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Venezuela liquidates Argentine Bonds
Ambito Financiero
July 10, 2008

By Carolina Barros

While there is already talk of a new negotiation on track between Caracas and Buenos Aires for another loan of US$1 billion, the Venezuelan government set August 19th as the deadline for local banks to undo their "structured notes" with bonds in dollars in debt from third countries, mainly Argentina.

Venezuelan financial sources estimate that in the coming 40 days they will liquidate close to US$6 billion in bonds. This abrupt saturation of foreign debt paper into the trading floors assures a strong drop in value for them. It will also affect the future Venezuelan loans that our country seeks. At the moment, Venezuela is the only source of foreign financing that Argentina can count on. The obsession and international political errors of the K Administration, also the mistreatment of the most important debtors the Paris Club and the holdouts have not permitted the opening of other doors to credits until now. (It remains to be seen if Tom Shannon could do something as the Casa Rosada would request before the Paris Club, an organization which is owed US$6.3 billion and with the imperiousness and countermands of the Argentine side the intention to reach an accord was aborted in recent months.)

The Venezuelan structured notes have been put together since 2006 through the Fonden, a fund destined in theory for development plans and which count on resources from PDVSA and reserves that the Venezuelan central bank confiscates. Using the Fonden, the Chavista government acquired Argentine debt (also, while less so, Ecuadoran) that it then sold to the private banks. A very interesting deal, where the Caracas government which would use notes in a discretional form among "grateful" banks would buy bonds at an average exchange rate of 3,500 bolivars to the U.S. dollar and sold on the parallel market for 5,500 bolivars per dollar.

This since the middle of last year, when the Venezuelan Central Bank not-disinterestedly allowed the parallel dollar to break the 6,500 bolivar barrier. Consequently, there were several banks that adventured out to buy at 5,000 bolivars this "risk debt", as it is called today by Rodrigo Cabezas, ex-finance minister and architect of this financial roller. Of course, they didn't imagine that in July of 2008 the government would iron the dollar at 3,300 bolivars and that their hopes would be traded into losses.

Argument

Suddenly now, the Venezuelan Finance Ministry demands that the banks part with the bonds in dollars. It argues that many are violating the norm that impedes having positions in currencies for an amount higher than 30% of all holdings.


The moral of the story: the true misalignment is just beginning since the forced sale with a deadline of August 19th brings an assured strong drop in the price of those bonds in question. One calculates, also, that no less than a half dozen banks will leave the market for being overexposed with these bonds (some of them would have paper hitting up to 400% of their capital.)

But the speculation in turn on the structured notes is not only financial and among banks. It's also political. It's said in Venezuela that with this measure the Chavez government would be taking the first step toward another Bolivarian dream: the progressive nationalization of the financial system. Not preposterous, especially if one takes into account that they already did it with the PDVSA oil company, the electric companies, and a few months ago with Sidor.