I should learn. There is no such thing as privileged information in Venezuela. For the last two days, I have been hearing that the Government would sell a bond to the public. Assuming it was PDVSA, which may need money, I thought maybe, just maybe, they will sell a bond to the Venezuelan Central Bank to supply that banks’ foreign exchange system called SITME. But given the volatility and the lack of depth of bond markets in the last few weeks, which ignorant fool would even think of coming out with a bond now?
I guess I forgot those in charge of finances in Venezuela have no clue. Thus, THEY are coming out with a new bond at a time where we may have Heisenberg’s Uncertainty Principle apply to them: Without the issue the price may be X, but the sheer presence of the new bond may push the price down…just about for all bonds, PDVSA or Venezuela. Way to go idiots!
But such are the idiots that run this country. They are clueless. Let me explain a little bit.
During the month of September, markets have been hit by three fears: Europe, a recession in the US and the Chinese economy cooling down. Because memories are fresh, the reaction by investors has been to run for safety. Despite the recent downgrade of the US, the dollar and US Treasury bonds became the “in” thing to have. People sold off everything, stocks, bonds, emerging markets bonds, Brasil, Asia, Russia. The works. Buyers went on strike with many of these. When there are no buyers and a few players, prices simply collapse. And the price of bonds did just that.
Russian bonds dropped 10% in price, Argentinean ones even more, Venezuelan ones like 10%, some more, some less. But people thought Venezuela did relatively well. the country’s “risk” went down, but not as much as most of the world.
But still, Venezuelan bond markets dropped, became fairly illiquid, by this I mean, volumes went down, down to 20% or 30% to what they were in June. Maybe worse, but these numbers are just not public. But that is what traders tell me.
So, after a month of no country or company issuing anything (Pemex even pulled out one bond) Giordani and his clueless combo decide to issue US$ 3 billion of a Global 2026 bond with a coupon of 11.75%. This will be sold to local investors, privileged ones at that (read oligarchs, the rich, the enemies of the revolution), who will purchase cheap (very cheap) foreign currency with their ever depreciating “Bolivares Fuertes” (Strong Bolivars, not a joke)
To put it in proper perspective. The Government will sell US$ 3 billion of this bond in Bolivars at 95% of the price. That is, people who buy $1000 of the bond will buy it at 95% of Bs. 4.3 times 1000 dollars or Bs. 4,085. Of course the bond will be worth somewhere between 70% to 75%, so you will get between $700 to $750 for Bs. 4.085 or you will pay between Bs. 5.83 or Bs. 5.44. Even if the bond drops to 65% you are still buying dollars at Bs. 6.28per dollar. A true bargain.
A great deal if I ever saw one, when you think a free floating Bolivar would be worth around Bs. 8-10 per US$.
But what is good for you today, is terrible for Venezuela tomorrow. This bond will generate for the Government the equivalent of US$ 2.85 billion at the official rate of exchange. But over the years it will cost the country with the 11.75% coupon a total of US$ 8,287. Too expensive to support a silly exchange rate policy. Pan para hoy, hambre para manñana.
But even worse, you have to ask yourself why? The average price for the Venezuelan oil basket in 2011 is the highest EVER. Period. At US$ 84+ per barrel, the country has never had such a high revenue level.
So, why compromise the future in this way? Why pay so much to get barely US$ 3 billion?
That is the 64,000 lochas (Coin for 1/8 th of a Boluvar) question. Either these guys are siphoning off billions of dollars to the parallel funds or they are being so inefficient that they need more and more. To pay the companies that skim off a few hundred million to subcontract electric plants, like in the previous post or simply to guarantee that Hugo Chavez gets elected in 2011.
And that is the scary scenario. After 2011, maybe they just don’t give a damn. All their eggs are in the 2011 basket, reelect a crippled Hugo and guarantee the survival of the revolution. Who cares about the people? Who cares about Venezuela? Who cares about efficient spending? Sovereignty? How do you eat that?
Issuing this bond is so crazy, that for the first time I believe these guys will default if Chavez is reelected. Not the next day. They will stretch it for as long as they want. Buy they simply don’t care. Hugon and the robolution is all that matters. Sovereignty, the people, efficiency are simply words, Hugo is the big deal. The only deal in town.
So, if you came here to find out whether to buy the bond or not. Go ahead, buy it, you will likely be getting Bolivars at below Bs. 6 per US$. It’s the deal of a lifetime. Just remember that this is compromising the future of the country in a serious way.
And the answer is: Else! These guys are idiots, these guys are ignorant and all they care about is the else: the survival of the revolution, the ability of Hugo to get reelected.
Except that cancer got in the way…