Archive for April 1st, 2008

Robolutionary Financial creativity and the much rumored multi rate exchange rate

April 1, 2008

The revolution does indeed work in mysterious ways. You have
to wonder what would happen if they applied the same creativity they use in making money for themselves to real problems, how much better things will be.
There is so little transparency and such remarkable financial innovation in the way
things are done, that every time I hear a rumor that makes little sense, I ask myself
how someone could make money off it and usually I am not capable of thinking as
wildly and incoherently as these guys are capable of doing so.

Rumor #1: A dual exchange rate ahead of us?

The rumor du jour (or du month) is that the Government may
be thinking of establishing a dual exchange system, in which food and medicines
would be purchased at the official rate of Bs. 2.15 per US$ and the
“remainder”, whatever that may mean, would be purchased as dollar denominated bonds sold by the
Government at the Caracas Stock Exchange for Bolivars. The rumor is so strong that it even
made it to
the international press

Rumor #2: Government pushing down parallel swap rate aggressively by selling lots of dollars into it in order to achieve Rumor #1

The second rumor is that that this the reason why the Government has been
spending such large amounts of money to try to drive lower the parallel swap rate that cannot
be mentioned because it would be illegal to do so. In fact, the Government has
spent US$ 1.1 billion in Fondeen owned structured notes in the last seven weeks to lower the rate to below Bs. 4
per US$. However, it has been having problems pushing it much further down, as
demand gets very strong every time it goes down below the now almost magic Bs.
4 number. Of course, as with so many things the Government does, there is no
transparency in how these dollars reach the swap market and a lot of ill-gained
money is being made on the way. Only “friends” get these notes.

This is not very efficient. The Government does not sell its foreign
currency at the highest price it could obtain and many “intermediaries” make a mint,
both in the private sector and in the Government.

Rumor #3: The Government would sell US$ 650 million in a new Electricidad de Caracas bond to help push further down the parallel rate

This third rumor was difficult to even believe and it said that
in order to pay for the old Electricidad de Caracas (EDC) bond, which I wrote about
, the Government would issue a new EDC bond. This definitely made
little if no sense, because EDC is slated to disappear by Presidential decree in May
2010, which is the reason for buying back the old one to begin with, which matures in 2014.
Thus, why issue another one? Who would want to buy it? How could you sell it?

But, always give some credit to robolutionary financial ingenuity and
try to figure out the profit motive behind it. I confess I couldn’t even guess
what was up.

But today I found out how it works and it is devilishly clever. There is indeed a new Electricidad de
Caracas dollar denominated bond being sold. But you have not heard about it, it is so non transparent that it is not even in the news. It
is only being offered in selective fashion to some corporations, brokers and
banks. But, they do not really offer you the bonds. They offer you to sell you the dollar bonds in
exchange for Bolivars and give you a guarantee that a certain European
investment bank will buy them back immediately from you at a certain price such that you
get a very attractive “implicit” exchange rate for the dollars.They basically sell you dollars with a bond in the middle that you don’t keep. Then you turn around and sell the dollars for a profit in the parallel market.

So, who you may ask buys the bonds and guarantees that it will do so? My
guess is that it is Fonden, the development fund that’s seems to spend more
time using its money on financial transactions than for real development
projects, which is what it is supposed to spend its money on.

So, the transaction is: EDC sells dollar denominated bonds for Bolivars,
Fonden buys the bonds, because right now there is little appetite for
Venezuelan bonds even if they are very attractive, but in any case nobody would
be interested in owning long term bonds of a company that is slated to disappear,
unless of course, you have the same owner. Venezuela owns Fonden and PDVSA, and PDVSA owns EDC. Fonden
pays dollars, which go to brokers, banks and corporations, relieving some
pressure from the parallel market. Of course, there are commissions, spreads
and who knows what in the middle at each step.

I mean, think about it this way: PDVSA gives money every week to
Fonden as part of its “social” contribution, so that Fonden can buy bonds of a PDVSA-owned company, so that this
company can buy its own bonds. Creative, no?

Which takes us back to the first rumor, that a of a dual
exchange rate system. Nothing has helped the swap exchange go down more than
the existence of the rumor itself: We will soon have two exchange rates, one for essentials and a
second one for the rest. But wait! It will actually be a triple exchange rate
system, as the parallel swap exchange rate will not really disappear.

Which is the reason why it is a mystery, at least to me, as
to why creating a second exchange rate has anything to do with lowering the
swap exchange rate.

You see, currently, the Government gives out US$ 180 million
a day via the foreign exchange office CADIVI. That’s like US 45 billion a year.
Of these, the Government gives 30% for “essential”, food and medicines, or
US$54 million per day. Thus, the Government would supposedly have to sell some US$ 126
million per day in the stock market in order to maintain the current daily

The difficulty lies in that first of all, the Government
controls what it approves every day, but it certainly does not approve every
request, it is controlling the flow. So, the first day at the stock market,
suppose the Government decided to sell US$ 200 million to the best bidders.
Well, with US$ 70 billion in monetary liquidity out there, you can bet much
more than US$ 200 million will be bid at the auction. Thus, the price would go

In fact, given that the Government only gives money for
certain things today, if they were to open it up to everything, you could imagine a
lot of money flowing to the “second” market, driving it up again. But since everyone
will not get dollars, the “third” market, the swap market will still exist and
that price will also move up.

The math is simple: The Government has US$ 30 billion in
reserves and there are US$ 70 billion in local currency out there, if you open
up the floodgates with the “second” exchange rate, all US$ could disappear and
you still have US$ 40 billion in Bolivars floating around.

Which is the reason why I don’t quite understand the rumors
about the dual (in my mind triple) exchange rate or why the Government has used
such high resources (US$ 150 million per week) to lower the swap rate if this
is what it plans to do.

But maybe, there is a further and very creative financial and profit twist, which
will allow someone to make lots of money.

We have seen it so often…

Three Cattleya Aclandiae

April 1, 2008

This week was the Natural Sciences Society Orchid Show, I took a few plants, but for complex reasons was unable to take pictures. Since I was away, I had not been checking my plants, so I did not notice the three Cattleya Aclandiae from Brazil were all in flower. Pity people could have compared how different they are: