US embassy cable - 05CARACAS1088

C O N F I D E N T I A L  CARACAS 001088 
 
SIPDIS 
 
 
TREASURY FOR OASIA - SIGNORELLI 
NSC FOR SHANNON/BARTON 
 
E.O. 12958: DECL: 04/14/2015 
TAGS: EFIN, ECON, PGOV, VE 
SUBJECT: VENEZUELA'S FINANCIAL SECTOR FACING MORE POLITICAL 
INTERFERENCE 
 
 
Classified By: Economic Counselor Richard M. Sanders.  Reason:1.4(b) an 
d (d). 
 
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Summary 
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1.  (C)  Several issues are causing heads to turn in Caracas 
financial circles.  It is rumored that the Central Bank is 
unloading its U.S. treasury instruments, for fear that they 
might be vulnerable to a U.S. economic embargo on Venezuela. 
Meanwhile the Finance Ministry has successfully carried out a 
USD 1.6 billion bond issue, that like previous ones, 
implicitly allows investors to exchange money at nearly same 
rate as that available on the parallel market.  At the same 
time the latest draft of the bill which would impose criminal 
sanctions for parallel exchange transactions remains tough in 
its penalties and far-reaching in its scope.  Leading bankers 
are still under criminal investigation for alleged "usury" on 
loans made in the 1990's.  One banker fears that this could 
be a prelude to a state takeover of at least one bank.  End 
summary. 
 
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Central Bank Divesting From US Securities? 
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2.  (C)  On April 6, Nelson Ortiz, President of the Caracas 
Stock Exchange (please protect) told econcouns that he had 
been reliably advised that the Central Bank had been 
progressively divesting itself of its in U.S. treasury 
instruments, held in U.S. banks.  He suggested that the Bank 
would probably put the money into dollar-denominated 
instruments held in Europe.  Ortiz said that he understood 
that the decision was made to enable Bank management to tell 
President Chavez that they were taking precautions to avoid 
the seizure of GOV assets by the USG in the event of any 
confrontation. 
 
3.  (C) Note:  As of December 31, 2004, the Bank had USD 
5.195 billion invested in foreign public securities, mainly 
U.S. treasury securities.  We are told by a former Central 
Bank official that "most of these" were in U.S. treasury 
instruments.  The rest of the Bank's reserves consisted of 
USD 10.984 billion in certificates of deposit in foreign 
commercial banks, USD 5.122 billion in monetary gold, USD 
1.147 billion in liquid available foreign exchange, USD 500 
million in its IMF position, USD 8 million in special drawing 
rights, and USD 710 million in its Macroeconomic 
Stabilization Fund.  End note. 
 
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New Bond Issue A Window For Buying Dollars 
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4.  (U)  The Finance Ministry successfully concluded a USD 
1.6 billion bond issue on April 7.  This issue, which 
followed a euros 1 billion issue concluded in March, marks a 
reversion back to the formula devised by former Finance 
Minister Nobrega ) the "combo" in which the bond, which in 
this case has a 20 year duration and pays interest of 7.65 
pct, can be purchased in bolivars at the official exchange 
rate of 2150 bols/dollar.  As local analysts note, the 
tremendous benefit to purchasers of being able to use the 
official rate is largely clawed back by the fact that the 
interest given is well below what other GOV instruments have 
paid, such as its 2018 bond which pays interest of 9.0 pct 
and its 2027 bond which pays 9.2 pct. 
 
5.  (C)  Alejandro Grisanti, Executive Director of 
Econalitica, a Caracas economic consulting firm calculates 
that buying this bond is the equivalent of buying a bond 
which pays a full market rate and selling bolivars at a rate 
of 2529 bols/dollar.  This is only slightly better than the 
parallel exchange rate (currently around 2650 
bolivars/dollar).  It does, however, have the advantage, 
especially prized by the treasurers of multinational 
corporations operating here, that this allows bolivars that 
cannot successfully be converted through the GOV's Foreign 
Exchange Administration (CADIVI) to be exchanged without 
recourse to the legally questionable parallel market. 
 
