Financial crisis start not with a bang, but with a whimper
and I just wonder whether that was a very loud whimper that we heard today.
For months, the Venezuelan Government had been announcing the infamous “Bono
del Sur” a joint issue between Venezuela
and Argentina.
After almost six months, it was finally offered last week, as the biggest
giveaway in history. Essentially, the Government was selling US dollars at a
very steep discount to the parallel market, which last week stood at Bs. 3,000
per US$, while the buyers of the bond could purchase dollars somewhere between
Bs. 2,300 and 2,400 to the US$. .
It was such a sweet deal, that banks and brokers were
offering financing without any guarantees, corporations were putting in
multimillion dollar orders and everyone wanted a piece of the pie and was
counting on getting a piece of it.
Thus, orders were received in such large amounts, that if
you requested more than US$ 5 million or over, you only got US$ 27,000, half of
it in a Venezuelan bond that only pays in local currency, even if denominated
in dollars. According to the Government, they received orders for US$ 9
billion, but I suspect it was more, much, much more. Except if they said how
much more it was, there could be real trouble, as people realize the parallel
market rate only has one way to go: up!
You see, the Government has held the official exchange rate
stable for almost two years, except that in those same two years it hass spent
money as if there was no tomorrow of there was a presidential election coming. Except
that last time there was a devaluation in February 2005, monetary liquidity
stood at US$ 21.3 billion and international reserves at US$ 23.8 billion, while
today liquidity stands at US$ 45.95 billion, while reserves are at US$ 34.6
billion and liquidity should jump up by at least US$ 7.5 billion before the end
of the year.
Thus, while reserves have barely increased by 50% (and
dropping!), liquidity will be up by almost 200% by the end of the year and
there is no stopping it, as the Government spends and spends.
Corporations had been waiting for a bond like “Bono del Sur”
to buy foreign currency, but they got very little today, thus they will move
their purchases to the parallel market in the next few weeks and push the
parallel rate higher.
You see, the Government thought it could fool the rules of
economics and as usual you can, but only for a while. The Government invented
this idea that it could buy bonds from Argentina and turn around and sell
them to “friends and family” at a cheap price, who would make a mint and supply
the parallel market with ample liquidity. And it worked for a while, except that
the rate was kept artificially low as inflation grew, after more than US$ 4
billion was supplied to the parallel market. Then a couple of months ago, the
rate jumped up and since then the Government has been unable to push it down.
Meanwhile corporations waited for the announced bonds,
before going to the parallel market. Bu today they realized they got very little
from the bond and the parallel market is much higher than when they first
started thinking about it. In fact, upon the news of how little was allocated to
each order and that the issue was not increased in size, the parallel market
jumped up and while the last quote of Bs. 3,500 to the US$ was probably never really
paid by anyone, purchases were made at Bs. 3,400 per US$, a full 13% higher
than last Friday.
Those that got the bonds made a mint, a full Bs. 1,000 per
US$ allocated if the parallel rate holds up near Bs. 3,300 per US$. Those that benefited
were those that put in many smaller orders rather than one large one. But for corporations the message is clear: Don’t
look for the Government to approve much for you in the future.
In fact, there appears to be little the Government can do at
this time. Even if the planned PDVSA issue came to market, it would barely
absorb half of the liquidity to be generated between now and the end of the
year, leaving the pressures on the parallel market out there.
It is in the end a self-fulfilling prophecy: The Government
overspends, creates too much liquidity, has exchange controls in place and in the
end has to create instruments to absorb the excess liquidity. Except that
resources are finite and at some point things catch up with you. For example, a
good rule of thumb is that for every US$ 1 per barrel drop, Venezuela loses
US$ 1 billion in oil income and thus reserves. Thus, so far the recent drop
accounts for some US$ 15 billion in income that has simply disappeared from the
future unless oil prices were to recover.
But if they did, it would just postpone the problem to a
later date. The Government could sell tomorrow US$ 10 billion and pressures
would be barely reduced but reserves would be at levels which would be
considered dangerous for the high monetary liquidity in the monetary system.
In the end, the trap created by the Government is too
complex and only has one simple, quick and perverse solution: devaluation. By
reducing the gap between the official and the parallel rate, pressures on the
parallel market are reduced temporarily, even if no structural solution has
been found to the problem. That is what happens when you run irresponsible
policies like those of this Government. The problem is that it is the poor that
get hurt the most by a devaluation.
Such irresponsible policies are not new in Venezuela, but
they have never been carried out and taken to the levels of today. What is most
incredible is that there seems to be little awareness as of yet, of the problem
the finances of the country are in, unless the events of today opened someone’s
eyes in the Chavez administration.
But I doubt it. My feeling is that today was the beginning
of a crisis that will lead to a larger than expected devaluation in the first
few months of 2006, no matter who wins in December. And unless corrective
measures are taken, what began today with a whimper will end up badly and with
a bang in the next couple of years.
The Devil's Excrement 
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