08/13/08

Boden 15: A trick gone awry

by Larry Email  647 words

Last week, Hugo Chávez announced he had bought 1 billion dollars worth of Argentinean bonds, a new lot of the so called Boden 15. In my first analysis of the transaction I wanted to focus on the open hypocrisy of Hugo Chávez, who supposedly lends Venezuelan money to his friend, the Argentinean president Cristina Fernández de Kirchner, because he has great confidence in the Argentinean economy, while at the same time he proceeds to dump the bonds as soon as possible, selling them to Venezuelan banks, that only buy them because it's a nice way to obtain US dollars at a lower exchange rate than the parallel (dollar they are forbidden to get freely due to the exchange control in place since 2003).

But this nice trick by Hugo Chávez turned awry and it caused a mini-panic in Argentina, whose government had to move quickly to assure investors and avoid a full blown collapse of its bonds in the international markets.

I won't go into the details of the magical transactions made by the Venezuelan government with the Argentinean bonds. You can read all about it in the Devil's Excrement. It will suffice here to say that this magical operations are only possible because ordinary Venezuelans lost their monetary freedom long time ago, they can only use rapidly depreciating "bolívares fuertes" in day to day transactions and are forbidden by law to buy foreign currencies, except in the cases the government deems necessary.

Now this operations with Argentinean bonds have been going on for several years now. What went wrong this time, that Chávez almost causes a collapse of the Argentinean debt in the international markets? There were two main problems this time. In the first place, the interest rate required by Chávez in order to buy the bonds was extremely high, around 15%; which is an astronomical number, given that bonds from countries like Perú, Colombia or Brazil are yielding between 5 and 7% (with similar maturities). So Argentina is being made to pay between two and three times what her neighbors are paying and this is from a guy that presents himself as a great friend of the Argentinean people. This set off the alarms in the international markets, since the higher the interest rates, the higher the risk involved.

In addition to the onerous conditions of the credit, it turns out that the financial wizards of the Chávez administration started to sell the bonds to the Venezuelan banks immediately and these in turn dumped them without waiting in order to get dollars. Why such desperation from the Venezuelan banks? I don't know, maybe they're not in such a good condition themselves and wanted to get the profits in bolívares as soon as possible, or they simply saw the bonds tumbling in the international markets and didn't want to wait for the Argentinean government to declare a new default (as in 2001). In any case, the reasons for the rush are now a subject of speculation and we will have to wait to see if any official reason emerges.

What we don know is that the actions by Hugo Chávez and by the Venezuelan banks made the Argentinean government pay a high cost. To avoid a full-blown bond collapse, Kirchner's government had to announce during the weekend a buyback plan, by which they plan to take out of the market around 1 billion US dollars in bonds expiring in 2008 and 2009. The announcement did what it was intended to do: calm the markets and Monday and Tuesday saw Argentinean bonds rebounding from the lows reached last Friday.

In any case, that billion dollar, which Kirchner was going to use for some socialist plan at home had to go instead to international bond investors, which made very unhappy the people in Kirchner's inner circles, to the point they are now reconsidering their dealings with Venezuela.

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