Screw you Argentina (we shall not cry for you)

When Hugo Chávez announced in 2008 he was buying about 1,000 million dollars in new debt in Argentina, a new batch of bonds called Boden 15. I want to focus on the overt hypocrisy of Hugo Chávez, who allegedly provided money to Cristina Fernandez de Kirchner because it has great confidence in Argentina’s economy, while at the same time comes to dispose of the bonds as soon as possible in Venezuela , selling them to Venezuelan banks, who only buy the bonds because they want to get dollars (not freely available due to exchange control). But the grace of Hugo Chávez became a grimace, which has served him quite a shock to the Argentine government, which had to move quickly on the weekend to prevent a collapse of its bonds in international markets.

First, let me explain how the stew of Argentine bonds. The Venezuelan government buy $ 1.4 billion in Boden 15 bonds the Argentine government. The price of the bonds is approximately $ 1 billion (the bonds were trading around 70 points at the time of the transaction on Tuesday). Venezuelan government immediately sell such bonds in bolivar fuerte Venezuela to a select group of banks with good contacts at a price, say 108 points, the official exchange rate of 2.15 Rs / US $. At that price, the government collected 1.512 billion, 3.251 billion or strong bolivar. Note that immediately and as if by magic, the government has earned $ 140 million in the operation (discarding commissions and other costs). What is the purpose of government? Obviously not invest in Argentina, because once you have downloaded the bonds they bought. The aim, apart from the small profit it has obtained is to force down the exchange rate on the parallel market dollar.

Now the question is: why banks buy bonds to 108 points when the market valued at 75 points? Obviously it’s not because banks want to invest in Argentina. Nobody wants to invest in Argentina’s debt, after the catastrophic default of 2001. The answer is that for banks this is a way to get dollars for a lower price would have to pay on the parallel market.

Banks sell their bonds immediately on international markets at a price of 70 points or less (remember, this was the market price at the beginning of last week). The banks then get 1,050 billion dollars, who paid 3.251 billion bolivar fuerte. In effect then, banks bought dollars to 3.09 Rs per dollar (again, we are not taking into account the fees). Now banks sold dollars on the parallel market at a price of Rs 3.35 per dollar for a gain of approximately 8.2% or about 266 million strong bolivar within days.

As you can see, no one is acting out of altruism or their confidence in Argentina’s economy. Everybody wins except you are prohibited from buying dollars freely.

Now, what was the problem last week that turned the grace of Hugo Chávez in a grimace? The problem is that the conditions in which the transaction took place between Hugo Chávez and Cristina Fernández were alarming. The implied interest rate or yield on bonds purchased by Chavez was about 15%. That is an astronomical figure. To have an idea, the Peruvian bonds due 2014 offered a yield of 6.5% (in Euros), Colombian bonds due in 2014 offered a yield of 5.72% (in dollars) and Brazilians due in 2015 pay 5.58% (in dollars).

So the Argentine government was agreeing to pay interest rates of 2 to 3 times higher than their neighbors, which sounded the alarm in markets. Why? Because while the higher the interest rate that you agree to pay by credit, the lower your creditor confidence in you. For the investor agrees to risk money, you have to offer higher potential gains.

In conjunction with the above fact, already predisposed to the holders of Argentine bonds to sell, it turns out that Chavez download a huge batch of new bonds on Venezuelan banks, who immediately took to sell at any price they could get. Why the despair of Venezuelan banks? Good question, maybe Venezuelan banks are not in as good condition and are looking for any way to squeeze some profits wherever they can. But that is a matter of speculation at this point. We shall see.

The point is that the actions of Hugo Chávez and Venezuelan banks together produced a sharp drop in Argentine bonds. Kirchner’s government, in response decided to start a debt repurchase of up to $ 1 billion as a way to reassure the market. And while Argentine bonds today are rebounding, there’s the fact that the 1.000 million courtesy of Hugo Chávez to Cristina was going to use for a social mission or who knows what now must be used to appease the international bond Argentine holders.

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