 
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Whither the Foreign Exchange Crimes Law? 
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6.  (U)  Indeed, the bond issue has become an element in the 
debate over the effort to draft a bill establishing criminal 
penalties for parallel market foreign exchange transactions. 
(Currently, the decree issued in 2003, in the aftermath of 
the general strike which shut down petroleum production, 
Venezuela's principal generator of foreign exchange, requires 
that all transactions be made through CADIVI, but does not 
establish any penalties for failing to do so.)  The latest 
version of the legislation to emerge from the National 
Assembly's Finance Committee defined foreign exchange to 
include "any monetary expression, including paper money, 
bills, or any other instrument with a value other than in 
bolivars" and imposed a penalty of two to six years for the 
"purchase, sale, transfer, receipt, export or import" of USD 
10,000 or more in foreign exchange in the course of one year. 
 When an opposition deputy asserted that this legislation 
would make actions such as the bond issue, denominated in 
dollars although payable in bolivars, illegal, Finance 
Committee Chairman Rodrigo Cabezas (of the pro-Chavez Fifth 
Republic Movement) withdrew the draft, pending consultations 
with the Finance Ministry. 
 
7.  (C)  In a breakfast with the Ambassador on April 7, the 
leadership of the Venezuela-U.S. Chamber of Commerce and 
Industry (VENAMCHAM) expressed their concern regarding the 
exchange crimes bill.  They noted that they had earlier 
sought out dialogue with the National Assembly but that the 
areas which they had criticized remained in subsequent 
drafts, or had even been worsened in their view.  Features 
which the business community finds especially objectionable 
include the, in their view, harsh sentences which are to be 
imposed for violations and the imposition of criminal 
responsibility for corporations and senior managers for the 
acts committed in their name by low ranking employees, 
without requiring their knowledge of or participation in the 
act. 
 
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Case Against Bankers a Prelude to a Takeover? 
--------------------------------------------- 
 
8.  (C)  The leadership of Venezuela's banks remain under 
investigation on possible criminal charges for alleged usury 
for their issuance of inflation-indexed loans in the 1990's. 
(When inflation zoomed up, in many cases the banks extended 
the life of the loans, allowing borrowers to maintain the 
same monthly payment as they had been doing earlier.  While 
this avoided immediate default, the result was, inevitably, 
that after lengthy periods of making monthly payments, 
borrowers found that they still owed the entire principal on 
their loans.)  Although the bankers are confident that their 
lending practices were perfectly legal, while the 
investigation continues, they are unable tl leave the country 
without court permission. 
 
9.  (C)  Two bankers facing the investigation took very 
different perspectives in separate conversations with 
econcouns.  On April 7, Gustavo Marturet, President of 
locally-owned Banco Mercantil, said that he viewed the 
investigation as probably an example of pro-Chavez 
prosecutors and judges seeking to prove their commitment to 
the GOV and their toughness on the business community, which 
is viewed as politically hostile.  He expressed confidence 
that eventually the investigation would end without charges. 
 
 
10.  (C)  However, Juan Carlos Escotet, president of rival 
bank BANESCO, took a bleaker view in a March 19 conversation. 
 The GOV, he suggested, wants to re-enter the commercial 
banking system.  (There are GOV efforts to re-establish 
state-owned enterprises in food distribution and processing, 
aviation, telecommunications, and paper manufacturing.  The 
strategically vital banking system would be a logical 
follow-own.)  He thought it likely that by moving ahead with 
a prosecution, the GOV hoped to force at least one banker to 
flee the country.  That would be a prelude to the GOV's then 
pressuring the bank's owner to sell it the bank, which would 
then be merged with various existing (if moribund) state 
banks, such as the Banco Industrial de Venezuela.  Escotet 
said that at least one foreign-owned bank whose local manager 
is being investigated in the usury case is "fed up" with 
 
 
Venezuela, and may be prepared to sell out.  (He mentioned no 
names, but "Banco de Venezuela," owned by Spain's Banco 
Santander, fits this description.) 
 
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Comment 
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11.  (C)  Whether it is the rumored dumping of U.S treasury 
instruments by the Central Bank, the highly discretionary 
draft exchange crimes bill, or the pressures on prominent 
bankers, financial activity seems ever less governed by 
economic fundamentals and ever more by GOV political 
priorities. 
Brownfield 
 
 
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      2005CARACA01088 - CONFIDENTIAL