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Cablegate: Summer Bonding in Venezuela

VZCZCXRO0980
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
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

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