Archive for March, 2007

Censorship, corruption and freedom of the press

March 29, 2007

A couple of weeks ago, Ultimas Noticias, not precisely considered as an opposition newspaper, in part because of the openly pro-Chavez stance of its Director Eleazar Diaz Rangel, published a series of investigative reporting articles on the corruption and irregularities in the Venezuelan/Iranian partnership to process milk and corn in Venezuela. According to the reports, under the byline of reporter Luz Mely Reyes, the losses due to irregularities, mismanagement and corruption could reach as much as US$ 100 million.

Rather than call for an investigation or ask those responsible what was happening, the wrath of the autocrat was immediately let loose on his Alo President program on the same day as part two of the article, with Chavez accusing Diaz Rangel of treason, serving “obscure” interests as well as being a puppet of the owners of the paper. According to Chávez, this was simply part of a conspiracy in which obviously “imperialism” was part of it and blamed it all on the fact that since the partner in the project was Iran, it was that country and its Government that were the target of the investigate reporting and that newspaper.

Attacks like this from the autocrat are quite common; he has threatened the media over and over in the last few years, both print and broadcast media. What was initially “new” about this case, was that it was aimed at a newspaper which is not only considered to be very friendly to the Government, but one which has been shown in studies to be the beneficiary of official advertising, in what is clearly a discriminatory policy by the Chavez administration and a subtle form of interfering with freedom of the press. Such attacks show not only the intolerance of the Government, but its inability to accept criticism. Rather than investigate the case, the reaction is to attack and blame it all on a conspiracy, as blatant corruption has become the rule, rather than the exception.

But if this were not enough, Minister for the Popular Economy, Pedro Morejon, wrote a letter to the Editor of Ultimas Noticias, threatening to take the reporters, the Editor and the paper to Court, accusing them both in civil Court and penal Court. The Minister threatens the reporter for defamation, of which he suggests the Editor participated for not stopping the articles, but then he also threatens to sue the reporters, the Editor and the paper itself, for participating in an international conspiracy against the Venezuelan Government.

 More remarkably, neither in Chavez’s speech or Morejon’s letter, there is even the slightest suggestion that the case or “guiso” (stew in Spanish, commonly used to refer to corruption cases) would be investigated.

Diaz Rangel, ever the apologist for the autocracy and its supreme leader, considers the case to be “grave” as it represents the first time a high Government official sends a written threat like that of the Minister for the Popular Economy, considering it the biggest threat ever to a medium, as if Tal Cual and Laureano Marquez had not been fined for the case of Chávez’ daughter or there wasn’t a very explicit threat, repeated today, to shut down TV station RCTV on May 27th. without the law being followed or giving the latter a chance to defend itself.

What is most worrisome of this case is that it shows how thinly skinned the Government has become, that it has begun frontally attacking even his staunchest supporters in the media, while refusing to go and even try to find out whether the accusations are true or not. A newspaper like Ultimas Noticias has a high dependence on Government advertising that could disappear overnight if it does not behave, which we have seen in the case of TV stations Televen and Venevision, both of which have abandoned their criticism of the Government, refuse to show anything controversial such as protests and have shutdown most opinion programs. Both of these stations have now been rewarded for their good behavior with lots of Government advertising.

Besides the basic rights of freedom of speech that are being violated, there is of course the problem that the public’s right to know is simply being undermined. On days when dozens of protests occur across the nation, very little is actually reported in the print or broadcast media. Blatant corruption cases are not even mentioned or discussed, as was the case of the structured notes and Argentinean bonds sold by the Ministry of Finance to a select group of “friendly” institutions and crime figures seemed to have disappeared from the press.

But there are still some out there who still claim this is a democracy, there is absolute freedom of the press and corruption is not a bigger problem than it ever was in the past.

Yeah, sure…


Here is today’s translation of Teodoro Petkoff’s article in today’s Ta Cual, which complements rather well my post above and which I was going to publish tonight anyway, showing that the concerns are quite similar and in synch with the Editor of Tal Cual.

It was now Ultimas Noticias’ turn by Teodoro Petkoff in Tal Cual

Ultimas Noticias, its Director Eleazar Dias Rangel and reporter Luz Mely Reyes have been threatened with a suit by the Minister for the Popular Economy, Pedro Morejo. The reason? The publication of a documented series of investigative reports about a supposed IranianVenezuelan swindle, a really stinky case, much like many others, whereby millions were made to disappear into the pockets of some of the members of the bolibourgeois and its accomplices in the Government.

The threat of a suit is the logical consequence of the scolding that a week before, I the Supreme, gave Diaz Rangel, who he accused of being a puppet of the popular daily, serving as usual “obscure” interests, and as always, linked to “imperialism”. Morejon simply copied the line. The response by the Editor of Ultimas Noticias, in both cases, was appropriate, but in the second one, he allowed a phrase to leak into it, that not even him can believe: “The conduct of Minister Morejon can not be considered to be Government policy”, having stated before it that “for the first time, a reporter receives on the part of this Government a letter like that one from a high level bureaucrat. Nobody else has ever been threatened like now”

Diaz Rangel is not right. The conduct of Minister Morejon is not an isolated one and it is indeed part of the policies of this Government. It is true that it is the “first time” that a reporter has been threatened in this way, but it was also the “first time” that a daily and an opinion writer, in the case of Tal Cual and Laureano Marquez, were fined with the not so small amount of Bs. 105 million, it was also the “first time” that the announcement was made of the cancellation of the concession for a broadcast TV station, it was the “first time” that a reporter was tried like Gustavo Azocar in San Cristobal, it was the “first time” that reporter Jose Clemente Ocanto was tried in Barquisimeto, one “first time” that the microwave equipment of TV station Globovision were confiscated (and not returned yet!); for the “first time” that trials have begun, which are still pending, against a number of communicators.

