For the last three or four years, Hugo Chavez has been
buying Argentinean bonds as a way of “helping” that country and at the same
time using them to provide dollars to the parallel swap market, so that the
parallel swap rate would not get out of hand.
The mechanism is also a source of corruption, but that is
not the subject of this post. Suffice it to say that Venezuela has bought more
than US$ 6 billion in Argentinean bonds, which have been sold to “some” local
financial institutions with no transparency whatsoever. In Guisonomics part
I, I showed how bad these transactions are for Venezuela, as it becomes a
subsidy to richer Argentina (per capita) and it would be more efficient and
cheaper for the Government to simply sell dollars into the local swap market.
A separate mechanism has been for Venezuela to issue dollar
denominated bonds, but sold in local currency, as a way of selling “cheaper” US
dollars to locals, relieving the pressure in the parallel swap market.
As I have explained before, this mechanism has limitations,
as there is not infinite appetite for Venezuela’s debt abroad and as more and
more issues have come to market, it has become more expensive for Venezuela to
issue more debt. The reason is simple, while Venezuela’s debt is small relative
to its GDP, the lack of transparency, Chavez’ economic policies and
nationalizations has made investors demand a higher interest in order to buy
the country’s bonds. The number of interested investors is also limited.
Higher interest implies lower prices for the country’s bonds
and obviously, it is more expensive for the country to borrow money. It took a
while for the Chavez administration to realize this. In March of last year, a long-term
bond (’27) from Venezuela would yield a little bit under 7%, but after the
issuance of US$ 7.5 billion in PDVSA bonds and more bonds this year (and the US
subprime crisis), the same bond yields 10.4% these days. In the end, it’s a self-fulfilling
prophecy, if fund managers in the US expect more bonds to come out, they will
wait for them to come out and buy them cheaper (or higher yielding!)
In May, the Venezuelan Government issued US$ 4 billion more
in new bonds and people at the Ministry of Finance realized that if they issued
more any time soon, they would drive prices even lower. And that is not good for the country
or its people.
And what is bad for Venezuelans can’t be good for
Well, instead of screwing up Venezuela’s debt, we went and
announced that Venezuela would by an additional US$ 1 billion in Argentina’s
debt, because as I mentioned yesterday, Chavez said, “We have great trust in
Which is a huge lie…
Because what the Venezuelan Government does is simply turn
around and sell them to local financial institutions, who turn around and sell
them really fast to funds in New York, with a lot of money made in the process.
Thus, what Venezuela does to its Argentinean “buddies” is
exactly what it does not want to do to its own bonds: Flood the markets with
them so that prices go down and yields move up.
Except that Argentina is in much worse shape than Venezuela
and its bonds had to pay 15% last week for someone to buy them (Venezuela)…
Because today the Venezuelan Government decided to sell more
than the usual of the Argentinean bonds. The reason has not been given, but it is probably
that there has been more demand in the parallel swap market since the
nationalization of Banco de Venezuela was announced. Thus, the supply of Argentinean
bonds in the New York market became a deluge (some traders said it was raining Argentienan bonds in New York) and Argentinean bond prices
plummeted today. Below I show the price and yield of the Boden 15, which is
what Chavez bought this week.
Price of Boden 15 in 2008. Note the huge drop today and that it has gone from 85% to 62% so far in ’08
Yield of Boden 15, which soared today, has gone from 10% to almost 17% this year.
Thus, today´s problem was that as the Chavez administration sold more Boden to locals, these locals turned around and sold everything, doing to Argentina´s bonds what the Government did not want do to its own bonds: Have them drop in price because the market was flooded with them.
So Chavez has turned out not to be such a great buddy of the Kirchners. He is helping them by buying the bonds, but by doing to their bonds what he did not want to do to ours, he ended up screwing them and the people of Argentina.
Which in the end are also being screwed by the Kirchners who have been selling bonds to support their popularity via the financing they provide. Note however, that the Boden 15 yielded close to 17% today, a truly “junk bond” yield, which is indicative of the fact that people do not trust Argentina and fear that much like eight years ago, that country may default and stop paying its debt sometime in the not so distant future.
So, in the end, Chavez is helping his Kirchner buddies and viceversa, but in the end both of them are simply screwing their constituents by undertaking expensive schemes to attempt to support their popularity and help them remain in power.
Which they will, until the whole thing explodes. The day the Kirchners can’t sell a bond or stop paying them, Chavez will not be able to buy that country’s bonds. And if at the time Chavez needs to raise money by selling debt, the country will have to pay through the nose to support Chavez’ addiction to power.
And in the end it will be the people of both countries that will pay for it.