VZCZCXRO3047
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #1638/01 2291144
ZNR UUUUU ZZH
R 171144Z AUG 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 9510
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 001638 
 
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: ECON EFIN VE
SUBJECT: BLAME IT ON THE VOLATILITY OF INTERNATIONAL 
MARKETS: BONOS DEL SUR 3 CANCELED 
 
REF: A. CARACAS 1554 
 
     ¶B. CARACAS 1617 
 
¶1. (SBU) SUMMARY:  On the afternoon of August 16 Finance 
Minister Cabezas announced that the BRV would cancel its USD 
1.5 billion "bonos del sur" bond issuance.  According to 
Cabezas, the volatility of international markets made the 
issuance untimely.  Section contacts considered the bonds a 
marginal deal, at best, as the implicit cost of dollars 
obtained by selling the bonds was near or above the cost of 
dollars in the parallel market.  The issuance was troubled 
from the start due to domestic factors, including banks' lack 
of interest in the Venezuelan TICC bonds, and international 
factors that have led to a fall off in demand for emerging 
market debt.  END SUMMARY. 
 
¶2. (SBU) On the afternoon of August 16, Finance Minister 
Cabezas announced that the BRV was suspending until further 
notice the USD 1.5 billion "bonos del sur" bond issuance. 
The issuance consisted of three bonds, USD 500 million of two 
Venezuelan TICC bonds, which are bolivar-denominated, but 
tied to the exchange rate and thus devaluation-protected, and 
USD 500 million of the dollar-denominated Argentine BODEN 
2015 (reftel A).  The demand for these bond issuances has 
always been driven by the demand for dollars caused by 
Venezuela's exchange rate controls.  The February bond 
issuance sold at an implicit rate of around Bs. 2800/dollar, 
which when compared with the parallel market rate of Bs. 
4000/dollar was a very good deal.  The fall off in prices for 
both the TICCs ( Covered Capital Interest Bonds) and BODEN 
bonds meant that the implicit rate for this version of the 
"bono del sur" would be somewhere over Bs. 4000/dollar, which 
given a parallel rate of between Bs. 4200 and 4300/dollar was 
hardly a deal (especially when commissions and financing 
charges are factored in). 
 
¶3. (SBU) When the bond issuance was announced on August 13, 
the TICC 2017 and 2019 were trading at 95 and 94 percent of 
face value, respectively.  By the close of trading on August 
15 they had failed to around 80.  The Argentine BODEN 2015 
which trades in international markets suffered a similar 
drop, from 82 to 78.  The fall-off in Venezuelan instruments 
was caused in part by the issuance, which according to 
brokerage house contacts, was larger than the market could 
absorb.  The market for TICCs is driven by the banking 
sector, which invests in them to protect against devaluation. 
 Banks are limited to holding no more than 15 percent of 
their assets in foreign currency, and since the TICCs are 
tied to the dollar exchange rate, they are treated as foreign 
currency holdings.  Most banks are already at their limits, 
and thus could not legally purchase more TICCs. 
 
¶4. (SBU) The timing of the issuance had always been 
circumspect as it took place during mid-August, when most 
Venezuelans are on vacation, and seemed rushed with the 
deadline for bond requests due only three days after the 
announcement (the deadline was subsequently pushed back a day 
before the issuance was canceled).  Banking sector contacts 
guessed that the rush was either related to a) the 
government's desire to get rid of its Argentine liability as 
quickly as possible, b) a dire need for cash (unlikely given 
the amount of rainy day funds available to the BRV and the 
high price of oil, or c) the desire to intervene to lower a 
parallel market slowly creeping past Bs. 4300/dollar (which 
would represent a nice, even 100 percent overvaluation of the 
official rate).  (COMMENT: Post does not discount the 
possibility that it was the whim of Chavez to set a date to 
complete the issuance, regardless of market factors.  END 
COMMENT.) 
 
¶5. (SBU) According to the executive director of one brokerage 
house, the Ministry of Finance held an emergency meeting on 
the afternoon of August 15 where officials demanded that 
banks intervene in the market to raise the value of the TICCs 
and thus make the new issuance worthwhile.  Reportedly, the 
officials threatened to have Chavez attack the banking sector 
if they did not comply. 
 
¶6. (SBU)  Cabezas' announcement sought to blame the United 
 
CARACAS 00001638  002 OF 002 
 
 
States, saying that the decision was unfortunately caused by 
the crisis in  U.S. financial markets the United States and 
its domino effect on other markets.   He continued to argue 
that, "the suspension has nothing to do with the strength of 
the Venezuelan economy" and was solely related to the "grave 
volatility of the prices of bonds in emerging markets and of 
developed economies, particularly the United States." 
 
¶7. (SBU) COMMENT: While Venezuelan and Argentine bonds have 
fallen significantly in recent weeks as investors have moved 
to quality in the midst of the sub-prime mortgage fallout, 
the lack of demand for this bond issuance is more tied to the 
construction and timing of the bonds.  While bond prices had 
been falling for the past two weeks, they only tanked after 
the "bono del sur" announcement, as investors realized that 
Venezuela intended to issue more debt into an already 
saturated market.  The attempt to blame the United States is 
simply a continuation of the constant anti-U.S. rhetoric 
practiced by the BRV, which has sought to blame the United 
States for just about all that ails it (reftel B).  END 
COMMENT. 
 
FRENCH