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Viewing cable 06CARACAS3375, BRV TO ISSUE BONOS DEL SUR

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Reference ID Created Released Classification Origin
06CARACAS3375 2006-11-13 15:28 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Caracas
VZCZCXRO6406
RR RUEHAO
DE RUEHCV #3375/01 3171528
ZNR UUUUU ZZH
R 131528Z NOV 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 6975
INFO RUEHAC/AMEMBASSY ASUNCION 0719
RUEHBO/AMEMBASSY BOGOTA 7112
RUEHBR/AMEMBASSY BRASILIA 5816
RUEHBU/AMEMBASSY BUENOS AIRES 1511
RUEHLP/AMEMBASSY LA PAZ 2401
RUEHPE/AMEMBASSY LIMA 0654
RUEHMN/AMEMBASSY MONTEVIDEO 0879
RUEHQT/AMEMBASSY QUITO 2487
RUEHSG/AMEMBASSY SANTIAGO 3819
RUEHAO/AMCONSUL CURACAO 1060
RUEHGL/AMCONSUL GUAYAQUIL 0709
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC
UNCLAS SECTION 01 OF 02 CARACAS 003375 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VE
SUBJECT: BRV TO ISSUE BONOS DEL SUR 
 
REF: CARACAS 0659 
 
1.  (U) SUMMARY:  The Ministry of Finance (MF) announced the 
imminent issuance of the long-awaited "Bonos del Sur" on 
November 7.  The bonds, issued jointly by Venezuela and 
Argentina, will be worth USD 1 billion and are expected to 
start trading the week of November 13.  The bonds will likely 
be met with enthusiastic demand from Venezuelan purchasers, 
seizing on this mechanism to avoid exchange controls that 
prevent many from converting their bolivars to dollars.  END 
SUMMARY. 
 
2.  (SBU) The MF announced the long-awaited, though 
often-postponed, issuance of the "Bonos del Sur" on November 
7.  The bonds will be a combination of the BRV Secured 
Interest and Principal Certificate maturing on April 6, 2017 
(USD 500 million), the Argentine Bonden 12 expiring on August 
3, 2012 (USD 300 million), and the Argentine Bonden 15 
expiring on October 3, 2015 (USD 200 million).  All three 
instruments are dollar-denominated.  The two Argentine bonds 
can be converted into either dollars or pesos, whereas the 
Venezuelan portion can only be converted into bolivars 
(though devaluation-safe as they are denominated in dollars). 
 (Comment:  This will probably affect demand for the 
Venezuelan bonds in the secondary market as they will pay 
interest in bolivars and can only be converted into bolivars, 
thus while they provide a decent hedge against inflation and 
devaluation, they do not provide the much desired outlet to 
dollars that most Venezuelans seek.  End Comment.)  The 
purchaser will get a combination "Bono del Sur" at the time 
of issuance, but they can then be split, with the Argentine 
portions sold on the international market for dollars. 
(Note: During a lunch with econoffs on November 8, a sector 
contact received a steady stream of calls about the bonds and 
noted that, while the bonds were not yet issued, people were 
already trading them on the local market.  End Note.) 
 
3.  (SBU) Given the current demand for foreign exchange and a 
parallel rate in excess of 2900 bolivars/USD, it is unlikely 
that this issuance will meet the private sector's demand for 
dollars.  Unlike previous bond issuances, this announcement 
did not seem to affect the parallel rate, implying that the 
demand for dollars is such that USD 500 million in 
dollar-denominated assets hardly dented demand.  Liquidity 
has increased 40.6 percent in 2006 (and 63.9 percent year on 
year) and shows no signs of abating.  Delays in getting 
Commission for the Administration of Foreign Exchange 
(CADIVI) approvals and limitations placed on goods and 
services eligible for approvals mean that there are thriving 
parallel and black markets for dollars.  One contact involved 
in the parallel exchange business recently estimated that the 
parallel market converts USD 20-30 million daily and that 
business recently had been picking up (even as the bolivar 
lost value).  (Note: CADIVI has been approving approximately 
USD 100 million daily.  End Note.) 
 
4.  (SBU) COMMENT: As with previous issuances, it is likely 
that this one will be over-subscribed.  While historically 
the MF attempted to favor "small investors" over large 
institutions when assigning the rights to purchase these 
bonds, the process today is sorely lacking in transparency. 
The bonds are valued at the official exchange rate of 2150 
bolivars/USD, but will probably be sold at an implied rate of 
between 2400 and 2600 to the dollar.  This allows the BRV to 
make money on the arbitrage between official and implicit 
rates.  Of course, the lucky purchasers can then sell these 
bonds at the parallel rate of 2900/USD, so it works out well 
for all parties involved.  As with the Argentine bonds 
purchased and resold earlier this year (see reftel), it is 
likely that the "winners" of this process will be successful 
less for their merit than their political loyalty and 
 
CARACAS 00003375  002 OF 002 
 
 
financial largesse with certain BRV officials.  We expect 
additional "Bonos del Sur" issuances to follow in 2007.  END 
COMMENT. 
BROWNFIELD