Understanding the bet on Venezuelan bonds due to a possible change in economic strategy

July 5, 2011

Some people are a little surprised that someone would buy Venezuelan bonds because of Chavez’ illness. It is simply a bet on Chavez not being around or even much simpler, on something as simple as Chavez changing his team, including the economic team.

You see, it was not that long ago (2008), under Chavez, that Venezuela’s risk premium was 500 basis points or 5%. This is simply the extra yield that investors demand from Venezuelan bonds over the equivalent US Treasury bond or expressed in another way how much it costs to insure against default (They are similar). Today that number stands around 1050 basis points or 10.5% for Venezuela (For comparison, it stood at 105 basis points for Colombia, 107 for Brazil, 1.05% and 1.07% respectively, that is what good management does and could do in Venezuela). The historical graph is shown below:

Above you can see the value of the 5 year CDS, the cost of insuring against Venezuela’s default in five years, which is the most common benchmark used. As you can see in 2008 this was around 500 basis points, it rose to over 3000 points during the financial crisis and now settled down around 1060 in the graph.

Why didn’t it go back down to 500 basis points?

Easy, just look at graphs in this post a couple of weeks ago and you will see that it was around this time that Venezuela and PDVSA started increasing debt issuance in both local and foreign currency. Here is the change in total debt (Warning since that date of the post two weeks ago, it has already increased by US$ 1.7 billion (or maybe more…)):

This creates two problems for investors: First, there are too many new bonds around that have to  be absorbed by the markets. Second, it is in the long run an impossible strategy as there is a limit to how much Venezuela can issue. As long as there is no alternative strategy in the long term something has to give some day.

Thus, if there was a possibility that the economic team would change with Chavez’ illness, that the Government itself could change, or the actors could change, then there is the possibility that this crazy rhythm of issuance will end and Venezuela’s debt will improve and maybe even go back down to the 500 basis points or 5% value it had in 2008.

What is critical to understand is that small changes in yield lead to large changes in bond prices, particularly of bonds that trade at discount like all Venezuelan bonds.

For example, if the yield to maturity of Venezuela’s benchmark bond Global 2027 went down by 3% (from 13% to 10%), the price of the bond would change (increase!) by almost 25%. Or if the yield to maturity of the PDVSA 2022 dropped by 3% (from 14.7% to 11.7%), the price of that bond would jump up by almost 18%.

So, if you are a foreign investor who thinks there may be change in Venezuela, it becomes a very asymmetrical bet. If you think there will be change in the next 18 months, you buy the bond. If there is change, the strategy changes for whatever reason and Venezuela stops issuing like there is no tomorrow, the bonds go up by 18-25%.

What if nothing changes?

Well that is why it is so asymmetrical and attractive. If nothing changes in those 18 months, you collect a year and a half of coupons, which range from 18% for the 2027 to roughly 26% for the PDVSA bond. As long as Venezuela and PDVSA pay and the bonds don’t drop so much in price, it is a nice return either way.

Of course, investors are attracted by the possibility of the upside, which they believe would occur if something as a simple as a change in the country’s economic team takes place. The possible downside in the same time frame, looks reasonable.

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47 Responses to “Understanding the bet on Venezuelan bonds due to a possible change in economic strategy”


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  5. moctavio Says:

    I think we will see a Republic bond first, PDVSA has yet to file financials for last year.


    • Very, but very soon, if will be no difference at all between both, PDVSA and Republica. People is starting to think that it is the same, in any case, PDVSA, whicha I named “Yacimientos Petroliferos Fiscales venezolanos, emulate Republic soberanos.


  6. No Katherine, you are not the only one; there are two types of people expecting or hearing new PDVSA bonds issues; namely, those with self-fulfilled prophecies, and those –as me- with hopes to buy cheap dollars as Venezuelan residents.
    If the SITME arbitrage is 5.3 BS/$ and the “free market” but in extreme regulated environment (SENIAT AND SUDEBAN) is 80% higher, I bet, PDVSA bonds sold for Venezuelan residents, and financed by Central Bank, could be around 6 bolivares per USD. Not a bad business, however, keep in mind, that “there is not such a thing as a free lunch”.

