Paralell market becomes strictly controlled in Venezuela

May 18, 2010

(Between the Galaxies of Merentes and Giordani there is a huge limbo)

There is clear disagreement within the Government, you could feel it at the press conference. Merentes let Giordani speak and he did, demonstrating he is incredible cynical or incredibly ignorant. Giordani gave explanations that have no basis. He showed a plot of how a bond worth Bs. 2.6 per dollar would be converted to a bond worth Bs. 7.8 per dollar. Of course, nobody can obtain bonds at Bs. 2.6 per $, so he is talking not about the flow of money in the swap market, but the implicit rate of the swap. These are very different things.

Then he proceeded to say that in the penal investigations, brokers would have to justify where all the dollars came from, because he said, it is so much money it had to come from drugs or from money laundering. Except that 95% of the funds in dollars offered in the swap market in the form of bonds have come from…

The Government and PDVSA…

Can the Minister justify this? Can he explain at what price they were sold? To whom? Why was it done in such an opaque fashion? Why isn’t it being investigated?

Much like the banking crisis, which Giordani said was confronted “head on” by Chavez, but those banks flourished under the not so watchful eyes of the Chavez Government, it was the Government that authorized the swap market and fed it with anything from Argentinean bonds to structured notes, to PDVSA bonds and whatever. Had all of these been sold in a transparent fashion, there would have been less graft and more efficiency and we are now supposed to believe that it is the brokers fault.

So, we will now have a “band system” for the trading of bonds at the Central Bank, with the bands decided by the Government and brokers left out of this market, only banks will participate. Replace a fairly efficient market with the regulated sale of bonds at the price decided by the Government at the Central Bank is supposed to solve the problem…


The only problem is that the Government does not have the dollars to lower the swap rate, so a regulated rate is supposed to solve the problem? Sure.

To start with, this “new and improved” market will not start until at least two weeks from now according to BCV sources, which creates a pent up demand of around US$ 800 million to US$ 1 billion. Then, if the Government sells these dollars cheaper than Bs. 7, everyone in Venezuela who has Bolivars will like a piece of these dollars. Thus, you can imagine orders will pile up, much like it happened with the PDVSA bonds in 2007, where everyone knew that it was such a good deal that there were hundreds of thousands of orders.

In fact, Giordani confirmed this when he said that last year (or in 2008, he kept changing years) there were requests at CADIVI for US$ 92 billion, which he said was crazy and the oligarchs were trying to take away all of the country’s international reserves.

I see it the other way around. At Bs. 2.15 per US$, getting dollars for anything from CADIVI, even wheelbarrows, is a better business than manufacturing anything , let alone growing any foodstuffs in Venezuela. In fact, at the end of 2009, there were Bs. 240 billion in the country, at Bs. 2.15, this is US$ 111 billion. This means that 82 % of all Bolivars were aimed at getting the cheapest thing there was in Venezuela, a US$ at the official rate of Bs. 2.15 per dollar. At Bs. 2.6, the new exchange rate, the same number is lower at US$ 90 billion. This just shows what a unproductive country we have become under Cahvez.

And you can bet that slowly all of these Bolivars will start going to an ever increasing and unlimited number of orders to buy US$ via the banking system at the Central Bank at a more intermediate number which is supposed to be between Bs. 5 and Bs. 7 to start with.

But it will certainly fail, because the problem is once again, who will sell?

According to Giordani, the Government does not need to sell any dollars in this market, after all, it issued US$ 20 billion in debt in the last few years. It should be the holders of that debt that sell into this new BCV market.

Say What?

First of all, most of these bonds are now in the hands of foreigners, but who wants Bolivars when inflation is 30%+, interest rates are in single digits and the exchange rate keeps rising, whether official or parallel.

But if 95% of the dollars are produced by the Government, who do you think can intervene in this market? If the Government does not this BCV folly, the perfect storm for intense shortages in the upcoming months will unravel even faster than most think.

And I think is untenable anyway, an irresponsible policy that will simply blow up in the face of Giordani, which is what Merentes seems to be waiting for. He seems to understand better that the country needs a fluid parallel market to function properly. But this will not happen until the effects of Giordani’s folly are felt. And they will, watch put for shortages galore in the upcoming months.

And then they will come up with another scheme, hopefully a better one. It’s hard to think it can be worse, but anything is possible in the revolution.

30 Responses to “Paralell market becomes strictly controlled in Venezuela”

  1. Miguel Octavio Says:

    Yes, if they force banks to sell and those bonds go abroad, the Government will not be able to issue.

