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Editorial / Commentary / Opinion
VenEconomy: Malicious move
On Thursday, January 28, a Central Bank resolution came into force that establishes new rules the banks will have to follow when entering assets and liabilities in foreign currency on their books.
According to the resolution, published in Official Gazette N° 39,356, the official exchange rate of Bs.F.2.60:$ will be used to calculate the value, for bookkeeping purposes, of dollar-denominated bonds issued by the public sector that are payable in bolivars (TICs), whereas the exchange rate of Bs.F.4.30 will be used to calculate other foreign-currency-denominated public bonds.
The resolution states that the calculation and entry on the books of the value of assets and liabilities of banks, foreign exchange houses, and other public and private financial institutions maintained in dollars will be performed at the Bs.F.2.60:$ exchange rate.
For several years now, the government has been issuing dollar-denominated public sector papers payable in bolivars, whose main purpose was to reduce pressure on the swap market and narrow the gap between the official and swap exchange rates. These TICs had been enjoying a degree of acceptance among the public, given that they gave holders of these bonds a degree of protection from a possible devaluation.
On the other hand, and no less relevant, is the fact that the government benefited from these issues as it obtained funds to maintain its astronomical levels of public spending.
Now, with the sudden change in the game rules, a number of drawbacks have emerged that, at the end of the day, will affect all players.
One of them is that the resolution laid an economic trap for the holders of these bonds: now that the value of the TICs are calculated at Bs.F2.60:$, the interest will be paid on a smaller amount of capital than would have been paid had it been calculated at Bs.F4.30:$. And this will have a negative impact on the final value of the bonds on the market.
This is, to say the least, a malicious move by the Central Bank that could result in losses for investors owing to the opportunity cost of having invested in TICs instead of alternative investments offering greater guarantees for protecting themselves against devaluation. Besides, this change in the game rules and the inclusion of far from transparent rules considerably undermine investors’ confidence and could discourage them from considering future government issues.
Another problem is that, as a consequence of the loss of the market’s confidence in these issues, the government could find it more difficult to place instruments of this type in the future. It may be that this opaque machination has resulted in benefits for the government this time, but it is doubtful that it will be equally successful if repeated in the future.
Definitely, with their lack of transparency, the government and its economic players have, once again, played a lose-lose game. Today, the losers were the people who invested in TICs, but tomorrow, the loser will be the government when it issues its public sector bonds and has to sell them at a higher cost for the country or run the risk of not finding any buyers.
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 02/01/2010. Petroleumworld reprint this article in the interest of our readers .
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Petroleumworld News 02/01/2010
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