Cablegate: Blame It On the Volatility of International

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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

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