LIMITED OFFICIAL USE
PAGE 01 QUITO 02247 272310 Z
73
ACTION ARA-17
INFO OCT-01 ADP-00 CIAE-00 DODE-00 PM-09 H-02 INR-10 L-03
NSAE-00 NSC-10 PA-03 RSC-01 PRS-01 SS-15 USIA-12
AID-20 COME-00 EB-11 FRB-02 TRSE-00 XMB-07 OPIC-12
CIEP-02 LAB-06 SIL-01 OMB-01 RSR-01 /147 W
--------------------- 053755
R 272140 Z APR 73
FM AMEMBASSY QUITO
TO SECSTATE WASHDC 7279
INFO AMCONSUL GUAYAQUIL
AMEMBASSY SAN JOSE
LIMITED OFFICIAL USE QUITO 2247
E. O. 11652: N/ A
TAGS: EFIN, EC
SUBJECT: GOE SELLS DOLLAR BONDS TO CENTRAL BANK
REF: QUITO A-207, DECEMBER 8, 1972
1. SUMMARY: AFTER LENGTHY DEBATE THE GOE HAS DECIDED TO FINANCE
ITS 1973 BUDGET DEFICIT BY SELLING $10-20 MILLION OF DOLLAR DENOM-
INATED GOE BONDS TO THE CENTRAL BANK. THE DECREES AUTHORIZING THE
SALE LIMIT THE AMOUNT TO 10 PERCENT OF NET INTERNATIONAL REVENUES
( NOW $160 MILLION AND STILL RISING) AND STIPULATE THAT THE GOE
USE THE PROCEEDS ONLY TO FINANCE IMPORTS FOR DEVELOPMENT PURPOSES.
THUS GOE PLANS TO FINANCE THE 1973 BUDGET DEFICIT BY FOREIGN
BORROWING HAVE BEEN DROPPED FOR THE TIME BEING. THIS ARRANGEMENT
APPEARS NON- INFLATIONARY, POLITICALLY FELICITOUS, AND SUFFICIENT
TO COVER THE DEFICIT. END SUMMARY.
2. MIN. FINANCE ENRIQUE SALAS TOLD REPORTERS APRIL 24 THAT THE
GOVT. HAD APPROVED TWO DECREES ( TEXTS NOT YET AVAILABLE)
AUTHORIZING
THE SALE OF GOE DOLLAR BONDS TO THE CENTRAL BANK. ACCORDING TO
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PRESS REPORTS, SUPREME DECREE 421 PERMITS THE MINISTRY OF FINANCE
TO EMIT UP TO $20 MILLION IN FOREIGN CURRENCY GOE BONDS THIS YEAR.
DECREE 421 A ALLOWS THE CENTRAL BANK TO PURCHASE SUCH BONDS OR
SIMILAR DEBT INSTRUMENTS UP TO 10 PERCENT OF THE NET INTERNATIONAL
MONETARY RESERVE, PROVIDED SERVICE AND AMORTIZATION OF THE BONDS
ARE IN THE GOE BUDGET. THE INITIAL PURCHASE WILL BE $10 MILLION
TO FINANCE IMPORTATION OF ROAD WORKING MACHINERY AND 10,500 COSTA
RICAN CATTLE. EACH SUBSEQUENT PURCHASE REQUIRES PRIOR APPROVAL
OF THE MONETARY BOARD, WITH AT LEAST 5 OF THE 8 MEMBERS VOTING
IN FAVOR. THE BONDS MUST BE FREELY NEGOTIABLE IN INTERNATIONAL
MARKETS, AND ANY RESALE LOSS WILL BE CHARGED TO THE BUDGET. THE
PROCEEDS MUST BE USED TO FINANCE IMPORTS UNDER THE DEVELOPMENT
PLAN.
3. SALAS REVEALED THAT THE BONDS IN QUESTION ARE PART OF $70
MILLION OF DOLLAR BONDS AUTHORIZED AND PRINTED BY THE VELASCO
IBARRA GOVT. IN AUGUST 1969, MOST OF THEM NEVER SOLD ( REFERENCE).
HE PRESENTED THE ARRANGEMENT AS A METHOD OF INVESTING IDLE FOREIGN
EXCHANGE RESERVES IN THE DEVELOPMENT EFFORT. EL COMERCIO,
QUITO' S LEADING DAILY, SWALLOWED THIS LINE WHOLE IN A LAUDATORY
EDITORIAL APRIL 26.
4. DECREE 421 DOES NOT REQUIRE THE MIN OF FINANCE TO PLACE THE
ENTIRE $20 MILLION WITH THE CENTRAL BANK. ACCORDING TO A STOCK
BROKER HANDLING THESE BONDS, THE GOE IS ALSO SELLING THEM IN THE
DOMESTIC MARKET IN SMALL LOTS.
5. THE GOE APPEARS TO HAVE FOUND A NON- INFLATIONARY WAY OF
BORROWING
FROM THE CENTRAL BANK. SOME OF THE DETAILS OF THE CATTLE PURCHASE
ARE PUBLIC. THE GOE WILL PAY COSTA RICAN EXPORTERS DIRECTLY WITH
FOREIGN EXCHANGE RECEIVED FROM THE CENTRAL BANK IN RETURN FOR THE
DOLLAR BONDS. THE GOE BANCO DE FOMENTO WILL SELL THE CATTLE TO
RANCHERS ON 12- YEAR TERMS AT 8 PERCENT INTEREST WITH 5 YEARS GRACE
FOR CAPITAL AND 3 YEARS GRACE FOR INTEREST. THUS THE TRANSACTION
WILL HAVE NO SHORT RUN IMPACT
E E E E E E E E
*** Current Handling Restrictions *** n/a
*** Current Classification *** LIMITED OFFICIAL USE