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DE RUEHCV #1554/01 2151812
ZNR UUUUU ZZH
R 031812Z AUG 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 9420
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 02 CARACAS 001554 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR MMALLOY AND KAUSTIN 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
ENERGY FOR ALOCKWOOD AND CDAY 
NSC FOR JCARDENAS 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: EFIN VE
SUBJECT: SUMMER BONDING IN VENEZUELA 
 
REF: A. 06 CARACAS 3375 
 
     ¶B. CARACAS 493 
     ¶C. CARACAS 667 
     ¶D. CARACAS 741 
     ¶E. CARACAS 844 
     ¶F. CARACAS 1292 
 
¶1.  This message is Sensitive but Unclassified, please treat 
accordingly. 
 
¶2. (SBU) SUMMARY: Venezuela is preparing a third "bonos del 
sur" issue for August or September which according to reports 
will be announced formally during Chavez' upcoming August 6 
visit to Argentina.  The expected announcement to purchase an 
additional USD 1 billion of Argentine debt would bring 
Venezuela's total purchase of Argentine debt to around USD 
5.4 billion.  The first two such issuances (reftels A and B) 
combined Argentine and Venezuelan debt and were sold locally 
to Venezuelan investors.  Demand for these instruments is 
primarily driven by the dollar-denominated Argentine portion 
of the issuance which can be re-sold in secondary markets 
outside of Venezuela for dollars.  PDVSA is also rumored to 
be planning another USD 3 billion-plus issuance, and the 
Ministry of Finance has restarted selling bonds and 
structured notes locally.  Given the pent-up demand for 
dollars driven by currency controls and political 
uncertainty, investors are looking to sell the bonds at a 
discount abroad in order to obtain dollars at an implicit 
rate below the parallel exchange rate, which is hovering near 
Bs. 4300/dollar.  END SUMMARY. 
 
¶3. (SBU) The Venezuelan and Argentine press reported on July 
29 that Venezuela would purchase USD 1 billion worth of 
Argentine Boden 2012s and 2015s during Chavez' upcoming 
August 6 visit to Buenos Aires.  Minister of Finance Rodrigo 
Cabezas confirmed on August 2 that a bond issue was near, 
though declined to give the date or terms of the issuance. 
The Argentine newspaper Clarin has reported that the issuance 
will be formally announced during the week of August 6 and 
will be for an initial USD 500 million, followed by two 
smaller USD 250 million tranches later this year.  Post 
estimates that Venezuela has purchased approximately USD 4.4 
billion worth of Argentine debt (so this would raise to total 
to around USD 5.4 billion, or USD 5.2 billion according to 
the Argentine newspaper Clarin).  Post estimates that the BRV 
currently holds between USD 1-2 billion via its off-budget 
National Development Fund (FONDEN).  (Comment: It is unclear 
whether this Venezuelan purchase of Argentine bonds is in 
addition to the USD 1.2 billion (USD 400 million in Boden 
2012s and USD 800 million in Boden 2015s) that Venezuela 
reportedly may have obtained sometime during the first 
quarter of 2007 or whether it is merely a formal announcement 
of this open secret. If it is the former then Venezuela's 
purchases of Argentine debt could amount to as much as USD 
6.2 billion.  End Comment.) 
 
¶4. (SBU) On August 2 Cabezas also confirmed that the BRV 
planned to purchase Bolivian debt for a future bond issuance 
with that country.  According to Cabezas, the issuance will 
amount to USD 100 million, however the BRV plans to purchase 
the debt from Bolivia in USD 10 million installments.  Chavez 
hinted at future "ALBA" bond issuances during the most recent 
ALBA summit on April 28-29 (which would presumably combine 
Venezuelan, Nicaraguan, and Bolivian debt) (reftel E).  Local 
analysts believe that the long lag time between announcement 
and issuance of these bonds is related to Venezuela and 
Argentina's current financing needs (or lack thereof) as well 
as falling demand internationally (due to tightening credit 
markets and rising spreads for emerging market debt).  The 
local demand for these instruments is driven by their 
implicit exchange rate.  If a USD 100 bond sells for Bs. 
215,000 locally, and can be resold for USD 60 on 
international markets, then its implicit cost in bolivars is 
Bs. 3440/dollar.  This in turn allows Venezuelan's to obtain 
dollars at Bs. 3440/dollar instead of the parallel rate of 
Bs. 4300/dollar.  As of August 2, Boden 2015s were selling 
near 83 percent of face value and Boden 2012s (which have a 
lower coupon rate) at 57 percent of face value. 
 
