Archive for October 28th, 2009

Chavez approves CVG issue, will they really do it?

October 28, 2009


The Chavez Government has been threatening to bring to market a bond issue by Corporacion Venezuelana de Guayana. AllĀ  the work was done, balance sheets for the company were cooked up for the last three years and a credit rating was sought. And that was the problem, the rating was so low that it would be nuts to bring it to market because CVG would have to pay a huge yield to get the deal done.

But as part of the cookbook to make sure Venezuela’s economy is destroyed, the National Assembly approved two weeks ago that the Central Bank can buy bonds issued by Venezuelan corporations. This is not the law yet, but will soon be, after all, Chavez controls how the National Assembly breathes.

Thus, today we got the announcement that Chief Economist Chavez approved the bond issue. Read: BCV will buy it!

Think about the possibilities and the implications:

–It is sold to the BCV in exchange for Bs. Thus, BCV prints a bunch of Bs. to buy it. CVG turns around and buys US$ at Bs. 2.15 per $ to buy stuff abroad. Reserves don’t go down, the BCV has the bonds!

–It is sold for $. Reserves don’t go down, because the BCV has the bonds, CVG spends the US$ and/or brings some back to pay unions.

–Reserves are at around US$ 33 billion, but of that not all of that can be used, there are drawing rights, gold and other instruments. Add to them the CVG bond, which they will be unable to sell.

–Come December Chavez will ask for US$ 8 billion for his Fonden. The money for Fonden will come out of the cash, not the instruments, so that BCV’s reserves will become even more illiquid.

Will they really do this? You bet they will. They have done US$ 11.3 billion in $ denominated bonds this year and US$ 9 billion in local bonds, they will do this one and next year’s budget calls for an additional US$ 14 billion in debt. These guys’ irresponsibility has no limits. This is a bubble, we all know it is being inflated, but we don’t know when it will explode.

But it will.