Archive for June 19th, 2008

Chavista Guisonomics 101 part II: There is indeed no such thing as a free lunch

June 19, 2008

I am going to have to speed up this primer, as events that led me to
write part I have accelerated in an unexpected fashion, forcing me to
cover the material faster than I expected.

There is indeed no free lunch for Venezuela in always “making money”
when it buys Argentinean bonds even if they drop in value. In fact, you and I are simply paying
for it as usual, if you are naive enough to think the money is “ours”. The apparent free lunch arises from the fact that at
the end of the day, what is happening is that the Government is leaving
a lot of money on the table. Our money.

Let’s look first at the Government’s profit in our previous example:

The Government bought one million dollars of Argentinean bonds at 100%, sold them at 110% for a 10% profit of Bs. 215,000.

But suppose for a minute, that rather than buying bonds from Argentina,
the Government went straight to the banking system and offered to sell
them US$ 800,000 at Bs. 2.965 per dollar, the same amount and price at
which the bank effectively bought the dollars when it bought the
Argentinean bonds and sold them in the international markets in part I.

From the point of view of the bank, the transaction is identical, no?

But it makes a world of difference for the Government which now, rather
than making a puny 10% profit, will get (US$800,000x Bs. 0.815)=Bs.
652,000 for the transaction.

Huge difference, no?

Of course, the Government made now Bs. 652,000 on the transaction,
rather than Bs. 215,000, but on top of that, it sold US$ 200,000 less!

Who kept the difference?

Easy, Argentina, which received in the case of the bonds a full one
million dollars but the bonds later dropped 20% (US$ 200,000 less). And
of course, we Venezuelans are better in theoryof, because we all collectively
have US$ 200,000 more.(Even if we will never see it!)

Is the Government stupid?

Of course not.

First of all, it helps Chavez friends Mr. or Mrs. Kirchner in placing a billion or so
dollars of Argentina’s debt with one call. Second, by hiding the
transaction behind bonds, most people do not understand that the whole
thing is just a “guiso” or racket at the same time. (Call it corruption
if you like!). Third, the Government can maintain the official line,
that there is no and there will be no devaluation and dollars are worth
Bs. 2.15 per US$.

Because these type of transactions are given only to a select group of
“friendly” banks or financial institutions who are friendly because the
obviously pay somebody off, no?

But it doesn’t end here…because, why should the Government allow the
bank to make so much money. The bank buys each dollar at Bs. 2.956 and sells
it for Bs. 3.45, making a nice profit of Bs. 0.494 or 16.7% without
doing anything!

Thus, the more normal, regular, rational, customary and transparent
manner would be if the Government offered the same US$ 800,000 to ALL financial institutions at Bs. 3.4 per US$ for their customers. Then, the Government
would make US$ 800,000 x (Bs. 3.4-Bs. 2.15)=Bs. 1,000,000, rather than
Bs. 652,000.

The banks would make a tidy Bs. 0.05 per dollar, which adds up after a
few million dollars. That is the usual way foreign currency markets
work.

Thus, there is no such thing as a free lunch, just a bunch of people having a profitable lunch off us Venezuelans.

Soon: part III, how to buy a bank with no money…

Chavista Guisonomics 101, part I: Why the Government never loses money with Argentinean bonds

June 19, 2008

The word “guiso” in Spanish means “stew” and is used as
slang  for those fraudulent transactions or deals that take place whenever
two or more parties find a way to fix things in such a way that they can make a
lot of money.

In the Chavez revolution, Guisonomics has truly become a
science thanks to the wonders and arbitrage provided by foreign exchange
controls. Simply put, the fact that the Government has access to or decides who
has access to foreign currency, allows it to generate huge amounts of profits
from the artificial arbitrage between the official and the parallel swap
exchange rate.

In fact, hiding behind the exchange controls, corrupt
Government officials can obtain illegal profits in magnitudes never seen before
in Venezuela’s history of corruption. Sometimes, there is not even enrichment
involved, just the ability to use creative accounting and the artificiality
of the exchange rate to help the revolution and/or its friends without most
people noticing or even realizing what is going on.

In this first installment of Guisonomics 101, I will
describe the simplest transaction there is, in order to prepare you for some
transactions that I expect will be in the news in the next few days.

If you have been following the news lately fo example, Argentinean
bonds have
been dropping like a stone
in the last few days as the conflict between the
Kirchner Government and the farmers has intensified. In fact, talk of a second
Argentinean default in this decade have also
intensified
as that country’s debt levels reach historical highs once
again.

But if you have been following the news, it has been Chavez
and Venezuela that have been saving the day for Argentina buying close to US$
6.5 billion in the last three years of the countrys’ debt.

Only three weeks ago, Venezuela bought about US$ 1.4 billion
of that country’s bonds the so called Boden issue, of which between US$ 400 to US$ 600 million has
been sold by the Government in order to lower the parallel swap rate. Thus, there is about US$ 800 million left and their prices have been dropping.

But, you may wonder, has Venezuela lost money because these
bonds have dropped in the international markets?

The answer is no, because thanks to some of the elemental
principles of Chavista Guisonomics, for the Venezuelan Government it is very
difficult, if not impossible,  to lose money in
these transactions.

Say what?

This almost magical trick is possible, because
accounting-wise, for the Government all Bolivars are valued at Bs. 2.15 to the
US$, while it can manage to sell dollars at a much higher rate in the swap market.

Let’s look at an
example:

Suppose the Government buys one million dollars of
Argentienan bonds. From an accounting point of view, only the exchange of
Bolivars is registered, thus, the US$ 1 million cost Bs. 2.15 million.

Let us assume, that the Venezuelan Government bought the
bonds at a price of 100% and that they drop 20 points to 80%. (These prices are
faked for illustration purposes). How can the Venezuelan Government make money
if they have dropped so much?

Easy. It can sell these bonds to a local bank at 110% of its
value, but at the official rate of exchange of Bs. 2.15 per US$. Thus, the Government bought the bonds
at 100% and sold them at 110% for a tidy 10% profit of 215,000 Bolivars, even as the
bonds dropped in price.

But why would the local bank buy them? Also easy. The local
bank paid 110% for them at the official rate of exchange or Bs. 2.365 million
(1.1×2.15).

But then it turns around and sells the bonds at 80% of their
value in the international markets. Thus, it receives US$ 800,000 for them.
Thus, the local bank paid in the end Bs. 2.956 (Bs. 2.365 million divided by US$ 800,000) for each dollar
it receives.

But since the swap rate is somewhere between Bs. 3.4 and 3.5
per US$, the local bank makes roughly half a Bolivar per dollar or 16.9% profit
in the sale of those US$800,000 to the swap market.

Thus, the Government makes money, the bank makes money and
there is indeed such a thing as a free lunch in Chavista Guisonomics.

Or is there?

More in Part II

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