Venezuela

Bahamas I Bardados I Bermuda I Dominician Republic I Jamaica I Trinidad & Tobago I Costa Rica I El Salvador I Guatemala I Honduras I Nicaragua I Panama I Argentina I Bolivia I Brazil I Chile I Columbia I Ecuador I Mexico I Paraguay I Peru I Uruguay I Venezuela

BEST BANK: Banco Mercantil BEST DEBT HOUSE: Citigroup

Political risk is high in Venezuela and is likely to increase as the economy becomes more regulated. Compulsory lending requirements on banks and capital controls have made operating extremely difficult and have left privately owned banks vulnerable to a deterioration in their balance sheets. But that has not discouraged Banco Mercantil, Venezuela’s largest bank, which has a 16% market share and subsidiaries in the US and Europe. Helped by growing government banking business, a strong economy boosted by high oil prices and the sale of its stake in Colombia’s Bancolombia, Banco Mercantil posted earnings of $340 million last year, nearly double that of 2004, while its assets rose 27% to $11 billion and deposits jumped 41%.

Citigroup’s credit default swap on bolívar-denominated Venezuelan treasury bills has allowed companies to protect themselves against devaluation in the local currency, which is subject to exchange controls under the leftist government of president Hugo Chávez. Following a severe recession in 2002, Chávez fixed the exchange rate at B1,600 to the US dollar in 2003, but high inflation and a volatile political environment have created a parallel market, with the Venezuelan currency varying in value between B2,150 and B2,750 to the dollar. Under Citigroup’s scheme, even in the case of a Venezuelan default on its 90-day bills, the credit swap allows the holder to receive payment from other investors and create liquidity in a market where dollar debt repayment approvals can take up to 120 days. Hedge funds and asset managers have also bought into the swaps because they give investors access to treasury bills without having to bring their money into Venezuela, which is affected by currency controls.