Monday, February 18, 2008

The CENIS dispute: Nicarauga makes a bad retreat

When the Contra war came to a close in 1990 with the victory of the pro-US opposition (the UNO or National Opposition Union) most Nicaraguans heaved a sigh of relief. That sigh party muffled the sounds of suppressed rage at what eight years of US sponsored aggression had done to the country. Peace came, but a war of another kind intensified, a war against the poor called neoliberalism.

The country was left with the mines sewn along its northern frontier with Honduras and in some of the valleys reaching southwards. That was small change however, compared with many mines of another stripe – economic, ecological, and social time bombs destined to explode at one point or another.

The social time bomb was defused partly by an increase of exports of youth in the form of migrant workers. In the eighteen years since the victory of Violeta Barrios de Chamorro over one million Nicaraguan young people have emigrated abroad (out of a population of five million), mostly to the USA and to Costa Rica in search of work. They end up doing the jobs that locals prefer to avoid, earning low wages and working in dangerous conditions. But they earn enough to send remittances home to their families. The total value of remittances entering Nicaragua is now the second major source of foreign currency (see my article on migrant workers at ).
Another time bomb is the huge internal debt produced by the decision to compensate the Somocista mafia and their cronies whose properties had been confiscated during the revolution. That debt is a huge burden on the country.

Yet another time bomb is the component of the current internal debt acquired in the course of a series of bank failures seven years ago – known as the CENIS – or the Certificados Negociables de Inversión (negotiable investment certificates). This huge debt is mostly owned by several large Nicaraguan banks who acquired it for a song and dance performed behind closed doors. The process through which these banks acquired CENIS certificates, now being paid down from the public purse, has been declared illegal by both the country’s Attorney General and the Auditor General. President Daniel Ortega has also on numerous occasions stated that the process involved massive fraud and is illegal.

The question of the legality of the CENIS scam is now before the country’s Supreme Court of Justice (CSJ).

This internal debt will never be payable. It will be a permanent albatross around the necks of the poor of Nicaragua.

However, President Ortega and the government say the debt must be “honored” or else the country will fall into international disgrace and lose credibility in the face of lending agencies and prospective investors.

Nevertheless, it seems that the CENIS time bomb has exploded, leaving in its shards a divided government and FSLN.

State Prosecutor (Procurador) Hermán Estrada has backed up a request from Special Prosecutor Armando Juárez (assigned to investigate the CENIS case) for a judicial order stopping all payments pending a judicial resolution of the evident fraud.

Last week Judge Julio César Arias issued an order to the Ministry of Finance and the National Bank (BCN) to that effect. BCN President Antenor Rosales (a close and longtime confidant of Daniel Ortega) publicly refused to obey the order, and immediately appealed the judge’s decision. Subsequently Daniel Ortega backed up Rosales’ assertion that the debt must be paid. However, he also said that it must be renegotiated, and that those responsible for the fraud will face prosecution.

The issue “to pay or not to pay” the CENIS “debt” has divided Nicaraguans not just along left/right lines -- it has also divided the Frente Sandinista itself, even at the highest levels. All the main state functionaries lined up on opposing sides of this issue are Sandinistas. As well, the National Workers Front (FNT), Sandinista in orientation and affiliation, has re-iterated its opposition to paying the illegal component of the debt. This is a longstanding FNT position that they have been campaigning around, including daily radio and TV announcements. As well, the Citizen’s Power Councils (CPCs) have been running strong ads denouncing Eduardo Montealeage (head of the Nicaraguan Liberal Alliance (ALN) party and prominent banker) as one of the authors of the gigantic fraud. The CPCs are against paying the “debt” and insist on making “the thieves pay.” The Sandinista Renovation party (MRS) has also opposed repaying the CENIS certificates, as have many NGOs and grassroots organizations.

It will not surprise readers of this blog that the rightwing daily La Prensa is 100% in favor of paying off the CENIS certificates and has accused the government of “playing with fire” for maneuvering to force the bankers to accept a renegotiation of the terms of payment. Likewise the pro-imperialist ALN and PLC favor paying off the debt down to the last cent -- of course who wouldn't favor that if they were among those who own CENIS bonds. Many of these certificates have been bought and sold on the market; hence it is difficult to know where they now reside. But it is known that the big banks who own the ALN party in partnership with the US Embassy also own most CENIS claims against the public treasury.

The fraud involved is very simple. It is well explained in the article “The CENIS dispute: government beats a bad retreat” by Adolfo Acevedo, posted below (my translation). Acevedo is one of our most accomplished and respected economists whose research is valued by all sectors regardless of political orientation.