Thus, it is certainly the policy of this Government to progressively reduce the space for the exercise of freedom pf speech, using a perverse and very sophisticated set of procedures the objective of which is to create, using fear, a climate of self-censorship in the media, its owners, its workers and its opinion writers.

In each of
these cases the message is the same: see yourself in the mirror of your neighbor. If a daily like Ultimas Noticias, whose Director is a well known Chavista, can be threatened with a suit, accusing it of “being part of a national and international conspiracy”, as stated in the insolent and not very imaginative rhetoric of authoritarian regimes, what can one expect for the other media, reporters or opinion writers from a Government that each day makes more ostensible its disposition to silence criticism and dissident positions?

The looming Constitutional battle over Chavez poposal to allow his indefinite reelection

March 28, 2007

I can’t help to show below a video of the autocrat/dictator Hugo Chavez, which I shamelessly stole from Daniel’s blog, to lead this article about the connection between the recent conflict between the National Assembly and the Venezuelan Supreme Court.

As you see, the almighty leader speaks about the way people conspire against the process and himself, curiously referring to himself in the third person, a trait that I will leave to medical doctors to tell us what it implies. But the totalitarian tone is there and very clear, there is no tolerance for dissent and even the Supreme Court is being pressured and manipulated to go against the revolution.

Chavez says:

“And many times they manage to neutralize decisions of the revolution, through a judge, or a court, or even in the very Supreme Court, behind the back of the leader of the revolution, acting from the inside against the revolution. That is, I repeat, treason against the people…”�

What is he referring to in this clear statement of the little regard he has for the separation of powers and the rule of law, given that there has been no recent fight between himself and the Courts?

What most people may not know is the fight that has been brewing between that Court and the Government as discussions in academic and legal circles on all sides of the political fence all point out to the fact that Hugo Chavez’ proposed change in the Constitution to allow him to perpetuate himself in the Presidency can not be done as a simple partial reform of the Constitution, but requires a Constituent Assembly and can not simply be part of a Constitutional reform. Thus, it would not be a matter of a simple reform and then referendum, as the Supreme Court could rule against Chavez’ desire.

You see, Art. 342 to 344 of the 1999 Constitution clearly say that you can modify the Constitution via reform, as long as you don’t “modify the structure and fundamental principles of the Constitutional text“. While Hugo Chavez wants to modify Art. 230 which establishes both the Presidential term and one reelection, which would appear not to be fundamental or part of the structure, in Title I, which contains the fundamental principles of the Bolivarian Constitution, there is an article, Art. 6, which states:

Ari­culo 6. El gobierno de la Republica Bolivariana de Venezuela y de las entidades politicas que la componen es y seran siempre democratico, participativo, electivo, descentralizado, alternativo, responsable, pluralista y de mandatos revocables.

Which translated says:

Article 6. The Government of the Bolivarian Republiuc if Venezuela and its political entities that are part of it, is and will be democratic,..alternative

Now, in Spanish, “alternativo” means “which happens with alternation” and alternation comes from “alternar” which actually has a definition relating to holdng political positions: ” To take turns in holding a position”.

And therein lies the main problem, as the proposal of indefinite reelection is one of the few which has been explicitly proposed by the Government for the upcoming Constitutional reform, and thus has been the subject of much discussion among lawyers and very few of them believe that article 230 can be interpreted in any other possible way: Allowing for Chavez reelection would be a fundamental change as the Constitution clearly says here has to be alternation and a time limit to the President’s reelection was clearly established by the Constituent assembly and only another one can change it. In fact, it has been suggested in the press that Justice Cabrera of the Supreme Court, coincidentally the only one mentioned by name by the National Assembly “mafia” investigation, has told the Government this would not fly by the Constitutional Hall.

So the dots can be easily connected between the autocrat’s favorite proposal for reform, that of his own and everlasting reelection, the interpretation that it can’t be done by a simple reform and the sudden attack on the Court and the threat to remove all members of the Constitutional Hall by the National Assembly. By the way, the last one is moving right along in the committee investigating the Court.

Skeptics and the naive have suggested that what is going on between the
National Assembly and the Supreme Court is simply a normal fight
between two powers. They fail to explain why the Assembly gets so mad
about a simple interpretation by the Court of the word “income” while
delegating on Chavez their Constitutional mandate to legislate for a year and a half.

And the video just proves how all of this is clearly in Hugo Chave’ autocratic and totalitarian mind, blaming it all on his enemies manipulating the Courts and the judicial system to stop “the leader” as he refers to himself, in this apparently out of context and bizarre statement. But the context is quite clear…

The mystery of the tax free status of the PDVSA bonds

March 28, 2007

Sort of in synch with recent posts on tax issues, bonds and the National Assembly, last night I did not mention the mystery that the upcoming PDVSA bonds will be tax free to both Venezuelans and foreigners. Mystery, because while tax legislation gives sovereign bonds their tax free status, no such treatment applies to corporate issues even if they are owned by the Venezuelan Government.

But the mystery was increased when Minister Rafael Ramirez told El Universal that the PDVSA bonds are tax free because the Minister of Finance Rodrigo Cabezas “gave them a dispensation on that issue”.

