Tuesday, November 01, 2005

What are friends for? 

Venezuela has purchased $1 billion worth of Argentine bonds this year according to news reports:

CARACAS, Venezuela (AP) - Venezuela plans to buy a total of US$1 billion (euro830 million) in Argentine bonds before the end of the year, Venezuela's finance minister said Tuesday.

Finance Minister Nelson Merentes said Venezuela has bought US$950 million (euro791.14 million) in Argentine debt so far this year, and will make an additional US$50 million (euro41.64 million) purchase before Dec. 31.

The debt purchases are part of an ongoing initiative by President Hugo Chavez to foster a more cohesive and stronger financial system in South America, Merentes said.

Venezuela is looking at the possibility of buying debt from various other South American nations, including Ecuador, as it seeks to expand investments in the region.

Now, the opposition has previously condemned these bond purchases and will probably waste no time complaining about this one. Some how this is supposed to be something bad or sinister. But why?

Venezuela is not simply giving this money to Argentina. It is purchasing bonds which is equivalent to giving Argentina a loan. The money will be paid back, with interest. So this is not money that is simply being given away or somehow wasted.

And why not give it to Argentina? After all, Venezuela needs to save money and the saved money needs to be put somewhere. Traditionally, it is put in banks in the United States or they buy U.S. bonds (ie, they loan the U.S. money!). Yet there are many countries in Latin American that desperately need money. So why shouldn’t Venezuela loan the money to fellow Latin Americans who actually need the money instead of loaning it to gringos who are already quite well off and don’t really need it?

Further, when the U.S. or “multilateral” organizations such as the I.M.F. or World Bank loan money to Latin American countries they often attach onerous conditions to the loans. The receiver of the loan is often forced to implement draconian austerity measures and pursue free market economic policies that they might not want to follow. Venezuela imposes no such conditions.

So by making these investments in the rest of Latin America Venezuela is able to receive a good return on its money. But more importantly, it also gets the benefit of knowing its money is being used to help others in Latin America achieve their economic goals without having to put themselves under the thumb of the powers that be in Washington. In other words this is a good investment for Venezuela and a good policy for Latin America – come to think of it, no wonder it upsets the Venezuelan opposition so.


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