US embassy cable - 05CARACAS806

C O N F I D E N T I A L  CARACAS 000806 
 
SIPDIS 
 
 
STATE FOR WHA/AND 
NSC FOR CBARTON 
TREASURY FOR OASIA-GIANLUCA SIGNORELLI 
HQ USSOUTHCOM FOR POLAD 
BUENOS AIRES FOR TREASURY-MHAARSAGER 
 
E.O. 12958: DECL: 03/30/2015 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: BANKS UNDER PRESSURE 
 
REF: CARACAS 577 
 
Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D 
 
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SUMMARY 
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1. (C) Government intervention in the economy has taken 
another step forward with the issuance of regulations which 
force the banking sector to devote 10% of its lending 
portfolio to mortgage and home construction loans and which 
increase from 10% to 16% the portion which must be dedicated 
to the agricultural sector.  29% of bank loan portfolios are 
now prescribed by the GOV, with 26% at preferential interest 
rates, which could both force banks to both take on risky 
loans as well as reduce lending in other areas.  Meanwhile, 
several private bank presidents, a former Superintendent of 
Banks, and two former Central Bank presidents may face 
charges of usury and fraud for having allowed loans with 
interest rates indexed to inflation.  While the bankers say 
that they are on solid legal footing, they worry about the 
outcome in the highly politicized judiciary.  Banks have been 
hugely profitable in recent years; the usury case may be 
pressure to keep them from complaining too hard about the 
increased demands being placed upon them, while focussing 
public attention on another presumedly exploitative private 
sector interest.   END SUMMARY. 
 
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HOW SHOULD A BANK LOAN?  AS THE GOV TELLS IT 
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2. (SBU) Based on a 2001 housing law, the National Housing 
Council (CONAVI), a GOV body, recently set a legal maximum 
for interest rates on mortgages of 11.36%, which was 65% of 
the average bank lending rate at the time of the decision. 
Lower-income borrowers can qualify for a rate three-quarters 
or even half of that maximum, and may also be eligible for 
subsidies from the government.  CONAVI also directed that a 
minimum of 10% of each bank's lending portfolio be dedicated 
to housing loans, 3% to mortgages and 7% to home 
construction.  In addition, the GOV recently required that 
banks increase the portion of their lending portfolios 
dedicated to agriculture from 10% in 2004 to 16% by June 
2005, all with a maximum interest rate of 16%.  These new 
requirements, in combination with an existing requirement 
that 3% of lending be committed to micro-loans (with no 
maximum rate), mean that 29% of all private sector bank 
lending is now directed by the GOV. 
 
3. (C) Ignacio Salvatierra, President of the National Banking 
Council (a group with both private and public bank members 
created to advise the GOV on banking policy), pointed out to 
econoff March 14 that, if one includes the existing 16% 
reserve requirement, over 40% of a bank's lending ability is 
now constrained by the GOV.  However, he said, the minimum 
lending requirements are not as big an imposition as the 
preferential interest rates, and that it was "tough for 
banks" to provide such a subsidy.  Jose Barcia, Vice 
President of economic consultancy Metroeconomica, told 
econoff March 10 that he expected credit card rates, 
currently between 30 and 44% annually, to rise over 50% to 
compensate for the lower rates.  When asked if rates would 
rise, Salvatierra answered, "theory says yes, (but with) 
competition, I don't know," given the enormous liquidity in 
the economy due to exchange controls.  Pedro Coa, Vice 
President of Economic Studies at local bank Banesco, told 
econoff March 14 that he expected rates provided to savers on 
their accounts to drop as a consequence. 
 
4. (C) Salvatierra also opined that it "makes little sense" 
to require over twice as much funding to go to construction 
loans, which last about two years, than to mortgages which 
last twenty, but noted this could be adjusted at a later time 
by CONAVI.  Salvatierra and Barcia both observed that the 10% 
requirement would, at best, make a very small dent in the 
housing deficit, estimated at 1.5 million homes, since 7% of 
bank lending portfolios would finance no more than 50,000 
 
homes per year.  (In a separate meeting with econcouns, 
Construction Chamber President Alvaro Sucre said that while 
in principle, he opposed such interference in private 
economic decision, he hoped that the new lending requirements 
would indeed spark a significant recovery in his sector.) 
 
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USURY - WHAT WASN'T ILLEGAL THEN IS NOW 
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5. (U) While they adjust to the new lending requirements, 
Venezuela's bankers face pressure on another front.  Though 
they have not yet been charged with any crimes, seven private 
bank presidents (including the heads of Banesco and Banco 
Mercantil, the two top locally owned banks, and the head of 
Spanish-owned Banco de Venezuela), one former head of the 
Superintendency of Banking (SUDEBAN, a GOV agency), and two 
former Venezuelan Central Bank Presidents (including the 
recently retired Diego Castellanos, were prohibited from 
leaving the country by a February 21 court decision.  The 
restriction was mandated because those individuals, along 
with some other ex-SUDEBAN employees, are being investigated 
and will possibly face charges of usury and fraud.  The 
investigation stems from a Supreme Court decision in January 
2002, in which it ruled that loans with interest rates 
indexed to inflation, and loans with balloon payments, were 
unconstitutional.  The Supreme Court made its ruling 
retroactive.  The actions upon which the charges would be 
based pre-date the Supreme Court decision. 
 
6. (C) Salvatierra, one of the bank presidents facing 
charges, told econoff that he and the other presidents "feel 
calm, and that we committed no crime."  He claimed that the 
accusation "has no solid legal or economic base" because the 
loans in question were based in law, and also enabled poor 
people to obtain mortgages they would not have been able to 
otherwise.  Salvatierra did acknowledge some doubt about the 
outcome given the increased politicization of the judiciary 
(reftel).  He said, "there is an intent to create a negative 
perception of the banking sector," perhaps not with the 
intent of imprisoning anyone now, but "to send a message" for 
the future.  Coa agreed, saying the GOV is perhaps "going 
after the banks," after destroying the independence of 
state-owned oil company PDVSA, the National Electoral Council 
(CNE) and other institutions which should be autonomous. 
 
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SUMMARY 
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7. (C) Profits in the banking sector soared 44% in 2004 over 
2003, with an impressive 43.3% return on equity.  In 
addition, GDP in the financial services sector was up 26.6% 
in 2004 (vs. 17.3% for overall GDP), after being the only 
private sector to show GDP growth in 2003.  The lion's share 
of this growth came from investments in government securities 
issued to allow free spending policies  to continue. 
Exchange controls, which prevent borrowers from moving their 
money out of the country where they could get better returns, 
have also been enormously beneficial to the banks.  Thus, 
they are poorly positioned to challenge these new 
requirements.  Nonetheless, the imposition of directed 
lending and subsidized rates, historically common in Latin 
America, however, is bad regulatory policy.  Inevitably it 
will force banks to make loans to customers who would 
otherwise be too shaky to qualify, eventually damaging 
portfolio quality, while driving up rates for good customers 
in other sectors.  We suspect that the usury case against the 
bank heads constitutes pressure to make them go along with 
the policy relatively quietly.  It also raises yet another 
populist target for the bolivarian government, which is ever 
alert against exploitation and profiteering by the private 
sector. 
Brownfield 
 
 
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      2005CARACA00806 - CONFIDENTIAL