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By Karla Jacobs, 25th June 2009
On June 16th, 39 former public officials and other individuals accused of collaborating in and facilitating the fraudulent financial operation known as the CENIs scandal received formal notification of the indictment against them. On June 22nd the preliminary hearing took place, although Judge Julio César Arias suspended the trial until two of the accused, Noel Ramírez and Eduardo Montealegre (who are protected from legal prosecution thanks to the parliamentary immunity they enjoy as deputies in the Central American and National Assemblies, respectively) are stripped of their immunity and obliged to present themselves in court.
The CENIs scandal is widely referred to as the biggest fraud in Nicaraguan history. CENIs are government bonds - literally Negotiable Investment Certificates - issued by the Central Bank in a somewhat similar way to US Treasury bonds. The CENIs scandal resulted from a three stage financial operation implemented during the administrations of former presidents Arnoldo Aleman (1996 - 2001) and Enrique Bolaños (2001 - 2006), the Nicaraguan state was effectively bankrupted to the personal and commercial benefit of a number of Nicaraguan oligarchs.
The operation began in 2000 when the Directors of Interbank (a private Nicaraguan bank) declared the institution insolvent. As part of an agreement between the government of the time and BANPRO, another private Nicaraguan bank, BANPRO absorbed Interbank under extremely favourable conditions: The Nicaraguan Central Bank would issue a number of Negotiable Investment Certificates or CENIs (high interest rate bonds) in favour of BANPRO to compensate BANPRO for the losses it might incur. But BANPRO - thanks to dishonest evaluations by unscrupulous government financial advisors - was able to acquire Interbank's loan portfolio for less than 30% of its real value and then go on to make multimillion dollar profits charging full value to former Interbank clients according to the original interest and payback arrangements.
The damage to Nicaragua's finances would not have been so catastrophic if the operation ended there. But during the next few months, in the second stage of the scandal, four more private banks - Bamer, Banic, Banco del Sur and Bancafé -were declared insolvent. To cope with the effects of thsoe insolvencies, the government proposed a similar deal to the original deal with Banpro. Terms were agreed between the government and two other private banks, Bancentro and BDF, whose directors fell over themselves to grab the concessionary conditions on offer.
According to the government of the time, the CENIs bonds were issued in the name of guaranteeing public deposits and macroeconomic stability. As economist Adolfo Acevedo says, however, "the issuing of the CENIs actually provoked a much greater risk of a severe financial and monetary crisis."
As part of the initial agreements CENIs bonds earned up to 21% annual interest. Consequentially the Central Bank incurred short term loan obligations equivalent to 95% of the country's brute international reserves. It was impossible, therefore, for the Central Bank to pay the debts without a dramatic drop in the country's international reserves which threatened to provoke a disastrous national financial and monetary crisis.
In order to avoid this scenario, the Nicaraguan government embarked on a programme of severe budgetary cut backs, adversely affecting crucial sectors of public spending. Even funds freed up as the result of the HIPC (Highly Indebted Poor Country Initiative) were used to service Nicaragua's internal debt despite the explicit requirement that these funds be used for poverty reduction programs.
In 2002 the amount the government set-aside to service internal debt grew by approximately US$100 million compared to 2001. The amount grew by a further US$100 million in 2003 compared to 2002. By 2004, as a result of accumulating interest, the amount grew by a further US$200 million compared to 2003. These are shocking figures considering that Nicaragua's average annual budget between 2002 and 2004 was just over US$929 million.
Indeed, the debacle of the state's finances provoked by the fraudulent operation surrounding the CENIs is probably one of the main reasons, along with lack of political will, that the Bolaños government was unable to deliver on even its most basic social obligations in terms of things like healthcare, education and infrastructure development. All this time the governments of the United States and the European Union were praising the Enrique Bolaños government for its responsible fiscal management and its stance on anti-corruption, for its commitment to the "free market".
In 2003 the third stage of the financial operation was set into motion during the period in which Eduardo Montealegre served under President Bolaños as Finance Minister. This stage, referred to as the "re-engineering" of the CENIs debt, involved a slight reduction in the interest rates the State paid on the CENIs bonds issued to BANPRO, Bancentro and BDF and the auctioning off of properties and goods inherited by the State from the banks declared insolvent in 1999 - 2000. While the government put a brave face on the supposed benefits of the renegotiation of the CENIs debt, in fact the beneficiaries of this stage of the operation were the private banks and in particular Bancentro.