Well, I really don’t know where to begin. We seem to have a new legal figure in Venezuelan legislation whereby the Minister of Finance has apparently been given some sort of special powers to give “special dispensation” on tax mattes whenever he feels like it. In fact, I talked to a couple of lawyers and neither of them had ever heard of such a legal figure. In fact, one of them told me that it sounded more like an item from the church, than a tax matter.

In any case, as we have learned recently, tax legislation is a matter for the National Assembly and the Supreme Curt can review the Constitutionality of it, but the Minister of Finance certainly has no discretionary power on such matters least of all to decide whether a corporate bond is tax free or not. So, either Minister Ramirez had no idea about what he was talking about or there is something we are missing on this.

Funny that the National Assembly does not find this true invasion of their legislative domain offensive or has said nothing about or initiated an investigation like it did on the Supreme Court’s interpretation of the word “income”.

But I guess, Minister Cabezas must be a friend of the National Assembly of which he was a member until recently, but as we can see only in the revolution can one have such an issue still up on the air and unclear on the eve of the placement of the second largest corporate emerging markets bond issue in the history of those markets.

Taxing Venezuelan bonds

March 28, 2007

A couple of weeks ago, the tx superintendent said that the Government was planning to tax Venezuelan Government bonds because banks were making too much money because of their tax free status. I meant to write about it, but things have been hectic. This is an eminently reasonable proposal in terms of tax fairness and equality. However, nothing is ever simple in economics. As a trained scientist I have learned that the problems in economics is that mankind makes up the rules and once you alter one, it may affect a whole chain of them. In science the rules are there and you study them. Even better, you can rn the experiment again, which in economics its hard to do particularly if you wait too long.

There is an example of a similar tax exemption that would make sense to remove in another country, that of the capital gains tax exemption for foreigners in the US. It would be fair to remove it for US citizens who have to pay taxes, the problem is legislators in the US are afraid that if removed, there might be a mini crash in US stock markets as foreigners decide to take tehir money elsewhere.

The case of Venezuelan bonds is very similar. It may sound fair, but it has too many edges that in the end hurt the Government and its financing needs.

But first, let’s look at the history of this tax free status. Venezuelans, both citizens and corporations have always been weary of Government. This is a Government that decades ago forced banks to give up all their gold, so that in general Government bonds are frowned upon. In fact, this reluctance to invest in Government bonds makes many Venezuelan citizens act irrationally preferring to have their money in banks that in the end depend anyway in Government bonds to pay them interest.

Up to the debt crisis in the early 90′s Venezuela had no dollar denominated bonds, but depended on bank loans, that almost made many foreign banks go belly up. Then came the Brady bonds, which provided a solution to the crisis. But in order to work, Governments had to grant these bonds tax free status to make it attractive for foreigners. Venezuela, for example, taxes foreigners at a rate of 30% if they are not in the country. Thus, when Venezuela’s Brady bonds were created, they were granted tax free status by the Organic Bill that created them. Since then, all new issues have been tax free, because otherwise, the Government would have to pay more interest to make their return comparable to those with tax free status.

The same became true of Bolivar denominated binds, which were not that large, as banks used most of their deposits to grant credits. Then, when Chavez came to power, when the initial stock of Bolivar denominated binds was no more than US$ 1 billion, the Government began issuing more and more local bonds to finance the deficit. To do this, it had to pay high interest to make it interesting, as the stock in these bonds ballooned to some US$ 10 billion by 2002. And they were tax free.

Then came the exchange controls and the Government began forcing interest rates down to the point that today they are extremely negative, with inflation near 20% and Government bonds paying 6%. Banks invest in it, because there is so much liquidity that they have little else to invest in.

Thus, while the proposal is good and seems quote fair, the problem is how to implement it, without creating a crisis. (By the way, interest earned in Venezuela in a savings account or a CD is also tax free).

All bonds, or only those in Bolivars? The first question is whether the exemption would be removed for both local bonds or those denominated in foreign currency. You see, if all of a sudden you removed the tax exemption from all foreign bonds, then foreign investors will ask for a premium to invest in Venezuelan bonds in order to compensate for the new tax. Sfter all, funds that invest in Venezuelan Sovereign bonds look at them in comparison with those of other countries, if all of a sudden you implemented a 30% tax on them, the prevalent 7% yield on Venezuela’s bonds would be cut to 4.9%, making it quite unattractive. Thus, whatever the Government is paying would have to be increased by exactly the tax and nothing would be gained. In fact, its is easy to see this in the new PDVSA bonds. Because they are from a Government owned hydrocarbons company, these bonds are tax exempt. If they weren’t the coupons would have to be much higher tah they were set this week.

Only those in Bolivars? While banks have nowhere to turn because of the exchange control and the legal limitations in foreign currency for local banks, the current yield in local bonds also makes it hard for the Government to remove the tax free status. Since it is the Government that needs the financing, it can not afford to have banks stop buying the bonds. Since yields are near 6%, a 30% tax would drop it to 4%, banks may prefer to lend money cheaper to good risks, at rates near 9%, or more expensive to bad risks, say 20%, rather than get so little from the Government. In the end, it would force the Government to pay a higher interest, because it is the Government that is running a deficit and needs the financing.

All bonds, or only from now on? Finally, the question is whether they say all bonds will have a tax from day one, or they will work them in gradually. Clearly, forcing all of the to have axes from day one creates more of a dislocation, than working them in slowly. This would seem to be the only way for having it work. At the beginning the Government would have to pay more for new bonds to compensate, but as the old ones expire, they could lower yields and there would be a net positive effect for the Government.