  2. Kate Says:

    Will this law not cause the government massive problems – they’ve been dependent on massive debt issuance for financing. Presumably there will be little domestic incentive for such large-scale issuance if people can only trade these bonds via the BCV?

  3. Miguel,

    Some questions (please) and some comments:

    1. What I mean by market capitalization is the total value of dollar denominated bonds printed to bolivar denominated bonds printed.

    2. How does the actual paper money
    (dollars) move from PDVSA to BCV to Banks or casa de bolsas (if this is correct)
    to the person’s account in the USA or elsewhere?

    3. I know that the US has some strict compliance requirements; I was looking into
    associating with a casa de bolsa in Venezuela two years ago, and know a lot about
    the laws from both countries. I can tell you for a fact, that Vyasulu got in trouble
    fundamentally for not following compliance mechanisms. First of all, you can’t be the
    owner of a corporation and also do compliance (look at 31cfr.103125(1) and the FINCEN website). By the way, PNC bank used to provide accounts for various casas de bolsa in Venezuela but the USA Department of the Treasury told them to close those accounts. I know that because they told me so on the phone. They said it is impossible to do proper compliance programs in Venezuela. I can offer advice to anyone needing it as I had to learn a lot to open a money transmitting account. I was recreating Vyasulu’s structure (LEGALLY AND FOLLOWING THE ACTUAL RULES IN THE USA AND VENEZUELA) after studying it once I came across it when Rosemont began showing up. Vyasulu’s genius was to realize that Venezuelans have trouble opening business (not to mention broker) accounts in the USA because of the money laundering status of the country (they can open personal bank accounts at Commerce Bank/Banco Mercantil anytime they want even without being in the USA: So, what he did at Bank of America can be done again at any time LEGALLY.

    4. It seems to me the swap market was sort of a hot potato market where whomever
    ends up with the bonds at the end loses since they are only a symbolic representation of
    the dollar without much fundamentals backing them up. I know this because my friend at Lehman Brothers (now collapsed) told me no one in the USA knew or engaged in any trading with Venezuelan financial products and there is definitely not Bolivars in any Forex trading companies.

    5. Just to reiterate above; Client A and Client B used to be brokers who buy and sell bonds for customers and make sure to transfer the dollars between the customer’s accounts in the USA or elsewhere?

    6. Thank God I am in the USA and can say anything I want (well almost since protected
    speech is limited in some ways)!!!

  4. Miguel Octavio Says:

    Franlin: What do you mean by the market capitalization? In the swaps, you buy (sell) a bond today and then sell (buy) the same bond in 72 hours and yo do it all via the internatinal markets. What you REALLY have is Bs. and US$ in each side, hich you use to purchase bonds to do the swap. (See explanation above)

    The Government uses the bonds periodically to lower the swap rate, it has not issued new ones since October. The Government buys bondsand then sells them into the swap arket periodically.

  5. I just wanted to reiterate that I am not a Chavista Spy. I love Ayn Rand and you can find information about me all over the internet (carvajal UMASS and VT). Is there a reason why my question regarding the total market cap cannot be answered (well, questions 1 – 4)? I have not been in Venezuela for years, live in LA, and just wanted to know because it is just fascinating from the point of view of a business person.

  6. An Interested Observer Says:

    GWEH, care to provide some additional info on that? I’m not aware of it, and it sounds interesting, to say the least. (Oh, and DEA agents and prosecutors don’t freeze accounts – judges do.)

  7. GWEH Says:

    OT: Miguel, an update on the case of “el hindu” from Miami and the frozen accounts that is being tried in Mass. courts: not a single account has been linked to drugs aside from the reverse sting the DEA pulled on el hindu. IOW, some dumbass DEA agents and prosecutors froze the accounts without the faintest understanding and idea of what those accounts mean and do for Venezuela. In my book that was act of war but Chavez failed to sieze the opportunity because they also did not understand what was going on and assuming this was drug related, squirreled away for cover to avoid negative publicity.

    If some foreign power like China unilaterally and without notice froze half of US forex accounts this would be an act of war.

    Anyways, stupidity abounds on both sides of the border.

  8. Kevin Says:

    Thanks Miguel,

    I needed someone to walk me through that. I just would never have suspected anyone would waste that much time and money.

  9. Kevin Says:

    You should keep Chavez! He’s too interesting. It’s like Opera Bouffe without all that damned music.

