World

 

Brazil

Mexico

Bolivia

Peru

Trinidad &
Tobago

Venezuela







Very usefull links



 

 


Editorial / Commentary / Opinion

 

 

 

VenEconomy : Buried in junk bonds

 

 

At unbelievable speed, the pieces of the jigsaw puzzle of what could be behind the amendment to the Central Bank of Venezuela Law are falling into place.

Less than a week ago, a bill that will turn the Central Bank into the government’s petty cashbox was passed following its first debate, without prior public consultation. This Wednesday, it was revealed that, 15 days ago, Hugo Chávez gave approval, in council of ministers, for the Corporación Venezolana de Guayana (CVG) to issue bonds for up to ·$3 billion, supposedly backed by future gold production.

This raises the possibility that the international reserves will start to be used to finance the highly compromised state-owned companies.

The issue the CVG is preparing should, according to Article 58 of the proposed amendment to the Central Bank Law, be acquired by the Central Bank via third parties, which will probably be state-owned banks or, possibly, some private banks in the hands of people sympathetic to the “process.”

However, here we have a “minor” detail worthy of note: the third parties will be able to purchase these dollar-denominated bonds with bolivars, with the result that, once the amendment to the Central Bank Law is passed, they will be able to sell them to the Central Bank. Even more interesting is the fact that the Central Bank will have to draw on the dollars in its reserves to purchase these papers.

Naturally, it is to be expected that there will be some profit to be made between the price the first purchasers pay the CVG for the bonds and the price the Central Bank pays. However, on the Central Bank’s books everything will seem to remain unchanged, as there the Central Bank will replace one asset with another; where before there were liquid dollars, it will enter these papers of doubtful liquidity and priced low on international markets.

So, these papers then become the backing of the bolivars in circulation. When someone tries to change his bolivars for dollars, he will find papers that are worthless; and the reserves, which should only be invested in papers of proven security and high liquidity, will be place in these and any other papers the Executive decides, on a whim, to issue.

The Central Bank, faced with the scant value and liquidity of these bonds, will have to hold on to them until they mature or run the risk of taking substantial losses.

But that could result in an acute problem of liquidity, and the Central Bank could find it impossible to respond to any national emergency that requires paying out foreign currency, and even to back Venezuela’s current imports, never mind the tight spot the country would find itself in if there is a hiccough in the oil market.

A quick calculation illustrates the scenario in which Venezuela could find itself in January 2010. Assuming that the international reserves are currently at $33 billion, $18 billion of which are liquid, if we subtract the $3 billion of the CVG bonds, we are left with $15 billion. If in January, $8 billion are transferred to Fonden, as required under the law, the country’s operating reserves will come to a mere $7 billion.

So, what is being cooked up is a mechanism for printing bolivars backed by debt, which will only serve to fuel inflation and further devalue the local currency, while a select few carry on lining their pockets and the “process” continues to have access to funds in order to maintain itself in power.


VenEconomy has been a Venezuela's leading specialized publisher on financial, political and economic data since 1982. VenEconomy's Points of View on the issues of the day, as seen by VenEconomy during the last week. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by VeneEconomy on 10/29/2009. Petroleumworld reprint this article in the interest of our readers .

All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.

Fair use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.

All works published by Petroleumworld are in accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.Petroleumworld has no affiliation whatsoever with the originator of this article nor is Petroleumworld endorsed or sponsored by the originator.Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld articles provided that any such reproduction identify the original source, http://www.petroleumworld.com or else and it is done within the fair use as provided for in section 107 of the US Copyright Law.
If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.
Internet web links to http://www.petroleumworld.com are appreciated

Petroleumworld welcomes your feedback and comments, share your thoughts on this article, your feedback is important to us!We invite all our readers to share with us their views and comments about this article, write to editor@petroleumworld.com

Petroleumworld News 11/09/09

Copyright© 2008 respective author or news agency. All rights reserved.

We welcome the use of Petroleumworld™ stories by anyone provided it mentions Petroleumworld.com as the source. Other stories you have to get authorization by its authors

Send this story to a friend Any question or suggestions,

please write to:
editor@petroleumworld.com

Best Viewed with IE 5.01+
Windows NT 4.0, '95, '98 and ME +/ 800x600 pixels

 


TOP

Contact: editor@petroleumworld.com/phone:(58 212) 635 7252, (58 412) 996 3730 or
(58  412) 952 5301

Editor:Elio C. Ohep A/Producer - Publisher:Elio Ohep /
Contact Email: editor@petroleumworld.com
CopyRight © 1999-2006, Elio Ohep - All Rights Reserved. Legal Information
- CCS office Tele
phone/Teléfonos Oficina: (58 212) 635 7252
PW in Top 100 Energy Sites

Technorati Profile

Fair use notice of copyrighted material:
This site is a public free site and it contains copyrighted material the use of which has not always been specifically authorized by the copyright owner.We are making such material available in our efforts to advance understanding of business, environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have chosen to view the included information for research, information, and educational purposes. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission fromPetroleumworld or the copyright owner of the material.