  7. Katherina Says:

    I keep hearing big rumours of a new PDVSA bond for the next few weeks, I’m the only one hearing this?

  8. moctavio Says:

    As long as PDVSA exports oil to the US, there will not be a political decision not to pay debt, unless Chavez wanted to bundle both in one. If PDVSA stopped paying debt, while it could, shipments of oil would be impounded in the US by creditors. I think Under the current situation, Chavez will play for survivale of the revolution and we will see if he prevail in 2012, then we will have to reevaluate.

    As to the 4 billion, it is not new. The original loan for US$ 20 billion, has only had a US$ 4 billion disbursement and I would like to see the Chinese saying they will disburse US$ 4 billion, not Chavez


    • I agree, however there are “bemoles”,. For instance, PDVSA is shipping or selling to CITGO nearly 900.000 barrels a day, two years ago, there were 1.350.000 million of barrels a day; and 10 year ago 1.600.000 barrels a day; that is 34% less which does not surprises anyone well informed, PDVSA has already sold two refineries on CITGO complex, and however, it agreed to sell the heavy oil needed in CITGO complex in order to be refined. At this pace, 2022 will look to far. Do not worry, Chavez will pay the debt, if he has the money, for sure.There are new partners, which have a say in this business, China, is the major.


    • (in spanish as I received)
      Emerging Markets Monitor de Business Monitor International, publica que Venezuela está en un grupo de países que presentan posibilidades serias de enfrentar un evento de impago, o default, en el transcurso de los próximos 18 meses. Mientras Chile (A), Brasil (B), Colombia (B), México (B) y Urguay (C) han presentado pocos cambios en el portafolio de emergentes, Venezuela (E-) posee el peor perfil de riesgo soberano, debido a la combinación de las posibilidades y voluntad de pago, acompañado por Ecuador y Argentina, pero con el agravante de la deuda creciente del país, la comprometida posición de Pdvsa en efectivo y una considerable sobrevaluación.

  9. Alexander Says:

    Really, I do not think in default, that it is not my point; it is difficult to forecast it. In Venezuela if something like is going to happen, it is going to be a political decision, no an economic one. When such a decision is taken under certain rationalle, is economic, you can infer it. Remember Luis Herrera Campins (qepd) Venezuelan president between 1978-1983, when asked about the military coups in 1992, he replied con his usual sarcasm: “los militares nunca se alzan, solo se sabe, cuando se alzan” (I could not translate it!!)…jeje.
    For this particular reason I do not like this type of environment in which PDVSA is not anymore an oil company, it is something else. Venezuelan government does not believe in fiscal rules, indeed they do not need them; they can reform laws between “gallos y media noche”.
    I have analyzed the budget constraint year by year, from 2001 onwards, and found this economic regularity: government expenditure has been growing without limits disregarding the path of oil revenue. When oil prices falled on third quarter 2008, Chavez went to National Assemble and got a law for 15.000 USD in new debts. Today, government expenditure is marginally more dependent of oil -at the today prices, I do not like it.

  10. moctavio Says:

    All of that is true, but in the end it has the cash flow to pay interest for the next five years as long as oil stays above $80. I am not going to “sit” on them, if they go up I may sell them, if a new one comes along, I may switch. PDVSA still earned US$ 3 billion last year, it is far from default. If it issues too much more, I may leave the trade. But I see no reason for concern for the next 24 months. In fact, based just on numbers, PDVSA should yield less.

  11. Alexander Says:

    correctiom:

    where you read….. “In most of those “empresas mixtas” PDVSA has made the necessary investments, is paying with oil, some of the empresas mixtas simple are not producing “ni una latica de petroleo”.” it should be read this way: In most of those “empresas mixtas” PDVSA has NOT made the necessary investment, is paying with oil………..”
    AG

  12. moctavio Says:

    Well, 2022 is a long way away. In the meantime PDVSA’s debt service is quite manageable and maturities are easily payable until 2017. That is 6 years from now. at 15-16% current income you will collect 80% in income before then and the bonds will have some value even if they are refinanced.

