BLAME IT ON THE VOLATILITY OF INTERNATIONAL

UNCLAS SECTION 01 OF 02 CARACAS 001638 SIPDIS SENSITIVE SIPDIS TREASURY FOR MMALLOY AND KAUSTIN COMMERCE FOR 4431/MAC/WH/MCAMERON ENERGY FOR ALOCKWOOD AND CDAY NSC FOR JCARDENAS HQ SOUTHCOM ALSO FOR POLAD E.O. 12958: N/A TAGS: ECON EFIN VE SUBJECT: BLAME IT ON THE VOLATILITY OF INTERNATIONAL MARKETS: BONOS DEL SUR 3 CANCELED REF: A. CARACAS 1554 ¶B. CARACAS 1617 ¶1. (SBU) SUMMARY: On the afternoon of August 16 Finance Minister Cabezas announced that the BRV would cancel its USD 1.5 billion "bonos del sur" bond issuance. According to Cabezas, the volatility of international markets made the issuance untimely. Section contacts considered the bonds a marginal deal, at best, as the implicit cost of dollars obtained by selling the bonds was near or above the cost of dollars in the parallel market. The issuance was troubled from the start due to domestic factors, including banks' lack of interest in the Venezuelan TICC bonds, and international factors that have led to a fall off in demand for emerging market debt. END SUMMARY. ¶2. (SBU) On the afternoon of August 16, Finance Minister Cabezas announced that the BRV was suspending until further notice the USD 1.5 billion "bonos del sur" bond issuance. The issuance consisted of three bonds, USD 500 million of two Venezuelan TICC bonds, which are bolivar-denominated, but tied to the exchange rate and thus devaluation-protected, and USD 500 million of the dollar-denominated Argentine BODEN 2015 (reftel A). The demand for these bond issuances has always been driven by the demand for dollars caused by Venezuela's exchange rate controls. The February bond issuance sold at an implicit rate of around Bs. 2800/dollar, which when compared with the parallel market rate of Bs. 4000/dollar was a very good deal. The fall off in prices for both the TICCs ( Covered Capital Interest Bonds) and BODEN bonds meant that the implicit rate for this version of the "bono del sur" would be somewhere over Bs. 4000/dollar, which given a parallel rate of between Bs. 4200 and 4300/dollar was hardly a deal (especially when commissions and financing charges are factored in). ¶3. (SBU) When the bond issuance was announced on August 13, the TICC 2017 and 2019 were trading at 95 and 94 percent of face value, respectively. By the close of trading on August 15 they had failed to around 80. The Argentine BODEN 2015 which trades in international markets suffered a similar drop, from 82 to 78. The fall-off in Venezuelan instruments �0A;was caused in part by the issuance, which according to brokerage house contacts, was larger than the market could absorb. The market for TICCs is driven by the banking sector, which invests in them to protect against devaluation. Banks are limited to holding no more than 15 percent of their assets in foreign currency, and since the TICCs are tied to the dollar exchange rate, they are treated as foreign currency holdings. Most banks are already at their limits, and thus could not legally purchase more TICCs. ¶4. (SBU) The timing of the issuance had always been circumspect as it took place during mid-August, when most Venezuelans are on vacation, and seemed rushed with the deadline for bond requests due only three days after the announcement (the deadline was subsequently pushed back a day before the issuance was canceled). Banking sector contacts guessed that the rush was either related to a) the government's desire to get rid of its Argentine liability as quickly as possible, b) a dire need for cash (unlikely given the amount of rainy day funds available to the BRV and the high price of oil, or c) the desire to intervene to lower a parallel market slowly creeping past Bs. 4300/dollar (which would represent a nice, even 100 percent overvaluation of the official rate). (COMMENT: Post does not discount the possibility that it was the whim of Chavez to set a date to complete the issuance, regardless of market factors. END COMMENT.) ¶5. (SBU) According to the executive director of one brokerage house, the Ministry of Finance held an emergency meeting on the afternoon of August 15 where officials demanded that banks intervene in the market to raise the value of the TICCs and thus make the new issuance worthwhile. Reportedly, the officials threatened to have Chavez attack the banking sector if they did not comply. ¶6. (SBU) Cabezas' announcement sought to blame the United CARACAS 00001638 002 OF 002 States, saying that the decision was unfortunately caused by the crisis in U.S. financial markets the United States and its domino effect on other markets. He continued to argue that, "the suspension has nothing to do with the strength of the Venezuelan economy" and was solely related to the "grave volatility of the prices of bonds in emerging markets and of developed economies, particularly the United States." ¶7. (SBU) COMMENT: While Venezuelan and Argentine bonds have fallen significantly in recent weeks as investors have moved to quality in the midst of the sub-prime mortgage fallout, the lack of demand for this bond issuance is more tied to the construction and timing of the bonds. While bond prices had been falling for the past two weeks, they only tanked after the "bono del sur" announcement, as investors realized that Venezuela intended to issue more debt into an already saturated market. The attempt to blame the United States is simply a continuation of the constant anti-U.S. rhetoric practiced by the BRV, which has sought to blame the United States for just about all that ails it (reftel B). END COMMENT. FRENCH