Archive for May 3rd, 2007

Chavez and default scare the markets

May 3, 2007

Today it was the turn for the banks and steel company Sidor
to be threatened and you know when Chávez threatens, he will do what he wants,
whether you comply or not. Remember the threats against CANTV? Chávez would
threaten that if the company did not pay the pension liabilities, he would
nationalize it. The company was never behind in the payments, paid every penny
the Court ordered, but… Chavez wanted to do it anyway. Now he is screwing the
company’s workers buying their shares from them at a half of what they paid and
the workers claim the Government is not paying them all that was owed now.

Steel company Sidor used to be protected because Argentinean
President Kirchner asked Chávez to protect his buddies from Techint, but
apparently the recent corruption scandal involving that company has changed the
rules of the game, as the Government of Argentina is now against current
management. Thus, Chavez’ threat seems now very real and he claimed he had
asked for a report and within 24 hours will know what the situation at Sidor
really is, as he is accusing the Argentinean owners of exporting all
production.

Clearly we now have steel, cement and banks in line as
Chavez thinks he is Daddy Warbucks and has funds to buyout the whole country. Private
property rights are slowly withering in the autocracy and no matter what are of
the private sector people are, they are finally worried. Wait for the new
Constitution and they will panick!

But he doesn’t. In fact, the Government continues to
misunderstand the implications of the withdrawal from the IMF for its debt.
Today the Government ratified that it would withdraw from the IMF because it
was sure “that bondholders would not exercise the default”. Well, last time I
checked, the funds that invest in Venezuelan debt are not into it out of
solidarity or altruism, but they are there to make a buck. And the can make a
few million bucks by asking for the Government to accelerate payment. You see,
there are three bonds issued by the Venezuelan Government (all under Chavez!)
which are under 100 in price and which 25% of the bondholders could call for
acceleration in payment. That would amount to US$ 4.5 billion, a nice piece of
change on a day that international reserves dropped to US$ 26.3 billion and
next week we should see another drop as the Government pays for CANTV and
Electricidad de Caracas to the tune of US$ 2.6 billion, some part of it will
come from Fonden, but reserves will take another hit.

The problem for the Government is that a technical default
will lead to a downgrade and to higher expenses if it tries to issue new bonds.
In any case, if it allows the technical default to occur, interest will also
drop in buying the country’s debt. Today one Wall St.bank held a conference very concerned about the situation and essentially telling investors to sell the country´s Sovereign debt. In the end this is all the result of
mismanagement as the Government has slowly been putting itself a corner with
its economic bad policies as noted here as far back as October.

What this means is that devaluation looms large at this
time, as the budget continues to expand. Just the salary increase decreed last
Tuesday would cost another US$ 3 billion to the Government, adding to the
growing 2007 deficit, despite high oil prices. Add a bit of nervousness to the
parallel market, increasing liquidity as the Government spends more than it has
and what you have is a recipe for disaster. It is just a matter of time.

Weil captures well the RCTV case implications

May 3, 2007

Weil captures well the meaning of the RCTV case to the broadcast media in Venezuela

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