  10. moctavio Says:

    No, client B is in the end another broker, who was given dollars or bonds by the Government and PDVSA.

    Yes, this is just a “structured product” brokers make money on the spread and it is done with securities because they are (or “were”) not currency which is what the law forbid in its old version.

    The Government does not do what you say, because it is illegal! Currency can only be sold at Bs. 4.3 per $.

    Totally and absolutely unnecessary.

  11. Kevin Says:

    So spell it out — client B is the Government of Venezuela or PDVSA.

    And Client B, the government, just sold its dollars for a higher price than if it had sold them through Cadivi.

    You made a commission for buying and selling each bond twice and at end of 72 hours with the same inventory of bonds that you started out with. So, in theory, until the bonds mature, you can keep doing this indefinitely, especially if they keep issuing more bonds.

    The government (BCV) could have just sold the dollars for bolivars at a weekly auction and cut out the middleman (you) but that would have been simpler.

    So, in the end, this was just the Bolivarian version of a Rube Goldberg machine made out of Rubric’s cubes? Totally unnecessary?

  12. killChavez Says:

    Is there any way to find some US dollars thru Chavez Candanga?

    It might be the fourth way after BCV ‘s”mediocre” first proposal…

  13. moctavio Says:

    The Government plays no role except that the biggest supplier of $ to the swap market was…

    Pdvsa and the Government

  14. moctavio Says:

    Swaps are simple

    Client A has Bs.
    Client B has $

    I sell client A a Bolivar bond for 8 million Bs.

    I sell client B a $ bond for 1 million dollars

    I swap one bond for the other

    Client A tells me to sell bond
    Client B tells me to sell bond

    Client A has 1 million dollars
    Client B has 8 million Bs.

    That’s it, that was a Bs. $ swap

    (the whole,thing takes 72 hours and I do every single step in the process)

  15. Kevin Says:


    For those of us far away, please walk us though these transactions. The whole indirect swap of bonds is confusing. It would seem to me that the 120 day bonds that were issued earlier this year were essentially a float and as soon as the government had to pay those in dollars the BCV’s inability or unwillingness to provide USD just came back with interest.

    Is there any other advantage (from the government’s point-of-view) to the bond system than the float or possibly the opacity?

    The bonds have been described as “dollar denominated but payable in bolivars.” Is that right? If it is — I don’t get it. You still get bolivars that cannot be used to buy imports or pay for a hotel room in another country. Or for bolivars at some specified exchange rate? Or are they actually redeemed for greenbacks?

    Who actually buys these bonds abroad? Foreigners with an appetite for risk? But who are they typically and why are they interested in such an exotic instrument? German insurance companies or French banks for example?

    So am I correct to assume that the government of Venezuela is just borrowing dollars abroad, in essence, and selling them at a more depreciated rate at home. It’s just a more complicated way of doing the simple?

    I’m befuddled.

  16. Mercedes Atencio Says:

    Brilliant!!! And thank you for translating the excellent interview with M Naim for my non spanish speaking friends. Both of you -and Daniel- cannot be more clear in your explanations of the destruction of Venezuela by these dumb ignorants.

  17. 1. Does anybody know what the total capitalization is for the dollar denominated bond

    2. The same about the bolivar denominated bond market? (I am trying to figure
    out the actual ratio between the two).

    3. It seems to me that printing bonds (issuing) is the same in Venezuela as
    printing dollars, and since most people are looking for dollars, most people
    would buy dollar denominated bonds. So, how do they keep on replenishing the
    actual dollar (paper money) if there is a constant fuga de capitales?

    4. How does the actual paper money
    (dollars) move from PDVS to BCV to Banks or casa de bolsas (if this is correct)
    to the person’s account in the USA or elsewhere?

  18. loroferoz Says:

    What Venezuela needs is for CADIVI to disappear definitively, along with the stupid laws that made it possible, and with the hare-brained idea that the government has any role in controlling exchange.

  19. Roy Says:


    For what few real estate sales are being done at present, prices are discussed in USD. The final sale price in Bs. is “pro forma” only.

    It is impossible to discuss business transactions in Bs. at the moment, because no body knows what the Bolivar is worth. Eventually, a black market will form to take up the slack, but it will be far less efficient that the old system.

  20. I think the cash market is going to grow in the present climate.

  21. Or do you get locked up when you are caught with $10 000 cash in your possesion?

  22. Why not sell the Bs on the black market (8.5) for US Dollars and drive over the border with USD 10 000 in your pocket or family member´s pocket at a time. It is legal to have USD 10 000 with you.