    The true story is what happens between now and then with oil, politics and, most importantly, with issuance. Venezuela and PDVSA yield a lot, not because of the inherent risk, but because of the constant supply due to new issuance. To me that is key and it is why investors have been betting heavily on the bonds since Chavez’s health got bad. Any change n strategy should reduce the risk premium and Venezuela can pay what is out three as long as oil stays above US$ 80 per barrel.

    • Alexander Says:

      SOrry Octavio, it is long!!

      Octavio, I apologize for any failure to comprehend, but I think we are talking about two different corporations.
      The PDVSA I am talking about is a services state corporation which among other things operate with oil, as well as being importer of 6.500 million US in food and raw material for food industry, import houses, build houses, buy and distribute notebooks, books, pencils, import medicines from Cuba, India, Russia, etc., about 500.000 barrels daily exchange for meat, wheat, corn, rice, carrots, tomato, some of these oil sell on easy installments “cuotas”, some pay, others, simply, do not pay, the revolution it is not a cheap stuff. Honduras for example owe 500 million USD in oil to PDVSA; Mr. Lobo, Honduras President agreed that Zelaya former Honduras President returns to his country in exchange from Venezuela of more time and more installments of easy payments, otherwise he should have paid the whole debt.
      Furthermore, PDVSA has accumulated a payroll of 120.000 workers, nearly four times more when it was the PDVSA you seem to be talking about. Import 170.000 barrels daily of petrol and some other of gas from Colombia, nobody know where is the natural gas from the Maracaibo lake, or from Cumana and Delta Amacuro, the gas production in Venezuela decreases with the drop in oil, more or less 1.000.000 barrels per day. In Venezuela Octavio, I am sure you know, if you the oil production decrease, the gas will drop too, more of the gas comes together with oil, the other gas, the natural one not associated with oil, need investment, but PDVSA did not have a penny for it, everything goes to the “fisco”. To show you just a glimpse, electricity supply, today in charge of PDVSA, has fallen, by 20%, a very strong rationing is taking place in the whole country.
      The cost of producing a barrel of oil has triple in three years, even though the price had multiplied by five.
      The last PDVCSA figures show something very interesting, with a turnover of nearly 100.000 million dollars, the super corporation, something like Wal-Mart, had barely 3000 dollars in profits!!, did you know that, I am sure you know, since as you like yields you might be aware of it, by the way, I like yield too. I know the rest of the money flew as government expenditure using two pipelines; the first one, the budget law, and the second one, as additional fiscal credits, given the difference in the price of oil accounted in the Ley del Presupuesto and the actual price of oil.
      For the sake of the argument PDVSA is receiving from its owner, “el fisco” from 2008 up to now some promissory notes (pagares) to easy its cash flow; the latest one, purchased by BCV on 31st December 2010 before devaluation, debt which was paid by the 2022 bonds issued in January, and which represented a “capital gain” for the Treasure od 12.000 bolivares, the one that you likes most!!. In the near future, we are going to witness many bonds (dollars or bolivares) purchased by BCV and swapped via SITME, the bolivares ones will accompany the old notes in his way to the crematory.
      I still remember, few months ago that Ramirez, PDVSA’s CEO –super corporation- claim PDVSA contractors, local and foreigners, to reduce the price of the contrabass on which depends the production of more than 1.500.000 million off barrels/day; all of them making a short term debt over 12.000 million USD!!. They agreed to cut some, since otherwise they will not charge the reminder, as simple as that, that is “dando y dando”.
      Allow me to add something more, PDVSA changed the terms on contracts and violated some others, several foreign oil companies sued and are asking for some 7-10.000 million USD in compensation, those arbitrage are due very soon, however there are in parallel some bargaining in order to avoid something worst, only God knows what.
      PDVSA is as well violating its own contracts with foreign companies, I talk about the contracts which emerged when the “strategic associations” in the Orinoco Belt and were replaced by “empresas mixtas” where PDVSA has the majority stake (more than 50%). In most of those “empresas mixtas” PDVSA has made the necessary investments, is paying with oil, some of the empresas mixtas simple are not producing “ni una latica de petroleo”. Some other projects runs a “media marcha”. Where is the money from an oil price which averages 75 USD/barrel in the last 6 years ?. Nobody knows. By the way, several of my colleges, economists, think that government has some “hidden money or funds”, obviously, they do not anything about “legitimacion de capitals” in international markets, you cannot hide money, in the same manner, you cannot hide cough!!.
      I have just made a quick review some of the channels where the cash flow is supposed to go. I remember that the old PDVSA, the one I think you are talking about, had no long term debt, the old PDVSA “titularizaba sus facturas” , CITGO issued some long term debt, I am not suggesting that an oil corporation, even state property, should not issue long term securities, but, PDVSA it is not PETROBRAS, there are huge differences. PDVSA issues speculative bonds, with high yield (I think a lot of what I have mentioned above is taken into account when they ask for a large coupon). If we take into account every bit happen in PDVSA I am sure that financial markets, or investor are being “benevolentes” with PDVSA, I agree that oil is not the same as peanuts. The finances of PDVSA do not look stable since its economics are not rational, are in hands of a government that increase government expenditure no matters what happen, “mosca”, I am talking “nominal bolivares” not the real ones, these real bolivares does not gives us the real picture of politicians incentives to increase government expenditure. So, continue sitting down into the 2022, you might like as well the perpetuities for the next 30 years!!, I suggest you do trade these ones……..jejejejeje

