A few people have asked me about the zero coupon bonds that the Central bank is selling asking why it is I don’t think it will drive down the swap rate down. While Chavez claims he is revaluing the currency because the swap rate will go to Bs. 4.3 per dollar and some respected analysts think this mechanism will work, I disagree. I actually think that the way it is currently designed, this will get nowhere and I think we have already seen the first signs of this. Unless the Central Bank changes the design, it is wasting its time (and our money). Here is why:
First of all, the process is not an auction. It is a sale of dollars at Bs. 5 per dollar, far from the swap rate that closed on Friday at Bs. 5.85 per US$. Thus, there is no way to lose, you sell dollars at close to Bs. 6 and get some sort of democratic allocation at Bs. 5. Whatever you get, if you do, is a gift. Zero risk gift at that. If it was an auction there would be guessing and there would be risk, those needing more dollars would pay higher for it and would get them. There would be no sure thing.
Second, the big drivers of the swap market are corporations. They need millions of dollars not thousands, but if one is to believe what people are being allocated and that nobody has been given preferential treatment, on the first day, orders above $ 60,000 were allocated $60,000, orders below were allocated the full amount. On Thursday, the same thing happened but the number went down, orders above $53,000 were given $53,000, those below the full amount. (I have heard someone was sold millions in the CD’s, either they got preferential treatment or they placed many small orders)
And we come to the crux of the problem: As time goes by, more institutions, individuals and companies will put in more and more small orders, much like in the bonds sold by the Government to drive the swap rate down, but which failed to do so except psychologically. Each day smaller amounts would be allocated and the swap rate will not go down, unless the Government sells a huge amount and wipes out the bids. But I understand the first day there were US$ 500 million in orders. Thus, by the end of next week we may see allocations of $20,000 per orders and thousands of orders.
Whether the CD’s are registered abroad or not to me is almost irrelevant at this point. If they are, those that get them will sell the CD’s and then go back to the “auction” to ask for more. So, it may actually go against the Government to register them. Note that the first day, local banks were buying the CD’s back from the buyers. On the second day they did not, because the Government changed the wording and removed what the Prospectus said on the first day: That the zero coupon bonds would be sold in the international markets. The BCV says it will now register them abroad.
Thus, I expect the Central Bank to change the mechanism soon. In the meantime a few hundred million dollars would have been wasted by the Central Bank. What else is new in a wasteful and incompetent Government? I obviously have ideas as to how I would do it, but I will not tell the BCV how, in their self sufficiency and arrogance they haven’t even asked.
And to make sure I answer all the questions, these bonds will not trade in local currency, it is explicitly prohibited by law.
The Devil's Excrement 
January 21, 2010 at 6:33 pm
And now the priec is lowered (Bs. 4.816 per $) as the swap rate reaches a high for the week and a high since the “auctions” began. (Bs. 6.1 per $)
January 20, 2010 at 12:05 pm
Yesterday’s auction US$ 15,000 per order, this is going badly faster than I expected, swap rate over Bs. 6 already.
January 18, 2010 at 4:57 pm
But is it really a marginal increase? Or is it the same dollars that used to be sold in the “guiso” in big chunks to “select” brokers, but now will be sold in 5,000 pieces? That is the question. To me that corrupt mechanism went straight to the relevant buyers, this stupid one does not.
January 18, 2010 at 1:23 pm
Miguel,
Dollars are fungible.
Maybe Krazy Wally’s Whale Jizz Emporium Incorporated doesn’t get access to the $50 million auctions, so they have to go to the swap market. But when they’re there, they find that there are many fewer small-time dollar buyers bidding up the price of those parallel dollars because they got their orders filled through Merentes’s auctions.
One way or another, any marginal increase in supply to the dollar market tends to lower the price – even a really idiotically misdesigned one. More supply = cheaper dollars.
But of course Omar is right: whether that effect is strong enough to dominate any of a number of other influences on the parallel rate is anybody’s guess.
January 18, 2010 at 11:16 am
Quico, Miguel,
On the demand side
(-) Venezuela will be hit by a harsh recession and I expect consumption of tradables to experience a sharp contraction on 2010, so transactional demand is going down
(+) Crazy Chavez will remain fueling the demand for forex currency recomposition of assets trough compulsive expropiations, shaky property rights protection. malandro judiciary and skyrocketing inflation
On the supply side
(-) The BCV is implementing the merente’s auctions, at the same time a new (hopefully) more flexible policy for realeasing official dollars at 4,30 is expected
(-) Basic consumption theory indicates that agents will attempt to smooth consumption by depleting savings, thet were made in US$ in the past 4 years, so this can be a additional source of dollars for the market
So the swap rate is a closed form of a function where al the variables mentioned above (and by you before) have an impact. We don’t really know which effect will dominate at the end. I agree with Miguel that the Merente’s auction alone are not binding and would not have a sizable effect by itself.