In a November 2007 article I made reference to how the CENIS dispute was being handled in the aftermath of the Hurricane Felix disaster (see Nicaragua confronts natural disasters: time to strengthen solidarity, Nov 3, 2007

I wrote “ALN leader Eduardo Montealegre said that the ALN favors a new government agreement on debt payment to bondholders. He is one of the country’s biggest bankers and part of the CENIS scam. But he told the newspaper La Prensa last week that he now believes ‘bankers holding bonds as a result of obtaining deposits from fraudulently collapsed banks should sit down with the government, the Central Bank, and the Ministry of Finance to re-finance them.’” He offered his support to a proposal from President Daniel Ortega for a moratorium on CENIS payments pending renegotiation.

However, the national budget just adopted by the National Assembly does not include any moratorium and is based on a “business as usual” recognition that the “debt must be honored.”

A broad discussion is unfolding in the country as to what should be done with funds freed up from any successful renegotiation. The FNT says a workers bank should be established and that government pension and social security funds should be deposited there and not in the for-profit banks. Farmers’ organizations are calling for the formation of a rural bank and for more affordable credits for productive investment in agriculture. Teachers and health workers argue that a large portion of salvaged resources should be dedicated to make up the shortfall in the education and health budgets of the country.

The list goes on. Not to speak of the struggle.

Felipe Stuart C.,

The CENIS dispute: government makes a bad retreat
By Adolfo Acevedo

Translated by Felipe Stuart Cournoyer

Managua. Radio La Primerísima. febrero 17, 2008

The government of Nicaragua lost an opportunity to correctly and definitely resolve the issue of the CENIS certificates (Certificados Negociables de Inversión – negotiable investment certificates). The whole thing shows that its actions amount to mere expedience to exert pressure on and threaten its political opponents. It has steered clear of handling this case in such a way that it would not only be possible to resolve the two key problems involved, but also to do so in a way that benefits the public.

First, ever since their emission, the CENIS certificates– and then their subsequent “reclassification,” their “re-purchase,” and then the denominated auction, have been manifestly and totally illegal. These certificates were issued without the National Bank of Nicaragua (BCN) ever having the slightest faculty to do so, and they were passed off – and this already been recognized by different governments – as a public debt in a situation where the Central Bank did not have the slightest faculty to put the nation into debt, nor reclassify portfolios, nor renegotiate this illegal debt, nor anything else it has done in relation to this case.

In the speech prepared for the “El pueblo president” (People President) program on January 11, 2008, the president of the Republic himself, “recalled that the authors of the CENIS operation [that is Noel Ramírez and company] broke the Central Bank Organic Law which does not authorize it to handle the crash of private banks.” Compañero President Daniel Ortega announced that the Government of Reconciliation and National Unity would not continue paying the certificates because issuing them was a “delinquent act” (but it should be said in passing that this stuff about the CENIS “will not be paid” – as any half informed person knew – was mere rhetoric aimed at the ranks of the governing party).The government has had in its hands (for some time, even before assuming office) the possibility of resolving definitively the problem of the legality of the CENIS certificates. The president has an enormous influence in the Supreme Court of Justice (CSJ) (over Sandinista and Liberal magistrates) that at this point no one even bothers to hide. The only thing the president would have to do is ask court magistrates to bring down a decision on the move for a injunction against the 2005 decision of the Auditor General nullifying the emission of the CENIS certificates.

Instead of doing that, the CSJ magistrates declared that they will not base their decision on strictly juridical considerations, as they should, but rather on “considerations of State.” The Court is not empowered to do anything other than make decisions based strictly on Law. That is what the president should demand the magistrates do. “State considerations,” in any event, are the responsibility of the Head of State and he must assume full responsibility for this case (whether we are in agreement with the Court or not, whether we question it or support it, but we become indignant when the magistrates arrogate publicly and openly the power to decide, not based on juridical considerations but on the basis of “considerations of State,” a role that is not within their competence).

If the Court makes its decision in strict conformance with law, the only decision it could bring down would be one confirming that the CENIS certificates were issued without any legal basis. Such decision, once the legal issue has been basically settled, would enable the government (that is, the Head of State) to move to settle, fundamentally (if that is really the aim), the other fundamental problem of the CENIS – irregular and fraudulent acts that have caused enormous damage to the patrimony of the State, and have imposed an enormous cost on the population (last year CENIS payments in the period immediately following the Hurricane Felix meant that the government did not have even minimal resources to respond to the emergency).

The irregular acts are, of course, inseparably connected to the illegal manner in which the whole matter has been handled.We should ask: why was it decided to manage every step in the process that led to the emission of the CENIS certificates, up until the auction, in a purely administrative way behind closed doors, handling each case, without exception, outside the bounds of legal procedures and processes?

