Government sells US$ 1.5 billion in bonds at exchange rates at least twice the official rate

November 13, 2007
According to
the Government spokesmen, including the Minister of Finance, the
parallel foreign exchange market is either irrelevant or non-existent,
depending on whom you talk to. We are told that it is tiny, less than
5% of imports at times. Other times, we are told the Government does
not care what happens to it, because it is irrelevant.

But
reality says otherwise. When you don’t know whether something has been
purchased with official CADIVI dollars or not, there is room for profit
and when the foreign exchange office CADIVI is slow to approve funds,
importers are forced to go to the swap market, which is quite legal as
the swapping of securities is explicitly excluded from the exchange
control illegalities Bill.

But there is another
reality: The Government has either issued or sold to the market some
US$ 13.5 billion in securities so far this year, in order to keep this
“irrelevant” market down. This does not include the structure notes
sold to the local banks, because little is revealed as to who buys
them, how much and why some and not others. Now, to give you some
perspective US$ 13.5 billion represents 38% of what the foreign
exchange control office has approved so far this year. Of course, the
Government has sold all sorts of instruments, including bonds
denominated in dollars at the official rate of exchange, which are
hybrids and some, very few Bolivar denominated ones. But the dollar
fraction is at least 30% of it, to which you have to add the actual
swap market.

Now, the official rate of exchange
is Bs. 2,150 per US$, but these sales by the Government to help
maintain the parallel rate down are done at a rate above the official
rate and below the parallel swap rate.

Today,
the Government announced the allocation of its latest effort to fight
the “phantom” parallel market, a US$ 1.5 billion issue composed of two
Bolivar denominated bonds or Vebonos and a dollar denominated bond,
which matures in 2038 and has a 7% coupon. The bond was named Venezolano I, since it had no Argentinean component like three of the bonds sold in the last twelve months. For the first time ever, the
Government used an auction system, even if it had a slight twist.
Basically people could put in their orders at any price and they would
receive the bond with dollars valued at Bs. 2,150. People will turn
around tomorrow, sell the bonds and effectively they will be buying
dollars at a higher rate than the official one.

How much higher? Well,
the results of the “auction” are such that those that bid over 136% for
the bond will get 100% of the amount requested. At 136, the effective
price for each dollar obtained is roughly Bs. 5,400 per dollar. Thus the
Government is tacitly selling dollars at a rate, which is way over
twice the official rate of exchange. Those requesting between 122 and
125 got 20% and between 125 and 135.99 got 35%. Thus, at the lowest end
of the scale, people paid Bs. 4,500 per US$, still twice as much as the
official rate of exchange. The non-existent parallel market has been
around B. 6,200-6,300 lately.

Thus, the market that does not exist, that “mediatic” instrument
used by the opposition to destabilize, received a healthy dose of
foreign currency by the Government today and there are promises that
the Government will sell into it some US$ 600 million in the remainder
of the year.

Unfortunately, at best, this will
keep the swap market constant, due to the pent up demand, nerves and the high monetary liquidity, in this
virtual and supposedly non-existent market. Just the Government validating prices around the Bs. 5,500 level will set that as the ultimate lower floor for the time being.

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