Guatemala Central Bank Head Indicted as Crisis Deepens

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Guatemalan central bank President Julio Suarez was indicted for fraud as part of an investigation into contracts issued by the Social Security Institute, deepening a political crisis in Central America’s largest economy.

Suarez was indicted Tuesday, along with 16 other people, for his role in approving a 116 million-quetzal ($15 million) contract for blood dialysis services awarded by the Social Security Institute. The move comes as President Otto Perez Molina revamps his cabinet and fends off calls by protesters to resign about three months before national elections.

After listening to the proceedings from a cage in the courtroom, Suarez testified last week that the institute’s board didn’t have administrative responsibilities for issuing contracts and that he complied with the law in carrying out his duties. Suarez, who used to represent Guatemala before the International Monetary Fund, has a seat on the board because of his position at the central bank. The court dismissed that view.

“You were irresponsible by not reviewing the contract,” Judge Silvia De Leon Santos told the defendants from her courtroom in Guatemala City. “You had the chance to reject it and you didn’t.”

‘Totally False’

All 17 defendants, including the director of the institute and former Perez Molina aide Juan de Dios Rodriguez, were sent to prison to await a July 27 hearing. Prosecutors will then present evidence to a court that will decide if the case proceeds to trial.

Since the start of 2015, Perez Molina has fired or accepted the resignation of his vice president, tax chief, two energy ministers, environment minister and head of intelligence for reasons that included corruption allegations. Last week he called claims that his cabinet is falling apart “totally false.” Bi-weekly protests calling for his resignation have grown since April, peaking May 16 when 60,000 people took to the streets.

About an hour after the indictment was issued, Moody’s Investors Service lowered its outlook on the country to negative, citing the political crisis it said has “rapidly escalated.” The company maintained its Ba1 rating, which leaves the $54 billion economy in the same category as Russia and Portugal.

Guatemala’s interim central bank president, Sergio Recinos, said at a news conference on Wednesday that Moody’s is “overreacting to short-term circumstances. Everything is being resolved in a peaceful, lawful manner.”

Falling Bonds

“The probability that domestic political events could negatively affect macroeconomic stability and government financial strength remains low, but has risen as a result of the heightened uncertainty surrounding the outcome of the political crisis,” Moody’s said in the report.

Guatemala’s dollar bonds have lost 1.4 percent this month, the most of any Latin American nation, according to JPMorgan Chase & Co.’s EMBIG index. The yield on the country’s notes maturing in 2022 have climbed 23 basis points, or 0.23 percentage point, to 4.32 percent.

Recinos said Wednesday that the country’s bonds are “experiencing normal fluctuations” when compared to other countries in Latin America. “Guatemala can’t be compared to Venezuela. Venezuela has much more serious political problems,” Recinos said, adding the central bank is functioning “at 100 percent with all its services and activities.”

Suarez’s attorney, Vinicio Garcia, said Tuesday night that “the imprisonment of my client could have grave consequences for the country’s economy.”

Suarez’s indictment also came one day before the monetary policy committee maintained the country’s benchmark interest rate at 3.5 percent since lowering it from 4 percent in February.