I should learn. There is no such thing as privileged information in Venezuela. For the last two days, I have been hearing that the Government would sell a bond to the public. Assuming it was PDVSA, which may need money, I thought maybe, just maybe, they will sell a bond to the Venezuelan Central Bank to supply that banks’ foreign exchange system called SITME. But given the volatility and the lack of depth of bond markets in the last few weeks, which ignorant fool would even think of coming out with a bond now?
I guess I forgot those in charge of finances in Venezuela have no clue. Thus, THEY are coming out with a new bond at a time where we may have Heisenberg’s Uncertainty Principle apply to them: Without the issue the price may be X, but the sheer presence of the new bond may push the price down…just about for all bonds, PDVSA or Venezuela. Way to go idiots!
But such are the idiots that run this country. They are clueless. Let me explain a little bit.
During the month of September, markets have been hit by three fears: Europe, a recession in the US and the Chinese economy cooling down. Because memories are fresh, the reaction by investors has been to run for safety. Despite the recent downgrade of the US, the dollar and US Treasury bonds became the “in” thing to have. People sold off everything, stocks, bonds, emerging markets bonds, Brasil, Asia, Russia. The works. Buyers went on strike with many of these. When there are no buyers and a few players, prices simply collapse. And the price of bonds did just that.
Russian bonds dropped 10% in price, Argentinean ones even more, Venezuelan ones like 10%, some more, some less. But people thought Venezuela did relatively well. the country’s “risk” went down, but not as much as most of the world.
But still, Venezuelan bond markets dropped, became fairly illiquid, by this I mean, volumes went down, down to 20% or 30% to what they were in June. Maybe worse, but these numbers are just not public. But that is what traders tell me.
So, after a month of no country or company issuing anything (Pemex even pulled out one bond) Giordani and his clueless combo decide to issue US$ 3 billion of a Global 2026 bond with a coupon of 11.75%. This will be sold to local investors, privileged ones at that (read oligarchs, the rich, the enemies of the revolution), who will purchase cheap (very cheap) foreign currency with their ever depreciating “Bolivares Fuertes” (Strong Bolivars, not a joke)
To put it in proper perspective. The Government will sell US$ 3 billion of this bond in Bolivars at 95% of the price. That is, people who buy $1000 of the bond will buy it at 95% of Bs. 4.3 times 1000 dollars or Bs. 4,085. Of course the bond will be worth somewhere between 70% to 75%, so you will get between $700 to $750 for Bs. 4.085 or you will pay between Bs. 5.83 or Bs. 5.44. Even if the bond drops to 65% you are still buying dollars at Bs. 6.28per dollar. A true bargain.
A great deal if I ever saw one, when you think a free floating Bolivar would be worth around Bs. 8-10 per US$.
But what is good for you today, is terrible for Venezuela tomorrow. This bond will generate for the Government the equivalent of US$ 2.85 billion at the official rate of exchange. But over the years it will cost the country with the 11.75% coupon a total of US$ 8,287. Too expensive to support a silly exchange rate policy. Pan para hoy, hambre para manñana.
But even worse, you have to ask yourself why? The average price for the Venezuelan oil basket in 2011 is the highest EVER. Period. At US$ 84+ per barrel, the country has never had such a high revenue level.
So, why compromise the future in this way? Why pay so much to get barely US$ 3 billion?
That is the 64,000 lochas (Coin for 1/8 th of a Boluvar) question. Either these guys are siphoning off billions of dollars to the parallel funds or they are being so inefficient that they need more and more. To pay the companies that skim off a few hundred million to subcontract electric plants, like in the previous post or simply to guarantee that Hugo Chavez gets elected in 2011.
And that is the scary scenario. After 2011, maybe they just don’t give a damn. All their eggs are in the 2011 basket, reelect a crippled Hugo and guarantee the survival of the revolution. Who cares about the people? Who cares about Venezuela? Who cares about efficient spending? Sovereignty? How do you eat that?
Issuing this bond is so crazy, that for the first time I believe these guys will default if Chavez is reelected. Not the next day. They will stretch it for as long as they want. Buy they simply don’t care. Hugon and the robolution is all that matters. Sovereignty, the people, efficiency are simply words, Hugo is the big deal. The only deal in town.
So, if you came here to find out whether to buy the bond or not. Go ahead, buy it, you will likely be getting Bolivars at below Bs. 6 per US$. It’s the deal of a lifetime. Just remember that this is compromising the future of the country in a serious way.
And the answer is: Else! These guys are idiots, these guys are ignorant and all they care about is the else: the survival of the revolution, the ability of Hugo to get reelected.
Except that cancer got in the way…
The Devil's Excrement 
November 1, 2011 at 9:58 am
The great problem in Venezuela are the venezuelans. I mean, I agree with you, Chavez is the must go out of the presidence, but it’s not the only problem, because even if he go outthere, Venezuela will be in problems by at least 200 years in the future. Venezuela seems have no choices, it will face many problems for long time and maybe re-building everything since 0. That’s my opinion.