  23. Zax Says:

    A question:

    I do not live any longer in Vzla and was about to sell a property there expecting to buy Bonds (if available) and then swap them into $, when suddenly all this s*** happened.
    What would suggest to do? Should I halt the selling of the property, as it seems I won’t be able to exchange Bs into foreing currency and inflation will deplete the product of the sell, or I should go ahead?
    How probable is that with the “new” mechanism any citizen will be able to exchange BsF into $ by buying/selling those bonds?

    Thanks for your comments
    (I’m really new to all these financial topics and just want to get my money out)

  24. j.scott barnard Says:

    …policy that begets shortages right before an election? ??

  25. Robert Says:

    Again we pray for the downfall of this government over their foolishness but can have no assurance that this won’t end in repression and suffering in the end.

  26. Anonimus Says:


    With all due respect, I think that leaving this to banks will transform a bad plan into an unmanageable nightmare. By the way I agree with you regarding the message in BCV’s president face.

    As Tim James (Dem-Alabama) would NOT say… “Maybe it’s the business man in me, but this seems like a waste of time and money… and it doesn’t make sense… Does it to you?” JIC and for your enjoyment, here is Tim James ad:

    Btw, I just hope that the Chinese Govt doesn’t “invite” Tim to learn Mandarin… if he wants to continue receiving Chinese Dollars, in English. That day, Tim’s logic might improve dramatically.

  27. moctavio Says:

    When the arguments have no basis on the law and when the crooks are running the show it helps little to say anything, other than defend yourself. Fighting it you hurt your customers and your workers. There is no law in Venezuela, all you can say is what we did was legal, period and hope they agree or don’t want to get you. A few brokers have been shut down and it is not clear why.

    Banks will take time to set this up, this is a money losing proposition and they don’t have trained personnel to handle it. They need someone in every agency.

    Banks are already separating the capital market parts, I know one bank that gave it to its shareholders, I think banks are supposed to run this BCV market thru the bank, not the brokers.

    No, they said explicitly that each transaction will take place with the BCV acting as the intermediary. There will not be trades between brokers.

    The Head of the CNV was there to show he is tough and is persecuting brokers. Of course nobody ever asks where the supervision was before, 31 brokers have been intervened and/or raided.

    What do you mean b/d permits. The swaps were approved by a law and people had their license to be either a Casa de Bolsa or a Sociedad de Corretaje. In the end, in any case, you needed neither, Art. 1 of the Capital Markets Law says that Government bonds are exempt from the law, that is why banks can trade them without a broker being involved.

  28. Anonimus Says:

    I am stunned! You have this Government Officer Giordani screaming and yelling that ALL Broker/Dealers in the country are criminals, and not even one has the dignity to say one word. You guys might have a business but have no balls. If I were you, at least I would have said what Pancho Villa presumably said right before dying: “Don’t let it end like this. Tell them I said something”.

    Don Quixote would have said in modern English: Sancho, you’ll see stuff that’ll blow your mind!

    On the pragmatic side I have 3 questions (assuming there funds to supply):

    1- How banks are going to manage a service that they are not either willing or prepared to serve. Good luck with your bank, may it be one with a basic understanding of current international compliance requirements and basic abilities to manage securities. Sorry, but I am having a very hard time envisioning how that could work.
    2- If the new “National Financial System Law” explicitly separates banking/capital markets/insurance activities… are banks going to start violating the law even before the new “super” financial regulator is created?;
    3- Might have this guy meant that B/D will only be allowed to operate as “book-runners”, that is, it will be forbidden for them to act as “market-makers”?

    Sorry 2 more questions came to mind… If B/Ds can no longer operate in the “Capital Markets” (at least the most important one):
    1- What was the head of the CNV doing in that press conf?
    2- Wouldn’t have been it easier to cancel all b/d permits?

  29. killChavez Says:

    Looking at tomorrow headnews: Electricity shortage still in place….. and prolonged for 7 months more… swap market frozen… + the firmly crazy sentences on Simonovis and Forero will remain…..

    Im gonna be up all night, can’T sleep..

    I would better move to other webpage otherwise I would be commenting nerviosly……..

  30. killChavez Says:

    I can believe this guys are about to sink the boat and we are sitting !!!

    Destruction is coming over inevitably, so gear up, everybody better get ready the downfall is about to start…

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