Identifier
Created
Classification
Origin
05CARACAS1088
2005-04-14 19:52:00
CONFIDENTIAL
Embassy Caracas
Cable title:
VENEZUELA'S FINANCIAL SECTOR FACING MORE POLITICAL
how-toThis record is a partial extract of the original cable. The full text of the original cable is not available. 141952Z Apr 05
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).
-------
Summary
-------
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).
--------------
Summary
--------------
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.
--------------
Central Bank Divesting From US Securities?
--------------
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.
--------------
New Bond Issue A Window For Buying Dollars
--------------
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.
--------------
Whither the Foreign Exchange Crimes Law?
--------------
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.
--------------
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.)
--------------
Comment
--------------
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
NNNN
2005CARACA01088 - CONFIDENTIAL
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).
--------------
Summary
--------------
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.
--------------
Central Bank Divesting From US Securities?
--------------
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.
--------------
New Bond Issue A Window For Buying Dollars
--------------
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.
--------------
Whither the Foreign Exchange Crimes Law?
--------------
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.
--------------
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.)
--------------
Comment
--------------
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
NNNN
2005CARACA01088 - CONFIDENTIAL