The Devil's Excrement

Everytime the Government of Venezuela issues a new bond, something
truly out of the ordinary happens. Today, Venezuela issued a euro
denominated ten year bond in the amount of euros 1 billion, which
matures in 2015 and has a yield of 7.1%. What was peculiar this time
around is that it was an amazing rush job, it was announced early this
morning and orders had to be in by 8 AM EST, which is 9 AM in Caracas.

What is strange about this? Easy. Imagine you want to place a bond (or
sell anything), you want as many people as possible to put orders in
for it. Well, it is hard for someone to place an order if that someone
does not know the bond even exists. No? So, what is typically done is
to announce the bond and receive orders at least for a couple of days,
give brokers time to call their clients, give the clients time to
evaluate the terms and decide whether to participate or not. The more
orders you receive the more “expensive” from the point of view of the
buyer you can sell it.

Well, last night there had been no announcement about the bond.
Sometime during the night, European brokers found out about it and US
and Venezuelan brokers found out this morning at 8AM EST. They had only
an hour to run and get orders. Not much time, no? In fact, many
corporations and institutional investors are incapable of deciding on
such short notice whether to make any investment, particularly
Venezuelan ones.

Some might say only Europeans would have been interested in this
because it was in euros, but even for these investors time was simply
too short. Bu no matter what your target investor may be, you still
want as many orders and investors as possible. A Government spokesman
said that there were orders for 2.8 billion euros. Well, I am sure they
could have recieved orders for even more, maybe as much as 4 billion
euros. You see, 7% yields in euros are hard to come by. As an example,
Mexican bonds in euros with similar maturities as this issue yield
about 5%, way below this issue.

The issue came out at a price of 99.3% and was instantly trading at
100% of its face value and it looks like it will inch up in the next
few days.Those that “knew” about teh bond ahead of time will certainly
profit handsomely.

By the way, Venezuela issued today this bond and the Minister of
Finance confirmed that Venezuela will invest US$ 500 million in
Argentinian bonds because it is attractive and to promote
integration. Thus, the Government that declared itself against
“capitalism” two weeks ago and said it will promote “socialism”, turns
around and borrows 1 billion euros of which it will pay 500 euros for a
bond maturing this month, use US$ 500 million to make a
profitable investment and subsidize a richer country and it will
have about US$ 300 million leftover to use in Venezuela. Of course, it
will have to pay about US$ 100 million in interest by October, so all
the “people” get in the end is a meager US $200 million this year. Is
this is a Government that “cares”, God save us from those that don’t
care!

In typical
Chavez style, today he makes two statements that are difficult to understand
together. In one, Chavez
blames Bush for the price of oil going up because of the invasion of Iraq and threats to Iran. He even laughs at Bush and
says that Bush has a plan called “mister Bush” to get the price to US$ 260 per
barrel, because Bush and Condoleezza Rice have oil interests.

But then
he turns around and says
that the world can forget about cheap oil and that oil is searching for its
equilibrium price around $40 to $50 dollars per barrel. So, I ask, which is it?
Did Bush increase it or is the price correct?

But maybe
Chavez did it, at least that used to be the canonical explanation around here
until recently. This is typical Chavez versus Chavez, not long ago, Chavez took
the credit for making oil prices higher, saying that it was his decision to cut
production down in 1998 that brought prices to their correct level. While
Chavez may have been more hawkish on cutting production, the truth is that Venezuela was already
cutting production down to help prices before Chavez took power in 1998.

Chavez
clearly is now fixated with the US
President and Mrs. Rice. Many interpret this to be a strategy to gain
popularity. But as a good friend and reader reminded me today, polls last year
showed that attacking the US may be popular in Cuba, but not in Venezuela. Maybe
that’s the problem, Chavez has too many Cuban advisors.

So, Bolivia’s President Carlos Mesa offers his resignation after the
leader of the coca growers and Congressman Evo Morales threatens to
block all roads unless oil taxes are raised. Mesa, who remains popular,
may have his resignation rejected by Congress. Essentially, Mesa does
not want to use force to stop either Morales or the peopel of El Alto,
where another crisis is brewing over the privatized water comapny.

Venezuela’s politicians are so far silent on the matter. If Mesa
resigns, will they call it a coup? A triumph for democracy?
Participatory democracy? The imposition of popular will? Whatever
they say, I am sure that they will be in favor of Mesa’s resignation or
maybe they will suprise us alll by saying that thye will not interfere
with the affairs of another country, but I doubt it.

But that is exactly what Chavez has done in the past. Only a couple of
weeks ago, Chavez had the same Evo Morales in his Sunday radio program,
Chavez said that there should be a Constituent Assembly in Bolivia, but
the “oligarchs” opposed it, in a clear violation of the same soverignty
that he defends daily in Venezuela. There have always been rumors thta
Chavez provides funding for Morales, but there has been no proof that
this the case.

