VZCZCXRO5016
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #1255/01 1761329
ZNR UUUUU ZZH
R 251329Z JUN 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 9091
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUEATRS/DEPT OF TREASURY
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 CARACAS 001255 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH, NGRANT, AND MMALLOY 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VE
SUBJECT: BORROWING FROM PETER TO PAY PAUL 
 
REF: A. 06 CARACAS 2622 
 
     ¶B. CARACAS 1138 
 
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SUMMARY 
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¶1. (SBU) Banks have increased loan portfolios by over 54 
percent in real terms in the past year and the financial 
sector is riding this wave of credit to record profits.  Fed 
by excess liquidity and exchange controls that prevent money 
from leaving Venezuela, Venezuelans are racing to invest in 
non-tradable goods (real estate, cars, etc.) that maintain 
value, and are doing so on credit.  The rapid increase in 
credit and the history of boom-bust cycles in Venezuela call 
into question banks' risk profiles and their abilities to 
handle a sharp drop in liquidity, which could result from a 
drop in oil prices, decreases in government spending, or a 
large devaluation. 
 
 
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GREED IS GOOD 
------------- 
 
¶2. (SBU) The banking sector's total assets grew by 21.3 
percent (in real terms) for the 12 months ending May 2007. 
The net loan portfolio grew 54.4 percent and deposits grew by 
37.9 percent. Consumption loans make up 78.4 percent of the 
loan portfolio and grew by 59 percent year on year.  Credit 
card debt grew by 114 percent and car loans by 117 percent in 
the past 12 months. 
 
¶3. (SBU) Banks in Venezuela remain incredibly profitable, 
with returns averaging 31 percent for the sector, and with 
one prominent western banker admitting to Econoffs that they 
had over 50 percent in returns in 2006.  Bank profits come 
from fees, lending, and investments.  The recent series of 
dollar-denominated bond issuances have become profit centers 
for banks (with one banker claiming an average of 20-30 
percent return per transaction), which serve as 
intermediaries for the purchasers, charging fees, making 
loans for their clients to buy on margin, and purchasing 
bonds themselves. 
 
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FREE MONEY 
---------- 
 
¶4. (SBU) Interest rates in Venezuela are fixed, with minimum 
rates for deposits (6 percent) and CDs (10 percent) as well 
as maximums for loans (28 percent, though many sectors have 
lower fixed rates). 
 
Table: Average bank interest rates (in percentages) as of 
June 22, 2007. 
 
Agriculture   Industry      Commerce   Services 
11.91         14.70         17.81      16.04 
 
Mortgages     Transport     Tourism    Communications 
16.04         20.28         15.06      14.54 
 
Vehicles      Credit Cards  Other Private Sector 
19.89         26.16         13.63 
 
(Source: Central Bank of Venezuela) 
 
The average rate paid to depositors is 6.57 percent and the 
average lending rate overall is 15.9 percent, providing a 
handsome arbitrage for the sector.  Given that the inflation 
rate is running at 19.4 percent year on year, almost all 
loans are currently below the rate of inflation, making money 
in Venezuela almost free. 
 
¶5. (SBU) Central Bank (BCV) regulations require banks devote 
a certain percentage of their loan portfolios to agriculture 
(18 percent), housing (10 percent), micro-credit (3 percent), 
and tourism (1.5 percent) (reftel A).  A new banking law, 
expected to be issued via Chavez' decree powers during the 
second half of 2007, will probably increase directed lending 
 
CARACAS 00001255  002 OF 003 
 
 
percentages, including adding sectors (such as industry).  As 
of the end of May, banks had completed their mandated housing 
loans for the year, and obtaining a mortgage is expected to 
become quite difficult for the remainder of 2007.  The BRV's 
obligatory savings fund (which receives one percent of 
salaries and a two percent matching contribution from 
employers) also offers mortgages, however its methodology is 
opaque and the decision-making process overtly political. 
Should supply not keep pace with demand, borrowers will be 
forced into the informal sector, where rates are much higher, 
or to chase precious formal loans with kickbacks or other 
under the table negotiations. 
 
