Venezuela orders banks to sell dollar-linked paper

CARACAS, May 20 (Reuters) - Venezuela on Tuesday ordered financial institutions to sell dollar-linked securities issued by foreign companies in an apparent bid to lower the parallel exchange rate and force banks to adjust their portfolios.

The move would end a widespread practice by Venezuelan banks of buying dollar-linked structured notes issued in local bolivar currency to skirt regulations requiring banks hold no more than 30 percent of assets in foreign currency.

Financial institutions will have to sell off this paper and buy bolivars, strengthening the bolivar on the parallel market where the dollar currently trades for around 3.3 to the bolivar compared to the official rate of 2.15 that is fixed by currency controls.

Foreign and local companies "will not be able to buy, accept as payment or acquire ... securities including structured notes denominated in bolivars," reads the measure published in the government publication the Official Gazette circulating on Tuesday.

Structured notes are an illiquid form of debt that combine the risk and yield attributes of a group of bonds or underlying assets. Financial institutions including banks, brokerages, and exchange houses have 90 days to sell these assets, according to the resolution.

"Many banks will have to bring their dollars and (turn them into bolivars) ... and that will have an impact on the parallel market," said a government source, speaking on condition of anonymity.

A source in the banking sector, also speaking on condition of anonymity, said the measure will prevent banks from making speculative profits from declines in the parallel market, thereby reducing currency market distortions.

"This will prevent these institutions from including paper issued by foreign entities as if they were bolivars," said the banking source. "Those are not bolivars, those are dollars."

Venezuelan banks often seek to lower their exposure to bolivars due to rampant inflation that reached 22.5 percent in 2007 and a volatile parallel exchange rate that dropped to almost 7 bolivars per dollar last year.

(Reporting by Ana Isabel Martinez, writing by Brian Ellsworth; Editing by Diane Craft)