The Devil's Excrement

The WSJ, makes it all about Chavismo. Sad, when politics in our countries are reduced to the whims of an autocratic Dictator who cares only about perpetuating himself in power and tried to have Zelaya do the same.

The Wages of Chavismo

The Honduran coup is a reaction to Chávez’s rule by the mob.

As military “coups” go, the one this weekend in Honduras was strangely, well, democratic. The military didn’t oust President Manuel Zelaya on its own but instead followed an order of the Supreme Court. It also quickly turned power over to the president of the Honduran Congress, a man from the same party as Mr. Zelaya. The legislature and legal authorities all remain intact.

We mention these not so small details because they are being overlooked as the world, including the U.S. President, denounces tiny Honduras in a way that it never has, say, Iran. President Obama is joining the U.N., Fidel Castro, Hugo Chávez and other model democrats in demanding that Mr. Zelaya be allowed to return from exile and restored to power. Maybe it’s time to sort the real from the phony Latin American democrats. [Review & Outlook] Associated Press People against the return of ousted Honduras President Manuel Zelaya participate in a rally at the central park in Tegucigalpa, Tuesday, June 30, 2009.

The situation is messy, and we think the Hondurans would have been smarter — and better off — not sending Mr. Zelaya into exile at dawn. Mr. Zelaya was pressing ahead with a nonbinding referendum to demand a constitutional rewrite to let him seek a second four-year term. The attorney general and Honduran courts declared the vote illegal and warned he’d be prosecuted if he followed through. Mr. Zelaya persisted, even leading a violent mob last week to seize and distribute ballots imported from Venezuela. However, the proper constitutional route was to impeach Mr. Zelaya and then arrest him for violating the law.

Yet the events in Honduras also need to be understood in the context of Latin America’s decade of chavismo. Venezuela’s Hugo Chávez was democratically elected in 1998, but he has since used every lever of power, legal and extralegal, to subvert democracy. He first ordered a rewrite of the constitution that allowed his simple majority in the national assembly grant him the power to rule by decree for one year and to control the judiciary.

In 2004 he packed the Supreme Court with 32 justices from 20. Any judge who rules against his interests can be fired. He made the electoral tribunal that oversees elections his own political tool, denying opposition requests to inspect voter rolls and oversee vote counts. The once politically independent oil company now hires only Chávez allies, and independent television stations have had their licenses revoked.

Mr. Chávez has also exported this brand of one-man-one-vote-once democracy throughout the region. He’s succeeded to varying degrees in Ecuador, Bolivia, Argentina and Nicaragua, where his allies have stretched the law and tried to dominate the media and the courts. Mexico escaped in 2006 when Felipe Calderón linked his leftwing opponent to chavismo and barely won the presidency.

In Honduras Mr. Chávez funneled Veneuzelan oil money to help Mr. Zelaya win in 2005, and Mr. Zelaya has veered increasingly left in his four-year term. The Honduran constitution limits presidents to a single term, which is scheduled to end in January. Mr. Zelaya was using the extralegal referendum as an act of political intimidation to force the Congress to allow a rewrite of the constitution so he could retain power. The opposition had pledged to boycott the vote, which meant that Mr. Zelaya would have won by a landslide.

Such populist intimidation has worked elsewhere in the region, and Hondurans are understandably afraid that, backed by Chávez agents and money, it could lead to similar antidemocratic subversion there. In Tegucigalpa yesterday, thousands demonstrated against Mr. Zelaya, and new deputy foreign minister Marta Lorena Casco told the crowd that “Chávez consumed Venezuela, then Bolivia, after that Ecuador and Nicaragua, but in Honduras that didn’t happen.”

It’s no accident that Mr. Chávez is now leading the charge to have Mr. Zelaya reinstated, and on Monday the Honduran traveled to a leftwing summit in Managua in one of Mr. Chávez’s planes. The U.N. and Organization of American States are also threatening the tiny nation with ostracism and other punishment if it doesn’t readmit him. Meanwhile, the new Honduran government is saying it will arrest Mr. Zelaya if he returns. This may be the best legal outcome, but it also runs the risk of destabilizing the country. We recall when the Clinton Administration restored Bertrand Aristide to Haiti, only to have the country descend into anarchy.

As for the Obama Administration, it seems eager to “meddle” in Honduras in a way Mr. Obama claimed was counterproductive in Iran. Yet the stolen election in Iran was a far clearer subversion of democracy than the coup in Honduras. As a candidate, Mr. Obama often scored George W. Bush’s foreign policy by saying democracy requires more than an election — a free press, for example, civil society and the rule of law rather than rule by the mob. It’s a point worth recalling before Mr. Obama hands a political victory to the forces of chavismo in Latin America.