How did the purely administrative course allow for a higher level of discretion and expeditious management, for the secret and hidden moves necessary, at each step, to favor the interests of the banks that bought certificates, and alleged functionaries, without at any point opening the process up to public scrutiny, or to any one else? The whole process was handled in such a way that nothing more was needed other than obscure acts and administrative decisions made and processed behind closed doors, most of which never became known and went unnoticed.

Were it not for the heroic journalist Eloisa Ibarra and the scandal she uncovered while others were looking the other way, it is possible we would never know what we now know.

A Supreme Court resolution based on law would allow the government to adequately redress the damage to public patrimony caused and to discharge most of this “debt” – the other basic problem of the CENIS certificates, thereby preventing the robbery from being consummated.
The government would have the full weight of that decision to proceed to propose to the holders of such certificates that they lack value, but that the government, out of responsibility, is disposed to recognize as a public debt. But EXCLUSISIVELY that part of said debt that can be demonstrated to be, in effect, support for deposits (because it is simply not possible to leave without any support depositors’ bank savings that are being backed up by CENIS certificates).

It is important to analyze in depth the full significance of this proposal. The part of the CENIS that, in effect, is backing up savings deposits is that which, in effect, corresponds to the portfolio of bad (uncollectable) credit of the liquidated banks.

For example, in the case of the portfolio of the Centeno Roque brothers with INTERBANK, amounting to US$ 77 million, a “hole” was produced in the sense that a mass of deposits for an equivalent amount was left with no support, and the Bank found it impossible to meet the massive obligations with account holders. This provoked its intervention and liquidation (its crash). To not recognize the part of this debt that would be covering the bad portfolio would equate to opening a real financial “hole” of a similar magnitude in BANPRO (and no one wants in the least to provoke the crash of another bank). It would leave uncovered and without support an equivalent mass of deposits of the public (back to the starting point).

But, as we know, the CENIS certificates issued for the INTERBANK problem amounted not to US$77 million, the equivalent of the bad Centeno portfolio, but covered the ENTIRE amount of the credit portfolio of that bank, equivalent to US$230 million (almost three times more than the “hole” opened up by the Centeno brothers and their associates).

Why did that happen if the bad portfolio that provoked the INTERBANK crash was only US$77 million?After INTERBANK was intervened a valuation of its overall portfolio was carried out that showed that most of it, aside from the Centeno Roque portfolio, was good. Nevertheless, once BANPRO took over INTERBANK, they said, without any prior valuation, that the ENTIRE portfolio of INTERBANK was bad, and that therefore CENIS certificates had to be issued to it not for the value of US$77 million, but for US$ 230 million (that is the ENTIRE portfolio of INTERBANK).

Of course, BANPRO had every incentive to ask for CENIS certificates instead of assuming the credit portfolio of INTERBANK:
· the CENIS certificates enjoy a much higher interest rate;
· that interest revenue is not taxable;
· managing a credit portfolio involves high administrative costs for follow-up, administration, and collection, while CENIS certificates have no administrative cost (which makes for a much higher effective return because it is net, without administrative costs); and
· in accordance with the norm for capital-credit ratio, BANPRO would have had to put up from its own capital US$23 million had they assumed the credit portfolio (an amount it did not have), but by receiving the CENIS certificates BANPRO became the largest and most profitable bank [in Nicaragua] without putting up a cent of its own capital.

It’s a simple question: did officials issue CENIS certificates to cover the INTERBANK case for an amount practically triple the value of the “hole” created by the Centeno brothers because, in effect, the ENTIRE INTERBANK portfolio was bad, or was this done simply to satisfy the interests of outlandish enrichment on the part of those who ended up with the certificates????

That simple question has a simple answer: an audit of fifteen days to a month of the INTERBANK portfolio. If it can be proved that CENIS certificates were issued fraudulently, three times what should have been issued, then BANPRO, which has already been paid MUCH MORE than the original US$77 million, must refund the overpayment,, and reduce to zero the amount left to be paid on this “debt” (which is more than the 80% of what remains to be paid).

If it turns out (and I don’t believe this, not at all) that there still remain more investment certificates to be paid, then let it be demonstrated that they are supporting deposits. Then, let that part be recognized as a public debt through certificates that are legally issued, but payable over a 30-year period at international interest rates (that are decreasing a lot). If that happens it should not prejudice the results of an investigation of penal responsibility (one thing is to assume responsibility for a debt that is shown to be backing up deposits, and another is that bankers and their cohorts would not have to assume penal responsibilities). In that way the legal problem would be definitively resolved. The damage caused to the public patrimony would be fully compensated, the burden of the debt would be resolved, and we would have recognized, in an effectively responsible way, what must be recognized.

