Cablegate: Brv to Issue Bonos Del Sur

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RR RUEHAO
DE RUEHCV #3375/01 3171528
ZNR UUUUU ZZH
R 131528Z NOV 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 6975
INFO RUEHAC/AMEMBASSY ASUNCION 0719
RUEHBO/AMEMBASSY BOGOTA 7112
RUEHBR/AMEMBASSY BRASILIA 5816
RUEHBU/AMEMBASSY BUENOS AIRES 1511
RUEHLP/AMEMBASSY LA PAZ 2401
RUEHPE/AMEMBASSY LIMA 0654
RUEHMN/AMEMBASSY MONTEVIDEO 0879
RUEHQT/AMEMBASSY QUITO 2487
RUEHSG/AMEMBASSY SANTIAGO 3819
RUEHAO/AMCONSUL CURACAO 1060
RUEHGL/AMCONSUL GUAYAQUIL 0709
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 CARACAS 003375

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: BRV TO ISSUE BONOS DEL SUR

REF: CARACAS 0659

1. (U) SUMMARY: The Ministry of Finance (MF) announced the
imminent issuance of the long-awaited "Bonos del Sur" on
November 7. The bonds, issued jointly by Venezuela and
Argentina, will be worth USD 1 billion and are expected to
start trading the week of November 13. The bonds will likely
be met with enthusiastic demand from Venezuelan purchasers,
seizing on this mechanism to avoid exchange controls that
prevent many from converting their bolivars to dollars. END
SUMMARY.

2. (SBU) The MF announced the long-awaited, though
often-postponed, issuance of the "Bonos del Sur" on November
7. The bonds will be a combination of the BRV Secured
Interest and Principal Certificate maturing on April 6, 2017
(USD 500 million), the Argentine Bonden 12 expiring on August
3, 2012 (USD 300 million), and the Argentine Bonden 15
expiring on October 3, 2015 (USD 200 million). All three
instruments are dollar-denominated. The two Argentine bonds
can be converted into either dollars or pesos, whereas the
Venezuelan portion can only be converted into bolivars
(though devaluation-safe as they are denominated in dollars).
(Comment: This will probably affect demand for the
Venezuelan bonds in the secondary market as they will pay
interest in bolivars and can only be converted into bolivars,
thus while they provide a decent hedge against inflation and
devaluation, they do not provide the much desired outlet to
dollars that most Venezuelans seek. End Comment.) The
purchaser will get a combination "Bono del Sur" at the time
of issuance, but they can then be split, with the Argentine
portions sold on the international market for dollars.
(Note: During a lunch with econoffs on November 8, a sector
contact received a steady stream of calls about the bonds and
noted that, while the bonds were not yet issued, people were
already trading them on the local market. End Note.)

3. (SBU) Given the current demand for foreign exchange and a
parallel rate in excess of 2900 bolivars/USD, it is unlikely
that this issuance will meet the private sector's demand for
dollars. Unlike previous bond issuances, this announcement
did not seem to affect the parallel rate, implying that the
demand for dollars is such that USD 500 million in
dollar-denominated assets hardly dented demand. Liquidity
has increased 40.6 percent in 2006 (and 63.9 percent year on
year) and shows no signs of abating. Delays in getting
Commission for the Administration of Foreign Exchange
(CADIVI) approvals and limitations placed on goods and
services eligible for approvals mean that there are thriving
parallel and black markets for dollars. One contact involved
in the parallel exchange business recently estimated that the
parallel market converts USD 20-30 million daily and that
business recently had been picking up (even as the bolivar
lost value). (Note: CADIVI has been approving approximately
USD 100 million daily. End Note.)

4. (SBU) COMMENT: As with previous issuances, it is likely
that this one will be over-subscribed. While historically
the MF attempted to favor "small investors" over large
institutions when assigning the rights to purchase these
bonds, the process today is sorely lacking in transparency.
The bonds are valued at the official exchange rate of 2150
bolivars/USD, but will probably be sold at an implied rate of
between 2400 and 2600 to the dollar. This allows the BRV to
make money on the arbitrage between official and implicit
rates. Of course, the lucky purchasers can then sell these
bonds at the parallel rate of 2900/USD, so it works out well
for all parties involved. As with the Argentine bonds
purchased and resold earlier this year (see reftel), it is
likely that the "winners" of this process will be successful
less for their merit than their political loyalty and

CARACAS 00003375 002 OF 002

financial largesse with certain BRV officials. We expect
additional "Bonos del Sur" issuances to follow in 2007. END
COMMENT.
BROWNFIELD

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