Alek Boyd has been trying to insert into Wikipedia’s section on “Criticism of Hugo Chavez”, the following paragraph:

Hugo Chavez has expressed in no uncertain terms his support for the Revolutionary Armed Forces of Colombia (FARC). High officials of the Chavez administration, such as Ramón Rodríguez Chacín have been accused by the Office of Foreign Assets Control of “materially assisting the narcotics trafficking activities of the FARC”. ^[81] Hugo Chavez held a minute of silence ^[82] over the assassination of Raúl Reyes, about whom he referred to as a “good revolutionary” and whose death prompted Chavez to push Venezuela and Colombia to the brink of war. ^[83] This was not the first time that Chavez would bring relations with Colombia to a standstill over the FARC. In 2004, Chavez halted diplomatic and commercial relations with Colombia over the capture, in the streets of Caracas, of FARC leader Rodrigo Granda.^[84]

However, the Editors of Wikipedia want to remove it and Alek has been fighting over it. As you can see here, Alek’s arguments with the so called editors are absolutely bizarre. Alek documents each accusation and after all, it is a section about Criticism of Hugo Chavez. Moreover, despite claims to work with him, they don’t get back to him.

Remember this next time you use or read a Wikipedia entry.

Well, the Government spent two months thinking about how to structure the Petrobono and came up with the strange animal I described before. Well, it took only two days for the “strangeness” to be removed, the schedule to be modified and turn into a plain vanilla zero coupon.

Basically, the Government removed the prohibition of having the bond trade in the international markets (Or will do it by changing the foreign exchange agreement with the Venezuelan Central Bank) so that people can buy it in Bs. and turn around and sell it in US$. It also changed the schedule because the Government seemed to have forgotten Monday is a financial holiday and it would be essentially impossible for individuals to participate.

Note added: The notes have not been registered in any international market including Euroclear or Cedel so far. Thus, investors will have to have them in Venezuelan custody, these limits, for now, how interesting they are.

I think US$ 3 billion of a PDVSA bond may be a little too much at this time, given international markets. Be careful if you decide to participate. I recommend you sell it right away uf you do, there will be an indigestion of Petrobono 2011 in the international markets as Venzuelans turn around and sell.

PDVSA finally announced tonight the PDVSA Bond 2011 and it is a strange animal indeed:

—It is  a zero coupon bond to be paid in local currency and denominated in US$. (Zero coupon means no interst payments, it just pays 100% of its nominal or face value the day it matures in 2011)

—It will trade only in Bolivars at the official rate of exchange after it is issued.

—The final payment will be 100% of its nominal value. That is, if you buy 100,000 dollars at whatever price they sell it, at the end, only at the end (in two years) will you get your 100,000. In the meantime you can only sell it for Bolivars at the official rate of exchange.

If I understood correctly, you can only trade it in local currency at the legal rate of exchange. It says specifically:

“El PETROBONO 2011 podrá ser negociado luego de la fecha de liquidación  exclusivamente en el mercado local, en moneda de curso legal al tipo de cambio vigente para la venta.”

which says

The Petrobono 2011 can be negotiated after its payment date exclusively in the local maret, in legal currency at the rate of exchange available for sale.

I interpret this to mean that you will have to multiply dollars by Bs. 2.15 per US$. This would mean that if the price does not change (which could be one interpretation) nobody, absolutely nobody would want to sell it and will want to keep it until the end. Very strange if this is correct (I dont this this the case but…). The second interpretation is that the price can vary, so you will multiply the price x 2.15 x nominal value, and that is how many Bolivars you have to pay. While the first case it’s strange, the second one is too, as there are no dollars in the transaction until the end. How does this help push the swap rate down?

Here is the Prospectus.

Paraguay’s President Fernando Lugo just hit one out of the park when he said:

“We are going to imitate the Dictatorship of the Venezuelan President Hugo Chávez”

I guess it takes one, to know one.

Imagine the scene somewhere in Maine last night, former Ambassador to Venezuela Patrick Duddy is sitting there eating some clams, some nice yellow corn on the cob and a nice boiled lobster with drawn butter, wondering with his friends where he will be sent next.

As he serves some more of that nice Chalone Chardonnay from California, he is wondering whether he will get Argentina next. Sounds cool, may give him a chance to learn more about those nice Malbecs from Mendoza. Chile would be nice too, interesting politics going on there, good cultural life, country doing well. Colombia is not his top choice. Complicated country with Uribe not running again, the FARC  and Chavez next door.  After Caracas and Chavez, Duddy deserves a break. After he behaved so well, the ultimate diplomat till the end, Chavez ended up kicking him out on one of his temper tantrums.

It’s a nice Maine summer evening, sun setting late, water calm, a little chilly to be eating outside, but hell, it’s summer and the Red Sox are leading the Nationals in the background, pass the corn.

Phone rings. It’s DC, maybe Hillary decided where she wants to send me. Hello! He hears the words normalization, Chavez, Venezuela, Barack wants it, back to Caracas. Seems like a nightmare. Simply unreal. He tries to wake up, thinking this is a Stephen King novel, King actually lives down the street and he knows him, but not even good old Steve would send me back down to Caracas!

Hello! Hello! as Hillary tells him he did such a great job, dignity, professional, all of those nice words, coming from the lips of Bill’s wife’s mouth. There is no going back, I am going back! Have to put up with Maduro again, visit Chavez, listen to boring Ali, the long speeches, the traffic, start reading again the Devil, Daniel and Quico, what a nightmare!

