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We maintain our overweight position based on our view that debt service capacity is sound and our belief that political and social developments will ultimately lead to a positive political outcome. The path toward a political solution is likely to be turbulent, and bond prices could take several hits along the way. But rather than try to maneuver around each corner, we prefer to remain overweight through a potentially volatile period based on our medium term expectation of a favorable outcome.

Our views on Venezuela are summarized in the following points:

More likely, the military will play a role in support of democracy.

Violence is not inevitable. Whether or not there is violence may depend more on Venezuela’s institutions than on Chavez. It is possible that Venezuela’s institutions together with international actors will encircle Chavez and leave him with little room for maneuver.

The constitution, which permits a recall referendum after August 19, 2003, is the first trap. Most analysts have assumed that Chavez will delay the referendum by either delaying the appointment of the National Electoral Council (CNE) or manipulating the CNE once it is in place. Either of these maneuvers would equip him with subtle tools to postpone the referendum for many months.

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Such a scenario would probably lead the opposition to take to the streets, leading ultimately to violence and probably regime change. As of today, this appears to be the most likely scenario.

However, recent developments suggest that this scenario may not be inevitable. Members of the Supreme Court have indicated that they will grant ten days, starting from May 15, to the National Assembly (AN) to name a CNE. If no CNE is in place after ten days, the Supreme Court will appoint the CNE, and it has even named the potential board members. Based on the names that have been released, the Supreme Court would appoint objective members who would bring credibility to the CNE, and leave little room for Chavez or the opposition to bias the work of the CNE. Even if the AN appoints the CNE, the risk that the country ends up with a pro-Chavez CNE may have declined since the Supreme Court seems to effectively be reducing the bargaining potential of the government in the negotiations.

Over the next ten days pro-government congressmen will push hard to negotiate with opposition parties to avoid Supreme Court involvement. Certain political parties may have an interest in negotiating an agreement with the government. However, the risks of ending up with a pro-Chavez CNE may have declined now that the Supreme Court has revealed their preferred membership for the CNE. Even if the AN selects the CNE, the chances of ending up with a pro-Chavez CNE have probably been reduced since the Supreme Court has reduced the negotiating powers of the Chavistas in congress.

If Chavez is denied the ability to manipulate the CNE, his ability to rely on subtle techniques to avoid an electoral exit will be reduced, leaving him with three options: face elections, resign with excuses and a set of guarantees, or rely on blatant tactics which would be condemned internationally and would probably not be tolerated by the military.

Pay close attention to the membership of the CNE.

I, Seth Antiles, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views in this report.

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