The Devil's Excrement

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
Argentineans, no?

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
Argentineans”.

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)…

Until today…

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.

Because while the process has been more traumatic that in
had to be, you all know I believe primaries would have made it much simpler, it
is indeed an achievement for such a heterogeneous group of politicians to have
reached this point, a point that I thought they may not reach by this week, but
rather by the attrition of some candidates before the final vote on November
23d. Remarkably, it is a better job than Chavez’ PSUV and cohorts, even if they
had their staged primaries, but still only have a unified candidate in eleven
states.

But then the Venezuelan Supreme Court came
out atoday nd declared that the Comptroller can indeed ban any candidate he
wishes, putting in another nail on the already crucified Venezuelan democracy.
I will not again go into the illegality of this or why it only serves Chavez’
purposes, but the Venezuelan Government has definitely become an outlaw
Government in terms of Inter-American Justice, even if this may be largely
irrelevant. But it is no longer a matter of illegality, the Venezuelan
Supreme Curt has now ratified a system by which a man appointed by the National
Assembly, the Comptroller, can simply ban anyone, even Hugo Chavez from running
for office. Starting today, the Comptroller is the second most important man in
the Republic starting today after the President. Everyone, including Chavez has to suck up to him
just in case.

Because in the end, in a country where ethics and morals
have gone by the wayside, I am sure he can be bought. It is just a matter of
price.

In the end, I thought that the Supreme Court would not do
what it did, not because it had a sense of legality or justice, but simply
because Chavez does not gain much politically by this incredible decision,
which in the end affects significantly two races for Governor and that of Mayor
for the Metropolitan Area of Caracas. In the end, much like last year’s decision
to shut down Radio Caracas Television, all this sentence will do is stir up the
opposition and the student movement at a time of Chavez’ lower popularity.

But then one thinks about the events of the last week, from
the nationalization of Banco de Venezuela, to the eleventh hour approval of 26 Bills that allow Chavez to grab more power and legislate what the population rejected last year,
to the Supreme Court decision and there is only one conclusion you can reach:
Chavez has decided to radicalize the process as the only way to prop up his
popularity in the face of the regional elections.

While I personally believe he may have problems handling all
of these conflicts at once, that is not how Hugo Chavez thinks. Except for last
year’s referendum, he has always come out ahead of events that polarized the
population and motivated his supporters. This appears to be his new strategy to
revive the triumphs of the past.

And it may not be as harebrained as you may think. The November
regional elections may be considered by the opposition to be a victory if it
can win 8 Governorships, but Chavez will claim victory up to half of the
Governorships of the country, something that the opposition is unlikely to
achieve.

Thus, I can envision the opposition in November celebrating
eight or nine Governorships representing 65% of the country’s population, while
Chavez goes on TV the same night to hail his victory in 63% of the states country.
They both will be right, but Chavez will make use of all of the power and
wealth of the State to convince the people and the world that this was
certainly the case and the only victor was Hugo Chavez.

Because despite his defeat in the November referendum,
Chavez has continued to act as it had not happened. He has acted like the
winner, nationalizing companies, reforming bills and traveling around the world
selling his leadership.And approving Bills in secrecy.

Unfortunately for us, the opposition has not provided a
coherent front, even with today’s agreement on the 17 unified candidates to counterbalance
Chavez. While he backed down on the “Sapo” bill and the curriculum, the 26
Bills approved on the expiration of the Enabling Bill show he is no democrat
and has no remorse about trampling the rules of democracy.

And while he will have to deal with high inflation levels,
which are having a strong impact on the population, it would not surprise me if
Chavez actually throws one more surprise into the ring in the next few weeks,
nationalizing one or more of the most significant food distribution companies
in the country (Polar?), by blaming shortages or high prices on them.

After all, he now has the legal instrument to do it,
whenever he wishes and without any immediate compensation. It is just a matter of sovereignty and it’s the law, no matter how it came about. Such expropriations have clearly
not been unpopular in the past. And announcing them would once again catch the
opposition off base and off balance and much like the twenty-six Enabling Bills or today’s
decision by the Supreme Court, it would simply throw an additional monkey wrench,
if any, on whatever plans or strategy the opposition may have in store to
confront Chavez. Distracting it once again from the problem at hand, that
Venezuela is being run by an outlaw autocrat who controls all the powers and
the purse strings without any scruples.

