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The country's name is derived from Nicarao, the name of the Nahuatl-speaking tribe which inhabited the shores of Lake Nicaragua before the Spanish conquest of the Americas, and the Spanish word Agua, meaning water, due to the presence of the large Lake Cocibolca (or Lake Nicaragua) and Lake Managua (or Lake Xolotlán), as well as lagoons and rivers in the region.

It was occupied by Spain in 1569, and by the US from 1909 to 1933. The US continued its control of the country with the dictatorship of Anastasio Somoza García until the end of the insurrection by the Sandinista National Liberation Front (1972--1979)

The US responded with support for the Contras, groups of Somoza's National Guard who had fled to Honduras organized and funded by CIA and Contras elements involved in cocaine trafficking in Central America.

In 1982, legislation was enacted by US Congress to prohibit further direct aid to the Contras. Ronald Reagan's officials attempted to illegally supply them out of the proceeds of arms sales to Iran and third party donations, triggering the Iran-Contra Affair of 1986–87. The Sapoa ceasefire between the Sandinistas and the Contras began on March 23, 1988. Subsequent agreements were designed to reintegrate the Contras and their supporters into Nicaraguan society preparatory in preparation for general elections.

The Republic of Nicaragua v. The United States of America was a 1984 case of the International Court of Justice (ICJ) in which the ICJ ruled in favor of Nicaragua and against the United States and awarded reparations to Nicaragua. The ICJ held that the U.S. had violated international law by supporting the Contras in their rebellion against the Nicaraguan government and by mining Nicaragua's harbors. The United States refused to participate in the proceedings

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