In the end, the proposal is good, but the whole thing boils down to the Government needing the bonds more than local banks or investors or foreign investors needing them. It would seem that unless the Government curtails it appetite for spending, removing the tax free status is sort of like running in the same place, the bonds would not be tax free, but the Government would turn around an pay an almost equivalent amount in interest to compensate for the taxes on the bonds.

In the end, it is always excess Government spending which is at the root of all current economic distortions in Venezuela. In the end it is the only problem that is not being attacked.

El Bono de PDVSA

March 27, 2007

(Traduccion cortesia de A. Boyd, en ingles aqui)

PDVSA emitirá hasta US$ 5 mil millones en bonos que será vendido a los inversores locales por bolívares, pero los bonos serán denominados en dólares y pagaran intereses en dólares. Los bonos serán emitidos bajo la Reg S, una regulación para emitir obligaciones afuera de los EEUU, la cual no requiere registro y significa que los inversores norteamericanos no pueden comprar los bonos durante los primeros 40 días.

Los detalles de los bonos serán conocidos el lunes en la mañana, todo lo que sabemos es que habrán tres de ellos con vencimientos de diez, veinte y treinta años. El precio y los cupones aparecerán en la página web de PDVSA el lunes. Se rumorea que los cupones estarán en el rango de 4-5%.

La emisión es extraña. Primero, esta la elección del momento. Las ordenes se tomaran la próxima semana, que es cuando la gente empieza a marcharse por Semana Santa, que es una gran semana de vacaciones aquí porque todos los niños tienen toda la semana libre.

Un segundo factor extraño es que en la próxima semana es el pago del impuesto sobre la renta. En Venezuela usted paga los impuestos vía el sistema bancario. Usted tiene que adquirir un cheque de gerencia y después paga en un banco. En consecuencia, los bancos tienen un alto tráfico esa semana y apenas se dan abasto.

Ahora, además tendrán gente pidiendo los bonos lo cual verdaderamente podrá a prueba sus capacidades. Después, la adjudicación será anunciada durante Semana Santa, cuando la mayoría de las personas ni siquiera esta aquí. Finalmente, el pago será hecho once días después de la adjudicación, lo cual es preocupante porque tantas cosas pueden ocurrir en los mercados emergentes en once días.

Hay una sensación que el bono fue apurado al mercado por razones sobre las cuales solo podemos especular. (PDVSA necesita el dinero, Chávez se impaciento después de tantos anuncios, bajar el mercado paralelo…). Un bono de PDVSA viene siendo anunciado desde Junio del año pasado y había rumores que era inminente hasta principios de esta semana. Después las cosas se enfriaron y supuestamente la emisión se pospuso hasta después de Semana Santa, lo cual tenia sentido.

Pero tarde el jueves, el ministro de energía y petróleo lo anuncio en una entrevista en una emisora de radio privada (Unión Radio). Ciertamente una forma extraña de anunciar lo que puede ser la emisión de bonos más grande de todos los tiempos en la historia de los Mercados Emergentes.

En contraste con el anterior Bono de Sur en Febrero, si los rumores sobre los cupones son ciertos y el precio es 100%, comprar este bono no será el mismo dinero fácil que fue el Bono del Sur.

Recuérdense que en ese caso, aquellos con dinero eran capaces de realizar un rápido retorno comprando los bonos vendiéndolos y volteándose y vendiendo los dólares en el mercado paralelo para netear una ganancia de Bs. 1000 por US$ en lo que era un regalo del gobierno a los mas pudientes. El bono fue un gran éxito localmente, pero no se negociara al nivel que debería negociarse en los mercados internacionales por un buen tiempo.

Este bono no pareciera que fuera un negocio tan fácil. Existen un número de razones para esto. Primero, nadie sabe donde se negociara, porque PDVSA no tiene bonos en los mercados internacionales. Típicamente, los bonos de la compañía petrolera de un país se negocian por encima de los bonos de ese país.

En México, por ejemplo, los bonos de PEMEX rinden 0.4% o 40 puntos base sobre su equivalente en bonos soberanos. Idealmente, aquí sería donde los bonos de PDVSA se negociarían si la emisión estuviera registrada con la SEC, pero no esta. Peor aun, el prospecto no tiene los balances auditados para 2006.

Súmale a eso el inmenso tamaño de la emisión (representa el 23% de los bonos soberanos del país) y inicialmente el gran tamaño puede causar indigestión en los mercados internacionales los cuales pueden negociar 100 o 150 puntos base sobre el soberano.

Recuérdense que la gente comprara estos bonos al 100% de su precio facial (en teoría) a la tasa de cambio oficial, pero por sus bajos cupones, los venderán con un descuento en los mercados internacionales, lo que significa que la gente recibirá menos dólares y por lo tanto estará pagando un precio mas alto por aquellos dólares cuando venda los bonos.

Si esto es verdad, entonces el tipo de cambio implícito en comprar los bonos será algo como Bs. 3.400 a Bs. 3.500 cuando se incluyen las comisiones y el mercado paralelo se esta negociando a Bs. 3.800 y puede caer si la gente empieza a vender los dólares de los bonos. Por lo tanto existe un riesgo y esa es la forma que debería ser.

Desafortunadamente, mucha gente piensa que será como el Bono del Sur y se están preparando para eso, pidiendo prestado dinero, registrando a su familia y adjuntos, lo cual puede causarles problemas, particularmente porque podrían recibir una adjudicación mucho mas grande de lo que se esperan y tendrán que moverse para conseguir el dinero para pagarla.

