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 .
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Petroleumworld News 11/09/09
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