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Venezuelan banks enjoy treasuries windfall

By Andy Webb-Vidal | The Financial Times

Published: January 31 2006 19:07 | Last updated: January 31 2006 19:07 | A select group of Venezuelan banks is profiting from opaque government treasury operations involving hundreds of millions of dollars of Latin American sovereign bonds under a financial programme fostered by President Hugo Chávez.

Backed by record oil revenues, Venezuela has bought $1.6bn in Argentine debt during the past year – mostly dollar-denominated Boden bonds maturing in 2012. They were purchased in auctions that were eschewed, in some cases, by big investment banks, such as Citigroup and JPMorgan Chase, because the yields offered were considered too low.

Venezuela, which has been the largest buyer of Argentine sovereign debt since the country defaulted on itsforeign debt in 2001, has said it is ready to buy up to $2.4bn worth of Argentine bonds.

It has also bought $25m of Ecuadorean debt and finance minister Nelson Merentes recently said he was looking at buying Brazilian and Chinese bonds.

Investment banks Morgan Stanley and Deutsche Bank are reportedly advising on the bond transactions.

Mr Chávez justifies his virtual "hedge fund" as a benevolent concept that will allow Latin American nations such as Argentina to "liberate'' themselves from an international financial system that, he asserts, is manipulated by the US.

Last year, Venezuela transferred all of its foreign reserves that were held in US Treasuries or that were on deposit at US banks, about $20bn in total, to the Bank for International Settlements in Basel, Switzerland.

Venezuela's bond purchases have helped Argentina increase its foreign reserves. President Nestor Kirchner's government last month paid off its outstanding $9.5bn debt to the International Monetary Fund, in part thanks to the cash injection from Mr Chávez.

"Whilst the [bond] purchases are good news for the Argentine government, the benefits for Venezuela are less clear," said Vitali Meschoulam, emerging markets strategist at HSBC Securities in New York.

The Financial Times has learned that significant profits deriving from the bond transactions are being accumulated by a few private banks, rather than by the Chávez government.

In late November, Mr Merentes announced that some of the bonds had been liquidated, leaving a profit of $40m. Mr Merentes said last month that $600m worth of the Boden 12 bonds had been sold, without elaborating on the method.

Most of the bonds were sold directly – instead of in an auction – to two local banks, Banco Occidental de Descuento and Fondo Común, according to two people familiar with the deal and a senior official at a financial regulatory authority. The banks have since re-sold the bonds into the open market.

Mr Merentes didn't respond to several requests for comment during the past week. Victor Vargas, president of Banco Occidental de Descuento, and Victor Gil, president of Fondo Común, also didn't return messages seeking comment.

But though the chosen banks are likely to have profited from increases in prices of Argentine bonds, they have benefited more significantly from Venezuela's foreign exchange controls, in place since 2003, and a flourishing but tolerated parallel market.

Venezuela's treasury sold the Boden 12 bonds to the banks at the official exchange rate of 2,150 bolívars to the dollar. But, according to the people familiar with the transactions, the banks re-sold the bonds at the parallel market dollar rate, which trades at about 2,600 bolívars.

On a re-sale of $100m worth of bonds, the banks would gain bolivar profits equivalent to about $17m at the informal market rate, or $21m at the official rate.

Following alleged complaints from banks that were excluded from the operations, in recent weeks the finance ministry has also begun selling directly to them some of the bonds that it still holds, in $40m-$50m tranches every two weeks.

Orlando Ochoa, an independent economist, said that a lack of transparency has become the hallmark of the Chávez government's financial administration.

''The ministry of finance is allocating windfall gains in Argentine bond operations to selected domestic banks, without bidding rounds and without financial reasons to privilege them,'' Mr Ochoa said.



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