Oil Wars

The Financial Times of London came out with a rather bizarre article today. In effect they are accusing the Venezuelan government of somehow doing something corrupt in buying and then selling Argentinian bonds. Here is the article:

A select group of Venezuelan banks is profiting from opaque government treasury operations involving hundreds of millions of dollars of Latin American sovereign bonds under a financial programme fostered by President Hugo Chávez.

Backed by record oil revenues, Venezuela has bought $1.6bn in Argentine debt during the past year - mostly dollar-denominated Boden bonds maturing in 2012. They were purchased in auctions that were eschewed, in some cases, by big investment banks, such as Citigroup (NYSE:C - news) and JPMorgan Chase, because the yields offered were considered too low.

Venezuela, which has been the largest buyer of Argentine sovereign debt since the country defaulted on itsforeign debt in 2001, has said it is ready to buy up to $2.4bn worth of Argentine bonds.

It has also bought $25m of Ecuadorean debt and finance minister Nelson Merentes recently said he was looking at buying Brazilian and Chinese bonds.

Investment banks Morgan Stanley and Deutsche Bank are reportedly advising on the bond transactions.

Mr Chávez justifies his virtual "hedge fund" as a benevolent concept that will allow Latin American nations such as Argentina to "liberate'' themselves from an international financial system that, he asserts, is manipulated by the US.

Last year, Venezuela transferred all of its foreign reserves that were held in US Treasuries or that were on deposit at US banks, about $20bn in total, to the Bank for International Settlements in Basel, Switzerland.

Venezuela's bond purchases have helped Argentina increase its foreign reserves. President Nestor Kirchner's government last month paid off its outstanding $9.5bn debt to the International Monetary Fund, in part thanks to the cash injection from Mr Chávez.

"Whilst the [bond] purchases are good news for the Argentine government, the benefits for Venezuela are less clear," said Vitali Meschoulam, emerging markets strategist at HSBC Securities in New York.

The Financial Times has learned that significant profits deriving from the bond transactions are being accumulated by a few private banks, rather than by the Chávez government.

In late November, Mr Merentes announced that some of the bonds had been liquidated, leaving a profit of $40m. Mr Merentes said last month that $600m worth of the Boden 12 bonds had been sold, without elaborating on the method.

Most of the bonds were sold directly - instead of in an auction - to two local banks, Banco Occidental de Descuento and Fondo Común, according to two people familiar with the deal and a senior official at a financial regulatory authority. The banks have since re-sold the bonds into the open market.

Mr Merentes didn't respond to several requests for comment during the past week. Victor Vargas, president of Banco Occidental de Descuento, and Victor Gil, president of Fondo Común, also didn't return messages seeking comment.

But though the chosen banks are likely to have profited from increases in prices of Argentine bonds, they have benefited more significantly from Venezuela's foreign exchange controls, in place since 2003, and a flourishing but tolerated parallel market.

Venezuela's treasury sold the Boden 12 bonds to the banks at the official exchange rate of 2,150 bolívars to the dollar. But, according to the people familiar with the transactions, the banks re-sold the bonds at the parallel market dollar rate, which trades at about 2,600 bolívars.

On a re-sale of $100m worth of bonds, the banks would gain bolivar profits equivalent to about $17m at the informal market rate, or $21m at the official rate.

Following alleged complaints from banks that were excluded from the operations, in recent weeks the finance ministry has also begun selling directly to them some of the bonds that it still holds, in $40m-$50m tranches every two weeks.

Orlando Ochoa, an independent economist, said that a lack of transparency has become the hallmark of the Chávez government's financial administration.

''The ministry of finance is allocating windfall gains in Argentine bond operations to selected domestic banks, without bidding rounds and without financial reasons to privilege them,'' Mr Ochoa said.

Of course, its hard to know what exactly is going on here as what is opaque is the article itself, especialy considering it doesn't quote anyone for attribution on the charges of wrong doing.

As has been mentioned on this blog before the Venezuelan government, as an act of solidarity, has bought Argentinian bonds. In effect this is just loaning Argentina money which Venezuela will get back when it sells the bonds. This has the benefit of letting Argentina get the money it needs without having to borrow it from obnoxious people like the IMF who will attach all sorts of right wing policy prescriptions as a condition to any loan. So this is good for Argentina, a nice act by Chavez, and it doesn't really cost Venezuela much of anything.

Now, Venezuela has turned around and sold some of the bonds to private entities like banks so it can get its money back. Fine. Nothing wrong with that and Argentina still has the money it needs.

But what the article complains about is that while Venezuela sold the bonds at 2,150 bolivares to the dollar the banks then turned around and sold them to someone else at a higher rate. Two things. First Venezuela had to use the official exchange rate when selling the bonds. That official exchange rate is the one that by law everyone in Venezuela must use when exchanging Bolivares and dollars. If the government didn't use that rate they would be breaking their own laws!!!!

It is then alledged that these private banks turned around and sold the bonds at a higher unofficial (and illegal) exchange rate. That may be. But the government can't control that unless it catches them. So instead of making anonymous accusations in newspapers maybe the people that supposedly know this should give the information to the Venezuelan authorities so they can do something about it. But that is not the way the article reads. They make it sound like their main beef is that THEY weren't given some of the bonds so THEY could sell them at high unofficial rates and make a nice, illegal profit for themselves. So I guess we know why the article is so opaque and unsubstantiated. The people complaining aren't concerned that the law is potentially being broken. They are upset they aren't getting a piece of the action!!!!!!
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