CABEI is based in Central 
America, not Washington," he commented, "so we're pretty 
flexible about such things." 
 
COMMENT 
------- 
 
¶19. (C) El Salvador continues to face short-term liquidity 
problems and its fiscal accounts will continue to be vexed by 
subsidy expenses.  The IDB and WB loans, if passed will 
provide some needed relief, but will not necessarily resolve 
either the liquidity or fiscal problems.  In light of the 
urgent need for immediate funds to roll over Letes, Treasury 
Minister Handal's apparent reluctance to buy back 2011 
Eurobonds from domestic bondholders who might then be able to 
purchase Letes does not make sense.  Luminaries such as 
Hinds, Barraza, and former Minister of Economy Miguel Lacayo 
all continue to believe that the Ministry of Finance is a 
major impediment to resolving the short-term debt problem. 
Minister of Finance Handal is viewed only the man who "holds 
the President's pocketbook," and none of the Ministry's staff 
are seen as strong figures.  While Hinds remarked that he had 
seen some signs President Saca was becoming more concerned, 
Saca's two closest advisors, Herbert Saca and Elmer Charlaix, 
are the same advisors who pushed budget-busting subsidies in 
the first place.  While there is a possibility that the 
Liquidity Commission could persuade President Saca otherwise, 
the early signs of that Commission's effectiveness are not 
promising. 
 
¶20. (C) The international financial crisis and next year's 
elections are the two major factors affecting the Salvadoran 
economy and investment climate. Saca could do a great deal to 
restore confidence in the economy by coming up with a 
comprehensive plan on how to address debt and credit (reftel 
A) and presenting that plan to the public.  Economists like 
Lacayo, Luis Membreno and Hinds are saying that people are 
looking to the GOES (with multilateral and other assistance) 
for signs that the country can not only weather but also 
stimulate the economy to emerge from the current financial 
storm. 
 
¶21. (C) That strategy implies two things; that Saca is 
willing to face up to the issue, and he has a team in place 
that can develop and execute such a plan.  However, the 
administration does not want to pursue any assistance (e.g., 
the IMF credit line) that requires conditionality, both for 
fear of how it could be played by the FMLN in the campaign, 
and because that conditionality would likely include reducing 
and targeting government subsidies for electricity, gas, 
water, and transportation.  Given their reluctance to share 
information and questionable past economic policy choices we 
also question whether his current advisors are up to the 
task, even if they wanted to do it. 
GLAZER