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Cablegate: Silencing Critics: Attacking the Opposition Leader

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P 242220Z SEP 07
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S E C R E T SECTION 01 OF 04 MANAGUA 002185

SIPDIS

SIPDIS

E.O. 12958: DECL: 09/18/2017
TAGS: PGOV ECON EFIN RELAM KDEM KCOR NU
SUBJECT: SILENCING CRITICS: ATTACKING THE OPPOSITION LEADER


MANAGUA 00002185 001.2 OF 004


Classified By: Ambassador Paul Trivelli, reason 1.4 (b) & (d)

Summary
- - - -

1. (S) The anti-democratic forces of the Ortega government
combined with the corrupt powerbroker Arnoldo Aleman are
mounting a politically motivated attack against the leader of
the Nicaraguan Liberal Alliance (ALN) Eduardo Montealegre.
The Comptroller General's office has accused Montealegre of
criminal activities related to his effort as Finance Minister
in 2003 to renegotiate government issued bonds, known as
Negotiable Indemnization Certificates (CENIs). It is not
clear how personally damaging to Montealegre these charges
will be ultimately, but the threat is real, and there are
indications that ALN party members are jittery. On September
19, ALN National Assembly Deputy Ramiro Silva announced he
was leaving the party. With the ALN genuinely shaken by the
attacks on Montealegre, we need to continue to find ways to
foster the democratic forces of Nicaragua. Comment begins at
paragraph 9. Extended background on the CENI issue begins at
paragraph 11. End Summary.

The Messy Politics
- - - - - - - - - -

2. (C) Montealegre's involvement in the CENI case became a
political weapon for his political opponents during the 2006
election campaign. One of the most outspoken critics of
Montealegre's links with the CENI case was PLC National
Assembly Deputy Enrique Quinonez. 2006 election polling data
suggests that the CENI accusations did hurt Montealegre.

3. (C) Montealegre has told us before that he expected that
the "Pacto" alliance formed by President Ortega and former
President and convicted felon Arnoldo Aleman would continue
to pursue him on the CENI issue. The question is, according
to ALN party strategist Eliseo Nunez, Jr., why has the
Comptroller General decided to pursue the case against
Montealegre now? It could have done so last year before the
elections. The answer, it appears, may have something to do
with the five-year statute of limitations in Nicaragua. The
Comptroller General's office September 12 announcement
indicated that all five members of the Central Bank
responsible for re-financing the CENIs, including
Montealegre, are culpable for acting without a legal basis
in refinancing the CENIs; however, the statute of
limitations for the other CENI-linked notables -- including
Arnoldo Aleman and former Central Bank President Noel Ramirez
-- has already expired. The sole real target is clearly
Montealegre, and the Comptroller General's office had to wait
until now to avoid any political collateral damage, Nunez
told us.

4. (C) Nunez doubts that the Ortega regime intends to do
more than fire a warning shot at Montealegre. Liberal
opposition disunity favors the Sandinistas, Nunez argues, and
as long as Montealegre continues to lead an anti-Aleman
liberal movement, the Sandinistas benefit -- particularly as
the country enters the municipal election period. He
indicated that the threat to Montealegre was real, however,
and that Montealegre could face as much as 14 years'
incarceration, should the Prosecutor's office decide to act
on the Comptroller's conclusions. Nunez also noted that if
the case winds up in the Pacto-controlled courts,
Montealegre's chances of a fair judicial process are limited.
Admitting that the ALN would be leaderless without
Montealegre (Note: Nunez's father is a National Assembly
Deputy and one of the more important ALN politicians. End
note.), Nunez added that the CENI case made it all the more
urgent for the ALN to reach an institutional cooperation
agreement with the Constitutional Liberal Party (PLC). If
something happens to Montealegre, he opined, the only way to
maintain a separate ALN identity within the liberal current
of Nicaraguan political life would be through some kind of
arrangement between the ALN and the PLC.

ALN Supporting Their leader?
- - - - - - - - - - - - - - -

5. (C) Kitty Monterrey, ALN Chief Advisor, told us on
September 19 that the situation is dire. The ALN party
members are rattled by the possibility that Montealegre may
not survive the CENI issue. "They are looking for other

MANAGUA 00002185 002.2 OF 004


options," she argued. On September 19, ALN Deputy Ramiro
Silva Gutierrez announced that he was leaving the party, to
become an independent National Assembly Deputy. Monterrey
told us that the ALN leadership knows that the Sandinistas
have been courting Silva. She doubted however, that it was
money alone that tempted Silva away. She told us that Silva
and his family have received personal threats. "They are
attacking Eduardo (Montealegre) on all fronts. The party is
on the verge of complete disintegration," Monterrey warned.