At the time Montealegre was a major shareholder in the bank and a member of its Board of Directors. A major concern related to the auctioning off of properties and other goods. The sell-off incurred major losses for the State's patrimony. The results of the auction were widely perceived to have been rigged. The values of auctioned properties were were effectively those of a fire-sale, reduced to approximately 10% of their real value, according to the Public Prosecutor's Office investigation.
According to the Comptroller-General's Office, which had carried out a previous investigation into the CENIs scandal in 2005, this second phase of the financial operation provoked losses to the Nicaraguan State of over $100 million, on top of the losses of US$492 million resulting from the initial phase.
Since the FSLN came to power in 2007 there has been pressure from a number of sectors, including sectors within the FSLN, not to continue servicing the CENIs debt which, as established by the Comptroller General's Office, is an illegal debt. Current President of the Central Bank, Antenor Rosales, has refused to consider this option, however, arguing that the practical consequences of simply refusing to service the debt (plummeting confidence in the security of Central Bank bonds) would be more damaging than continuing to make payments.
Rosales and his colleagues argue that Nicaragua could not manage the consequences should existing and potential holders of Negotiable Investment Certificates lose confidence in the Nicaraguan government's commitment to honouring the terms of those bonds in the open market. The government uses bonds like the CENIs to manage the country's money supply and to help fund its budget deficit. Furthermore, it is not at all clear whether some significant proportion of the original CENIs that were the cause of the scandal have not been sold on to foreign investors outside Nicaragua, with all the complications that might imply.
What Antenor Rosales and his colleagues have been able to achieve, in 2008, is a second renegotiation of the debt. This renegotiation saw interest rates reduced to 8% or lower and increased the payback period from 8 to 20 years thus freeing up a significant amount of government funds for public spending, funds that would otherwise have been used to service the debt. Argument continues as to the legitimacy of the latest renegotiation and that of the renegotiation in 2003.
Now that it looks as though the trial against those implicated in the CENIs scandal is finally about to begin, expectations about political and other fallout that could result dominate political commentary in Nicaragua. It would appear to be only a matter of time until the National Assembly deputies vote on whether to strip Eduardo Montealegre of his immunity. Meanwhile there are signs that suggest the US Embassy has finally realized that Montealegre - widely regarded as their golden boy - is actually a dud and plan to create a united right wing force around the figure of Arnoldo Aleman.
At the end of May, Arnoldo Aleman presided over a meeting between leaders of the PLC and right-wing figures closely associated with the US Embassy such as Antonio Lacayo, Violeta Chamorro's son in law and former first minister, and César Zamora, head of the American Chamber of Commerce in Nicaragua. According to Francisco Aguirre, a PLC deputy, the fundamental conclusion reached during the meeting was that only a united right wing would have a chance of winning the 2011 elections. A majority vote to strip Montealegre of his immunity may or may not happen. That definitely does now depend on the PLC deputies controlled by Arnoldo Alemán.
The list of the accused in the CENIs case includes two former presidents of the Central Bank, two former finance ministers, and two former presidents of the Bank Superintendent's office, among over twenty other former public officials. It is hard to imagine these 39 white collar bankers and bureaucrats actually ending up sharing cells in Tipitapa's El Modelo prison, just outside Managua, with chicken-thieves, drug-pushers and gang-members. The most interesting thing about this stage of the saga will be to see how far the Ortega government is able to go in bringing justice to the men and women responsible for causing almost inconceivable damage to the Nicaraguan people and their right to a functional, viable State.
Looking back over the details of the fraudulent operation known as the CENIs scandal, it is impossible not to pick up on the parallels with the US government's bailout plan which both the Bush and Obama governments have used to manage giant insolvencies on Wall Street. Fundamentally, what both financial operations boil down to is the accumulation of unsustainable amounts of public debt in order to benefit society's richest members while provoking severe hardship for society's most vulnerable. Another way in which the two operations are similar is that they were both hailed as a solution to a financial crisis. In actual fact both cases demonstrate governments acting undemocratically to preserve the wealth of their countries' respective oligarchies, while provoking dramatic cutbacks and unemployment for the majority.