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Venezuela: Bonds, devaluation and monkey business

By Miguel Octavio

03.12.04 | So today the Minister of Finance announced that on Jan. 1st the official exchange rate will become Bs. 2150 per US$ from the current Bs. 1920 per US$, an 11.9% devaluation. Nothing strange here, it was in the budget, it was expected, it was even mentioned yesterday by the Head of the Finance Committee of the National Assembly (Rumored to be the next Minister of Finance). But isn’t it strange to announce a devaluation one month before it occurs. Isn’t it?

Piensa mal y Acertaras? (Think badly and you will be right on target):

Today the Government completed placing up to US$ 500 million in the country’s Global ’34 bond. The placement was made in local currency at the official rate of exchange. The bond was sold to local investors at a price to be announced tomorrow between 122 and 125, while the bond trades in Wall Street at 103-104.

Why the difference? Easy, you pay in Bolivars at the official exchange rate at the higher price, but later you turn around and sell the bond to foreign investors at the lower price. The “implicit” exchange rate at which you purchased the foreign currency is somewhere between the official rate and the parallel market rate, which today was around Bs. 2,400 per US$.

The bond was not that attractive to individuals, because the difference between the parallel market rate and the official rate was not big enough and the market price of the bonds would fluctuate between now and Dec. 10th. when you get your bonds delivered. It may fluctuate even more with oil prices tumbling. It was attractive to corporations as it provided a legal way to purchase foreign currency. However...

…once the devaluation was officially announced, right after the book for the bond was closed, it meant that the parallel market rate tomorrow will adjust up to the announced devaluation and will be some Bs. 200 higher than yesterday and those that bought the bonds will make money like bandits…Of course, you had to know in advance about the announcement of the devaluation…Did someone know? You figure it out. Otherwise, why would the Government make the announcement today, why not wait until late December? Viva la revolucion!

(Note: think about it, who gets hurt the most by a devaluation?)

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