Central Bank of Venezuela worried about indebtedness

MAYELA ARMAS H. EL UNIVERSAL

The directors of the Central Bank of Venezuela (BCV) have shown concern about the country’s indebtedness since this could have an impact on fiscal stability during the next few years.

BCV President, Diego Luis Castellanos, on June 9 sent a letter to the Finance Minister, Tobías Nóbrega, including some remarks made by the bank concerning a public borrowing transaction amounting to VEB 4.8 trillion ($3 billion) provided for in Public Borrowing Law for 2003.

In the letter, the official seriously opposed to the financial conditions surrounding the transactions, stating that the bank “is concerned that such a huge indebtedness -together with the Republic’s current debt- may have an impact on both the fiscal sustainability and the domestic market’s absorption capability, which may compromise the financial system’s stability.”

The BCV board of directors also questioned the three types of bond placements: in US dollars, euros and in the domestic market. Regarding transactions in dollars, it is believed that interest rates are too onerous and do not reflect the actual risk, while bond placements in euros are “also expensive and imply a foreign exchange risk.”

Concerning transactions with sovereign debt bonds (DPN), the bank estimated that titles subject to swap could not be used as a mode of payment, “since this can be considered as a debt refinancing, and that requires a special law. We suggest to suspend the use of dation in payment.”

In response, on June 10, Nóbrega sent a letter to Castellanos explaining the transaction. The Finance Minister shared BCV’s view as to the interest rates to be implemented for bond placements in US dollars, and added that such rates reflect the current conditions in world financial markets. As to the rates for operations in euros, Nóbrega claimed that spreads stemmed from the market values observed during the last few weeks.

The minister stated that internal public debt bonds' swapping is made with unmatured bonds, which do not require a special law. He affirmed that Venezuela’s borrowing is within the limits of the Umbrella Law of 2003.