BRV'S DIRECTOR OF PUBLIC CREDIT -- A SMOOTH

C O N F I D E N T I A L CARACAS 001679

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E.O. 12958: DECL: 08/23/2017
TAGS: ECON EFIN VE
SUBJECT: BRV'S DIRECTOR OF PUBLIC CREDIT -- A SMOOTH
OPERATOR

REF: A. CARACAS 741


B. CARACAS 869

C. CARACAS 1292

D. CARACAS 1638

Classified By: Economic Counselor Andrew N. Bowen for reasons 1.4(b) an
d (d).


1. (C) SUMMARY: Econoffs met with the Director of Public
Credit, Luis Davila on August 21. During a frank discussion
of the BRV's financial policies and activities in the capital
markets, Davila painted a rosy picture. The BRV did not
expect to issue any foreign debt this year and debt should
shrink as a percentage of GDP. He said the recent "bono del
sur 3" postponement was the result of global capital market
turbulence, and the April PDVSA USD 7.5 billion mega-bond
issue had demonstrated a lack of BRV coordination. He added
that the BRV intended to institute a mechanism to intervene
in the parallel market to reduce the parallel rate for
dollars, and that the large amount of risky structured notes
purchased by FONDEN in 2006 was the poor outcome of good
intentions to reduce Venezuela's risk rating. He noted the
BRV had approximately USD 65 billion in liquid, hard-currency
assets, and had no intention of withdrawing from the IMF in
the near future. END SUMMARY.


2. (C) On August 21 EconCouns and Econoff met with the
Director of Public Credit at the Ministry of People's Power
for finance (MPPF),Luis Davila. According to Davila, the
BRV's financial situation is healthy and the BRV does not
have additional financing needs this year. However, the
budget bill passed in 2006 (based on a USD 29/barrel price of
oil) assumed that the BRV would run a Bs. 9 trillion (USD 4.2
billion at the official exchange rate) deficit and thus
authorized the MPPF to issue debt for this amount. Under
Venezuelan law, the MPPF now has to issue debt this year even
though the government "does not need the money."


3. (C) There are no foreign currency denominated issuances
planned and Venezuela's foreign debt load is around USD 26
billion (approximately 13 pct of GDP; but rises to 19 pct
when PDVSA's USD 12 billion of debt is included). This level
should remain constant, though as percentage of GDP, foreign
debt will continue to fall as the economy grows. The BRV has
preferred to issue debt locally in recent years, which Davila
attributes to local markets' capacity to absorb these
issuances.


4. (C) The MPPF decided to postpone the third "bono del sur"
on August 16 due to the instability in international markets
(reftel D). Davila noted that the Argentine BODEN 15s that
would have been issued fell in value from 82 percent of face
value on the day the issuance was announced to 75 on the day
it was canceled. The decision to sell USD 1 billion worth of
bolivar-denominated, devaluation protected Venezuelan TICC
bonds and only USD 500 million of Argentine BODENs (which are
dollar-denominated and drive demand for the package) was
intended to push the implicit cost of the dollars closer to
the parallel market rate by forcing investors to buy more
bolivar-denominated notes.


5. (C) Davila described the process leading up to the massive
USD 7.5 billion PVDSA bond issuance in April 2007 (reftel A)
as one defined by an unfortunate lack of coordination between
the various BRV agencies and PDVSA. He admitted that the
Ministry was not consulted about the decision to increase the
amount (from an original USD 3.5 billion) and hinted that had
he been consulted, he would have advised against the
increase. He noted that the precipitous drop in the value of
these bonds and the sheer amount of bonds trading in

international markets means that PDVSA will have trouble
issuing more debt in the future.


6. (C) Turning to the matter of the large amount of
structured notes the National Development Fund (FONDEN) had
purchased in 2006, Davila said that the BRV purchased these
notes to lower the cost of Venezuelan Credit Default Swaps
(CDSs) and thus the country's risk premium. Davila admitted
that they had been a bad investment as the value of the notes
had fallen, mostly due to market concerns that Ecuador would
default on its obligations. He claimed that FONDEN needed to
unwind these commitments in order to continue its mission
funding projects, but that it wouldn't be easy as these
instruments were complex. (Note: FONDEN reportedly purchased
approximately USD 6.2 billion in structured notes in 2006,
although Davila avoided confirming this figure or how much
they have since unwound. These illiquid notes are reportedly
comprised of Credit Linked Notes (CLNs) based on Argentine,
Brazilian, Ecuadorian, and Venezuelan debt (reftel C). The
mechanism by which they sought to reduce the country risk
premium remains murky to us, though Venezuela's risk rating
did fall to below 190 in January. This reduction has been
negated by Chavez' actions these past eight months, including
nationalizations, threats to leave the IMF, and drops in the
country's foreign exchange reserves. As of August 21
Venezuela's risk rating was 477 basis points above
treasuries. End Note.)


7. (C) He also stated that total "foreign currency assets" of
the BRV amount to around USD 65 billion, which inclues
foreign exchange reserves, FONDEN, the treasuy account at
the BCV, and other opaque BRV and sate-owned firm accounts.


8. (C) Despite Chavez'calls for Venezuela to withdraw from
the IMF andWorld Bank in April (reftel B),Davila discountedthe likelihood that Venezuela would do so in the nar future.
In Davila's words, Venezuela doesn'tintend to "quit
school," but rather intends to "e a bad student," with
regards to its participation in the Fund and World Bank
activities and meetings.


9. (C) Davila described BRV concerns about the "speculation"
taking place in the parallel foreign currency market. As of
August 21, the parallel market was over Bs. 4400/dollar, more
than double the official Bs. 2150/dollar rate. Davila
claimed that the size of the parallel market was only USD 50
million per week and could easily be controlled by BRV
intervention. (Note: Most private sector contacts think it is
much larger, as much as USD 200-300 million/week. End Note.)
He maintained that the run up in the parallel exchange rate
during 2007 has been caused by the elimination of the CANTV
ADR transaction, which allowed Venezuelans to obtain dollars
by buying local CANTV shares and exchanging them for ADRs
sold on the NYSE in the United States. Davila asserted that
the replacement of this transparent and open market with the
more opaque "permuta" transaction had allowed speculators to
bid up the price of dollars. He added that the BRV was
working on a plan to create a new market mechanism that would
provide more transparency and, according to him,
significantly lower the parallel market rate to around Bs.
3100/dollar.


10. (C) COMMENT: Davila was appointed to the position in
March 2007 and arrived with good reputation. Local contacts
and rating agency visitors have described him as competent
and effective. He was open with econoffs during the meeting
and smoothly painted a positive picture of the BRV's
activities. While some of his explanations contradicted
conventional wisdom, Davila went to great effort to make the
BRV's financial actions seem logical and transparent. As the

BRV's primary representative to visiting investors and rating
agencies, he plays the part well. Davila met with econoffs
alone and spoke in English. END COMMENT.

BIO NOTE: Davila studied at American University and the
University of Pennsylvania and was previously PDVSA's
Director of Finance. END NOTE.

FRENCH