  13. moctavio Says:

    Carlos: For me the risk difference between the two is small. It is hard to envision on defaulting without the other one. In fact, the Republic can have an easier time defaulting. If you are looking for yield the PDVSA 2022 is my favorite, it is 8% cheaper and you get the extra yield on more bonds for the same amount of money. If you are looking for upside, other bonds may be more interesting, like the shorter end of the curve. I love yield.

    • Alexander Says:

      For those who love yield.

      PDVSA bonds, all of them, mostly 22, are in risk of being refinanced, or restructured, -I bet for the first one- well before 2022. I will not exclude that would happens whoever wins the 2012 presidential election. Some government officials in MinEcono&Finance would like to “clean” PDVSA balance, as PDVSA cash flow will be -theoretically- under enormous fiscal pressure en the following months as electoral expenditure will rise without any compassion.
      Do not get confused about oil price, Venezuelan oil exports depends in great deal of local oil consumption (750 mil barrels /day), since oil production is decreasing function of natural depletion and to little investment; indeed, both phenomena are endogenous related. Observ that oil exports are then decreasing, at the same time as imports of gasoil and gas (for electricity) and petrol (auto motor) are growing….jejejeje….
      .

  14. Carlos Says:

    Miguel: I am currently planning to add some positions in the 2022 bonds. Would you go for the more expensive, safer and lower yield Soberanos or the riskier PDVSA? Spread prices are near 8% and yield difference a bit more than 1%.

  15. island canuck Says:

    Here is another little bit of off topic news that relates to the economics of the country – new cars.
    It was reported yesterday that new car sales are again down year to year – this time 2+% – in a continuing decline over the last few years. The lack of new cars if mainly due to the manufacturers inability to obtain sufficient dollars because of the tight government controls.

    For those who do not live in Venezuela the situation with new & used cars is just intolerable. Waiting lists that run for more than a year for popular cars & prices out of all sense of rationality. I keep track of rising prices. Here is a comparison for 3 popular cars directly from the Toyota website:

    January 2011
    Toyota Fortuner – BsF.318.000
    Corolla Gli – BsF.231.000
    Corolla XEi – BsF.196.000
    Terios AWD – auto – BsF.190.000
    Terios AWD – manual – BsF.180.00

    July 8, 2011
    Toyota Fortuner – BsF.436.000 (increase 37.1%)
    Corolla Gli – BsF.315.000 (increase 36.4%)
    Corolla XEi – BsF.267.000 (increase 36.2%)
    Terios AWD – auto – BsF.245.000 (increase 29%)
    Terios AWD – manual – BsF.231.00 (Increase 28.3%)

    The real shock comes in when you figure what these cars actually cost in hard currency. If you use the official rate of BsF.4,3 to US$1 then even the cheapest car BsF.231,000 is US$53,721 for a car that typically would sell for around $12,000. At the street rate it would be around US$29,000. I bought one in 2005 for BsF.21.000 which was around US$8.500 at the time. This car used is worth 5 or 6 times what I paid for it in Bolivars.