It is not “responsible” to keep on validating the fraud committed when CENIS certificates were issued over and above what should have been done. (If for some reason that had to be done, there are instruments distinct from CENIS certificates that could have been legally employed. But they were not even considered because BANPRO demanded CENIS certificates issued at a rate of interest they dictated, in return for assuming responsibility for the obligations and assets of the failed INTERBANK. The BCN Board of Directors, headed by Dr. Noel Ramírez, authorized that.).

The President of the Republic, has all the necessary instruments to resolve this debt in strict observance of the law. But he has preferred to leave the basic CENIS problems unresolved and to create an impressive imbroglio in which he sees himself obliged to again recognize this debt as one that must be “honored” (which does not augur well regarding the decision of the Supreme Court on this case).Everything indicates that this case involves the following elements:

· Priority has been given to a privileged relationship that has been established with huge economic groups, and for that reason, this debt is being treated, in relations with them, as if it were fully legal and above board, that is presuming that everything done was legal and establishing that the fraud committed will be validated through a compromise of “honoring” the debt (that is, allowing the robbery to be consummated);
· The penal investigation underway is being used only as a means to pressure and threaten political opponents; but, in any case, it is an investigation based entirely on the presumption that what happened was illegal;
· Leaving the Supreme Court the task of again using its juridical “creativity” to “reconcile” these two ways of handling the case that are by nature irreconcilable.

If what happened was legal they there is no crime to go after – including the “renegotiation” with Eduardo Montealegre who is accused of having committed the criminal act of having renegotiated an illegal debt. That would be nothing more than a “voluntary refinancing” of a perfectly legitimate and legal debt. In this context, everything that was done is legal because when one asks a legitimate creditor for “refinancing” it is that party who accepts or not, willfully, the conditions attached to the refinancing. Hence there is no crime to go after. If an illegal debt is refinanced then there is a crime, aggravated by all the other deeds (not just on his part, but that of ALL others involved).

But, of course, here it seems that what is involved is really not to settle on who is responsible, but rather to use this investigation as a threat against opponents. But, on the contrary, if Eduardo Montealegre did commit a crime by renegotiating an illegal debt, the problem now is that an equal crime would be committed by the current government team that is trying to “refinance” this debt. If pursued for having a conflict of interests, for having links with BANCENTRO (which has around 10% of the CENIS certificates issued) when handling this matter, some could ask themselves if that is not the same thing as having links with BANPRO, in favor of whom most of the CENIS certificates were bountifully issued?

The president has responded with the argument that he is obliged to pay off the CENIS certificates in order to avoid a confrontation with “global capitalism.” I think it would be ten thousand times more likely to get into a confrontation with “global capitalism” by taking over the tanks of ESSO than for a wretched debt in a wretched country – a debt that, as well, is easy to show results from fraud and corruption. Evidently, if it is clearly shown that the CENIS certificates were issued through corruption on the part of the functionaries who did that, and if it becomes clear that when “re-classifying” (de facto or through illegal “valorization”) the portfolios there was intentional fraud and that the bankers were in collusion with those officials, then there should be no more problem that with any other act of corruption.

In reality, the legal functionaries closest to the president know the capacity that the legal condition of this debt affords the State. What is most likely is that the president, more than fearing that touching this debt would provoke a “deadly confrontation” with the global empire, is under pressure from the powerful groups holding these debts, with whom he has forged very close relations. That relationship, along with the strategic alliances with the PLC (Arnoldo Alemán), with the Church, the IMF, the WB, and more recently with the USA, he appreciates, are the basic stabilizing elements of his government. It is not in vain that his government has invested so much effort and time to forge and consolidate this relationship, to the point that businessmen, despite the president’s rhetoric, seem to feel confident and secure under his mandate.

The other “argument” about losing credibility is simply pathetic, to say the least. We have already dealt with this so many times and will not do so again. Just let me point this out – to maintain “credibility” in certificates the government issues in the amount of some US$45 million a year it must pay the richest people in the country US$200 million a year. Stretching the argument to its extreme, if you stop paying the US$200 million and lose “credibility” and then don’t manage to sell the US$45 million in certificates, the net result would be that you would save US$155 million, at least.

Who does this “business” of “maintaining credibility” serve? Who is excessively strengthening their capital accumulation in the medium range to the detriment of the very poor population of Nicaragua? Moreover, this debt, in the hands of the richest people, is paid with taxes coming from a regressive tributary structure that exacts proportionally more from the majority with the lowest income in the population. It has become a gigantic mechanism for regressive redistribution of income, from the poor majority of the population to those who are concentrating income in an excessive manner.

No comments: