(Between the Galaxies of Merentes and Giordani there is a huge limbo)
There is clear disagreement within the Government, you could feel it at the press conference. Merentes let Giordani speak and he did, demonstrating he is incredible cynical or incredibly ignorant. Giordani gave explanations that have no basis. He showed a plot of how a bond worth Bs. 2.6 per dollar would be converted to a bond worth Bs. 7.8 per dollar. Of course, nobody can obtain bonds at Bs. 2.6 per $, so he is talking not about the flow of money in the swap market, but the implicit rate of the swap. These are very different things.
Then he proceeded to say that in the penal investigations, brokers would have to justify where all the dollars came from, because he said, it is so much money it had to come from drugs or from money laundering. Except that 95% of the funds in dollars offered in the swap market in the form of bonds have come from…
The Government and PDVSA…
Can the Minister justify this? Can he explain at what price they were sold? To whom? Why was it done in such an opaque fashion? Why isn’t it being investigated?
Much like the banking crisis, which Giordani said was confronted “head on” by Chavez, but those banks flourished under the not so watchful eyes of the Chavez Government, it was the Government that authorized the swap market and fed it with anything from Argentinean bonds to structured notes, to PDVSA bonds and whatever. Had all of these been sold in a transparent fashion, there would have been less graft and more efficiency and we are now supposed to believe that it is the brokers fault.
So, we will now have a “band system” for the trading of bonds at the Central Bank, with the bands decided by the Government and brokers left out of this market, only banks will participate. Replace a fairly efficient market with the regulated sale of bonds at the price decided by the Government at the Central Bank is supposed to solve the problem…
The only problem is that the Government does not have the dollars to lower the swap rate, so a regulated rate is supposed to solve the problem? Sure.
To start with, this “new and improved” market will not start until at least two weeks from now according to BCV sources, which creates a pent up demand of around US$ 800 million to US$ 1 billion. Then, if the Government sells these dollars cheaper than Bs. 7, everyone in Venezuela who has Bolivars will like a piece of these dollars. Thus, you can imagine orders will pile up, much like it happened with the PDVSA bonds in 2007, where everyone knew that it was such a good deal that there were hundreds of thousands of orders.
In fact, Giordani confirmed this when he said that last year (or in 2008, he kept changing years) there were requests at CADIVI for US$ 92 billion, which he said was crazy and the oligarchs were trying to take away all of the country’s international reserves.
I see it the other way around. At Bs. 2.15 per US$, getting dollars for anything from CADIVI, even wheelbarrows, is a better business than manufacturing anything , let alone growing any foodstuffs in Venezuela. In fact, at the end of 2009, there were Bs. 240 billion in the country, at Bs. 2.15, this is US$ 111 billion. This means that 82 % of all Bolivars were aimed at getting the cheapest thing there was in Venezuela, a US$ at the official rate of Bs. 2.15 per dollar. At Bs. 2.6, the new exchange rate, the same number is lower at US$ 90 billion. This just shows what a unproductive country we have become under Cahvez.
And you can bet that slowly all of these Bolivars will start going to an ever increasing and unlimited number of orders to buy US$ via the banking system at the Central Bank at a more intermediate number which is supposed to be between Bs. 5 and Bs. 7 to start with.
But it will certainly fail, because the problem is once again, who will sell?
According to Giordani, the Government does not need to sell any dollars in this market, after all, it issued US$ 20 billion in debt in the last few years. It should be the holders of that debt that sell into this new BCV market.
First of all, most of these bonds are now in the hands of foreigners, but who wants Bolivars when inflation is 30%+, interest rates are in single digits and the exchange rate keeps rising, whether official or parallel.
But if 95% of the dollars are produced by the Government, who do you think can intervene in this market? If the Government does not this BCV folly, the perfect storm for intense shortages in the upcoming months will unravel even faster than most think.
And I think is untenable anyway, an irresponsible policy that will simply blow up in the face of Giordani, which is what Merentes seems to be waiting for. He seems to understand better that the country needs a fluid parallel market to function properly. But this will not happen until the effects of Giordani’s folly are felt. And they will, watch put for shortages galore in the upcoming months.
And then they will come up with another scheme, hopefully a better one. It’s hard to think it can be worse, but anything is possible in the revolution.