¶5. (SBU) The local parallel market has risen steadily after a 
 
CARACAS 00001554  002 OF 002 
 
 
leveling off near Bs. 4000/dollar during June and most of 
July as the Ministry of Finance began selling 
dollar-denominated structured notes (comprised of Venezuelan, 
Ecuadorian, Colombian, and Brazilian debt) to local banks 
(reftel F).  There have been no sales during the past three 
weeks and coupled with threats by National Assembly deputies 
to make the parallel market illegal this decision has reduced 
supply and increased demand for dollars.  The National 
Assembly is debating a revision to the Law Against Illegal 
Foreign Exchange, which governs the currency control regime 
and allows for parallel market transactions.  Despite early 
indications that the proposed revisions would have eliminated 
the language protecting the parallel market, Deputy Iroshima 
Bravo announced on July 26 that the parallel market would not 
be touched by the planned revisions.  The Deputy's 
announcements are not quelling the market's jitters and, as 
of August 2, the parallel market rate is Bs. 4300/dollar. 
 
¶6. (SBU) On August 1 the Finance Ministry issued Bs. 200 
billion (USD 93 million at the official exchange rate) worth 
of domestic 2012 TIFs (fixed interest instruments).  This is 
after a failed auction at the end of July to issue 2020 TIF 
notes.  Apparently local investors were uninterested in 
holding Venezuelan debt for such a long period.  The 2012 
TIFs pay a 9.5 percent coupon and mark the first domestic 
debt issuance since the second "bono del sur" in February 
¶2007.  On August 2, Cabezas announced that the government 
would issue up to USD 3.7 billion worth of debt during the 
remainder of 2007, in part to soak up excess liquidity. 
Cabezas has previously said that the government would not 
take on any new liabilities in 2007, but could issue new debt 
as part of a buyback program. 
 
¶7. (SBU) PDVSA is rumored to be considering another large 
debt issuance (USD 3-3.5 billion) to follow up on its massive 
USD 7.5 billion issuance in April 2007 (reftel C and D). 
PDV2017s are trading at 75 percent of face value and PDV2027s 
and 37s are trading at 65 and 63 percent of face value, 
respectively, on international markets.  Bond sector contacts 
are mildly skeptical that PDVSA would be able to place 
another large issuance at this time given the current 
appetite for PDVSA and Venezuelan debt and increasing yields 
for emerging market debt as a whole.  However, analysts from 
a major rating agency did not expect they would have any 
problem given the oversubscription of a recent large issue in 
a nearby country, and the amount of global liquidity.  As of 
August 2, the risk indicator on Venezuelan sovereign debt was 
361 basis points over U.S. treasuries, well above Colombia 
(172 points) or Brazil (200 points). 
 
¶8. (SBU) COMMENT: Chavez continues to use debt instruments to 
help his friends (or reward their loyalty), and future bond 
issuances with allies, including Argentina, Bolivia, Ecuador, 
and Nicaragua should be expected.  Venezuela's domestic 
demand for dollar-denominated assets guarantees a market for 
bonds which countries would have trouble placing 
internationally.  The spike in Venezuela's risk indicator and 
the postponement of debt issuances by Argentina, Venezuela, 
and PDVSA are more likely related to the ongoing turmoil in 
international debt markets than domestic factors.  While 
investors certainly place a political risk premium on 
Venezuelan debt as compared to other members of the Emerging 
Market Bond Indicators (EMBI) group, the premium up tick in 
recent weeks does not seem related to any of Chavez' 
shenanigans, but rather to a general market move by 
bondholders to quality. 
 
FRENCH