Excellent link with all the details here in Publiuspundit

The story on the attempt on Chavez’ life gets more bizarre. Now
the Venezuelan Vice-President says that it was the former US Ambassador
to Venezuela Charles Shapiro that warned him
about a possible attempt on Chavez’ life. Rangel says that for v”legal”
reasons the US Government had to tell the Venezuelan Government about
it.

OK, let me think out loud what is going on. The US Government decides
it needs to get rid of Chavez, but because of legal reasons that
prevent the US Government from killing a foreign President, then the US
Government tells the Venezuelan Government to satisfy the US laws. I
guess now that they have fullfilled the legal steps, now they can go
ahead and do it, no? Interesting system!

In the same statements, rangel says that the result of the meeting
between Chavez and Cisneros, who owns a TV station, is that now that TV
station has stopped “conspirring” against Chavez. I gues they mean, has
stopped saying bad things about the Government, which is called censorship anywhere else. Another achievement for Carter!

To complete the bizarre statements, General Baduell tells the Cuban press
that the US has created an unbalnace of power and disequilibrium since
the “Patriots Act” went into effect. Well, I have read the Patriot’s
Act, and Baduell has clearly no clue what that Act is all about, since
its has nothing to do with funding or combat power in the world.

But hey! How much more bizarro can it get that Jimmy Carter is on
vacation in Venezuela
this weekend with none other than Cisneros. Celebrating the
implementation of censorship or getting paid? I
sure hope the sharks are qutte active this weekend in Los Roques, they
will only scare him, they know better than not to eat him, they could
get indigestion.

The Chavez
admisnitration has passed a bill that makes mortages a not for for profit
business, by fixing the mortgage rate at 65% of the average lending rate of the
banking system, which today would be 11.65% in an economy with 20% inflation. There
is clearly no free lunch, the existence of this rate implies that others arre
paying for it, banks are simply going to translate the costs to the customners
on both side, the savesr and the borrowers. Additionally, banks have to lend 3%
pf their credit portfolio at this rate.

But less
than one month after the new mortgage protection bill came into effect,
President Chávez announced an even newer rate structure for the financing of
mortgages for those that make less than a certain monthly salary. Banks were
still calculating the adjustments and waiting for new regulations to implement
the changes, when they were hit by the new rate structure. So much for careful planning!

There were
two changes made: First, the Government issued a new decree that creates two
additional categories under the so called housing policy, by which those that
make less than Bs., 588,000 will have a special subsidized rate of half the
rate of 5.68% and those making between Bs. 588,000 and 1.61 million a month
will have to pay a rate of  8.52%, or
three quarters of the higher rate. Chavez seemed to suggest that the Government
will subsidize this difference, but banks have no clue as to whether this is
true or not.

Separately,
the Housing Council approved that banks should devote 3% of the financing to
mortgages and an additional 7% to builders.

While the
rates are clearly very attractive, well below the current inflation level of
nearly 20%, the truth is that the subsidy is hard to use for those in the
lowest ranges of the salary structure. The law limits monthly payments to 20%
of the monthly salary, implying that a worker could only pay a maximum of Bs.
117600 per month. Since loans will for 20 years, this implies that someone in
that salary level will only be able to borrow Bs. 18.000.000.

Given that
the most economic housing unit available is above Bs. 40.000.000, it will
require a down payment of at least Bs. 20.000.000. But recall that the
Government is now considering increasing the minimum salary to Bs. 400,000 a
month. To those making the minimum salary this is simply hopeless, as they have
no savings capacity and will be unable to purchase anything in the market.

In the end,
it is another populist measure which will benefit more those at the higher end
of the salary scale. So far, the Government has not announced who will pay the
difference in interest rates. Chávez’ speech seemed to suggest that the
Government will do it, but so far there are no firm indications that this is
the case. In any case, 3% of the credit portfolio of banks will only finance
some 17,000 housing units at the lowest price range, a drop in the bucket in a
country with a shortage of some 2 million housing units.

I find it
remarkable how the Chavez administration is looking for economic solutions in
areas where there are careful studies (by pro-Chavez people) that show that
what you need is a Government plan to build housing in a massive scale. The
problem is a US$ 50 billion problem, not an US$ 80 million problem as this
decree makes it. This is once again improvisation and populism at an
irresponsible scale. Maybe it is better that way, one day people will simple
get very tired of the repeated empty promises of the revolution.

This is
something I thought about a few days ago briefly, but it was not until a
conversation I had today with my brother that I realized what a good idea it
may be. The Venezuela Government wants to sell CITGO (see
article in today’s NYT) because it does not believe that the return on its investment
is good enough and the funds would be better spent in Venezuela.
Well, I think my proposal is much better: Let’s have the best of both worlds,
let’s take a large part of CITGO public, while the Venezuelan Government
retains control of it. In this manner, PDVSA or the Government, whichever way
you want to see it, will recover its original investment plus gains during these
years, but it will retain the strategic importance of CITGO in the country’s overall
oil strategy.

