CORRUPTION IN BRV ARGENTINE BONDS TRANSACTIONS

C O N F I D E N T I A L CARACAS 000659

SIPDIS

NOFORN
SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR KLINGENSMITH AND NGRANT

E.O. 12958: DECL: 03/10/2026
TAGS: EFIN ECON PGOV VE
SUBJECT: CORRUPTION IN BRV ARGENTINE BONDS TRANSACTIONS

REF: A. CARACAS 00512

B. CARACAS 03782

Classified By: ECONOMIC COUNSELOR ANDREW N. BOWEN FOR 1.4 (D)


1. (C/NF) SUMMARY. On March 3, 2006, Nelson Ortiz, the
Caracas Stock Exchange (BVC) President, outlined the BRV
mechanism undertaken for the purchase and re-sale of
Argentine bonds. The BRV has reportedly sold USD 1.1
billion, of a reported USD 2.8 billion in Argentine bonds
originally purchased. Ortiz maintained the BRV chose not to
execute the transactions through the BVC because this would
have required transparency and would have directed all
profits to BRV coffers. Instead, in a series of private
transactions through selected banks, various parties
reportedly earned a cut. The BRV was left with only about
one-fourth of the profits and private banks kept about
three-fourths. With Finance Minister Merentes announcing USD
75 million in profits to date, private banks (and their BRV
sponsors) could have earned roughly USD 225 million in
profits on these transactions. END SUMMARY.


2. (C/NF) Nelson Ortiz, the President of the Caracas Stock
Exchange (BVC),used the hypothetical example of a USD 80
Argentine Bond to illustrate the transaction. According to
Ortiz, the Government of Argentina (GOA) sold the bonds to
the BRV at a price slightly above the market rate (USD 81),
which justified not selling the bonds on the open market.
The BRV then sold the dollar-denominated bonds to local banks
in local currency for a price slightly above this amount (USD
83-84) at the official exchange rate (2,150 B/USD). Local
banks interested in exchanging Bolivars for dollars, were
willing to pay the premium. These banks in turn sold the
bonds for dollars in private transactions to international
banks at slightly below market rate (USD 79),but at an
implicit exchange rate slightly below the parallel rate
(2,668 B/USD). Foreign exchange gains far off-set the lower
prices received for the bonds.


3. (C/NF) To avoid fluctuations in bond market prices, the
bonds are purchased and resold in just a few days. Ortiz
claimed the BRV was left with around one-fourth of the gains
and private individuals about three-fourths. According to
the Finance Ministry (MF),the BRV sold USD 1 billion in
Argentine bonds to 25 financial institutions, earning USD 75
million in profits. Private banks (and their BRV cohorts)
could have earned roughly USD 225 million in profits.
Originally, the MF sold the bonds exclusively to two banks,
Occidental de Descuento (President, Victor Vargas) and Fondo
Comun (President, Victor Gill),which are banks widely
alleged to pay commissions for BRV deposits. In March 2006,
Finance Minister Merentes announced that the BRV planned to
sell approximately USD 60 million in Argentine bonds every 15
days to 32 financial institutions, by a formula which would
not offer bonds to the same financial institutions in
consecutive rounds. However, the selection criteria is not
transparent.


4. (C/NF) COMMENT: The BRV can claim that the purchase and
re-sale of Argentine bonds supports BRV policy objectives of
helping alleviate inflationary and foreign exchange pressures
(reftel A and B),expand regional influence, convert Caracas
into the "epicenter of emerging market debt", and earn
profits for the BRV (reftel B). However, anecdotal evidence
suggests that corruption also strongly influenced the
process. And, as with other financial transactions, those
private individuals and businesses closest to the BRV appear
to have received preferential treatment. END COMMENT.

BROWNFIELD