US embassy cable - 04CARACAS103

C O N F I D E N T I A L  CARACAS 000103 
 
SIPDIS 
 
 
STATE FOR WHA/AND, EB 
NSC FOR SHANNON 
TREASURY FOR OASIA - GIANLUCA SIGNORELLI 
USCINCSO FOR POLAD 
 
E.O. 12958: DECL: 01/09/2008 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: CHAVEZ TURNS UP THE HEAT ON CENTRAL BANK FOR 
TRANSFER OF RESERVES 
 
REF: 03 CARACAS 3941 
 
Classified By: Ambassador Charles S. Shapiro for reasons 1.4(b) and (d) 
 
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Summary 
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1. (C) President Chavez has renewed his struggle with the 
Central Bank over USD 1 billion in international reserves, 
which he has demanded be handed over to the GOV for 
agricultural spending.  The Bank has to this point resisted, 
citing controlling legal restrictions.  The National Assembly 
joined the fray January 7 with a non-binding resolution 
passed on partisan lines urging the Central Bank to comply 
with Chavez's request.  Despite the political upside for 
Chavez in this fight, the downside for Venezuela's economy if 
he succeeds in tapping the reserves would be severe.  End 
summary. 
 
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Chavez Hits BCV (Again) 
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2. (U) In his December 28 "Alo, Presidente!" telecast, 
President Chavez renewed his call  for the Central Bank of 
Venezuela (BCV) to transfer USD 1 billion of its USD 21 
billion in international reserve holdings to the GOV for use 
in "agricultural reactivation."  Since then Chavez has used 
every public appearance to repeat his demand.  Chavez cites 
provisions of the 1999 Constitution that generically require 
the BCV to promote the overall economic health of the 
country, including agriculture.  (Note: Article 320 of the 
Constitution and Article 32 of the Central Bank Law 
specifically prohibit the BCV from using reserves to fund GOV 
budgetary items.  End note.)  He has continued his threats to 
appeal to the Supreme Court or call for a referendum on the 
issue if the BCV does not yield.  In one major difference 
from his November statements on the issue (see reftel), 
Chavez has specifically targeted the corn and sugar sectors 
for receipt of the funds.  He has not been specific about 
what the process for distribution of the funds would be. 
 
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Agricultural Credit Problems 
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3. (U) The conflict between the President and the BCV over 
the "millardito" (little billion), as Chavez calls the 
demanded amount, exists against the backdrop of a struggling 
agricultural loan program.  The Special Plan for the Resupply 
of Agriculture is an agreement between the BCV, the Ministry 
of Finance, and commercial banks that requires agricultural 
credits be 12 percent of bank loan portfolios.  According to 
the plan, these loans are to have a preferential 
"agricultural interest rate" calculated at 85 percent of the 
rate for oil project loans.  This rate currently stand at 
approximately 16 percent, which is about 10 percent below the 
prime lending rate.  Banks that do not meet the required 
percentage in their loan portfolios face fines; most are 
gladly paying the fines rather than issue high-risk, low and 
even negative return loans. 
 
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BCV Holds Firm 
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4. (U) The BCV has been steadfast in its refusal to bow to 
pressure from Chavez.  BCV President Diego Castellanos and 
Director Domingo Maza Zavala both made statements to the 
press December 29 that said any such transfer would violate 
the Constitution and that they would welcome a Supreme Court 
ruling on the matter.  Following a pro-Chavez "millardito" 
demonstration outside the BCV January 7, the bank issued a 
statement to the press and to all diplomatic missions, 
including the embassy, that detailed the constitutional and 
other legal restrictions on the use of international reserves 
to finance government spending.  (Note: The BCV statement 
characterized the agricultural loan program as having 
"satisfactory results." End note.) 
 
 
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National Assembly Speaks 
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5. (U) The National Assembly passed a resolution January 7 
urging the BCV to transfer the reserves.  The expected 
partisan wrangling colored the debate over the non-binding 
resolution.  MVR Deputy Willian Lara echoed Chavez when he 
claimed the transfer was legal under the provisions of the 
Constitution requiring the BCV to support national economic 
development.  Opposition deputies were dubious about the 
prospects for meaningful results from a prospective draw down 
of reserves; Proyecto Venezuela Deputy Vestalia de Araujo 
noted that the administration has had five years to improve 
the agricultural sector and has failed.  The resolution 
passed by a vote of 51 to 37.  Pro-Chavez members of the 
Assembly plan to deliver the resolution to the BCV during a 
march January 11. 
 
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Chavez Speech Rattles Bond Issue 
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6. (U) The fallout from the Chavez/BCV conflict has been felt 
as far away as New York.  The GOV issued USD 1 billion in new 
30-year bonds January 7 (details septel).  In an almost 
disastrous alignment of events, a Chavez speech in Zulia 
state at the inauguration of a food processing facility in 
which he railed against the BCV sent a momentary jitter 
through the bond operation.  The Ministry of Finance quickly 
issued a statement clarifying Chavez's position with 
assurances that all funds from the BCV were subject to legal 
controls that the GOV had no intention of violating.  Finance 
Minister Nobrega claimed January 8 that the executive branch 
was only seeking to utilize "unused assets" from the BCV's 
monetary desk. 
 
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Comment 
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7. (C) This issue is a win/win demagogic jewel for Chavez in 
the short term.  The vast majority of his intended audience 
has little understanding of the importance of BCV 
independence.  Therefore, he is able to frame this issue 
squarely in terms of elite "haves" keeping down poor 
"have-nots."  The message requires others to engage in damage 
control as Nobrega's tortured explanation to international 
financial markets illustrates.  The ultimate danger lies not 
in this first attempt to commandeer the BCV's reserves, but 
in the addictive effect it could have on future GOV budget 
operations.  This administration does not have a good track 
record of fiscal responsibility; the laudable Macroeconomic 
Stabilization Fund (FIEM) intended to protect against oil 
price shocks has disappeared with little accountability at a 
time of record oil prices.  A policy of artifically high, 
exchange control-fueled reserves is an invitation to even 
higher inflation that was already 27.1 percent in 2003.  Our 
agricultural contacts, as well as our FAS counselor, are 
highly skeptical that any of the proposed transfer would 
become productive investment in that troubled sector. 
SHAPIRO 
 
 
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