Bono del Sur 3 postponed

August 16, 2007

The Minister of Finance announced today that it was postponing the placement of Bono del Sur 3 because of the “grave volatility in the prices of emerging market securities and those of developed countries”.

In the previous post I had said:

“The reason that the issue was being questioned was the fact that with
the uncertainty in the international markets with the sub-prime credit
crisis, then volatility could make the price of the Argentinean bond
swing dramatically and drop in price to the point that investors would
lose money.”

In the end, the problem lies in the artificiality of the transaction: Nobody is “investing” in these bonds, people are simply buying them to make a quick profit by buying dollars at a rate cheaper than the parallel swap rate which is the only rate for which the average Venezuelan has access to.

Thus, the true reason was simply that the decision to place the bond combo was made by a bunch of amateurs (see title of the previous post also) who have little idea about markets and economics and they prove it when they act.

The first thing people questioned about this issue was the timing. Why the rush to market if the Government does not need the money? Why not wait until markets stabilize? Why not wait until fewer Venezuelans are on vacation, thus guaranteeing more participants?

The second thing people questioned was the size. Given the market volatility, keeping the original plan of issuing a combo of US$ 500 million of the Argentinean bond and US$ 500 million of the TICC, would have made it more appealing to buyers, including banks and retail investors who buy these issues for different reasons. Thus, increasing the offer with another TICC just made matters worse.

Third, the price of the combo was set at 104 at an exchange rate of Bs. 2,150 to the US$. Who set that price on Tuesday? It certainly wasn’t the same international markets who they were referring to, it was the Ministry of Finance itself based on who knows what revo or robolutionary logic.

Finally, Minister Cabezas sounded today in his press conference as if the bond was announced weeks ago and not on Monday afternoon, only three days ago. Volatility has not changed much, Venezuela’s Global 27 bond changed 14 days ago by 4 points in a single day, today it changed by the same four points. (Even if at a somewhat lower level)

But there is another interesting fact. Part of the volatility in Venezuelan and Argentinean bonds over the last few weeks has been caused by…you guessed: The Venezuelan Government itself. You see, the Venezuelan Government has been selling structured notes and PDVSA to local financial institutions in order to drive down (unsuccessfully!) the parallel market rate. Simultaneously, Fonden has been selling structured notes directly into the international markets. Thus, the Venezuelan Government itself has been responsible for too much supply into these markets at a time of extreme volatility, which helps in itself to create more volatility.

It is like Heisenberg’s Uncertainty Principle, prices in these markets are affected by your actions, if you actions are significant. As an example, when the Bono del Sur 3 was canceled this afternoon, immediately the price of the Argentinean Boden ’15 went up from 70.5 to 74. Why? Simple, because investors and traders were worried that next week the US$ 500 million being unleashed by the Bono del Sur would drive prices down at a time that buyers have disappeared from emerging markets trading desks.

More ominously, it is a preview of something I have been saying here over and over: As the Government creates more and more strains in the Venezuelan economy, it becomes harder and harder to control their effects. The only reason why there was a rush to issue the Bono del Sur 3 was that the Government itself has been spending too much and increasing the money supply too fast, which increases the parallel swap rate and inflation. In the first half of the year it had to issue some US$ 10 billion in bonds to control this effect. Now, it is being forced to postpone this operation, which will only increase the pressures and strains in the Venezuelan economy until something blows up.

And like today, the amateur Government authorities will blame someone or something else and they will keep a straight face as they do it.

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