But first
some background for the uninitiated. (Some more here).
In the earlier 80’s there was an oversupply of crude in the world and given
that Venezuela’s
crudes are sulfur rich, it was becoming more difficult to place the country’s crude.
PDVSA first acquired control of CITGO and later it bought the rest of the
company, as well as a couple of refineries to support the policy. When Chavez
was running for President he charged that PDVSA was not getting its money’s
worth and promised he would sell the company after he was elected. Despite
this, all of the Chavez’ nominated President’s of both CITGO and PDVSA in the
last six years, found the CITGO ownership of PDVSA to be a positive and talk of
its sale had died down.

But with
the new changes in PDVSA and the ascent of Bernard Mommer to the company’s
Board, the idea of selling CITGO has resurfaced. Chavez in his characteristic
manner, has been saying that he now learns the gas stations don’t belong to
CITGO (which was known by everyone), that Venezuela is subsidizing the US and
that the money would be better used here. Except the last one, the rest are
simply not true.

While it
is true that under current strong oil prices the internationalization strategy
is no longer as critical as it was one day, it may be shortsighted to sell
CITGO now, only to see prices collapse once again. (I know, everyone is
predicting oil prices can’t go down, this time is different, I have heard all
that before, the NASDAQ could not go down and oil could not go down in 1980 or
up in 1998, but all three of these instances proved to be the same as the past,
nothing goes up forever and it is never really that different)

From an economic
point of view, I can’t really conclude whether owning CITGO has been good or
not, from an strategic point of view it guaranteed Venezuela markets for quite
a while, that otherwise may not have been available.

Thus, my
suggestion is: If the Chavez administration really believes that it is not a
good business, it can simply take the company public by selling let’s say
60-65% of the stock in an IPO in the NYSE (It could accompany it with a local
listing too). This will allow PDVSA to retain operating control of CITGO, while
the Government will be able to recoup most of the value of the company.
Moreover, by doing an IPO, the Government will realize a price higher than what
it would get in a sale, since by now, every oil company knows that Chavez wants
to sell it and will try to underpay for it. In fact, oil stocks are right now
at their historical maximum (Exxon passed General
Electric this week as the most valuable company in the world).

CITGO
would still be run by a Board with a majority representation from PDVSA, but it
will have to add external Directors. Additionally, the company will have to
clearly show that its plan for the future is to maximize shareholder value,
either by distributing dividends or expanding business. If CITGO ceases to be strategically
important, Venezuela
could even sell its stock in the market slowly over time. The company would
also have to be run with a great deal of transparency, once it becomes a public.

On the
negative side, some have suggested the Government really wants to sell CITGO as
a way of removing all valuable assets from the US,
just in case Venezuela
ever decided not to pay its external debt. This would imply this idea is of no
interest to the Chavez administration. The sale will also require that the
Chavez Government sound market friendly for a while in order to maximize the
value of the stock at the time of the IPO.

Finally, I
know that I am dreaming thinking that this may even be possible. The solution
is simply too “market oriented” for the current administration, which just
declared itself “socialist” last Saturady. But it clearly makes too much sense and
represents a win-win situation in which the country would receive a substantial
part of its investment and maximize the price of this return, while at the same
time retaining control over the strategy and future of CITGO, which may become
very important again for Venezuela
in the near future.

By now, Venezuelan Government authorities have become extremely arrogant and appear to be losing perspective about what Venezuela is in the grand scheme of things. High oil prices have become like a powerful aphrodisiac or expensive liquor and they are simply drunk, hallucinating with their empty and idiotic ideas, while trying to gain the political respect of other leftwing countries in the region. I can imagine the laughs in private of those same foreign Governments, when they talk about what a fool the Venezuelan leader and his collaborators have become. They are the noveau rich in the neighborhood that thinks that because they have a Porsche and they neighbor a Honda, they are richer, so why not help them? The truth is the neighbor has a Honda, because he understands the fragility of his wealth, while the man with the Porsche thinks his car proves he is smart.

Thus, Venezuela announces that it will send Uruguay 43,800 barrels of oil and derivatives a day, with 15 year financing and 2% interest. On top of that, Venezuela will give the poor people of Uruguay a two year grace period in payments, much like the agreement with Cuba or should I say with Dictator Fidel Castro. And I can hear the Uruguayans laughing all the way to the bank at the naiveté of our esteemed President, who is apparently so ignorant, that he does not realize that Uruguay has a much better standard of living than our poor and beleaguered country. In fact, Uruguay’s standard of living as measured by GDP per capita is not only bigger than ours, but it is almost three times larger than Venezuela’s. And three times larger when you are talking about GDP per capita is simply huge. It is, for example, the same ratio that exists between Canada (US$ 30000 per capita) and Chile (US$ 10,000) per capita. Or the ratio between the US (US$ 37,800 per capita and Uruguay (US$ 12,600).

