US embassy cable - 04CARACAS363

C O N F I D E N T I A L  CARACAS 000363 
 
SIPDIS 
 
 
STATE FOR WHA/AND 
NSC FOR CBARTON 
TREASURY FOR OASIA-GIANLUCA SIGNORELLI 
USCINCSO FOR POLAD 
 
E.O. 12958: DECL: 01/30/2014 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: CHAVEZ CONTINUES FIGHT WITH CENTRAL BANK AT A 
LOWER KEY 
 
REF: (A) CARACAS 103 (B) 03 CARACAS 4011 
 
Classified By: Charge d'Affaires Stephen G. McFarland for reasons 1.4(b 
) and (d) 
 
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Summary 
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1. (C) President Chavez has continued his campaign against 
the Central Bank of Venezuela (BCV), on January 18 
characterizing the Bank's international reserve holdings as 
"excessive."  In a speech January 28, BCV Director Domingo 
Maza Zavala held firm, saying the reserves were necessary to 
maintain the strength of the bolivar.  The dispute between 
the administration and the BCV exists against a backdrop of 
parallel currency market troubles for the bolivar and 
Ministry of Finance debt-juggling.  With the bolivar trading 
at sometimes twice the official rate on the parallel market, 
the GOV is likely to issue new foreign debt to add some 
dollars to the economy.  Perhaps in light of that 
probability, Chavez has dropped his anti-BCV statements to 
more generic political statements in recent days.  End 
summary. 
 
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Excessive... 
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2. (U) In an appearance on the weekly "Alo, Presidente!" 
program January 18, President Chavez and Minister of Planning 
Jorge Giordani claimed that Venezuela's current international 
reserve holdings of USD 21 billion were "excessive." 
Giordani stated that USD 15 billion was a sufficient level of 
reserves for an economy the size of Venezuela's.  He even 
claimed to be working on a new "economic theory" that would 
define exactly what was excessive.  Chavez and Giordani 
ascribed the withholding of reserves by the BCV as a 
neoliberalism-imposed limitation on Venezuela's development. 
Despite these claims, Chavez did not explicitly ask the BCV 
for more than his original demand of USD 1 billion to finance 
unspecified agricultural programs (Ref A). 
 
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Is Subjective 
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3. (C) The BCV has not budged from its position that a raid 
on reserves is both legally and economically unsustainable. 
Most recently, BCV Director Domingo Maza Zavala engaged in an 
"ECON 101 Course" in a speech to an economic forum January 
28.  Maza Zavala said that despite Chavez administration 
claims the reserve holdings were not excessive, indeed 
suggesting that the concept of "excessive reserves" did not 
make sense.  He added that the BCV's holdings were necessary 
to ensure the value of the bolivar.  Maza Zavala theorized 
that in the absence of exchange controls, the BCV's holdings 
would fall "within a month" to approximately USD 8 billion. 
(Note: Maza Zavala's statements hold Greenspan-like weight in 
Venezuela.  Despite Chavez's description of the BCV as a 
haven for neoliberals, Maza Zavala is decidedly leftist in 
orientation.  The octogenarian has worked at the BCV for over 
forty years and has been a director since 1994.  To say that 
he is personally impervious to political pressure is an 
understatement.  End note.) 
 
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Parallel Rate Spikes 
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4. (C) Fueled largely on rumors of an imminent devaluation 
and Chavez's railing against the BCV, the parallel market 
exchange rate peaked at approximately 3,200 bolivars/USD, 
twice the official rate, during the week of January 19. 
Miguel Santos, Chief Economist for the Venezuelan-American 
Chamber of Commerce and Industry (VENAMCHAM), told econoff 
January 22 that Finance Minister Nobrega had broached the 
subject of devaluation with President Chavez at Miraflores on 
the night of January 19.  According to Santos, Chavez had 
rejected the idea as politically impossible with the recall 
referendum still a possibility.  Santos said his opinion was 
 
 
the GOV would have to devalue relatively shortly in order to 
utilize exchange rate gains on reserve holdings to finance 
Chavez's electoral spending plans.  Other economists with 
whom we have spoken, including some associated with the 
Andean Development Fund, see devaluation well into the 
future, but agreed that is was eventually inevitable. 
 
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MOF Managing Debt 
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5. (C)  Alejandro Dopazo, Director of Public Credit for the 
Ministry of Finance, told econoffs January 27 that the GOV 
had sufficient resources to keep the bolivar at the 1,600 
official rate through 2004.  However, he said this was only 
possible if the GOV adhered to its historical pattern of 
75-80 percent budgetary execution.  Anything above that 
amount would require either exchange rate adjustment or 
additional debt operations according to Dopazo.  He also said 
the Ministry's main task for 2004 was to lower the domestic 
debt maturities coming due over the next three years.  These 
maturities represent approximately 85 percent of Venezuela's 
USD 18 billion internal debt load.  Dopazo hinted that a 
significant amount of this refinancing would be in the form 
of external debt offerings.  (Note: Two external debt 
offerings in 2003 were used as indirect exchange rate 
management vehicles.  See Ref B.) 
 
6. (C) Other avenues remain open for additional funds for GOV 
spending on Chavez's pet projects.  BCV Director of 
International Relations Mary Dager told econoff January 20 
that the Bank was sensitive to the economic demands of the 
country and was seeking legal ways to agricultural lending. 
Following Dager's comments on January 22, the BCV lowered 
reserve holding requirements two percent for banks that meet 
the GOV-mandated agricultural share of their loan portfolios. 
 That figure stands at 12 percent, although few banks meet 
the requirement.  The BCV also has USD 7.5 billion in 
certificate of deposit holdings in foreign banks.  In the 
past, the GOV has used earnings from these types of deposits 
to fund spending. 
 
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Comment 
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7. (C) In the latest "Alo, Presidente!" on February 1, Chavez 
kept his rhetoric against the BCV in check.  His brief 
remarks on the reserve issue were restricted to demands that 
the BCV guarantee agricultural financing and "not only with 
promises."   Professor Gustavo Garcia of the Higher Institute 
of Business studies told econcouns January 22 that severe 
inflationary effects on the parallel exchange rate could be 
felt in as little as one to two months if Chavez were 
successful in obtaining the unrestricted reserve transfer 
from the BCV to GOV coffers.  We can assume that Fin Min 
Nobrega has told Chavez the same.  In the forum that mimics 
Chavez's thought-de-jeur most closely, his supporters in the 
National Assembly have likewise fallen silent on the issue, 
preferring raucous debate over their own procedures or 
changes in the Supreme Court Law. 
 
8. (C) The current environment perfectly illustrates the 
cross-pressures in the Venezuelan economy.  GOV fiscal health 
is dependent on low levels of budget execution, but its 
political health is dependent on short-term electoral 
spending.  Over the past week, Chavez and the BCV have called 
a truce that probably has two root causes.  First, the BCV 
has hinted all along that some sort of legal accommodation 
could be found.  Second, the MOF could not ignore the 
parallel rate being twice as much as the official exchange 
rate and will probably seek another bonds-for-dollars debt 
issue.  That measure requires a kinder, gentler Chavez to 
soothe investor worries.  Whether this is a conscious choice 
on his part or just another lapse of attention remains to be 
seen. 
MCFARLAND 
 
 
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