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RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 001537

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E.O. 12958: DECL: 2019/12/07
TAGS: ECON EFIN VE

SUBJECT: Venezuelan government takes over three additional banks; key
minister resigns as probe widens

REF: 09 CARACAS 1491; 09 CARACAS 1509; 08 CARACAS 566

CLASSIFIED BY: DUDDY, AMBASSADOR, DOS, AMB; REASON: 1.4(B), (D)

¶1. (C) Summary: The Venezuelan government (GBRV) announced
December 4 that it was taking control of three more banks, in
addition to the four it took over November 20. While these three
banks are small, the growing scale of the GBRV's intervention has
had a number of repercussions in the financial sector, parallel
foreign exchange market, and international market for Venezuela's
bonds. If the GBRV does a poor job managing its unfolding
intervention, there is the potential for broader risk to the
banking sector, particularly among smaller and medium-sized banks.
Perhaps realizing this risk, President Chavez clarified his recent
threat to nationalize the sector by saying he only meant he would
take over any bank not complying with the law.

¶2. (C) Summary, continued: As part of its investigation into
irregularities at these banks, the GBRV detained Arne Chacon,
president at one of the banks and brother of Science, Technology,
and Intermediate Industries Minister Jesse Chacon. In a move that
surprised many observers, President Chavez announced December 6
that he had accepted Jesse Chacon's resignation as it would
"facilitate" the investigation into Arne. President Chavez is
clearly using this crisis to bolster his anti-corruption
credentials by demonstrating he is willing to go after people close
to his inner circle. End summary.
GBRV Takes Over Three More Banks

¶3. (U) In a press conference on the afternoon of December 4,
Minister of Finance and Economy Ali Rodriquez announced the GBRV
was taking over three additional banks: Central Banco Universal
(not to be confused with Venezuela's Central Bank), Banco Real, and
Baninvest. Rodriguez said the intervention would be "closed
doors," i.e. the banks would be temporarily closed for all
transactions while the GBRV determined a course of action.
Rodriguez said the intervention was necessary because the banks had
not been able to carry out measures to bring themselves into
compliance with regulations. Rodriguez said the rest of the
banking system was "in good condition." (Note: The three banks
are all small, representing a total of 3 percent of the banking
system as measured by assets. As with the four banks the GBRV took
over November 20, all three are owned by a group with close ties to
the GBRV that has made recent banking acquisitions that raise
questions about origin of funds [refs A and B]. It is possible
that the three banks suffered mini-runs in the week leading up to
their seizure. End note.)

¶4. (U) In his regular Sunday television show on December 6,
President Chavez said Central, Real, Bolivar, and Confederado would
be merged with Banfoandes (a state-owned bank) into a new
state-owned bank to be named "Banco Bicentenario." (Note: Bolivar
and Confederado are two of the four banks the GBRV took over
November 20. Chavez did not say what the GBRV intended to do with
Baninvest. End note.) Chavez said the GBRV had also taken over
Seguros La Previsora, a large insurance company recently acquired
by the same group that owned Central, Real, and Baninvest, and
would transform it into a state-owned insurance company called
"Bolivariana de Seguros." Chavez said on December 4 that clients
of Canarias and Banpro, the two other banks taken over November 20
and which the GBRV has determined to liquidate rather than try to
restructure, would have access to their savings by December 24 in
accordance with the law guaranteeing bank deposits up to 10,000
bolivars (USD 4651 at the official exchange rate). The GBRV has
taken actions to accelerate the liquidation process by modifying
the regulations governing the process and seeking the assistance of
a number of private banks in processing depositors' requests.
Consequences in the Financial Sector, Parallel Market, and Bond
Market

¶5. (U) The unfolding intervention process has had a number of
consequences in several related financial markets. While we do not
know the extent, there has clearly been a "flight to quality," as
some depositors in smaller or less reputable banks moved their
money to larger and more solvent banks (or switched money between
accounts to reduce their exposure given the Bs 10,000 guarantee).
In an indication of a higher demand for dollars, the parallel
foreign exchange rate jumped from 5.5 Bs/USD on November 30 (when
the GBRV announced it was liquidating or temporarily shutting the
four banks it took control of November 20) to 5.9 Bs/USD on
December 3, before falling slightly to 5.8 Bs/USD on December 4.
Finally, yields on internationally traded Venezuelan bonds jumped
(i.e., prices fell) during the week of November 30, as liquidity
became tighter and financial institutions sold dollar-denominated
assets to acquire bolivars through the parallel market. As the
GBRV announced the three additional interventions in the late
afternoon on December 4 and December 7 is a previously scheduled
banking holiday, it is not yet clear how the additional
interventions will impact financial markets.

