A few people have asked me about the zero coupon bonds that the Central bank is selling asking why it is I don’t think it will drive down the swap rate down. While Chavez claims he is revaluing the currency because the swap rate will go to Bs. 4.3 per dollar and some respected analysts think this mechanism will work, I disagree. I actually think that the way it is currently designed, this will get nowhere and I think we have already seen the first signs of this. Unless the Central Bank changes the design, it is wasting its time (and our money). Here is why:
First of all, the process is not an auction. It is a sale of dollars at Bs. 5 per dollar, far from the swap rate that closed on Friday at Bs. 5.85 per US$. Thus, there is no way to lose, you sell dollars at close to Bs. 6 and get some sort of democratic allocation at Bs. 5. Whatever you get, if you do, is a gift. Zero risk gift at that. If it was an auction there would be guessing and there would be risk, those needing more dollars would pay higher for it and would get them. There would be no sure thing.
Second, the big drivers of the swap market are corporations. They need millions of dollars not thousands, but if one is to believe what people are being allocated and that nobody has been given preferential treatment, on the first day, orders above $ 60,000 were allocated $60,000, orders below were allocated the full amount. On Thursday, the same thing happened but the number went down, orders above $53,000 were given $53,000, those below the full amount. (I have heard someone was sold millions in the CD’s, either they got preferential treatment or they placed many small orders)
And we come to the crux of the problem: As time goes by, more institutions, individuals and companies will put in more and more small orders, much like in the bonds sold by the Government to drive the swap rate down, but which failed to do so except psychologically. Each day smaller amounts would be allocated and the swap rate will not go down, unless the Government sells a huge amount and wipes out the bids. But I understand the first day there were US$ 500 million in orders. Thus, by the end of next week we may see allocations of $20,000 per orders and thousands of orders.
Whether the CD’s are registered abroad or not to me is almost irrelevant at this point. If they are, those that get them will sell the CD’s and then go back to the “auction” to ask for more. So, it may actually go against the Government to register them. Note that the first day, local banks were buying the CD’s back from the buyers. On the second day they did not, because the Government changed the wording and removed what the Prospectus said on the first day: That the zero coupon bonds would be sold in the international markets. The BCV says it will now register them abroad.
Thus, I expect the Central Bank to change the mechanism soon. In the meantime a few hundred million dollars would have been wasted by the Central Bank. What else is new in a wasteful and incompetent Government? I obviously have ideas as to how I would do it, but I will not tell the BCV how, in their self sufficiency and arrogance they haven’t even asked.
And to make sure I answer all the questions, these bonds will not trade in local currency, it is explicitly prohibited by law.