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Cablegate: Bonos Del Sur: Round 2

VZCZCXYZ0054
RR RUEHWEB

DE RUEHCV #0493/01 0661645
ZNR UUUUU ZZH
R 071645Z MAR 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 8042
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS CARACAS 000493

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
HQ SOUTHCOM ALSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON EFIN VE
SUBJECT: BONOS DEL SUR: ROUND 2

REF: A. 06CARACAS 3375

B. 06CARACAS 3434
C. 06CARACAS 3653
D. CARACAS 387

1. (SBU) SUMMARY: Venezuela will issue another round of the
"Bonos del Sur" on March 8 worth USD 1.5 billion.
Preliminary reports indicate that the issuance is more than
nine times oversubscribed. Demand for these
Venezuelan-Argentinian bonds is well ahead of supply, as the
Argentinian half offers an outlet to dollars at an implicit
rate well below the current parallel market rate. The
issuance will do little to help with Venezuela's liquidity
problems. In keeping with the irony that is "Socialism for
the 21st Century," this issuance will help a populist ally of
Venezuela's, enrich a small group of middle to upper class
Venezuelans, and do little to fix the mounting economic
distortions prevalent in all sectors of the economy. END
SUMMARY.

2. (U) Following the announcement by Chavez during Kirchner's
visit in February (reftel D), the Minister of People's Power
for Finance (MPPF) Rodrigo Cabezas announced the issuance of
another round of "Bonos del Sur" on February 26. The USD 1.5
billion issuance will occur on March 8 and trading will begin
on March 9, in a manner similar to the first issuance this
November (reftel A). The bonds have two halves: the
Venezuelan half is made up of BRV Secured Interest and
Principal Certificates (TICCs) that mature on March 21, 2019
and pay 5.25 percent interest and the other half is an
Argentine bond (Bonden 15) which matures on October 3, 2015
and pays 7 percent interest. The TICCs are protected against
inflation and devaluation and pay interest in Bolivars. The
Bonden 15s are dollar-denominated and are convertible to
dollars on international markets. The MPPF will sell the
bonds at 112.6 percent of value.

3. (SBU) The Argentine half drives the demand for this
instrument as exchange controls in Venezuela make it
difficult to obtain dollars. In addition, the bonds will be
sold at an implicit rate of over 2800 Bolivars/dollar, which
is 30 percent above the official exchange rate of 2150
Bolivars/dollar, though significantly less than the current
parallel rate above 4000 Bolivars/dollar. Given the
arbitrage between the implicit rate of the Bono del Sur and
the value of dollars in the parallel market, anyone lucky
enough to obtain a bond can make an immediate return of more
than 40 percent on the Argentine half. The TICCs will mostly
be sold off to local financial institutions, who desire these
instruments to protect against inflation and provide tax-free
interest payments.

4. (SBU) As was the case with the previous issuance in
November, MPPF announced that priority would be given to
small investors and it is likely that people will only get a
portion of their request. According to Cabezas' statement,
requests of under USD 5000 will be fulfilled and those over
USD 5000 will get between USD 5000 and USD 8000, depending on
the size of the request. A local banker told the DCM that
his bank processed "dozens" of million dollar buy orders,
including one USD 20 million order, all of which will
apparently get the maximum USD 8000 allocation. Anxious
buyers tried other methods, including some that collected
national identification numbers from their friends and family
members to make multiple submissions for bonds, in the hopes
of increasing their total allocation.

5. (SBU) While the issuance is a boon for the "small
investors" who obtain bonds, it will do little to help lower
the gap between official and parallel rates. Sintesis
Financiera, a respected economic consulting firm, recently
estimated that it would take as much as USD 6 billion in
issuances to stabilize the parallel rate (bringing it back to
the 2005-2006 level of 20-30 percent above the official
rate).

6. (SBU) The demand for parallel dollars has grown since
December, when the Commission for the Administration of
Foreign Exchange (CADIVI) instituted a new requirement for
importers to obtain certificates from the Ministry of
People's Power for Agriculture (MPPA) and Ministry of
People's Power for Industry and Light Commerce (MPPILCO) to
show that the goods they request dollars to import are not
produced locally or that local supply is insufficient (reftel
C). MPPILCO, in particular has been very slow in issuing
these certificates, forcing many firms to use the parallel
market to obtain dollars. CADIVI remains a problem for
companies seeking to repatriate profits or dividends and they
also have been using the parallel rate to make up for the
insufficient supply from CADIVI. This is despite the fact
that CADIVI approvals have increased of late, and in 2006
CADIVI authorized USD 27.4 billion in foreign exchange
transactions, up 32 percent from 2005.

7. (SBU) In addition, the added political and economic
uncertainty following the series of announcements by Chavez
and BRV officials at the beginning of the year have pushed
many individuals and companies to try to get their money out
of the country. By targeting the allocations for small
investors, the MPPF is providing an immediate profit for
them, yet doing nothing to meet the needs of the companies
and institutional investors driving the demand in the
parallel market. Minister Cabezas announced on March 4 that
the bonds had been oversubscribed by over nine times. As was
the case previously, the parallel rate may actually increase
as the issuance stimulates demand by those who expected to
obtain more bonds and thus have unmet foreign currency needs
(reftel B).

8. (SBU) During an interview on March 4, Cabezas indicated
that the proceeds would be used to pay off old debt, and not
for spending. Cabezas predicted that up to 40 percent of
Venezuela's external debt would be refinanced this year,
mostly by replacing external, dollar-denominated debt with
local debt in Bolivars. This will place less pressure on the
country's foreign exchange reserves and make future
devaluation or default less painful as they will be dealing
mostly with local creditors. Including USD 750 million for
the Bonos del Sur, Venezuela has purchased approximately USD
4.4 billion in Argentine bonds over the past two years, which
has been financed through the National Development Fund
(FONDEN).

9. (SBU) COMMENT: This is the first debt issuance of 2007 and
more are likely to follow. PDVSA is still planning to issue
up to USD 3.5 billion in bonds, though it appears this
issuance will be only in Bolivars and targeted to the local
market. Estimates are that the BRV will once again go into
deficit spending this year as oil prices and production evens
out or even falls from 2006 levels while spending and
inflation continue to grow. Estimates of the BRV's financing
needs for 2007 range widely, from USD 5 billion to USD 25
billion. In the end, Bonos del Sur II will be more of a PR
ploy than real economic policy. The government will claim
that it has intervened to lower liquidity, reduce inflation,
help out small investors, and maintain solidarity with an
important ally. In reality, it will have enriched tens of
thousands of (already wealthy) Venezuelans and purchased some
Argentine goodwill, the price of which seems to continue to
increase. END COMMENT.

BROWNFIELD

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