    Even at the street rate the Fortuner would cost US$54,500. This car is the equivalent of a Forunner in the US.

    This comparison shows just how markedly imbalanced our economic situation is. With average incomes below $500 monthly & new car bank loans with interest rates around 24% having a car, new or used, is just impossible as used car prices are often more than the price of a new car due to their unavailability.

    • Alexander Says:

      Lets be more precise, it is not a problem of CADIVI dollars to car makers, they only make about 30% of the “demanda”. Indeed, 67% of car purchased in Caracas’ “consecionarias” are imported on its weels. Recall, we are importing nearly everything, the “parrilla” is imported to, “carne” from Brasil and “yuca” from Nicaragua and there are only 4/5 months in international reservs at BCV……..but do no worry, governement will honor itd debts. Which desease is worst, this one or the other one, it is hard to choose.
      ag

  16. claco Says:

    http://english.aljazeera.net/programmes/insidestory/2011/07/20117781330961516.html

    Moctavio, off topic but interesting to hear this conversation

  17. deananash Says:

    Off topic (sorry Miguel), but I can’t resist commenting on this Chavez quote that I just read in the Christian Science Monitor regarding his participation in the bicentennial celebrations. “It’s a miracle I am here considering how I was,”

    I was reminded of how I had a front-row seat (in Miami) for some 40 plus years watching Castro orchestrate Machiavellian move upon Machiavellian move against his opposition, both at home in Cuba and abroad, principally Miami.

    I don’t claim to know anything about Chavez’s medical situation, and my personal speculations are completely worthless, but I do know that his BFF Castro is one sly dog.

    Anyway, the article is worth reading, so here’s the link for all my friends:

    http://www.csmonitor.com/World/Americas/2011/0705/Hugo-Chavez-s-triumphant-return-to-Venezuela

  18. moctavio Says:

    I think it is quite a sensible bet, you don’t make a huge bet of course, but just removing Giordani would generate a better management of the fiscal accounts in Venezuela.And if the opposition wins, the change could be dramatic just by not issuing any new bonds.

  19. Gordo Says:

    Two questions:

    1. Do these investors know something the rest of us don’t know?

    2. Are these investors just diversifying small amounts into these bonds because the speculative upside out-weights the down-side risk?

  20. Dr. Faustus Says:

    The next major US-Venezuelan crises is just around the corner.

    Today, the US House of Representatives is holding hearings on Conviasa. Fasten your seat belts. There is a regular weekly, or is it bi-weekly (?), flight from Caracas to Damascus to Tehran flight via Conviasa which has come under close scrutiny by the US government. You don’t need a passport to get on this flight, just a wink and a nod from someone at the gate. Back and forth this regularily scheduled flight goes, Tehran-Damscus-Caracas ….and back. All kinds of strange people get on this flight, and the plane is usually parked on the tarmac (Caracas) at the airport away from prying eyes. The US House is meeting today to recommend “sanctions” against Conviasa. Yup. The fireworks will be erupting shortly. Unlike the PDVSA sanctions, this one might have teeth. Stay tuned…..

  21. LD Says:

    OT (or not…) Eva Golinger said in Al Jazeera’s interview that Chávez is undergoing chemotherapy. Is she normally good informed about the füh, eh, leader’s health and wouldn’t confuse therapies? (Chemotherapy: colon cancer or last months of prostate cancer)

  22. moctavio Says:

    The current yield of the PDVSA 2022 is 16%, so in 18 months it would be 24%.

    As to the risks, if there was a change in the way the debt is managed (You dont even need a change in Government to do something, Giordani is worth 300 basis points), for example, stop this crazy issuance, bonds would soar in price. As to PDVSA, the company made 3 billion this year and spent 20 billion in social programs!!! take that out, invest 12, the company is making 11 billion a year, it is a no brainer.