Give me some more lobster and please, lots more of that nice white wine!

Well, I could eat a nice arepa again. Just trying to see the bright side.

If it were not absurd enough that PDVSA was thinking of issuing US$ 2 billion in bonds, today’s rumour du jour was that the bond was coming and it was going to be for US$ 3 billion, just  to make things even more entertaining.

Now, it will be easy to sell US$ 3 billion of this supposed bond to Venezuelans, that’s the simple part, the tough road ahead is for all of these Venezuelans to be able in turn to sell the bond abroad to international investors, if that is what is coming as rumored locally and strongly today.

Let me try to explain the problem. Venezuela has some US$ 24 billion in bonds already trading in the international markets and PDVSA has another US$ 7.5 billion.

Who buys these bonds?

Mostly international funds interested in either making money by collecting the interest payments from the bonds or by speculating that the price of the bond will go up in the near future. These funds are limited in size and number because Venezuela does not have a good credit rating. Venezuela’s rating is currently at BB- while PDVSA’s is at B+. This says if things get tighter PDVSA will have a hard time paying.

In this market, prices are set by supply and demand. If there are lots of sellers, prices go down and viceversa. Additionally, it is not an infinite market, the market is right now somewhere between US$ 50 and US$ 100 million each day.

Currently Venezuelan bonds are yielding around 12-16% depending on when they mature, i.e. when they have to be paid. Let’s take a simple example, the shortest Venezuelan bond, the 2010, has a coupon of 5.375% per year, that is, you get paid twice a year half of that on the amount you hold.

Let’s say you have 100,000 dollars, you get US$ 5,375 per year in two installments on August 7th. and February 7th. and the bond matures (ends or has to be paid by Venezuela) on August 7th. 2010. Currently that bond costs around 93% of its nominal value, which means to buy $100,000 of the bond, you pay 93,000 dollars.

Thus, if you buy it tomorrow, between now and its maturity there are around a year and 40 days of interest. But in addition you will get 100,000 dollars at maturity, for your 93,000 dollars investment. That means you will make around US$ 7,000 for the increase in price and another 5,375 dollars plus 40 additional days which is like another 500 bucks. So, you get a total of roughly 12,875 dollars on your 93,000 investment or around 12.7% annualized.

So, now PDVSA will issue a  two year bond, supposedly a zero coupon, i.e. it pays no interest but just appreciates in value to 100% at maturity. Based on when the Venezuelan bonds are trading today, it should yield 15%. That is, roughly it should sell in an ideal world at 70%, so that it gives you 15% a year, since you will gain 30% in two years.

Thus, the Government will sell you the bond at around 190% at Bs. 2.15 per US$. This means that if you order US$ 100,000 (and are lucky enough to get it), you pay Bs. 419,000  (195% x 2.15) for each US$ 100,000, then if you can turn around and sell it for 70,000 dollars, then each dollar you get cost you (419,000/70,000)=Bs. 5.98 for each dollar you got.

However, this is the real world. If the Government sells US$ 3 billion that corresponds to the volume (additional volume at that!) that is done by the market each 30 days, so it would take at least a month and half in terms of working days to absorb the full amount, if everyone in Venezuela turned around and sold them Thus, there is too much supply and not enough demand. Which means that the equilibrium price will not be 70% but lower, or the yield to maturity will be higher.

But suppose you are a fund that owns the 2014 Venezuela bond which yields 16% and all of a sudden the 2011 “new” PDVSA bond yields 18%, you quickly sell the 2014 and buy the new Pdvsa bond. But if too many people do this, the price of the 2014 Venezuela bond will then also go down in price.

Get the picture? By selling US$ 3 billion of the two year 2011 zero coupon, the bond itself will likely yield more than the typical Venezuelan bond due to the over supply, which will make people sell all the other bonds to buy the new one.

Now, under normal circumstances that would be ok, except that Venezuela’s yield is quite high already!

Now, the interesting part, is that if the PDVSA bond 2011 dropped below 65% of its price, or a yield of 17%, it would be cheaper for you to buy the foreign currency in the swap market on Thursday at Bs. 6.4 per US$,  than pay Bs. 419 thousand for 100,000 dollars of the bond which will sell at 65%.( (Bs 419,000/65,000)=6.44 per US$)

It seems to me to be a little close for comfort. So, my recommendation is that when conditions are announced, you do the math and likely the best option available would be to just go and buy the dollars in the swap market, this may be the last chance to buy foreign currency so cheap at Bs. 6.4 per US$ or lower.

The strange thing is that PDVSA does not need dollars, it needs Bs. which it will get. But why they want to sell a bond in dollars is what I do not quite understand. Why not sell and indexed bond in Bs.? After all, even if the swap market goes down with this new dollar bond, it will be only very temporary and people will forget that it even wnet down, let alone lower prices of products.

As usual, there has to be a trick somewhere. What it is may not be known, if at all, until the bond and its characteristics are announced. Or it may be that the conditions to sell you the bond are such that there is some specific and particular way for someone to make a few million bucks from the bond.

They don’t call it the robolution for nothing!!!