6. (C) On September 17, PLC Whip Maximino Rodriguez and PLC
heavyweight Enrique Quinonez both told the press that they
would not support removing Montealegre's immunity as a
Deputy, if CENI-related criminal charges are eventually
brought against him. "It's not a good sign," Monterrey
argued, "when members of the PLC are out there defending
(Montealegre) and the ALN itself is silent." On September
18, PLC Chief Spokesman Leonel Teller "clarified" the PLC
position, claiming that PLC wants what's best for the nation,
and that Montealegre should concentrate on liberal unity and
not on attacking PLC leader Aleman.

Next Steps
- - - - - -

7. (C) The Comptroller General's Office does not have the
ability to bring charges against any individual. At this
point it is up to the Prosecutor General (Fiscal). It is not
clear what steps the Prosecutor General will take, and that
office has announced that it would conduct its own
investigation into the CENI issue. Monterrey told us that
despite his close ties to Aleman, she doubted that Prosecutor
General Julio Centeno Gomez would directly attack
Montealegre, given the strong personal relationship between
the two. However, if there is sufficient pressure on him,
Monterrey guessed that Centeno would find away to excuse
himself from the action, letting others in the
Aleman-dominated Prosecutor's Office take the lead.

8. (C) Monterrey outlined for us the three choices
Montealegre faces: cut a deal with Ortega; cut a deal with
Aleman; or, go it alone. Going it alone will fail, she
opined. Without the solid backing of a united ALN,
Montealegre has neither the financial resources nor the
political capital to take on the Pacto. However, she said
that there was no chance that Montealegre would cut a deal
with either Ortega or Aleman. "Eduardo (Montealegre) doesn't
have a plan," Monterrey lamented, and as one of the ALN's
chief financial officers during the 2006 campaign, "they will
be coming after me next."

Comment
- - - -

9. (S) Monterrey is correct that the ALN is facing its most
serious challenge. Montealegre has known for some time that
the FSLN/Aleman Pacto would come after him on the CENI issue
and neither he nor his party have developed an effective
strategy to counter it. We also note that even the
Comptroller's findings alone could conceivably bar
Montealegre from being certified as a municipal candidate in
2009 or as a Presidential candidate in 2011. Further, we see
no reason to discount Monterrey's assertion that the
weaker/less loyal members of the ALN are scouting for options
should Montealegre, and thus the ALN, go down. Silva's
departure from the party has the potential to be the first of
several such defections and is exacerbating existing tensions
within the ALN and with ANL's coalition partner, the
Conservative Party. Montealegre may be the best
representative for a democratic future in Nicaragua, but he
is under serious attack and will need to go on the offensive
internally and externally to maintain his party and his
position. The CENI case has the potential to substantially
weaken Montealegre's ability to be the leader of any united
democratic front for the 2008 elections.

10. (S) Nonetheless, there are many liberal supporters for
democratic change at the municipal and local level, people
who want to see an end to Aleman's corruption of the liberal,
anti-Sandinista movement and Montealegre remains massively
popular among them. Recent public opinion polls give
Montealegre a 64 percent approval rating, higher than any
other political figure in the country. Montealegre's
difficulties make it all the more imperative that we find

MANAGUA 00002185 003.2 OF 004


ways to promote this democratic movement from the ground up
by aiding them with the resources and the training they need
to strengthen their institutions and to resist the combined
forces of the Pacto. End Comment.

Convoluted Background - The Cliff Notes Version
- - - - - - - - - - - - - - - - - - - - - - - -

11. (SBU) Accusations that Montealegre abused his former
capacity as Finance Minister for personal profit have been
circulating since before the 2006 Presidential elections.
The charges stem from Montealegre's association with
BANCENTRO, one of the banks that, critics argue, benefited
unduly during Nicaragua's 2000-2001 banking crisis. On 12
September, the office of Nicaragua's Comptroller General's
office announced to the press that Montealegre should face
criminal charges for his role in the 2003 refinancing of
certain sovereign Nicaraguan bonds, known as Negotiable
Indemnization Certificates (CENIs).

12. (U) Four Nicaraguan banks failed in 2000-2001 after
approving bad loans (many to insiders) and making unwise, if
not fraudulent, investments. Most of the board members of
the first and largest bank to fail were Sandinistas, who were
never charged with the financial impropriety that led to this
string of failures. The first two banks to fail were also
used by a shell company to launder money out of Nicaragua.
When the company's pyramid scheme fell apart, it took the
banks with it. At the time, there was no government deposit
guarantee agency, but the Central Bank, responsible for
ensuring the stability of the monetary system, deemed it
necessary to protect depositors and issued short term (2-4
year) bonds, CENIs, to facilitate the takeover of the failed
banks by other Nicaraguan banking institutions. The final
value of these CENIs was approximately USD 450 million. USD
118 million were issued to cover deposits and an initial USD
63 million were issued to the banks to encourage their
purchase of the failed banks, assets.