The Scandal Touches Chavez's Inner Circle

¶6. (SBU) In connection with its investigation into the seven
banks, the GBRV has ordered the detention of many of their
directors and executives including Arne Chacon, president of Banco
Real and a member of the group that owned Real, Central, and
Baninvest. Chacon, who was detained on December 4, is the brother
of Jesse Chacon, Minister of Science, Technology, and Intermediate
Industries. Jesse Chacon is a member of Chavez's inner circle of
loyal military colleagues who participated in Chavez's 1992
attempted coup and who have cycled through key government positions
since Chavez assumed power in 1999. Chavez announced December 6
that he had accepted Jesse Chacon's resignation. He said Arne
Chacon's detention showed "there are no untouchables" and
characterized Jesse Chacon's resignation as "a lesson for all of
us." Claiming he had never met Arne, Chavez said he respected and
cared about Jesse and that Jesse's resignation was the right thing
because it would "facilitate" the investigation into Arne by
"liberating him [Jesse] from suspicion as a Minister and brother
[of Arne]." In a media interview, Jesse Chacon affirmed he had
chosen to resign not because he had been involved in his brother's
financial dealings but because it would facilitate a transparent
investigation.

Comment 1: Potential Risk to the Financial Sector

¶7. (C) Venezuela's financial sector is characterized by a
significant concentration in five larger and generally
well-regarded banks and a proliferation of roughly 50 smaller and
medium-sized banks, many of which are weak enough to be threatened
by a moderate run (ref C). This figure includes a number of
smaller banks that specialize in certain sectors, of which
Baninvest is one. Respected analyst Francisco Faraco (strictly
protect) in his September 2009 assessment of the sector rated 23 of
54 banks as having "potential conditions for a collapse" or an
"elevated possibility of bankruptcy." All seven banks the GBRV has
taken over fell into these latter categories. The largest bank
falling into one of these categories is Banco Federal, which
represents 3 percent of the banking sector as measured by assets
and is reportedly in the process of being sold.

¶8. (C) In the absence of a run, the GBRV should be able to handle
the intervention at the seven banks, and even at other small banks
should it become necessary. Although it is impossible to quantify,
there is the risk of runs at other smaller and medium-sized banks.
After seeing depositors at seven banks at least temporarily lose
access to their funds, it would be understandable for depositors at
other banks, including Banco Federal, to be nervous. While the
initial November 20 intervention appeared reasonably well
coordinated, there have been problems with the unfolding
intervention process from the standpoint of calming depositors at
other banks. These problems include changing the initial
intervention from "open doors" to "closed doors" or liquidation;
widening the scope of the interventions after assurances that the
rest of the financial sector was healthy; and President Chavez's
statement that he might nationalize the banking sector if bankers
did not comply with the law, widely interpreted as a threat to the
sector (ref B). It seems that even President Chavez realizes that
the GBRV needs to be careful in its management of the unfolding
intervention process: on December 6 he noted he did not say he
would nationalize the sector, only that he would nationalize any
bank not complying with the law. End comment 1.

Comment 2: The Politics Behind the Interventions and Chacon's
Resignation

¶9. (C) Whatever the initial reason for the interventions,
President Chavez is using them to portray himself as a campaigner
against corruption. Polls show that many of Chavez' supporters
believe he seeks to govern in their best interests and blame those
under him for any governance problems, including corruption.
During the December 6 "Alo Presidente," Chavez urged the assembled
delegates to the PSUV Congress to improve their "radar" against
corruption within PSUV (United Socialist Party of Venezuela) and
government ranks. Alluding to Arne Chacon, Chavez asked, "How
could a dirt poor guy ("pato de tierra"), who started the same
place I started, suddenly get to be the owner of a bank?" Chavez
urged the delegates, many nodding their heads in approval, to watch
for signs of unexplained, sudden wealth by party and government
officials and to denounce them.

¶10. (C) Chavez distanced himself from Arne Chacon, whom he said
he had never met ("I think he was in the Navy") and with whom he
said he had had only one conversation, during which Arne expressed
some "strange ideas" ("ideas raras"). By detaining Arne and having
Jesse Chacon resign, Chavez is bolstering his image and sending a
message to others in his inner circle that there are limits to what
he will tolerate. Press articles have indeed suggested that other
confidantes may be implicated, including former Vice President Jose
Vicente Rangel, Minister of Public Works Diosdado Cabello, Director
of Military Intelligence Hugo Carvajal, and his own brother Adan
Chavez, to whom Chavez also issued a public warning. Chavez may
wait a decent interval and then rehabilitate Jesse after the
banking scandal has passed. End comment 2.
DUDDY