I am going to have to speed up this primer, as events that led me to
write part I have accelerated in an unexpected fashion, forcing me to
cover the material faster than I expected.
There is indeed no free lunch for Venezuela in always “making money”
when it buys Argentinean bonds even if they drop in value. In fact, you and I are simply paying
for it as usual, if you are naive enough to think the money is “ours”. The apparent free lunch arises from the fact that at
the end of the day, what is happening is that the Government is leaving
a lot of money on the table. Our money.
Let’s look first at the Government’s profit in our previous example:
The Government bought one million dollars of Argentinean bonds at 100%, sold them at 110% for a 10% profit of Bs. 215,000.
But suppose for a minute, that rather than buying bonds from Argentina,
the Government went straight to the banking system and offered to sell
them US$ 800,000 at Bs. 2.965 per dollar, the same amount and price at
which the bank effectively bought the dollars when it bought the
Argentinean bonds and sold them in the international markets in part I.
From the point of view of the bank, the transaction is identical, no?
But it makes a world of difference for the Government which now, rather
than making a puny 10% profit, will get (US$800,000x Bs. 0.815)=Bs.
652,000 for the transaction.
Huge difference, no?
Of course, the Government made now Bs. 652,000 on the transaction,
rather than Bs. 215,000, but on top of that, it sold US$ 200,000 less!
Who kept the difference?
Easy, Argentina, which received in the case of the bonds a full one
million dollars but the bonds later dropped 20% (US$ 200,000 less). And
of course, we Venezuelans are better in theoryof, because we all collectively
have US$ 200,000 more.(Even if we will never see it!)
Is the Government stupid?
Of course not.
First of all, it helps Chavez friends Mr. or Mrs. Kirchner in placing a billion or so
dollars of Argentina’s debt with one call. Second, by hiding the
transaction behind bonds, most people do not understand that the whole
thing is just a “guiso” or racket at the same time. (Call it corruption
if you like!). Third, the Government can maintain the official line,
that there is no and there will be no devaluation and dollars are worth
Bs. 2.15 per US$.
Because these type of transactions are given only to a select group of
“friendly” banks or financial institutions who are friendly because the
obviously pay somebody off, no?
But it doesn’t end here…because, why should the Government allow the
bank to make so much money. The bank buys each dollar at Bs. 2.956 and sells
it for Bs. 3.45, making a nice profit of Bs. 0.494 or 16.7% without
Thus, the more normal, regular, rational, customary and transparent
manner would be if the Government offered the same US$ 800,000 to ALL financial institutions at Bs. 3.4 per US$ for their customers. Then, the Government
would make US$ 800,000 x (Bs. 3.4-Bs. 2.15)=Bs. 1,000,000, rather than
The banks would make a tidy Bs. 0.05 per dollar, which adds up after a
few million dollars. That is the usual way foreign currency markets
Thus, there is no such thing as a free lunch, just a bunch of people having a profitable lunch off us Venezuelans.
Soon: part III, how to buy a bank with no money…