The Asunción Stock Exchange trades bonds and other securities. (Marta Escurra for Infosurhoy.com)

ASUNCIÓN, Paraguay – The Paraguayan government periodically issues Treasury bonds to make up for short falls in the country’s budget. But banks, which are the bonds’ biggest investors, are finding it more profitable to loan to customers.

About $373.5 billion guaraníes (US$79 million) in Treasury bonds have been purchased this year, and the total offered in March was $400 billion guaraníes (US$85 million).

But in June, a second batch of $100 billion guaraníes (US$20.8 million) only managed to sell $35 billion guaraníes (US$7.5 million).

In 2006, bonds with a value of $90.5 billion guaraníes (US$18 million) were placed in the local market, according to the Paraguayan Ministry of Finance. In 2007, $204 billion guaraníes (US$43 million) were placed, followed by $55.5 billion guaraníes (US$11.5 million) in 2008 and $682 billion guaraníes (US$145 million) last year.

The disappointing response to the last batch of bonds issued by the Open Market Operations Department (DOMA) of Paraguay’s Central Bank (BCP) was because of a shift in the banks’ investing profile, said Roberto Sosa, editor of the Asunción daily Última Hora’s business section. Banks, which are bonds’ largest buyers, are preferring to offer credit lines to their clients, since interest rates for loans are higher than investing in bonds.

“They maintain that through giving credit they can gain a higher interest rate than that obtained with bonds,” Sosa said. “It is more advantageous for them to lend money to people. They say that the second issue was not such a success because the government offered a lower interest rate.”

The maturity of the first offer goes from one to five years with an interest rate that ranged from 4% to 9%, according to the Ministry of Finance. The second batch had a maturity of three years with a 7.15% interest rate.

A third issue is expected later this year, so the Ministry of Finance can meet its fixed goal of US$314 million.

The government explained the success of the first batch of Treasury bonds issued this year was due to the “confidence of the private sector in the economic policy of the government,” according to government’s official news agency IPParaguay.

The Paraguayan Ministry of Finance, in downtown Asunción, regulates the bond market. (Marta Escurra for Infosurhoy.com)

“I believe that the government has the confidence of the public,” said finance analyst César Paredes Franco. “But much will depend on the interest rate at which they make the offer, because by putting it out to the private sector, [Treasury Bonds] have to compete with the bonds of companies that are quoted on the stock market and with Savings Deposit Certificates from the banks.”

“It’s the banking sector that bought the bonds locally,” Paredes Franco said. “The non-banking private sector has not had the opportunity.”

Previously, the government paid its suppliers with bonds, which were then sold to investors, Paredes Franco said.

“These investors have had to suffer the state bureaucracy in order to receive the interest payments and their capital, and that experience has not been good,” Paredes Franco said.

The operation of issuing Treasury Bonds should be made through the Stock Market of Asunción, giving outside investors the opportunity to buy them, Paredes Franco said.

“By promoting the bonds in foreign investment banks, a good sale can be achieved,” Paredes Franco said. “But before [entering] the international stock market, what has to be done is a local issue in the Stock Market of Asunción, in order to make the first steps locally.”

The optimal positioning of Paraguay’s Treasury bonds is “a good reference for international investors, but if it’s not successful in the country, it will be difficult outside,” Paredes Franco said.