October 14, 2011 at 10:43 pm
Could some of this new bonds be issued just to push the other bonds down, in order to repurchase them? (in order to issued them again as new debt and thus fueling the forex bicycle).
Maybe they are looking to develop a machine of perpetual indebtedness…
Are they really idiots? or they are using the means at hand to achieve their ultimate goal?
October 14, 2011 at 5:59 am
http://blogs.ft.com/beyond-brics/2011/10/13/venezuelas-3bn-bond-shock/#axzz1akj3E7dQ
October 13, 2011 at 2:51 pm
Reeks of desperation! Like being in a life boat in the middle of the ocean and drinking salt water to stay alive?
October 13, 2011 at 9:23 pm
In cards there is an expression=when someone has
a pair of 4’s and a pair of queens- you may know it…
Anyway-what is it with Chavez and 4’s??
4 billion from Chinese, 4 billion from Russians,
4 billion from bonds, now another bond 4 billion-
(Hey- think of the interest payments alone for all of
these billions-) 4’s and _______s?
October 13, 2011 at 10:23 am
Has anyone noticed El Universal published the same math on the bond issue? Look here…
http://www.eluniversal.com/economia/111012/venezuela-to-pay-usd-528-billion-in-interest-for-bond-issue
5.2 billion in interest! Wow. Anyone can do the math.
October 13, 2011 at 10:29 am
He is a good friend, we chat a lot. They dont have access to Bloomberg and things like that.
October 13, 2011 at 3:14 am
“Issuing this bond is so crazy, that for the first time I believe these guys will default if Chavez is reelected. Not the next day. They will stretch it for as long as they want. Buy they simply don’t care. Hugon and the robolution is all that matters. Sovereignty, the people, efficiency are simply words, Hugo is the big deal. The only deal in town.”
That, dear Sir, is the right answer.
Only they are not idiots. They are no economists, they might be ignorant, even fanatical. They will do what it takes to keep the charade going one day more, together with power, money and the self-delusion that come with it. When it folds, they will be safely away.
The idiotic and the ignorant in Venezuela shall experience industrial-strength suffering, though.
October 13, 2011 at 6:53 pm
That is exactly right. But, I beg to differ: it will be hydrogen bomb-strenght suffering. Perhaps that is what is needed to teach a good lesson to the idiotic and ignorant in Venezuela. Not a scarce supply.
October 12, 2011 at 6:17 pm
I dont know how much he will spend, I dont even think he will make it to the election, but it is clear they plan to issue and issue to spend and spend and make people feel they live better off so that Chavez or his designated successor wins. After that comes reality time.
October 13, 2011 at 9:50 am
“After that comes reality time.”
Lo arrecho de la vaina, is that the vast majority of Venezuelans think the fantasy is real. Maybe that is why they like Disney World so much.
October 13, 2011 at 12:57 pm
“Lo arrecho de la vaina, is that the vast majority of Venezuelans think the fantasy is real.”
When I first moved to Venezuela in the late 80’s the game then was Recadi.
Everything at half the real price because of this give away. As a newly arrived Canadian i couldn’t believe the falseness of it all.
Of course it didn’t survive for long.
I get the same sort of fantasy land feeling now. We are living in a total fantasy where cars that cost $13,000 elsewhere cost US$58,000 here at an exchange rate that is totally unrealistic. The thing is I don’t even know why he persists in this make believe. He’d get far more income from these bonds if he were to sell them at a realistic rate.
Just mind boggling. Too much for me. Time for a beer.
October 13, 2011 at 7:00 pm
A Canadian in Margarita! What a refreshing notion. In a time in which everyone wants to get the hell out, you are still there. It speaks extremely well of you.
But, then again, Canada is not heaven either. Take a look and try to explain this to me because I don’t have the capacity to understand this.
Why Is Canada Shutting Out Doctors?
http://www.readersdigest.ca/health/healthy-living/why-canada-shutting-out-doctors
I guess idiocy travels in planes, Canada not being very far from Venezuela.
Well, I guess superior souls are always scarce.
October 12, 2011 at 6:01 pm
Awesome post!
I wonder If we can know the order of magnitude of a Chavez campaign for President. I know Barack Obama spent about $750 million and that’s considered a lot. Do you really think Chavez can spend $ 3 billion just campaigning? or is it more like they are “raspando la olla”, squandering every cent they have left on social programs?
October 12, 2011 at 4:47 pm
What’s crazy is you had just written about the last bond they put out, several months ago (6?, it’s only a few pages back on your blog), the comment thread there is actually really interesting. I’m particularly appalled by the possibility (mentioned in comments in that other thread) of foreigners investing to make an easy buck, just feels dirty, but it’s probably going to happen on some level.
October 12, 2011 at 6:15 pm
Yes, the Global 2031 was announced on July 26th. it was for US$ 4.5 billion and was expected to be the last issue by the Republic in 2011. It is hard to understand why they need this.
Foreigners make money with this by buying these bonds after they start trading and getting paid the interest on them. But the well to do in Venezuela (Chavez’ enemies) buy them as a way of protecting their savings. They are sold cheap dollars by the Government that needs to sustain an absurd exchange system.