January 18, 2010 at 10:24 am
If a hurricane is coming, how much will you pay for a shelter?
Not long after Black Friday in the eighties, I heard a journalist asking an economist what was the reason the dollar kept going up and up, disregarding the government measures.
I’d never forget the economist answer: “How much are you willing to spend for a shelter?. The people just don’t trust the government economic measures, and they see the dollar as their only true long term refuge for their assets.”
It was a great lesson on the psychological effects on the economy, and I believe that with the continuous expropriations, the Chavez threats to private sector, the “I’m a marxist” declaration, the electricity crisis, the crime surge and the coming gas and gasoline crises, the psychological factor will be constant bias pushing the dollar up, disregarding the short term skirmishes.
January 18, 2010 at 7:55 am
Larry: I am assuming they will register them, but in general companies don’t want bonds they want the money itself. No company is willing to keep them for 90 days, but the fcat that thye iwll get 50,000 dollars is in the end more important.
January 18, 2010 at 6:57 am
because it run out of whale spooge and Venezuelans are buying candles like crazy
i c wut u did thar!
🙂
January 18, 2010 at 5:25 am
Another thing to consider is CADIVI.
If they change the policy of the last 14 months and start releasing dollars into the market at BsF.4,3 like they are supposed to do then the parallel rate will come down.
Unfortunately due to lower production & lower prices for oil they don’t have the dollars to meet the demand.
The $50 million per day will not meet the demand.
The parallel rate will have no where to go but up. They may control it a little for very short periods of time but will not be able to maintain it.
January 18, 2010 at 4:23 am
Miguel, if the bonds are not tradeable, then Company Acme has no use for the 50kUS$ they buy in the so-called auction, at least not if they need the $ now and not in three months. So, why would they bother?
January 17, 2010 at 11:49 pm
Markets:
There is supply, there is demand, there is price and there is liquidity. Example:
Last Friday, Microsoft traded about 55 million shares or roughly 150 million dollars.
Suppose Quico wants to buy 100 shares ($3,000) you are given the offer price whatever that is, say 30.01
Suppose a fund manager for Fidelity comes to buy 100 million dollars. What happens then? Well, either they look for a block at 30.01 or he starts buying whatever appears in the market at 30.01 + whatever. By the time he is done, the stock will be up. You did not move the market he did.
Back to swaps:
It is the same, but now there is an added feature. Miguel (or quico) is not interested in buying $ at 5.85, because we both think its going down. But, we have the opportunity of buying at Bs. 5 today, that sounds very attractive so why not buy some. You buy it, hold on to the CD and send it to your bank account. It never comes back.
On the other side is company Acme, which needs to buy 25 million $ by next week because it run out of whale spooge and Venezuelans are buying candles like crazy. The problem is that to buy, there is not enough supply, you go to the auction, you get 50,000, you go to the swap market, unless you increase the buy price, you will not be able to get the 25 million.
These are two extremes, of course the fact that the Government is offering dollars will keep the dollar “lower” but what provides the equilibrium? For example, I can tell you for a fact that companies are not buying yet, they dont even know what their accounting rate is going to be, they started working last week, they are making budgets. And the swap rate actually moved up after two “auctions”. So, I think they are going to need more than 50 million and certainly not put dollars on “sale”.
How would I do it? Never say the amount, do a real auction, allow it to move up or down, surprise the markets and be ready to do it every single day.
January 17, 2010 at 11:08 pm
So far they can not be traded. You have to keep them for 90 days (not a bad yield though). The first day the Prospecus said they would trade nationally an internationally, the second they removed “internationally”
Yes, there will be more supply, but less than there used to be with the guisos and atomized in thousands of small orders many of which will not be sold back into the market. I really cant figure out why they dont auction it.
January 17, 2010 at 10:47 pm
ps: On the broader point on whether these bond issues will help narrow the gap between the official and parallel rates, though, I have to say your logic seems pretty iffy to me.
It’s just supply and demand: any additional supply of dollars at prices below the parallel rate will tend to put downward pressure on that rate.
To be sure, that doesn’t mean that they’ll erase the gap entirely.
But it does seem pretty obvious that, by taking up at least some of the excess demand for dollars that has fueled the parallel market, these bonds are bound to depress the parallel rate, at least on the margin.
January 17, 2010 at 10:47 pm
Sorry, Miguel, to keep peppering you with questions, but I find this whole subject both fascinating and deeply confusing. So, if the bonds can’t be traded in local currency and aren’t registered abroad, does that mean that they’re basically not transactable in any secondary market at all?
So if I pay Bs.500 to buy Bs.430 worth of bonds, the ONLY thing I’m allowed to do with them is sit tight for 90 days while I wait to collect $100 for them?!
Really?!