VZCZCXYZ0054
RR RUEHWEB

DE RUEHCV #0493/01 0661645
ZNR UUUUU ZZH
R 071645Z MAR 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 8042
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS CARACAS 000493 
 
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: BONOS DEL SUR: ROUND 2 
 
REF: A. 06CARACAS 3375 
 
     ¶B. 06CARACAS 3434 
     ¶C. 06CARACAS 3653 
     ¶D. CARACAS 387 
 
¶1. (SBU) SUMMARY: Venezuela will issue another round of the 
"Bonos del Sur" on March 8 worth USD 1.5 billion. 
Preliminary reports indicate that the issuance is more than 
nine times oversubscribed.  Demand for these 
Venezuelan-Argentinian bonds is well ahead of supply, as the 
Argentinian half offers an outlet to dollars at an implicit 
rate well below the current parallel market rate.  The 
issuance will do little to help with Venezuela's liquidity 
problems.  In keeping with the irony that is "Socialism for 
the 21st Century," this issuance will help a populist ally of 
Venezuela's, enrich a small group of middle to upper class 
Venezuelans, and do little to fix the mounting economic 
distortions prevalent in all sectors of the economy.  END 
SUMMARY. 
 
¶2. (U) Following the announcement by Chavez during Kirchner's 
visit in February (reftel D), the Minister of People's Power 
for Finance (MPPF) Rodrigo Cabezas announced the issuance of 
another round of "Bonos del Sur" on February 26.  The USD 1.5 
billion issuance will occur on March 8 and trading will begin 
on March 9, in a manner similar to the first issuance this 
November (reftel A).  The bonds have two halves: the 
Venezuelan half is made up of BRV Secured Interest and 
Principal Certificates (TICCs) that mature on March 21, 2019 
and pay 5.25 percent interest and the other half is an 
Argentine bond (Bonden 15) which matures on October 3, 2015 
and pays 7 percent interest.  The TICCs are protected against 
inflation and devaluation and pay interest in Bolivars.  The 
Bonden 15s are dollar-denominated and are convertible to 
dollars on international markets.  The MPPF will sell the 
bonds at 112.6 percent of value. 
 
¶3. (SBU) The Argentine half drives the demand for this 
instrument as exchange controls in Venezuela make it 
difficult to obtain dollars.  In addition, the bonds will be 
sold at an implicit rate of over 2800 Bolivars/dollar, which 
is 30 percent above the official exchange rate of 2150 
Bolivars/dollar, though significantly less than the current 
parallel rate above 4000 Bolivars/dollar.  Given the 
arbitrage between the implicit rate of the Bono del Sur and 
the value of dollars in the parallel market, anyone lucky 
enough to obtain a bond can make an immediate return of more 
than 40 percent on the Argentine half.  The TICCs will mostly 
be sold off to local financial institutions, who desire these 
instruments to protect against inflation and provide tax-free 
interest payments. 
 
¶4. (SBU) As was the case with the previous issuance in 
November, MPPF announced that priority would be given to 
small investors and it is likely that people will only get a 
portion of their request.  According to Cabezas' statement, 
requests of under USD 5000 will be fulfilled and those over 
USD 5000 will get between USD 5000 and USD 8000, depending on 
the size of the request.  A local banker told the DCM that 
his bank processed "dozens" of million dollar buy orders, 
including one USD 20 million order, all of which will 
apparently get the maximum USD 8000 allocation.  Anxious 
buyers tried other methods, including some that collected 
national identification numbers from their friends and family 
members to make multiple submissions for bonds, in the hopes 
of increasing their total allocation. 
 
¶5. (SBU) While the issuance is a boon for the "small 
investors" who obtain bonds, it will do little to help lower 
the gap between official and parallel rates.  Sintesis 
Financiera, a respected economic consulting firm, recently 
estimated that it would take as much as USD 6 billion in 
issuances to stabilize the parallel rate (bringing it back to 
the 2005-2006 level of 20-30 percent above the official 
rate). 
 
¶6. (SBU) The demand for parallel dollars has grown since 
December, when the Commission for the Administration of 
Foreign Exchange (CADIVI) instituted a new requirement for 
importers to obtain certificates from the Ministry of 
People's Power for Agriculture (MPPA) and Ministry of 
People's Power for Industry and Light Commerce (MPPILCO) to 
show that the goods they request dollars to import are not 
produced locally or that local supply is insufficient (reftel 
C).  MPPILCO, in particular has been very slow in issuing 
these certificates, forcing many firms to use the parallel 
market to obtain dollars.  CADIVI remains a problem for 
companies seeking to repatriate profits or dividends and they 
also have been using the parallel rate to make up for the 
insufficient supply from CADIVI.  This is despite the fact 
that CADIVI approvals have increased of late, and in 2006 
CADIVI authorized USD 27.4 billion in foreign exchange 
transactions, up 32 percent from 2005. 
 
¶7. (SBU) In addition, the added political and economic 
uncertainty following the series of announcements by Chavez 
and BRV officials at the beginning of the year have pushed 
many individuals and companies to try to get their money out 
of the country.   By targeting the allocations for small 
investors, the MPPF is providing an immediate profit for 
them, yet doing nothing to meet the needs of the companies 
and institutional investors driving the demand in the 
parallel market.  Minister Cabezas announced on March 4 that 
the bonds had been oversubscribed by over nine times.  As was 
the case previously, the parallel rate may actually increase 
as the issuance stimulates demand by those who expected to 
obtain more bonds and thus have unmet foreign currency needs 
(reftel B). 
 
¶8. (SBU) During an interview on March 4, Cabezas indicated 
that the proceeds would be used to pay off old debt, and not 
for spending.  Cabezas predicted that up to 40 percent of 
Venezuela's external debt would be refinanced this year, 
mostly by replacing external, dollar-denominated debt with 
local debt in Bolivars.  This will place less pressure on the 
country's foreign exchange reserves and make future 
devaluation or default less painful as they will be dealing 
mostly with local creditors.  Including USD 750 million for 
the Bonos del Sur, Venezuela has purchased approximately USD 
4.4 billion in Argentine bonds over the past two years, which 
has been financed through the National Development Fund 
(FONDEN). 
 
¶9. (SBU) COMMENT: This is the first debt issuance of 2007 and 
more are likely to follow.  PDVSA is still planning to issue 
up to USD 3.5 billion in bonds, though it appears this 
issuance will be only in Bolivars and targeted to the local 
market.  Estimates are that the BRV will once again go into 
deficit spending this year as oil prices and production evens 
out or even falls from 2006 levels while spending and 
inflation continue to grow.  Estimates of the BRV's financing 
needs for 2007 range widely, from USD 5 billion to USD 25 
billion.  In the end, Bonos del Sur II will be more of a PR 
ploy than real economic policy.  The government will claim 
that it has intervened to lower liquidity, reduce inflation, 
help out small investors, and maintain solidarity with an 
important ally.  In reality, it will have enriched tens of 
thousands of (already wealthy) Venezuelans and purchased some 
Argentine goodwill, the price of which seems to continue to 
increase.  END COMMENT. 
 
BROWNFIELD