Lo que es divertido es como los periódicos están llenos de propaganda diciéndole a la gente que compre los bonos, pero nunca en dicha propaganda dicen las verdaderas razones detrás de los bonos. Por ejemplo, una de las propagandas pregunta: “¿Por qué PDVSA esta emitiendo los bonos en Venezuela?”

Bueno, la verdadera razón es porque PDVSA necesita tomar prestado dinero, es mas barato hacerlo de esta forma porque lo cupones pueden ser menores, ellos (los bonos) pueden temporalmente absorber el exceso de liquidez monetaria que presiona el mercado paralelo y mucha gente comprará los bonos, los venderá y venderá la divisa en el mercado paralelo, ayudando a bajarla y así se espera que ayude a bajar la inflación.

Pero nada de esto aparece en la propaganda. La propaganda dice:

-Porque PDVSA quiere que el pueblo participe en la industria petrolera

Seguro, excepto que el 80-90% de aquellos que compren el bono se voltearan y lo venderán.

-Porque quiere fortalecer la capacidad interna de ahorro de los Venezolanos.

Bueno, el mismo punto que antes aplica, pero que tipo de señal envían cuando lo hacen en dólares. Eso es lo que el “fortalecimiento” le esta diciendo a la gente. Es mas fuerte, no por PDVSA, pero porque es en divisas.

-Porque es a largo plazo, tiene buen retorno y seguridad

La misma cosa, poca gente lo conservará, el retorno es bueno porque la gente esta comprando dólares a los cuales no tienen acceso a un tipo de cambio más barato que el mercado paralelo.

-Porque PDVSA ahora se financia en Venezuela

Solo porque es mas barato hacerlo de esta manera para PDVSA en vista de los controles de cambio.

-Porque queremos que nuestro “pueblo” pueda invertir en nuestro activo más importante

Otra vez, la mayoría del “pueblo” lo venderá, pero fue Chávez, quien cuando asumió el poder en 1998, quien evito que el “pueblo” pudiera verdaderamente invertir en los activos de nuestra industria petrolera venezolana, cuando cancelo un proyecto que hubiera permitido a los Venezolanos invertir en la ahora difunta compañía llamada SOFIP, la cual poseía 10% de todos los proyectos de servicios de la apertura petrolera. ESO realmente hubiera sido permitir al pueblo invertir en los activos de su industrial petrolera.

Entonces, como es usual, un puñado de medias verdades y mentiras descaradas, pero ninguna mención de la verdadera razón de porque esto es esta haciendo. Aun peor, el presidente de PDVSA y ministro de energía y minas dijo que PDVSA iba a comprar US$ (al tipo de cambio oficial, claro) con los ingresos.

Con los precios establecidos y los cupones, el bono saldria a un equivalente de Bs. 3,000 por dolar, atractivo con el paralelo en Bs. 3,650. Otro regalito a los “pobres” ricos.

Esto es ciertamente sorpresivo, porque el ingreso de PDVSA es mayormente en dólares y típicamente lo que tiene que hacer es cambiar dichos dólares por bolívares para pagar impuestos, regalías y la mayor
ía de sus gastos en Venezuela.

Creo que esto es solo la línea oficial para hacer parecer que el bono reduce la liquidez monetaria. Lo hace pero solo temporalmente, porque PDVSA rápidamente gastará los bolívares que recibió y el efecto se perderá (PDVSA hasta US$ 5 mil millones al mes).

PDVSA bonds part II

March 26, 2007

Very quickly and completing the last post, the price of the PDVSA bonds was set at 105.5 and the coupons for each bond were set at 5.25% for the 2017, 5.375% for the 2027 and 5.5% for the 2037. This means that if the bonds go where they should after a month or so, you will be getting US$ at around Bs. 2,800, in the worst case Bs3,200 and in the likely case Bs. 3,000 or so. Not a bad deal. Just one warning, don’t ask for more than you can afford, you may get it all!!

PDVSA bonds

March 24, 2007

PDVSA will issue up to US$ 5 billion in a combo bond which will be sold to local investors for Bolivars, but the bonds themselves will be in US$ and pay interest in US$. The bonds will be issued under the so called Reg S, a regulation for issuing securities outside the US, which does not require a registration and means that US investors can not buy the bonds for the first forty days.

The details of the bonds will be known on Monday morning, all we know is that there will be three of them maturing in ten, twenty and thirty years. Price and coupons will appear on PDVSA’s page on Monday. Rumor has it that the coupons will be in the range of 4-5%.

The issue is strange. First, there is the timing. Orders will be accepted next week, which is just when people start taking off for Easter week, which is a big vacation week here as all kids get off the whole week. Even if only two days are official holidays, it is truly dead time in Venezuela. A second strange factor is that next week is income tax week. In Venezuela you pay income taxes via the banking system. You have to purchase a cashier’s check and then you pay at a bank. Thus, banks are very heavy with traffic that week and they can barely cope. Now they will have people also requesting the bonds which will really push their capabilities. Then, the allocation will be announced on Easter Monday, when most people are not even here. Finally, payment will be made a full eleven days after the allocation, which is unsettling as so much can happen in emerging markets in eleven days.

There is a feeling that the bond was rushed to market for a reason that we can only speculate (PDVSA needs the money, Chavez got impatient after so many announcements, bring the parallel rate down…). A PDVSA bond was being announced since June last year and there were rumors that itw as imminent up to the beginning of this week. Then things cooled off and supposedly the issue had been postponed until after Easter week, which made sense. But then late on Thursday, the Minister of Energy and Oil announced it in an interview in a private radio station (Union Radio). Certainly a weird way to announce what may be the largest bond issue ever in the history of Emerging Markets.