In fact, there was clearly a news blackout on the part of
the media to anything that could portray the whole affair as a negative. We
were not shown the long lines in front of many offices of Banco de Venezuela.
We were not told that the Central Bank called the Presidents of the country’s
largest banks to ask that they provide liquidity to the overnight market so
that Banco de Venezuela could borrow money as people took it out and we did not
hear in the media how they also called on the largest corporations with
large deposits in Banco de Venezuela, asking them not to take the money away. (They
obeyed, they will probably do it slowly however)

First we had a
catastrophic statement by Manuel Rosales. Why did he bring so any ideas into the
statement? Probably because he had no clue, no advise about what to say. There
is no “guiso” (he called it “chanchullo”) or funny shenanigans involved in the
Banco de Venezuela case, it is just another case of Chavez’ voracity for
control of the private sector. Very poor.

Then, the President of Banesco Juan Carlos Escotet gave us his wishful
thinking view that the banking sector will remain mostly in private hands and
that this is simply a “normal” transaction. I wonder how many transactions like
this will require for Mr. Escotet to change his mind? Or why he does not tell
us that he feels threatened by it? Or why he is not willing to defend the
private sector in Venezuela against its rampant nationalization by the Hugo Chavez
Government? With leaders of the private sector like that, Chavez will
eventually take the whole thing over.

Then there are two puzzling ones from Spain, which simply
show ignorance and the need or desire to say something. The
first one is from the President of something called the “Spanish
Association of Financial Services” who “applauds” the decision by Chavez.
According to this guy, Chavez transaction will “allow him to preserve a symbol
of the country”. Hello? Preserve it from what? First of all, it was a symbol of
the private sector. But even worse, the nationalization threatens to do exactly
the opposite, as the Government will likely destroy Banco de Venezuela as a
solid and well run financial institution.

Then there is the clueless Minister of Industry, Tourism and
Commerce of Spain who
comes up with the truly crazy idea that “he does not believe that there
will be nationalization of Banco de Venezuela” and he knows Santander wants to
stay. He also clarifies that Chavez did not even talk about it while visiting
Spain last week. That should have given him a clue of what he is up against.Or is he reading Chavez’ horoscope?

Then
there is the statement released by the National association to defend
consumers that urges the Government to face the challenge of keeping the bank
with the current levels of service (not very good ones by the way) and to “make
decisions affecting the process carefully”. Well, the way the process has been
handled so far leaves a lot to be desired.

Away from the headlines however, I find statements from two
people who dared to say what they were thinking. No surprise, given their track
record.

First, the President of Banco Venezolano de Crédito Oscar
Garcia Mendoza told us with his customary straightforward manner in Globovision
that “the announcement is part of the destruction of the private sector of
Venezuela”. Separately in
El Nacional he said that “From now on, the private banking sector is
against the wall…With this decision you create uncertainty because why invest
if the State can come and take it all”. I wonder what Escotet thinks about this
statement?

Similar ideas were expressed by Economist Orlando Ochoa in
the same article who said: “With this, the plan of having banks that sell the structured
notes and have losses capitalize their institution collapses, because this
purchase is seen as the beginning of a plan that may nationalize the whole
banking sector”.

Two people that speak their minds without the fear exhibited
by most of the people in the private sector. Even if they probably are worried
any way.

What most people don’t realize is what a waste of money this
transaction will be. A bank is not like a telephone company or an electric
company that deteriorate slowly over time. (CANTV’s profits dropped 60% in the
first nine months under Government management and Electricidad de Caracas’
dropped by 37% during the first year). Money flows very easily and capitals are very coward and this already
began on Thursday evening when Banco de Venezuela’ efficient and effective
webpage became its worst enemy, as people got home and moved money away from it.

And the bleeding will continue for too many reasons.
Beginning with the fact that most Venezuelans have never liked the Government’s
banking system to begin with. But then, what happens to banking secrecy when
the Government owns the bank you do business with? Then there is management as
the revolution places its workers and managers in place and the well-trained
managers of Banco de Venezuela leave. Then there is investments, as Government
run institutions are typically bad about thinking ahead and tend to be reactive
rather than proactive.

All of this will make the purchase of Banco de Venezuela a
gigantic waste of the people’s money. He is buying 12% of the banking system
and in a few months not only will he only have about 5% or so, but he will have
to move resources from the rest of the “official” banking system to prop it up.

And if there are no intentions of taking other financial
institutions today, which I doubt, at that time Chavez will order the takeover
of others or all of them. And the history
of bank nationalizations is a cemetery of inefficiency, corruption and wishful
thinking.

All of it paid with the “people’s” money.