Archive for February 27th, 2007

The Bono del Sur 2: Free money for the rich masses

February 27, 2007

(In Spanish here)

Imagine you could walk into a bank and go to window #1 and hand over a check for 24 million Bolivars (about US$ 11,100 dollar at the official exchange rate) and know that you can come back in eight days and go to window #2 and you will get back at least Bs. 29.4 million Bolivars (about 13,600 dollars at the official rate of exchange) for a hefty 18% minimum return in one week?

This is what the Minister of Finance and Hugo Chavez call “investing” in the upcoming Bono del Sur #2, where if you request a $10,000 unit you pay Bs. 24 million like in the example, and assuming those “small” investors get 90% of their request, they can then proceed to sell the half which is composed of an Argentinian bond in US$ at 95% of its face value and sell that in the parallel market at Bs. 4,000. They can then sell the Bolivar part of the bond, the so called TICC, and take a slight 7% loss on what they paid and they also get the $1,000 they were not assigned back at the official rate.

These approximate numbers are likely to get even better, since the value of the TICC is likely to be higher and most likely if you ask for $10,000 you will get the whole bond, but those are just small details.

Thus, Venezuelans that can come up with the money, are in a frenzy these days so they can place their orders before tomorrow afternoon and enjoy the largess of the revolutionary Government to those that have money.

In fact, it can even be better. If you can find financing, offered by dozens of financial institutions,, you can even get 90% financing for eight days with only a 10% down payment and your return is actually in triple digits!!!

Isn’t that nice!!!

You see, in 2004 the Government decided to sell dollar denominated bonds in exchange for Bolivars as a way of sterilizing the excess liquidity in the monetary system. And it worked. Typically bonds would be sold such that the “implicit” value at which you were purchasing dollars would be Bs. 100 below the parallel exchange rate, which was in the range of Bs. 2,600-2,700, a 4 to 5% difference. and there were risks too, a couple of times so many dollars flooded the market that the parallel rate went down Bs. 100 and people lost money. And they knew this was possible. So there was some risk involved, that is related to calling it investing.

But starting with the first Bono del Sur, the gap has widened. And quite a lot. Today, the parallel rate stands at Bs. 4,000 to the US$ and in the example I gave above, the implicit rate of buying the dollars via the bond is about Bs. 2,700 per US$. Thus the gap has widened to 32-33%, making the play a no brainer. But, given the absence of much risk, you can’t call this an investment, it is more of a giveaway.

Moreover, the more people participate, and they have learned to have their siblings parents, cousins et al fill out the forms to multiply the profits, the more the Government has to give to these small investors, and I should say rich people for Venezuelan standards, and less to companies, which drive the parallel market. Thus, there is little risk of the parallel rate dropping. About the biggest risk is some bad news coming out of Argentina, which will lower the price of 95% for the Argentinian Boden 15, which is part of the revolutionary Bono del Sur 2 Combo.

Thus everyone is looking to put in their request and get their Bs. 5 million to buy that nice plasma TV you always wanted, a PC or another tangible asset that will not lose money in time.

Many will simply keep the dollars, bought at the cheap, in their accounts in the US or wherever. But there is one thing you can be sure of: Almost nobody will keep the Bolivar denominated bond, even if linked to the official exchange rate. It’s coupon is 5%, which means that if people pay 105 for it, it yields in Bolivars less than 5%, when inflation is running at 20%. And you can be sure nobody, absolutely nobody will keep the Argentinean part of the deal. They will sell it to the hedgies.

I guess we could call this “Mision free money for the rich”

You gotta love the silly revolution and their concept of “investment”

Denounce the hoarders by Teodoro Petkoff

February 27, 2007

Denounce the hoarders by Teodoro Petkoff in Tal Cual

Speaking about inflation, shortages and the measures announced by The Government, we heard Minister of Finance Cabezas refer to the responsibility of “previous Governments” in all of this. Has Cabezas perceived that the “previous Government” happens to be that of Chávez? If you can point someone as being responsible of the tribulations that we are living today, is to I, the Supreme, whose acts, were, on top of that, all validated by Cabezas himself from parliament

For eight full years, Chavez and his underlings have devoted themselves to sow the winds of these economic gales.

But in the same way as his colleagues before him, I, the Supreme is looking for dust in somebody else’s eyes, instead of looking at the beam him own eye has inside. Not for one moment do these Government officials consider their own faults. Faithful to their conspiratory vision of life and history, repeating the old adage of previous governments-as impotent and wrong as those of today- they have pointed to the scapegoat, that mysterious “bad guy”, with a mask over his face, who they call “speculator”

Inflation is then, blamed on small corner store owners. The only thing that this could produce as a result of this massive propaganda campaign-a Goebbelian feature for which this Government does have the copyrights to-is that some of those cheated could think of looting the small corner stores in the barrios or beyond.

The lack of effective anti-inflationary action is not casual. The reason is purely political. On the one hand, the Government is prisoner of its own fiscal excesses. It has been spending in such an exorbitant mode and acquiring and pledging such compromising obligations, that it cannot stop. Even worse, many of those expenditures that will have to be repeated each year are under the risk that medium term, the income to cover them will not be sufficient.

One of the roots of inflation is fiscal irresponsibility. The reason is purely political. The reduction of the VAT, just as an example, may lower prices but not inflation. It is not a paradox. Inflation is not the simple increase in prices, but the rhythm and speed at which it goes up. Inflation will continue to go up because for the Government a fiscally responsible policy is not part of its arsenal.

On the other hand, the exchange controls and the indefinite extension of the foreign exchange anchor, which also have a considerable inflationary potential, will also not be subjected to review because its persistence is also political. They exist because I, the Supreme uses them as a mechanism for political control. As long as Chávez is president we will have permanent exchange controls –even if they are not necessary-with its consequential and inevitable parallel market (and the corruption that the whole structure segregates) and with prices of consumption goods strongly determined by the not controlled exchange rate—black or gray, as you may like it.

All of this has a boring air of having seen it before. It is the repeat of the first CAP Government, it is Lusinchi part II.