But these guys are so intoxicated with what they believe to be the richness of Venezuela, that they will now subsidize Uruguay, buy US$ 500 million of Argentina’s  debt (another country with a much higher standard of living than Venezuela, close to Uruguay’s) and continue to ship 50,000 barrels of oil a day to Cuba, all of them free. And they not only show their ignorance with their actions, but they ratify it with words, as exemplified by the Minister of Energy Rafael Ramirez who fills his mouth saying that the agreement with Uruguay will not affect the cash flow of  PDVSA, because he states “it is only a marginal volume of barrels for the company” . Yes, it is only 1.65% of PDVSA’s production, but another 2% is being shipped to Cuba under similar terms, making it 3.65% altogether. And we don’t know how many more agreements they will sign in the next few months.

This in a country that just devalued its currency by 12% in order to cover the fiscal deficit for 2005, once again directly affecting the purchasing power of the poor, who barely have enough money to eat. As usual, it is only politics that matters, whether nationally or internationally. We need to spend, so let’s devalue, we are rich, so at some point we will not have to devalue under this strange economic concept these ignorants have. It is truly a new form of Voodoo economics.

And Government figures continue vomiting their ignorance, as in the case of the mediocre Mathematician-turned-Minister-of-Finance Nelson Merentes, who explained to the country (the world was not listening, of course) that the devaluation yesterday” is part of a plan being advanced by the Government to obtain larger economic growth and more “social inclusion”. He added: “If we want to have a strong Bolivar in 2007, we have to take measures on 2006-2005; this is one of those progressive measures to be able to obtain growth and strengthen the Bolivar starting in 2007”.

I hope not too many economists are reading this and wonder what it was they studied at the University. This is the first time I have heard that devaluing allows for economic growth. Hey Nelson! If that is true, why didn’t you devalue by 50%? Imagine the growth it would have generated!

But these are the same promises that were made by exactly this same economic team in February of 2002, when the Government was forced to devalue the currency sharply, after using these innovative neo-voodooian economic concepts which sprout from the brains of the Giordani-Merentes team. Or is it simply ignorance?

At last we have a Government that is interested in erradicating poverty……….but in Argentina stupid!

Perhaps there is no better way to show what this post is all about, than to present today’s cartoon by Weil in Tal Cual:

(Look my dear, there goes our President, may God protect him)

Indeed, how is it that such an ineffective administration can maintain such a high popularity level? How Chavez can be such a snake farmer, that people whose purchasing power has been decimated by six years of this so called revolution, still have a hope that things will improve, even if they seem to be getting worse each day.

You see, one of the mysteries of the last six years is where has the money gone? It is a premise of the Keynesian economics, so favored by most Venezuelan professionals in that field, that public expenditures alone can sustain the economy, generate economic growth and at least, give the appearance of prosperity until the day of reckoning come, when income drops and you have to face the music. But as the following slide from a presentation sent by a friend and reader I had not heard from in a long time shows, this economic formula has failed miserably in the last six years:

Despite a 142% increase in oil income, a 66% in the country’s debt, a 323% in spending, GDP per capita is down 11% in the last six years.

But you know what Chavez says; he claims that the economy does not have to grow for people to do better, a concept that certainly is in conflict with traditional economics knowledge and experience. It is clear that economic growth by itself does not generate prosperity, but the second slide shows that inflation is up 292% in the last six years, but what is worse, food inflation, which is the one that hits the poorest the most is up 383% in the same period!:

 But by now you will be saying, well if salaries are up more than that, who cares? The problem is they are not, as shown in the next slide:

And this does not even take into account the impact of the 12% devaluation today. In any case, only 30% of the population is actually employed.

Any Government policy has two attack two fronts: Growth and employment. But employment after a brief foray at the 10% level recently, is back up to 15% this month, according to official numbers, even if not shown in this graph up to June of last year, when it was at the same 15% level (which is suprising to me by the way):

But the President speaks of salary increases who only benefit the employed, jobs are not being generated and mortgages are going to be subsidized by everyone (more on that later, when time allows).

But in the end, the revolution is simply killing everyone softly, like in the famous song, but apparently some feel loved by it anyawy. The poorer get much poorer, while the rich are getting a little bit poorer, except those that are attached to the lifeline (or nipple!) of the revolution, those are getting much richer!. But despite this reality, Weil’s cartoon still reflects to some degree the reality of the effects of populism. Indeed, killing you softly with hunger, but extremely popular!