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Latin American markets shudder

Stocks fall after Hugo Chavez vows to take control of firms in three Venezuelan industries.

January 10, 2007|Chris Kraul | Times Staff Writer

BOGOTA, COLOMBIA — Hugo Chavez spoke, and investors smelled sulfur.

Stocks fell sharply Tuesday in his own country and across Latin America as markets felt the effects of the Venezuelan president's nationalization plans for three key industries. On Monday, Chavez announced his intent to take control of businesses in telecommunications, electricity and oil that have sizable U.S. investments.

The IBC index of the Caracas Stock Exchange plunged 18.7% on Tuesday. Trading in shares of the nation's largest telephone company, popularly known as CANTV, was suspended for two days after they fell 30% in Tuesday morning trading. EDC, the electric power company serving Caracas, the capital, fell 20%.

The Caracas exchange, which soared 156% last year, had hit an all-time high Monday before Chavez's announcement.

In the U.S., companies with stakes in the affected sectors declined to comment, given the lack of specifics from Chavez, who will be sworn in today for a third term and is expected to elaborate on his proposals.

CANTV is 28.5% owned by Verizon Communications Inc. of New York, and EDC is 86% controlled by AES Corp. of Arlington, Va.

Also in the dark are energy companies Chevron Corp. of San Ramon, Calif., and Texas giants Exxon Mobil Corp. and ConocoPhillips, which have invested billions of dollars in the so-called Orinoco belt, a massive oil field in eastern Venezuela. Venezuela accounts for about 2% of worldwide oil production for Chevron and 5% for ConocoPhillips.

Analysts generally expressed caution as they too awaited more information.

"I don't see the nationalizations as much of a shock. Rather, it's a continuation of direct government intervention in the economy that's been going on for the past six years," said Richard Francis, a sovereign debt analyst at Standard & Poor's in New York. The firm rates Venezuelan debt two notches below investment grade.

"I don't think this is going to be Cuba in 1960 or that there are going to be expropriations. With their reserves, they have the capacity to just buy out investors in CANTV and EDC."

But Morgan Harting, a senior director at Fitch Ratings in New York, saw reason for longer-term concern, citing the pressures of Venezuela's 50% growth in public spending last year and the prospect of falling oil prices.

"We've been saying for a couple of years we are worried about the rule of law and property rights. It's a limiting factor on Venezuela's creditworthiness," said Harting, whose firm gives the country's debt a junk rating.

Markets also were jolted by Chavez's announcement that he would seek to end the autonomy of Venezuela's central bank and that he would ask the congress for special powers giving presidential decrees the force of law. With 100% control of the National Assembly, whose approval he needs, there is little doubt Chavez will prevail.

Chavez is a nemesis of the U.S. and of President Bush. He likened Bush to the devil in a speech at the United Nations in September, saying he had left a lingering smell of sulfur at the podium the day before.

On Tuesday, Gordon Johndroe, spokesman for the White House National Security Council, urged Chavez to pay foreign companies for their investments if he goes through with nationalization.

"If any U.S. companies are affected, we expect them to be promptly and fairly compensated," Johndroe said.

CANTV, Venezuela's largest privately held company, issued a statement Tuesday asking Chavez to offer details and saying it had received no formal notice of the government's intentions.

The nationalizations would seem to quash Verizon's pending deal, signed last year, to sell its controlling stake in CANTV to AmericaMovil and Telmex, companies owned by Mexican billionaire Carlos Slim Helu.

The news dragged Mexico's main stock market index down 1.9% on Tuesday. Elsewhere in Latin America, Colombia's market plunged 4.8%, the Argentine market slid 2.7% and Brazil's main index dropped 1.9%.

Venezuelan bonds also fell in value, although analysts seemed to believe there was little chance that Chavez in the near term would default on the nation's $27 billion in outstanding foreign debt. They said the country was flush with an estimated $45 billion in reserves from oil sales and that Chavez had an excellent debt payment record, even during the attempted coup and general strike in 2002 and 2003, which crippled the economy.

Longer term, the picture is murkier.

"Chavez has created a lot of social programs to bolster his political support since 2002," Harting of Fitch Ratings said. "In the future, if faced with the choice of servicing the debt or maintaining the programs, he may be more conflicted and may choose not to pay bondholders."

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