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Venezuela's Hugo Chavez causes panic in Wall Street

By Alexandra Beech, www.veninvestor.com

Yesterday, some investors panicked on Wall Street. Venezuelan government-issued bonds, which have been stellar performers, began to tank. What was going on? Apparently, some portfolio managers panicked when Chavez ranted about seizing international reserves.

During the last few days, investors have slowly been scooping up Venezuelan debt. Their thinking is simple. For one, they believe the worst is over. If Chavez could survive the nightmare strike and a nightmare recession, then he could survive anything. So-called “political volatility” was diminishing in their eyes. Even with a recall referendum down the road, the economy was bouncing back, and Chavez had demonstrated a resilience and will to political survival that few Latin American leaders had possessed.

Furthermore, he had astounded investors by restoring oil production nearly to pre-strike levels. Despite all the hoopla about the fired workers and inefficient management, PDVSA was producing enough revenues to fill the Central Bank coffers and more.

Compounded to that was the fact that world oil prices were remaining exorbitantly high, flooding the Venezuelan government with cash.

Investors usually rely on quick and slick analyses to make decisions. The smart ones crunch the numbers themselves, but most rely on research reports.

On a numbers level, Venezuela does look good. Currency controls have allowed the government to amass dollars. Companies, which should have drowned during the crisis, brought their own dollars into the country from their foreign accounts, helping the government to stay afloat. Furthermore, the Venezuelan economy is due to recover around 9% this year, according to Barclays Capital.

However, there’s no PhD in the world that can prepare you for Chavez. By now, as some traders have told me, Chavez’s nuttiness is factored into their investment decisions, and chaos is interpreted as stability. Investors only care about one thing, and that is his ability to service his debt. Thus far, the answer has been yes. Some estimate that he can blow another 5% of GDP, around $5 billion, on social programs, bringing the fiscal deficit to 10%. Some worry that once he tampers with reserves, debt prices will tank as his only source of security is threatened.

The fact is that Chavez knows how to tippy toe on the red line without crossing it. But there’s no reason to believe that he can’t be pushed over it, either by growing discontent with his inefficient policies, or a sudden drop in oil prices. Oil prices are unlikely to cut it; in fact, they just reached new highs recently.

That means that the only real risk is his policy risk and with Mr. Chavez’ creativity and eagerness to redefine his revolution by the day, his policy risk will likely grow. He’s now going after the Central Bank, one of the few institutions which his “revolution” hasn’t reached as witnessed by relatively controlled inflation. Because he doesn’t know to manage the Central Bank, he might have browsed through some of his revolutionary text books and realized that the Che Guevara took over the Cuban Central Bank and then destroyed it. Maybe he figures that he should do the same. The difference, of course, is that the Che couldn’t care less about what the rest of the world thought. (In fact, the more controversial he was, the better.) Mr. Chavez, though, will soon realize that this is not an option for him and, not surprisingly, that his revolution can’t get as far as he thinks (at least not now) if his regime is to survive.

Within all the mayhem, one fact remains. His problems are not going to disappear. Whether he wins or loses the referendum, Chavez faces a severe governability crisis, and an opposition that can only become more organized and efficient with time. In the meantime, as long as bondholders “own Venezuela”, they will likely wake up with headaches. Not even Chavez knows what he’s going to do or say on any given day. Thus far, he doesn’t seem to understand that his words move markets; unless, of course, he is short Venezuela.



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