US embassy cable - 05CARACAS857

C O N F I D E N T I A L  CARACAS 000857 
 
SIPDIS 
 
 
NSC FOR BARTON 
TREASURY FOR OASIA - SIGNORELLI 
SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: DECL: 03/22/2015 
 
TAGS: EFIN, ECON, PGOV, VE 
SUBJECT: FINANCE MINISTRY OFFICIAL MAKES SALES PITCH 
 
 
Classified By: Economic Counselor Richard M. Sanders.  Reasons 1.4(b) a 
nd (d). 
 
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Summary 
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1.  (C)  In a March 21 meeting with econcouns, Rudolfo Romer, 
the head of the Finance Ministry's National Public Credit 
Office (and thus chief liaison with the international 
investment community), expressed satisfaction with a recently 
concluded billion euro bond issue.  He asserted that the GOV 
policies, including the creation of off-budget trusts for 
infrastructure and of massive "missions" to meet health, 
education, and employment needs, were in fact "rational 
administration" of the oil bonanza.  Central Bank 
independence was being respected; now there was just "better 
coordination."  The GOV's decision to buy USD 500 million in 
new Argentine bonds was, he claimed, quite justifiable on 
economic rather than political grounds.  Much of Romer's 
presentation was unconvincing, but investors, viewing 
Venezuela through the prism of high oil prices, seem inclined 
to keep buying GOV securities, for now.  End summary. 
 
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Financing Strategy ) Look for Opportunities 
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2.  (C)  Rudolfo Romer, head of the Finance Ministry's 
National Public Credit Office, led off a meeting with 
econcouns on March 21 by noting his satisfaction with the  1 
billion euros (USD 1.3 billion) debt issue the Finance 
Ministry had concluded on March 7.  This had been the first 
time since 2001 that the GOV had gone to Europe for 
financing, and was proof of market interest in the "new 
Venezuela."  The issue covered a significant slice of the USD 
4 billion which the GOV needs to raise in 2005.  How much 
would be borrowed locally and how much in international 
markets was entirely a matter of which presented better 
opportunities.  (He admitted to some concern about a likely 
increase in U.S. interest rates and its impact on emerging 
market debt as a whole.)  He praised previous Finance 
Minister Tobias Nobrega and his team for having successfully 
issued instruments to push back large amounts of debt which 
had been coming due in 2003 and 2004.  There would not now be 
an important spike in immediate obligations until 2008.  New 
financing was thus aimed at meeting the current gap between 
spending and revenue.  While previous debt issues had been 
quite complex (with mixtures of dollar and 
bolivar-denominated debt, the latter convertible at 
preferential rates), for the recent issue, the GOV went with 
a "plain vanilla" approach  --  a 7 pct interest rate over 10 
years on a straightforward euro-denominated instrument, so as 
not to scare investors who were unfamiliar with Venezuela. 
 
 
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Spending Plans Under Control 
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3.  (C)  The GOV, Romer asserted, was looking to "administer 
high oil prices with rationality."  He noted that the GOV's 
budget had prudently assigned a price of USD 23 per barrel 
for oil.  (The Venezuelan basket of crudes now trades above 
USD 42 per barrel.)  When pressed as to whether this low 
price estimate was in fact necessary to make up for oil 
production well below the official claim of 3.1 million 
barrels, Romer declined to engage, saying "I am not an oil 
expert.  I leave that to the Ministry of Energy."  He 
suggested that the GOV's decision to leave USD 2 billion in 
earnings from state oil corporation PDVSA in separate 
off-budget trusts, administered by the state Bank for 
Economic and Social Development (BANDES), was in fact an 
indication of economic discipline, making sure that the money 
was spent on long-term infrastructure and human capital 
projects than on regular spending on salaries and operations. 
 
