Archive for March 31st, 2010

The recurring theme of Venezuela issuing a bond “backed” by gold

March 31, 2010

Periodically, the geniuses that manage Venezuela’s finances return to the idea that they can somehow issue a bond “backed” by gold production and that this will make it different, special and the country would have to pay less because of such guarantee. The idea was being kicked around last year, so that the Corporacion Venezolana de Guayana (CVG) could issue gold bonds, without having to pay an outrageous coupon on the bond. Since Venezuela yields like 12-13% and PDVSA 13-15%, imagine if CVG which loses money issues a bond. Thus, Minister Sanz has floated the idea of a gold bond many times, he did it again today.

Except it would make no difference whether it is backed or not by gold.

After all, aren’t all PDVSA or even Venezuela bonds backed by oil? Certainly not by the hard work of Venezuelans, no?

The problem is that if Venezuela ever had a crunch time in terms of money, such as the one being predicted by Morgan Stanley yesterday as soon as maybe the end of this year, the fact that the bonds are “backed” by oil, or gold would be simply useless.

Because the oil or the gold is here in Venezuela.

Thus, if CVG or the Central Bank (It is not clear who would be the issuer) “backed” a bond with gold production, the gold is in Venezuela. You would still have to go through Venezuelan Courts to get it. The risk is as good (or as bad) as the recently issued PDVSA “local law” bonds which foreign investors like less than the PDVSA bonds issued internationally. (I disagree with this interpretation, but that is a different story)

What Sanz or Merentes don’t understand is that for the gold “guarantee” to give the Government an advantage, it would have to be deposited abroad in an escrow account, something which I doubt Chavez is ready to do now, or ever.

I actually wrote about this already in August of last year when it was first floated. later Sanz himself said Chavez had approved the idea.

But, forget it. As long as the gold is here, or it will come from future local production, what matters most is who will issue it. CVG will have to pay more than the Republic or the Central Bank. A lot more.

That’s what happens when a country is run by amateurs.