VZCZCXRO4697
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #0741/01 1032100
ZNR UUUUU ZZH
R 132100Z APR 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 8361
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 02 CARACAS 000741 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD 
 
E.O. 12958: N/A 
TAGS: EFIN ENRG VE
SUBJECT: PDVSA BONDS POSTMORTEM 
 
REF: CARACAS 667 
 
¶1. (SBU) SUMMARY: On April 12, PDVSA issued USD 7.5 billion 
worth of bonds.  The issuance, an increase over the USD 5 
billion originally offered, was divided between three 
securities, yielding 5.25 percent, 5.3 percent and 5.5 
percent, and maturing in 2017, 2027, and 2037, respectively. 
The bonds were oversubscribed by as much as 300 percent, with 
demand driven almost entirely by Venezuelans seeking a 
guaranteed profit and access to dollars.  The issuance is one 
of the largest in the history of emerging market debt 
issuances.  END SUMMARY. 
 
¶2. (SBU) PDVSA issued USD 7.5 billion in dollar-denominated 
Eurobonds on April 12 via the Venezuelan Central Bank (BCV). 
The issuance rose from USD 3.5 billion, discussed in early 
2007, to a USD 5 billion offered on March 22 (reftel), to an 
announced allocation of USD 7.5 billion on April 3.  As of 
the morning of April 13, the bonds were being sold in 
secondary markets at 76 percent of face value.  The increased 
allocation was due both to high demand in Venezuela and by 
PDVSA's seemingly insatiable hunger for cash.  With this 
issuance, PDSVA will have issued over USD 12 billion in 2007, 
raising its total debt stock from USD 4 to USD 16 billion. 
The proceeds (in local Venezuelan bolivars) will reportedly 
be used to fund PDVSA's ambitious investment plans, though 
local analyst and industry players think it more likely that 
PDVSA will use this money to pay off current liabilities 
stemming from the "nationalization" of the oil industry in 
2006 and 2007. 
 
¶3. (SBU) Santander Investment expects that the issuance will 
remove around 50 percent of the excess liquidity in 
Venezuela, and estimates that the USD 7.5 billion amount 
represents 14 percent of Venezuela's current money supply 
(M2).  PDVSA has said previously that, to avoid reinjecting 
money into the local economy, it would convert the bolviars 
into dollars with the BCV.  This would reduce the country's 
foreign exchange reserves by USD 7.5 billion overnight. 
Coupled with transfers of USD 2 billion in February and USD 
1.7 billion in March to FONDEN, this would represent almost a 
33 percent decrease in foreign reserves since the beginning 
of 2007, and leave the BCV with enough money to cover only 
eight months of imports (well below the stated goal of 12 
months).  (Note: As of April 13, the BCV had 31.4 billion in 
foreign exchange reserves.  End Note). 
 
¶4. (SBU) In addition, even without the potential drain of USD 
7.5 billion in hard currency, the BCV's liabilities already 
exceed its assets.  While Central Banks by definition cannot 
go bankrupt, the effects of the BRV's monetary policy are 
clearly beginning to show.  Lower foreign reserves mean the 
BCV will have fewer resources to use for its operations and 
to back the CDs and notes it issues to banks locally to 
absorb liquidity.  The BCV is also handling the on-going 
monetary conversion, which will remove three zeroes from the 
bolivar.  It reportedly will cost the BCV at least USD 100 
million to purchase new bills and coins. 
 
¶5. (SBU) The announcement on April 2 provided a table of 
allocations.  Requests below USD 3000 will receive the full 
amount and a sliding scale for larger requests ranges from 90 
percent of orders between USD 3000 and 5000 to 20 percent for 
those in excess of USD 20 million (capped at USD 100 
million).  The bonds were reportedly oversubscribed by as 
much as 300 percent (which provided one of the excuses to up 
the ante).  Given the caps on issuances, this offering will 
not meet the demands of many of the corporations whose dollar 
needs drive the parallel market rate (reftel).  Following the 
PDVSA bonds announcement on March 22, the parallel rate fell 
from Bs. 4000/dollar to around Bs. 3500/dollar, where it has 
been hovering ever since.  Most financial watchers expect it 
to stay in this range for the near future, barring 
significant changes in approvals by the Commission for the 
Administration of Foreign Exchange (CADIVI). 
 
¶6. (SBU) On April 10, the BRV published an income tax 
exemption for the bonds in the Official Gazette.  Previously, 
Ministers Cabezas and Ramirez had explained that the PDVSA 
bonds would, like sovereign debt, be tax free.  However, 
 
CARACAS 00000741  002 OF 002 
 
 
under Venezuelan law this was not permissible.  The last 
minute act made possible by Chavez' diktat powers through the 
enabling law allowed the exemption, though the wording has 
led to more questions.  Under the language published in the 
Gazette, the bonds are only tax free for five years (through 
2012) and only tax free locally.  Once traded on secondary 
markets outside of Venezuela (as almost all will be in order 
for their holders to obtain dollars), it appears that future 
owners will owe taxes to the Venezuelan government, putting a 
further discount on their value and further complicating an 
already messy issuance. 
 
¶7. (SBU) The issuance also caused a hiccup in the banking 
sector, as bank liquidity was hurt when clients withdrew USD 
7.5 billion to pay for the bonds on April 12.  The interbank 
loan rate doubled (from around 7.5 percent to over 15 
percent) overnight and the BCV had to inject bolivars into 
the system in order to prevent a crisis. 
 
¶8. (SBU) COMMENT:  The newspaper El Nacional recently 
estimated that only 2.6 percent of Venezuelans had sufficient 
savings to be able to afford the bond offering.  Reportedly, 
brokers were in the barrios (poor neighborhoods) in the week 
leading up to the sale offering 500,000Bs. (or USD 232) for 
national identification numbers to submit additional orders. 
As was seen in the bonos del sur issuances, these lucky 
purchasers will make a nice return on their two week old 
investment, thanks to the gap between official and parallel 
exchange rates.  While the BRV and PDVSA have touted the 
enormous interest in these bonds as evidence of the 
Venezuelan people's support, it really is demonstrative of 
their desire for dollars and to take advantage of a 
guaranteed profit.  END COMMENT. 
 
BROWNFIELD