¶6. (SBU) Negative interest rates, coupled with increasing 
inflation and the continual threat of devaluation have 
affected Venezuelan consumption habits, with premiums placed 
on immediate gratification and on non-tradable goods that 
hold their value, such as cars and homes.  According to a 
recent Economic Commission for Latin America and the 
Caribbean (CEPAL) report, Venezuelans spend 45.3 percent more 
on restaurants and hotels (per capita) than other Latin 
Americans, as anyone out in Caracas on a Friday night can 
attest.  Car dealerships have waiting lists ranging from six 
months to over a year for new models, and most models 
increase in price after they are driven off the lot, as the 
shortage of cars has made them more valuable in the secondary 
market.  A recent "El Universal" investigation estimated that 
new cars sold in the secondary market cost up to 49 percent 
more than from the dealership.  The BRV has contributed to 
demand through its "Venezuela Movil" program, which 
subsidizes certain economy cars assembled in Venezuela, 
providing two percent loans with little money down. 
 
 
----------------- 
INCREASING ACCESS 
----------------- 
 
¶7. (SBU) Venezuela's bank network remains small, with 3,200 
branches throughout the country of 27 million people (albeit 
up by 45 percent in the past three years).  Total deposits 
have reached 30 percent of GDP, though loans as a percentage 
of GDP are only 12 percent and banking penetration remains 
low.  Government and private initiatives to expand bank 
access to the barrios via micro credit schemes have had some 
success, however much work remains (septel). 
 
¶8. (SBU) Most middle and upper class Venezuelans rely on 
credit cards to make it through the month, routinely spending 
their biweekly paycheck the weekend they receive it.  For 
those with insufficient salaries to obtain credit cards, a 
common perk offered by employers is to co-sign on a card. 
Once the employee has a credit card s/he can obtain future 
cards and will maintain access to the system for life. 
 
--------------- 
RISKY BUSINESS? 
--------------- 
 
¶9. (SBU) Non-performing loan rates remain low in Venezuela, 
hovering between 1.1 and 1.2 percent.  However, given the 
glut of liquidity and ease of obtaining credit cards, it is 
hard to say how many loans are being paid off with other 
loans.  Many analysts admit that individuals and their banks 
maintain "off-budget" liabilities by borrowing from one 
another--from Peter to pay Paul.  Venezuela's third largest 
bank, Banco Mercantil, currently offers up to a six month's 
advance on one's salary in credit card purchases and most 
banks have similarly permissive lending practices. 
 
¶10. (SBU) The capitalization requirement (debt over equity) 
was reduced from 12 to 8 percent in 2006 and capitalization 
levels have since fallen, from 12.41 percent in May 2006 to 
9.67 percent as of the end of May 2007.  Thirty percent of 
assets acquired after July 14, 2006 (and 15 percent of older 
assets) must be held in reserve at the Central Bank.  Banks 
can hold up to 30 percent of their assets in foreign 
currency, which helps them hedge against inflation and future 
devaluation. 
 
¶11. (SBU) Senior bankers admit the theoretical problem of 
 
CARACAS 00001255  003 OF 003 
 
 
non-performing loans in the event of a liquidity crunch. 
Many have confided to Econoff their concerns for the sector, 
while at the same time insisting that, in the case of their 
bank, risk was being well-managed.  Given the government's 
history of bailing out failing banks, financial institutions 
here may see their risk capped by the knowledge that the 
government will step in if things get too bad.  In addition, 
banks have been actively moving money offshore through 
accelerated dividend payments to protect against inflation 
and a potential devaluation, thus reducing their commitment 
in Venezuela should their bank ever require government 
intervention (reftel B). 
 
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COMMENT 
------- 
 
¶12. (SBU) The explosion in credit in recent years has been 
caused by and contributed to the massive increase in 
liquidity.  It has led mainly to increases in consumption (in 
non-tradable goods and massive import growth) that have 
raised prices considerably in Venezuela, though done little 
to increase investment or create jobs.  Imports are expected 
to exceed USD 40 billion this year, up from USD 32.2 billion 
in 2006 and USD 23.7 billion in 2005.  Banks seem to be well 
aware of the risk posed by expanding credit portfolios, yet 
hard-pressed to curtail such a valuable profit center. 
Reserve requirements, assets held in hard currencies, and the 
theoretical guarantee of government protection may cushion a 
future downturn, but should liquidity retract quickly, many 
Venezuelans would be hard-pressed to pay off their debt, 
though would be similarly loath to give up their goods. 
 
BROWNFIELD