In contrast with the earlier Bono del Sur bond in February, if the rumors of the coupons are right and the price is 100%, buying this bond will not be the easy money that the Bono del Sur was. Recall that in that case, those with money wee able to make a quick return by buying the bonds selling them and turning around and selling the dollars in the swap market to net some Bs. 1,000 per US$ in what was a giveaway by the Government to the well off. The bond will be a roaring success locally, but may not trade where it should in the international markets for quite a while.

This bond will not appear to be such easy pickings. There are a number of reasons for this. First, nobody knows where they will trade, because PDVSA has no outstanding bonds in the international markets. Typically, bonds from a country’s oil company trade above those country’s bonds in yield. In Mexico, for example Pemex bonds yield 0.4% or 40 basis points above the equivalent Sovereign bond. Ideally, this would be where PDVSAs bonds may trade if the issue was registered with the SEC, but it is not. Moreover, the prospectus has no audited financials for 2006. Add to that the huge size of the issue (It represents 23% of the country’s outstanding Sovereign bonds) and initially the large size may cause indigestion in international markets and they may trade 100 to 150 basis points over sovereign. Recall that people will buy these bonds at 100% of their face value (in theory) at the official rate of exchange, but because of their low coupons, they will sell at a discount n the international markets, which means that people will get fewer dollars and thus they wil be paying a higher price for those dollars when they sell the bonds.

If this is true, then the implicit exchange rate of buying the bonds will be something like Bs. 3,400 to Bs 3,500 when you include commissions and the parallel market is trading at Bs. 3,800 and may drop if people start selling the proceeds from the bonds. Thus there is a risk and that is the way it should be.

Unfortunately, many people think it is like the Bono del Sur and they are getting ready for it, borrowing money, registering their family and the like, which may come back to haunt them, particularly because they may get an allocation much larger than they think and they will then need to scramble to come up with the money to pay for it.

What is funny is how the papers are plastered with ads telling people to purchase the bonds, but such ads never say the true reasons behind the bonds. For example, one of the ads asks:Why is PDVSA issuing a bond in Venezuela?

Well, the true reason is because PDVSA needs to borrow money, it is cheaper to do it this way because the coupons can be lower, they be temporarily absorb the excess monetary liquid which pressures the parallel market and many people will buy the bonds, sell them and sell the foreign currency in the parallel market, helping to bring it down and thus hopefully help inflation.

But none of this is mentioned in the ad. The ad says:

-Because PDVSA wants people to participate in the oil industry

Sure, except that 80-90% of those buying the bonds will turn around and sell them.

-Because it wants to strengthen the ability for internal savings by Venezuelans.

Well, the same point as above applies, but what type of signal do you send when you do it in dollars. That is what the “strengthening” is telling people. It is stronger, not because it is PDVSA, but because it is in foreign currency.

-Because it is long term, has good return and security.

Same thing, few people will keep it, the return is good because people are buying dollars they have no access to at a cheaper rate than the parallel market.

-Because PDVSA now finances itself in Venezuela.

Only because it is cheaper to do it this way for PDVSA in the face of exchange controls.

-Because we want our “people” to be able to invest in our most important asset.

Once again, most “people” will sell it, but it was Chavez, when he assumed power in 1998, the one that stopped the “people” from truly investing directly in the assets of our Venezuelan oil industry, when it canceled a project that would have allowed Venezuelans to invest in a now defunct company called SOFIP, which owned 10% of all of the service projects of the oil opening. THAT would have been truly allowing people to invest in the assets of their oil industry.

Thus, as usual, a bunch of half truths and outright lies, but no mention of the real reason why this is being done. Even worse, the President of PDVSA and Minister of Energy and Mines said that PDVSA was going to buy US$ (at the official rate of exchange, of course) with the proceeds. This is somewhat surprising, since PDVSA’s income is mostly in dollars and typically what it has to do is change those dollars to Bolivars to pay taxes, royalties and most of its expenses in Venezuela. I think this was just the official line to make it look as if the bond removes monetary liquidity. It does, but only temporarily, as PDVSA will rapidly spend the Bolivars it received and the effect will be lost. (PDVSA spends US$ 5 billion a month)

Tune in on Monday when we know the details to see how risky (or not) buying these bonds will be.

Another day in the fake democracy

March 24, 2007

Yesterday the fake Chavista democrats had a field day proving how far their ideals are from the ideas of a democracy and the rule of law:

—Chavista Deputy Roberto Hernandez, who presides the committee that will investigate the Supreme Court “mafia”, suggested that the best way to resolve the controversy with the Constitutional Hall of the Venezuelan Supreme Court is for the Government not to accept the decision and just ignore it.

Way to go! Maybe the taxpayers will decide the same about the income tax bill ane we can move from revolution to anarchy.

—And Anzoategui Governor Tarek William Saab reminded those that want to hold a recall vote against him, that anyone signing the petition against him will have to register his/her fingerprint in the CNE’s infamous machines to sign his/her name in. Thus, he suggested it would be impossible to gather enough signatures to hold the recall against him.

I agree with him, now we can implement local discrimination, to guarantee that the enemies of the Government are discriminated against and blacklisted at all levels and do not receive anything from the Government and their rights can be denied at the national, regional and local level. the opposition is after all composed of second class citizens.

—But the biggest fascist of them all has to be Chavista Deputy Dario Vivas who accused the opposition of trying to participate in the communal councils, the new vehicle that Chavez wants to use to finance communities directly and which Vivas himself has suggested should replace the National Assembly.

