Archive for April 2nd, 2012

Chavez Government to pay debt to public workers with Petrorinoco (Petroripoff?) bonds

April 2, 2012

As the Chavez administration has given billions to other countries and received billions in oil income, imposing new taxes and a new windfall tax on oil, it failed to budget to pay public employees their benefits. Given that most of these public employees are Rojo/Rojitos and march to the tune of the all-mighty leader, the wonder is how they stay loyal.

And as if that was not enough, now there is a proposal to take money away from all Venezuelans (the usual) and “pay” these debts to these workers using an instrument to be called Petrorinoco, which in the end should be called Petroripoff. Because in the end, what the Chavez administration will do is simply to pay only part of the debt to these workers, issuing this novel instrument.

The details are fuzzy (What else is new?), but if one puts together what Chavez, Ramirez and the press (particularly El Mundo) have said, it goes something like this:

The Government will give 4% of all of the partnerships of the Orinoco oil belt to a “Fund”. Between now and 2034, when the contracts for the partnerships expire, this 4% plus 3.3% in royalties and taxes that will also go to the “Fund” will generate about $18 billion in capital plus the interest.

Thus, the Government will issue about US$ 18 billion in bonds, about US$ 1.7 billion in Bs. and the rest in US$. The Bs. bonds will matures in three or four years, but the dollar bonds will mature in 2034.

Since the Government owes public workers US$ 18 billion in benefits, including severance, it will pay these workers with these bonds guaranteed by the “Fund” (It is unclear what the money in the fund will be used for in the meantime, but you can guess). Workers will not be able to sell the bonds for two years, but they will be able to do it after that. What this means is that the workers that sell after two years will only get part of what they are owed, because these bonds will likely have a low coupon and thus will not be worth 100% but much less of what the worker will be owed.

Sure the worker can wait until 2034 to get 100%, but he may not only be dead, but who knows what other trick will be played with the “Fund” before then. Because it is a funny mechanism to have the fund accumulate the capital until maturity, who will use those funds in the meantime?

Thus, the Government creates an instrument to rip off the workers twice, once, because they were not paid, twice, because they will be paid much less. To say nothing of the fact that this “money” will come from equity in these oil projects that belongs to all Venezuelans, not only to public workers.

Finally,I wonder if anyone in this inventive and creative Government has thought about the impact of US$ 18 billion in bonds due in 2034 hitting the market all at once when millions of workers sell their bonds after the two years have expired. As the 2034 bond drops, it will offer more yield than other bonds, bringing the whole Venezuela/PDVSA curve of bonds crashing down all at once.

Not pretty…