  23. Ugo Pallavicini Says:

    I disagree about both happy ending if you buy Ven bonds right now. The high yields on Ven/PDVSA bonds are implying capital gain. Using the same example if the things remain the same in 18 months from now and the prices are the same you only get the coupon which is 9,25% on Ven 27 and 5,375% on PDVSA 27, so your 18 month return would be 13,875% and 8,0625% respectively. Not much attractive for such risk. Going forward, if anything good happens I don´t believe the prices will be the same because Venezuelan situation is deteriorating faster and faster. PDVSA (the only real asset the country has right now) is reducing its production everyday. The CAPEX is way behind its needs and also reducing yoy. That is a whole different story one issue trading @ 18% ytm and the country raising funds @ 18% a year. This is unsustainable and will not last longer. I don´t believe that Venezuela can go back on tracks with Chavez or your “team”, they just destroyed the country.

  24. Miguel Octavio Says:

    That is certainly a possibility, investors would worry if Constitutional order is broken, most think this will nit happen, i think there is a high chance it will if your scenario plays out.

  25. Noel Says:

    And whay if Chavez dies and the result is political chaos for an indeterminated period of time? That is on possibility, although, very difficult to assign a probability to.

  26. carne tremula Says:

    I think they are excellent bet right now. If chavez steps out (dies or lose election) they would rally. If chavez stays in power nothing would change, you just collect coupons.

  27. Alexander Says:

    What people would do if government is purchasing its owns bonds ?…. otherwise, wishful thinking is totally free…. The best bet: buy, both “soberanos” and PDVSA’s, and sit on them until Chavez is killed by his “cancercidio”. Anyway, PDVSA bonds are in the way of being “converted” into soberanos….

  28. An Interested Observer Says:

    One factor driving (I know Miguel understands this, but didn’t say so explicitly, and it’s worth a comment) this is that if there were “a change in the country’s economic team,” the presumed upside would essentially make the existing bonds an endangered species, so to speak. With Chavez in charge, Venezuela will keep on producing these until who knows when. With a rational policy driving things, the only such bonds that will exist will be those issued in the past, which will be more valuable by their scarcity – and paradoxically, more valuable becuase a new adimninstration will probably be seen as less likely to default. The perception of this possibility is probably causing part of the boost right now.

  29. rib Says:

    Not so sure first that Chávez’s disease really is true. I don’t know how many people in the economic and political might have doubts that everything has been a very well orchestrated show between the protagonist and Fidel Castro in order to: 1) appear as the man who sacrificed his health to work for the people 2) show as the super man who can challenge and win a terrible disease like cancer 3) show that Cuban medicine is the best in the world 4) return as a hero to his beloved people.
    Many coincidences in this case, the first and foremost that all has developed in the course of a presidential visit to Cuba, where the information could have been manipulated at will to produce the desired effect

    • jau Says:

      Chavez is a psicopath that does not respect venezuelans. That is clear, but if he is acting about having cancer, he should win the oscar and every other acting award in history. He has cancer, no doubt about it.

      • joseph Says:

        why “no doubt about it” ? think well
        Chavez arrives to Cuba where undergo a strict diet, waits and help to spread rumors about his health (very strange that he had PC, when with a simple blood test (PSA), the cancer can be spotten )
        When receiving his ministers and family simulates a poor state of health by taking medications that make him look pale and weak, same thing when he turns to the Venezuelans in the video where he states he had cancer.
        Any histological samples examinated abroad (may be Boston) may be a sample of another person.
        Spreads the word that will stay in Cuba for several months and suddenly and appropriately appears in Venezuela on the morning of July 4, looking fully recovered. I’d like to hear the opinion of a specialist if it is possible that a person with a cancer so advanced to cause a pelvic abscess can recover so quickly.
        see also http://www.talcualdigital.com/Avances/Viewer.aspx?id=55079&secid=44

        • jau Says:

          I think that you are looking for la quinta pata del gato. Besides, having cancer makes him human/mortal even if he survives it. Did you see the people crying when he was talkin at the balcon del pueblo? they see him as a demigod.

          Moreover, Chavez did not have to play the ‘cancer card’ to win the elections in 2012, he has all the oil money, the media, the vote rigged, the public employees…

          I just do not see the benefits of faking cancer, it makes no sense.

