Archive for August 15th, 2007

Bono del Sur with revolutionary amateur decision makers

August 15, 2007

On Monday, the Venezuelan Government announced the issuing of the Bono del Sur 3, one of those perverse combos in which dollar denominated bonds are offered to rich Venezuelans for a profit in order to accommodate the Government’s irresponsible policies spending and macroeconomic policies.

Over the weekend many analysts had questioned the timing. At the time, the combo was supposed to be composed of a dollar denominated Argentinean Boden 15 with a local TICC, a bond that trades only in local currency bt its price and coupon is indexed to foreign currency. The idea would be to sell US$ 500 million of each, which would help in absorbing excess monetary liquidity.

Just as a remainder, these bonds are sold at a price, calculated at Bs. 2,150 per US$ and people can turn around and sell it at a lower price in US$, but at an implicit price below the parallel exchange rate which today stood at a full 100% premium to the official rate at Bs. 4,300 per US$.

The reason that the issue was being questioned was the fact that with the uncertainty in the international markets with the sub-prime credit crisis, then volatility could make the price of the Argentinean bond swing dramatically and drop in price to the point that investors would lose money. Thus, by rushing the issue, the Government could burn some investors who had thought the PDVSA issue was a sure thing, held on to it and now can’t decide when to sell due to the volatility in international markets.

An additional problem is that this is the peak of vacation time so that there seemed to be no reason, given the resources available to the Government to rush it to market and wait a couple of weeks until vacationers came back.

But then some genius came up with the idea that rather than postpone, they would add to the bolivar part another US$ 500 million and this would somehow mitigate the possible volatility in the international markets.

Thus, on Monday the “combo” was announced to be equal parts of the Argentinean Boden 15 trading at 80, a TICC 2017 trading at 95 and a TICC 2019 tarding at 94. With this combination if you bought the combo at the announced price of 104 this morning, you would be buying the dollar part at an effective rate of Bs.3,500 per US$ give or take 50 Bolivars.

However, whomever thought of adding this additional part in bolivars did not think in through and the whole thing backfired. This morning, when the Government set the price, banks, who are the natural buyers of the TICC’s (Indexed to the official exchange rate but quoted in Bolivars) realized that US$ 1 billion in TICC’s was simply too much and their price dropped from the mid-nineties to around 80. To make matters worse today’s volatility abroad, also drove the price of the Boden 15 down to around 78, so that when investors plugged in their numbers into their spreadsheets, they came up with a rate around Bs. 4,100 per US$ very close to the official exchange rate.

The result? Interest dried up and brokers began telling their clients not to bother with the bond.

Let me also clarify why the US$ 1 billion was also unattractive to local banks. Under Venezuelan regulations, banks are limited to 15% of their equity in foreign currency. As you can imagine, in this inflationary environment, most banks have this up to the hilt. However, these TICC bonds, even though they trade in Bolivars, are indexed to the official currency, thus they count as part of this requirement. Thus, for banks it was nit too attractive to buy these two issues and given the size, US$ 1 billion, most decided to stay away.

By mid afternoon the Ministry of Finance was panicking, holding a meeting with the banking system, where according to one source the banks were even threatened with unleashing the autocrat on them.

Thus, as of tonight, with prices of both TICC’s and Boden 15’s depressed, the Bono del Sur 3 remained unattractive proving once again that the Government is losing its control over an over regulated economy, where you would need more knowledgeable people who would think before acting in such amateurish and simplistic way.

At this time, the solution would appear to be to exempt these TICC’s from the foreign exchange quota imposed on the banks. But logic has never been the forte of Chavismo and the revolution.

Stay tuned…the TICC’s will probably bounce up today, but international markets look jumpy early in the morning…

Note added on Wednesday night:  TICC’s rebounded today and should rebound even more tomorrow as I hear that they will be removed from the dollar quota for banks…without this maybe the Government would not have placed the issue. Interesting, lots os barking and in the end a profit incentive solves the problem. Sounds like XXth. Century Capitalism to me.