 
----------------------------------------- 
Argentina Deal  --  Economics or Politics 
----------------------------------------- 
 
4.  (C)  Econcouns asked how President Hugo Chavez's 
 
announcement that the GOV would now buy USD 500 million in 
Argentine bonds would be implemented (and how it made sense 
if the GOV itself was raising new money for its own needs at 
the same time).  Romer responded that the bonds would be 
purchased by the BANDES, which has large state deposits.  He 
suggested that BANDES might resell some of the debt on the 
open market.  In any event, he added that these were new 
post-default Argentine bonds which offered good returns and 
which international investors generally were finding 
attractive.  He denied that the decision had been imposed by 
Chavez for political reasons.  Rather, BANDES management had 
been interested in the purchase, and had suggested to Chavez 
that he could announce it publicly.  (Comment:  This 
stretches credulity.  Whatever the merits of the new 
Argentine bonds as an investment, tying up this large a sum 
in them seems like an imprudent decision, to say the least. 
End comment.) 
 
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Central Bank  --  Just Good Coordination 
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5.  (C)  Romer resisted the suggestion that the naming of 
Chavez loyalist Gaston Parra as head of the Central Bank and 
the Bank's earlier agreement to transfer to the GOV 3.2 
trillion bolivars (USD 1.48 billion) created as a result of 
devaluation marked a definitive end to the Bank's 
independence, raising the risk of inflation.  He dismissed 
the issue of how much in foreign currency earnings should be 
transferred as one of methods of calculation.  He saw Parra's 
selection, which enjoyed ample support within the (majority 
pro-Chavez) National Assembly, and the naming of new board 
members as current members' terms expire, as heralding 
greater "coordination," but he insisted that such 
coordination "flows in both directions."  The GOV, he went 
on, was sensitive to Central Bank concerns regarding the need 
to keep inflation on a downward path, and cited inflation in 
2004 (19.2 pct, coming in below the 20 pct which the GOV had 
forecast) as proof of its commitment. 
 
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Spending on Missions Will Pay for Itself 
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6.  (C)  Romer spoke enthusiastically of the GOV's aggressive 
spending on social welfare "missions."  He noted the 
"collapse" in health and educational systems in the 
pre-Chavez era, stressing that there was no way that 
long-term economic growth could be achieved without paying 
attention to needs in these sectors.  The use of ad hoc 
structures, as opposed to ministries, had been necessary 
because they were "more agile," but the challenge was now to 
institutionalize them.  He cited GOV statistics on decreased 
mortality rates as proof of success.  When asked if the 
missions, and the expectations that they will continue 
indefinitely, were creating enormous financial obligations 
that would be impossible to sustain, Romer responded that "in 
a country this poor you cannot use purely fiscal arguments." 
As for the disequilibria that these spending commitments may 
create, "you have worse problems in the U.S." 
 
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Comment:  The Greater Fool Theory in Action 
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7.  (C)  While Romer, who had previously worked for Finance 
Minister Nelson Merentes when the latter was in charge of 
BANDES, was superficially plausible, his assertions, whether 
they be on the independence of the Central Bank or the GOV's 
commitment to fiscal discipline while keeping billions in 
PDVSA earnings off-budget, are lacking in substance. 
Nonetheless, markets appear to like Venezuelan debt.  The 
combination of relatively high rates, caused in large measure 
by persistent noise about the political environment and the 
quality of economic decision-making, and the confidence that 
in the end, oil revenue provides a guarantee of repayment, 
makes them irresistible for now.  Of course, as one visiting 
U.S. investment banker told us, those buying Venezuelan debt 
have a trader's mentality, and do not expect to hold it for 
long periods.  Venezuela thus benefits from the "greater 
fool" theory (a chestnut of market analysis, under which an 
investor buys questionable securities not with regard to 
their quality but with the hope of quickly selling them off 
 
to another investor -- the greater fool -- who is also hoping 
to flip them).  Should oil prices slide (admittedly this 
could be a long way off), whoever is holding Venezuelan 
securities, may indeed look foolish.  The GOV, which wants to 
keep its spending machine at full tilt through the December 
2006 Presidential elections, however, may look quite smart, 
if also quite cynical. 
Brownfield 
 
 
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      2005CARACA00857 - CONFIDENTIAL