        • syd Says:

          agree with your observations, jau. I also saw the big fat tears rolling down at least two faces. (Is it possible that no others were crying while Superman practically unbuttoned his shirt from the balcony? Is it possible that the cameraman knew in advance, through whatever means, that those two ladies would be bawling their eyes out?) And if the crying see Ch. as someone who’s going to beat cancer, and who is worthy of their vote in 2012, I’ll bet many, many more see problems ahead, especially in 2012. My point is that, like you, I believe that the cancer issue is real (and more serious than we know).

    • Roy Says:

      No, it would be too far out of character. Chavez is an extreme narcissist. He could not willing choose to stay out of the limelight for so long. He craves the attention, the adoration, and even the fear of his “pueblo”. He would be psychologically incapable of such an exercise of delay of gratification, such as the one you describe.

    • Alexander Says:

      Accordingly, to what Chavez himself said, he is suffering CA -colon- and is undergoing some kind of therapy. Some independent sources have already confirmed it. He returned to Caracas on the 4th of July since it appears to be huge disarray in his party, in his own words “I returned to fix out some passions”.
      There is an inside-fight in his party, army and milicia, which in some way reflects the state of his disease. In Venezuela many people do not believe that Chavez faces a very serious disease, indeed a large part of the people, which opposes him politically, disbelieve every Chavez word.
      Moctavio speculates nicely, I think he is picking brain up, appears to be “largo” in Venezuelan/PDVSA bonds. What “many” there are expecting is a Finance minister “friendly” with the market, because at the coupons we have witnesses in the last two emissions – 12.755%- every one there is prone to buy them and play for a while; particularly if BCV finances the primary market, that is gives us residents, dollars at current exchange rate (4.3 Bs/$) to buy them. However, even with oil at 100 USD and with twin deficits in play, ministers are aware, for now, that the market could charge even more, even though two very well known, “banks” are lobbying BCV directors and its own President to “return” to the market. “Investors” are facing hard times with Venezuelan data, mainly oil production and prices; it is very hard to assess the Venezuelan risk without a good amount of confidence in these figures. This can be easy understood, as it did not happen never before; so people are obliged to get used of this type of africanization. The only way up to now is to rely in self-fulfilled prophecies.
      The market is by definition “myopic” and asymmetric informed, that its, in the short run does not take into account what economists keep saying, the public finances and BCV are in the margin carrying out very expensive and unsustainable policies. It has been difficult to follow the path of government expenditure, which has no “paz con la miseria”, it keep growing in spite of hard budget restrictions, which signals in the medium term to be unsustainable. This year our economy will contract again. The economic performance for the 2nd quarter (April-June) shows already the reversion of the 4.5% “jump” in the 1st quarter. Preliminary data on GDP and on aggregate demand, which is not public yet, show this very well know pattern, and what is worst, inflation keeps strong.
      Government is already facing –and paying politically- the consequences of his political agenda of de-capitalizing and ruining private sector. Every dollar spent abroad for food and others commodities for food industry, either government or private, pays an inflation of 16% in dollars terms. We have to add that PDVSA is importing 175.000 barrels daily and at full international prices of 105 USD, while is selling well below at 50 USD the oil to political friends in the region, and outside the region to Chinese, Byelorussians, Iranians, and so on.
      In any case, Venezuela will not default, there is a lot of oil, which will pay via royalty or mortgaged as the “Chinese and Japanese credits”. Nor communists or democrats will default, it does not make any sense, however, there will be surprises. Government will “refinance” PDVSA debt (it seems to me that the market did not read well the 2000-oil law), otherwise fiscal oil revenues will fall, some restructuring is on the way, Chavez broke the fiscal rule, and we will pay for it.
      AG

  30. moctavio Says:

    Well, I try not to confound, many people have been making that bet for a while, that’s why the curve is inverted. It is the best bet right now, if there is going to be change.

  31. NicaCat56 Says:

    This sounds so much like an episode from the (now defunct) soap opera, “As the World Turns” (known also by another name, “As the Stomach Churns”).


  32. important to note that the yield on two bonds can change in tandem, but the return for the investor would differ: Take pdvsa37 VS pdvsa22. With 100k you can buy almost 200k nominal pdvsa37 VS 125k on PDVSA22. If both bonds go up, the benefit for the investor would be higher for the one holding 37s. Long convexity trade they call it.


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