Imagine that, 40% of the population believing that they may have political participation in their communities! Don’t they know this is a Dictatorship of the majority? Maybe they should start a numbering system to identify opposition members.

La Asamblea Nacional va a investigar la “mafia” de los Magistrados de la Corte Suprema.

March 23, 2007

Entonces hoy nos enteramos que la Asamblea Nacional pretende ahora investigar a siete Magistrados de la Corte Suprema por “mafiosos” y llegaron al punto de mencionar explícitamente al Magistrado Cabrera de la Sala Constitucional de la Corte Suprema. El problema es que, según los honorables Diputados, estos ilustres mafiosos, se atrevieron a cambiar un articulo de la Ley de Impuesto sobre la renta escrito por ellos. Que osadía, no?

De acuerdo a los Diputados se cometió un crimen y le han pedido también al mal llamado “Poder Moral” que investigue el caso y determine si hubo un crimen, en cuyo caso los Magistrados podrían ser removidos de sus cargos. Se acusa a la Corte de haber hecho una interpretación ilegal de la Ley de Impuesto sobre la Renta, debido a que el Presidente Chávez puso un tope a las remuneraciones de la administración publica que afecta a los Magistrado de la Corte de forma importante. De acuerdo a los Diputados, al interpretar la Ley de esta manera, los Magistrados se aumentaron el sueldo, ya que ellos reciben un buen numero de bonos y compensaciones adicionales al salario que ahora no tendrán impuesto sobre la renta.

El caso tiene su origen en una interpretación de la Corte Suprema sobre la ley de Impuesto sobre La Renta, la cual especifica que representa renta sujeta a impuesto y que no. La Corte no reescribió el articulo como acusan los Diputados de la Asamblea, pero simplemente interpretaron un articulo a la luz de la nueva Constitución del 2000. Pareciera difícil argumentar que no le toca a la Corte Suprema interpretar artículos de leyes y además acusarlos que al hacer esto, se esta de alguna manera usurpando el papel de la rama legislativa de los poderes en Venezuela, tal y como lo sugieren los Diputados.

Pero esto es simplemente otro capitulo de esta bizarra y sorprendente revolución, que no le importa ceder sus poderes legislativos al líder supremo en decenas de temas durante 18 meses, que ciertamente son del dominio de la Asamblea, pero se molestan por la interpretación de un solo articulo escrito por ellos por parte de la Corte Suprema.

No hay duda de que la decisión de la Corte le crea problemas al Gobierno Central en el 2008, ya que reducirá de forma importante los ingresos por impuesto sobre la renta, al estar todos los ingresos “irregulares” exentos de impuesto de acuerdo a la decisión de la Corte. Peor aun, tal como hemos sugerido anteriormente, la interpretación de la Corte crea además posibles mecanismos para evitar impuestos mediante la creación de compensaciones por parte de las empresas que, con tal que sean irregulares, estarían exentas del impuesto sobre la renta.

No esta del todo claro porque este conflicto sale a relucir en este momento, pero una posible explicación podría ser que son precisamente estos siete Magistrados los que podría suponerse se opondrían a algunos de los cambio que se introduzcan bajo la Ley Habilitante por el Presidente Chávez. La leyes propuestas bajo La Ley Habilitante no necesitan ser revisadas o aprobadas por la Asamblea Nacional, pero si necesitan ser revisadas por la Corte Suprema para asegurase de su Constitucionalidad. Puede ser, por lo tanto, que estos jueces que serán investigados, sean aquellos que sean mas “sospechosos” de no ser totalmente leales al Teniente Coronel y quieran, por ejemplo, seguir la Ley o algún concepto extraño como ese.

A pesar de que Chávez escogió todos y cada uno de los miembros de la Corte Suprema actual, ha habido cada vez mas conflictos con algunos de estos Jueces. La actual Corte tiene un origen bastante oscuro desde el punto de vista legal. Cuando la nueva Constitución fue aprobada, la vieja Corte simplemente fue eliminada. El problema era que no había Congreso o Asamblea para escoger la nueva hasta tanto no se eligiera el mismo. El Chavismo invento entonces un nuevo cuerpo legislativo temporal, que fue llamado el “Congresillo”, que no tenia ningún basamento legal o fundamento en ninguna legislación venezolana, o en la vieja o nueva Constitución. Era un comité de doce miembros, escogido por Chávez mismo, que se encargo del país, aprobando presupuestos y legislando hasta que el nuevo Congreso fue electo seis meses después. Este Congresillo sin embargo, fue capaz de escoger los veinte magistrados de la Corte Suprema, el Fiscal General, el Defensor del Pueblo y el Contralor, en lo que muchos expertos todavía consideran como un proceso absolutamente ilegal y representó el comienzo de la usurpación del sistema legal Venezolano por parte de la administración de Hugo Chávez. Pero, a quien se podría apelar esto? A la nueva Corte? Ni de broma…

Como si esto no fuera suficiente, algunos de los nuevos Magistrados se enemistaron rápidamente con el Gobierno al cometer el crimen de sentenciar en contra de los deseos de Hugo Chávez. En la ya famosa sentencia de si hubo o no un golpe de estado en el 2002, la Corte sentencio que no lo hubo, porque la definición del acto de rebelión requiere de el uso de armas, lo cual no ocurrió en ese caso. Esto llevo a Chávez a llamar a la Corte Suprema una “plasta” y a que comenzara la búsqueda de una manera de neutralizarla.