13. (U) Under the terms of the takeovers, the acquiring
banks accepted responsibility for the deposits of the failed
banks' customers (e.g. liabilities for the banks). Given
that the 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 given the option of
declining certain assets of the failed institutions. The
Central Bank issued CENIs to make up the difference with an
initial payment of USD 63 million in CENIS to cover the gap
between assets and liabilities. The deposits from the failed
banks passed to the acquiring banks overnight, but the terms
of the acquisition gave the acquiring banks six months (plus
a three month extension) to evaluate the value of the assets
(loans) which they had accepted, and reclassify the loans --
if necessary -- with the agreement of Central Bank experts.
If loans that one of the failed bank had classified as "A"
were in fact non-performing, the Central Bank issued
additional CENIs to ensure an adequate level of loan
provisioning. The assets that the acquiring banks had
declined were returned to the "liquidation boards" of each
failed bank for disposition. After the evaluation period,
the Central Bank issued an additional USD 269 million in
CENIS to the acquiring banks to cover loans deemed
non-performing.

14. (U) BANCENTRO, of which Montealegre had been General
Director and a minority (10 percent) shareholder, was one of
the successful bidders on the assets and liabilities of the
failed banks. Critics charge that the failed banks' assets
were seriously undervalued and that the value of the CENIs
that BANCENTRO and the other acquiring banks received were,
therefore, excessive. Haroldo Montealegre, distant cousin
and rival of Eduardo Montealegre, and former President of one
of the failed banks, leaked the names of several well-known
borrowers whose loans had been classified as "A grade" by the
failed bank, then reclassified as "C grade" by BANCENTRO and
the Central Bank, but were subsequently reclassified as "A"
again -- leading to a widespread belief that BANCENTRO had
pulled a fast one on the Nicaraguan public.

15. (U) The Central Bank, BANCENTRO and the other 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. BANCENTRO

MANAGUA 00002185 004.2 OF 004


officials have explained in the past 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 subsequent reclassification. With
respect to the cases leaked to the press, BANCENTRO maintains
that they were indeed non-performing loans when acquired, and
only subsequently became loans in good standing because
BANCENTRO restructured and refinanced them. The Comptroller
General's Office investigated these accusations of faulty
revaluation, but it was never able to prove any fraud or to
tie it to Montealegre. (Note: An analysis by the Central
Bank in August of 2006, determined that the revaluations and
devaluations were correct. End note.)

The Montealegre Puzzle Piece
- - - - - - - - - - - - - -

16. (U) In January 2003, Montealegre became Finance Minister
in the newly elected Bolanos administration. At that time,
he resigned as General Director of BANCENTRO and divested his
minority shareholding of BANCENTRO. The purchaser of
Montealegre's BANCENTRO holding 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.

17. (U) In his capacity as Finance Minister, Montealegre
faced the immediate challenge of how to deal with the fast
approaching maturity dates of the CENIs issued by the
previous administration. There was no possibility that the
Nicaraguan government could have repaid the maturing CENIs.
As Finance Minister and ex officio Chairman of the Board of
the Central Bank, Montealegre oversaw the process of
renegotiation of the payment terms and interest rates of the
CENIs. The maturity terms were extended to ten years, and
the some of the interest rates were substantially decreased,
on average from 14.5% to 8.29%. At this point the bonds
renamed Bonos Bancarios and CENIs as such ceased to exist.

18. (SBU) In August 2005, the Comptroller General's office
issued a finding that the Central Bank did not have the
authority to issue the bonds and therefore the CENIs were
null and void. At the time, the financial institutions did
not appear to take the finding seriously, believing that
some accommodation would be found to regularize the
situation, as no government would allow the now stable
financial system to be jeopardized by wiping out a
significant portion of the assets of half of the banks of the
system. Both the previous and the current Central Bank
presidents have stated that the Central Bank will honor the
Bonos Bancarios, despite the Comptroller General's statement.
They both felt that not to honor the bonds would seriously
damage Nicaragua's recently hard won reputation as a good
financial performer.

19. (C) However, the 2005 finding by the Comptroller General
did provide the basis for what appears to be the current
politically motivated attack on Montealegre. Montealegre can
not be held responsible for the original decision in 2000 to
issue CENIs, but by extension of the Comptroller General's
2005 finding on the legality of the CENIs, the charge is that
Montealegre exceeded his authority in renegotiating the
bonds' terms. To add to the gravity of the charges,
according to Nunez, the Comptroller General's office may seek
to link the 2003 renegotiation of the CENIs with the terms of
Montealegre's sale of his shares in BANCENTRO. The argument
is that because the purchaser's payments to Montealegre for
the sale of his minority BANCENTRO holding were still being
made when he was in office, his renegotiation of the CENIs as
Minister of Finance resulted directly in personal financial
benefit.
TRIVELLI

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