The Bono del Sur 2: Free money for the rich masses

February 27, 2007

(In Spanish here)

Imagine you could walk into a bank and go to window #1 and hand over a check for 24 million Bolivars (about US$ 11,100 dollar at the official exchange rate) and know that you can come back in eight days and go to window #2 and you will get back at least Bs. 29.4 million Bolivars (about 13,600 dollars at the official rate of exchange) for a hefty 18% minimum return in one week?

This is what the Minister of Finance and Hugo Chavez call “investing” in the upcoming Bono del Sur #2, where if you request a $10,000 unit you pay Bs. 24 million like in the example, and assuming those “small” investors get 90% of their request, they can then proceed to sell the half which is composed of an Argentinian bond in US$ at 95% of its face value and sell that in the parallel market at Bs. 4,000. They can then sell the Bolivar part of the bond, the so called TICC, and take a slight 7% loss on what they paid and they also get the $1,000 they were not assigned back at the official rate.

These approximate numbers are likely to get even better, since the value of the TICC is likely to be higher and most likely if you ask for $10,000 you will get the whole bond, but those are just small details.

Thus, Venezuelans that can come up with the money, are in a frenzy these days so they can place their orders before tomorrow afternoon and enjoy the largess of the revolutionary Government to those that have money.

In fact, it can even be better. If you can find financing, offered by dozens of financial institutions,, you can even get 90% financing for eight days with only a 10% down payment and your return is actually in triple digits!!!

Isn’t that nice!!!

You see, in 2004 the Government decided to sell dollar denominated bonds in exchange for Bolivars as a way of sterilizing the excess liquidity in the monetary system. And it worked. Typically bonds would be sold such that the “implicit” value at which you were purchasing dollars would be Bs. 100 below the parallel exchange rate, which was in the range of Bs. 2,600-2,700, a 4 to 5% difference. and there were risks too, a couple of times so many dollars flooded the market that the parallel rate went down Bs. 100 and people lost money. And they knew this was possible. So there was some risk involved, that is related to calling it investing.

But starting with the first Bono del Sur, the gap has widened. And quite a lot. Today, the parallel rate stands at Bs. 4,000 to the US$ and in the example I gave above, the implicit rate of buying the dollars via the bond is about Bs. 2,700 per US$. Thus the gap has widened to 32-33%, making the play a no brainer. But, given the absence of much risk, you can’t call this an investment, it is more of a giveaway.

Moreover, the more people participate, and they have learned to have their siblings parents, cousins et al fill out the forms to multiply the profits, the more the Government has to give to these small investors, and I should say rich people for Venezuelan standards, and less to companies, which drive the parallel market. Thus, there is little risk of the parallel rate dropping. About the biggest risk is some bad news coming out of Argentina, which will lower the price of 95% for the Argentinian Boden 15, which is part of the revolutionary Bono del Sur 2 Combo.

Thus everyone is looking to put in their request and get their Bs. 5 million to buy that nice plasma TV you always wanted, a PC or another tangible asset that will not lose money in time.

Many will simply keep the dollars, bought at the cheap, in their accounts in the US or wherever. But there is one thing you can be sure of: Almost nobody will keep the Bolivar denominated bond, even if linked to the official exchange rate. It’s coupon is 5%, which means that if people pay 105 for it, it yields in Bolivars less than 5%, when inflation is running at 20%. And you can be sure nobody, absolutely nobody will keep the Argentinean part of the deal. They will sell it to the hedgies.

I guess we could call this “Mision free money for the rich”

You gotta love the silly revolution and their concept of “investment”

One Response to “The Bono del Sur 2: Free money for the rich masses”


  1. Very creative, one of the nicer sites I have seen today. Keep up the great work.


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