El primer paso fue el comenzar a cuestionar las credenciales de algunos de los Magistrados nombrados por el mismo Chávez y el Congresillo, lo cual era efectivamente cierto y había sido denunciado en su momento por los medios cuando fueron originalmente nombrados, sin que ello tuviera ningún efecto. Pero como todo esto era muy lento, algún leguleyo Chavista tuvo la ocurrencia brillante de que la Ley de la Corte Suprema podría ser cambiada para que la propia Asamblea Nacional aumentara el numero de Magistrados de 20 a 32 y doce frescos y leales Chavistas pudieran ser nombrados a estos cargos para hacer contrapeso a aquellos menos leales que ya estaban en la Corte. Esto fue hecho mediante una decisión de la propia Corte que sentencio que la Asamblea Nacional podía hacer dicho cambio con una mayoría simple de sus miembros.

Pero aparentemente hay ahora todavía siete Magistrados que son demasiado independientes del autócrata/Dictador y necesitan ser removidos y cambiados y aparentemente ya todo esta en movimiento para hacerlo, usando la decisión sobre los impuestos como excusa.

Manténganse en sintonía para mas información sobre este nuevo intento de violentar y socavar lo poco que queda en nuestro pobre país de la legalidad por parte del autocrata y sus compinches.

Venezuelan National Assembly to investigate”mafia” Justices of the Supreme Court

March 22, 2007

In a very revolutionary step, the National Assembly called today for investigating seven Justices of the Supreme Court, explicitly mentioning the name of Justice Cabrera, of the Constitutional Hall, because they are part of a “mafia” and they dared change an article of the income tax bill written by that Assembly.

According to the Deputies a crime was committed  they also asked the “Moral Power” to investigate the case, in order to determine whether there was a crime, which in turn could lead to the removal of these seven Justices. The Court is being accused of making an illegal interpretation of the Income Tax Bill, because President Chavez ordered a cap on civil service salaries, which affects the Justices. By interpreting the law this way, the Deputies suggested, the Justices were increasing their salaries, since they receive a number of bonuses and perks besides their salary, which will now become tax free.

The case arose form the recent interpretation
by the Court of the Income Tax Bill, with regards to what is income or not. The Court did not rewrite the article, as suggested by the Deputies of the National Assembly, but simply interpreted one article based on the text of the new 2000 Constitution. Somehow it would seem difficult to argue that it is not the domain of the Supreme Court to interpret articles of Bills and that by doing so, they are “usurping” the role of the legislative branch, as the Deputies stated.

But this is another remarkable chapter in this bizarre revolution, which gives up its power to legislate to their almighty leader President Chávez on dozens of topics for 18 months, which are their domain, but gets irked by an interpretation by the Court of one article of a Bill they wrote.

The decision by the Court does create a problem in 2008 for the Central Government, as it would reduce income tax collection since bonuses and all “irregular” income will be exempt from income tax. As noted earlier by us, more importantly, it creates a possible huge loophole by which companies can create payments, which as long as they are irregular, would be exempt from income tax.

It is unclear why this conflict arises at this time, but an explanation may be that these Justices were the ones that are likely oppose some of the changes that would be introduced under the Enabling Bill by Chavez. Bills proposed under the Enabling Bill, need not be reviewed or approved by the national assembly, but they do need to reviewed by the Supreme Court to check on their Constitutionality. Thus, it may be that the judges to be investigated are the ones more “suspect” of not being absolutely loyal to the Lieutenant Colonel and may want to follow the law or some strange concept like that

Despite the fact that Chávez has single-handedly chosen all members of the current Court, there have been increasing conflicts with some of the Justices. The current Court has a very dubious origin from a legal point of view. When the new Constitution was approved, the old Court was simply eliminated. The problem was that there was no Congress until new elections took place. Chavismo invented then a new temporary legislative body, which was called the “Congresillo”, which had no legal basis or foundation on any known Venezuelan legislation, or on the old or the new Constitution. It was a small committee of twelve Chavistas, picked by Chavez himself, which ruled the country, approved budges and acted like a full Congress until the new National Assembly was elected six months later. This Congresillo nevertheless chose twenty new Justices for the Supreme Court, the Prosecutor General, the People’s Ombudsman and the Comptroller, in what is still considered by most experts as being completely illegal and began the usurpation of the rule of Law by the Chavez Government. But who could anyone appeal to? The new Court? Sure…

As if this were not enough, some of the Justices in this court quickly became unfriendly to the Government by committing the terrible crime of ruling against Chavez’ wishes. In the now infamous ruling on whether there was a coup or not in 2002, the Court ruled there wasn’t, as the definition of rebellion requires the use of military weapons, which was not the case. This led Chávez to call the Highest Court in the land “ A pile of shit” and then he began looking for a way of neutralizing it.

The first step was to begin questioning the credentials of some of the same Justices appointed by Chavez and his Congresillo, as indeed there were some who did not fulfill the requirements, which was widely publicized by the media when they were first appointed to no avail. But since this was too slow, some Chavista legal eagle came out with the brilliant idea that the Supreme Court Bill could be changed so that the National Assembly itself would increase the number of justices from 20 to 32 and twelve fresh and very loyal Chavistas could then be appointed to counterweight the not so loyal chavistas already on the Court. This was done by having the Court itself approve that the number of justices could be changed by a simple majority of the National Assembly.

But apparently there are now seven of these Justices who are too independent of the autocrat/Dictator and they need to be removed and/or changed and the wheels are apparently in motion to do so, using the income tax case as an excuse. Stay tuned by this new attempt at violating what little rule of law is left in the country by the autocrat and his cronies.


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