Absolutely crazy!
October 13, 2011 at 12:07 am
jc,
There is nothing dirty about foreigners buying these bonds once they are trading in the international market in dollars. Yes they are likely available below par and yes that will of course push up the yield higher to, e.g. 15% / YEAR (in $$).
However presently, any financial instrument paying these type of interest rates is very high risk, and if Venezuela or actually I guess PDVSA defaults, these “foreigners” will loose everything. Smart investors may take a small position in their overall well diversified portfolio. Any foreigner putting everything in this bond driven by the lure of the high return is a fool.
The “dirty” money is made in Venezuela by those who have lots of Bolivares (mostly Venezuelans I am confident to say, and there is in principle nothing dirty about the person buying the bond) and those who have connections, who will get the lion’s share. The poor ignorant Pueblo gets nothing as usual.
Btw, as a foreigner, you’d have to borrow Bolivares to “play” at this stage, which is next to impossible and if it were, only at extremely high interest rates and other costs, plus I am not even sure if the government would sell the initial issue of the bond to foreigners. Plus in this case, you’d HAVE to go to the black market, to buy Bolivares to pay your loan back. Of course the latter is illegal, too visible and might land Mr. Foreigner in jail. In short, not worth it.
Back to the initial transaction, that money is made in a few days or weeks, by buying the bond in Bolivares, then selling it in $$ which mathematically will come to get $$ at around BsF 6. They could then sell these $$ at say BsF 8 in the black market. The gain would be 33% and presuming the transaction takes 1 MONTH, that would come to almost 400% annualized (in BsF), not bad for doing exactly zero work other than some phone calls and, most importantly, at minimum or probably no risk at all.
Of course the black market part is also illegal here, so I suppose, a lot of the initial buyers and sellers of the bond will just leave the cheap $$ in their bank account in Miami. They are typically rich anyhow and don’t need the conversion back to BsF.
If you want to call this dirty money or an easy buck, you will probably have a lot of supporters that think alike. But it has absolutely nothing to do with foreigners, as they are typically not involved at the initial stage of the transaction.
Miguel, please correct me if I got something wrong here conceptually as well as my (maybe fuzzy) math.
October 13, 2011 at 1:55 am
Miguel, Mike, my bad, I remembered the scheme wrong, I thought foreigners were buying the bonds at a subsidized rate (in Bolivares ) using some black market technique. Thanks for clearing that up for me, it makes sense, and I went back to the other thread and the scheme I was thinking of was actually not written over there. In any event, if I were to classify it as dirty it wouldn’t be because people doing stuff like that (humans optimize their outcome the best they can), it’d be because the government of Venezuela would think to enable such behavior which seems to hurt everyone in the end. Thanks for clearing that up guys, I understand it more clearly.
October 13, 2011 at 8:48 am
You are correct Mike, foreigners who buy in the aftermarket take a big risk, but can make big profits if Venezuela does not default. Venzuelans can make money by turning around and selling the $, but not only is the black market non-transparent, the small amounts allocated are such that people prefer to keep the $ and save them. Last time people were given only US$ 6,000 per person or non-Cadivi company maximum.
October 13, 2011 at 3:36 pm
It was released for educational value. Foreign buyers are going to get a fast education. 🙂
Not necessarily…. but maybe. It’s that maybe that makes the market and horse races (which are more fun).
October 12, 2011 at 3:03 pm
Antonio.
“That’s really matter to them.” ??
Perception is all in our head, and that’s a Psychiatry joke.
October 12, 2011 at 2:00 pm
…and people will vote them anyhow, anyway.
October 12, 2011 at 12:28 pm
Idiots? Maybe; Ignorant? Sure. But these have really their pockets full with stolen Money. That’s really matter to them.
October 12, 2011 at 10:58 am
Credit markets have been rebounding nicely over the past week.They’d do well to wait a while to bring this to market.
But, of course, we know that cost is not an issue. Political convenience trumps all.
October 12, 2011 at 8:37 am
Great Post Miguel!
“Pan para hoy, hambre para mañana”
Yesiree, sociopaths see the world on their own terms, as a place of high drama and risky thrills, and it’s all about the culmination of their short-sighted and self centered visions.
Not THAT related to the post…just curious, as I know nothing about this stuff:
speaking of the uncertainty principle , it sounds like it refers to some impossibility of determining something with accuracy and precision….almost as though an outcome might be random…dunno, just asking.
Stupid is as stupid does, and acting selfishly in the short term will always reap negative consequences in the end for those acting in such an unfortunate way, and this is something not dependent on any random uncertainty 🙂
October 12, 2011 at 5:31 am
I will bet that this issue will be oversubscribed by a factor 3 or 4 if for no other reason then the huge back log in the demand.
As Miguel points out is why?
The cash flow must be really bad.
Supposedly this money is to finance 2 missions (I have a bridge for sale) but more probably will be used to pay the December bonuses to government employees & pensioners.
October 12, 2011 at 3:56 am
They just need fresh cash for the campaign…