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Venezuela: A clear path to default

By Miguel Octavio | The Devil's Excrement

23.03.05 | Many people tend to minimize Chavezí ability to think long term. Politically, Chavez has always stuck to his long term plans and continues to do so. Thus one needs to analyze all of the following events in its proper context:

- PDVSA buys back its debt last summer in an operation that had no financial justification: it left the company with practically no debt and the price paid was too high. The only possible explanation was that it was being done to protect the companyís Board from prosecution, since it had been unable to file its finances under US law.

- CITGO also repurchased its debt. The possibility of this being done to protect its Board was not feasible as the company has filed and continues to file financials due to the partnerships it has.

- Chavez announces that the country will sell CITGO because the company makes no money. This despite the fact that the company is making record profits and according to one of its partners, Lyondell, receiving up to US$ 5 per barrel of oil above market, under the terms of its contract.

- Chavez threatens to not export oil to the US. This could only happen if CITGO is sold as the Venezuelan oil company PDVSA, has long terms agreements with CITGO.

None of the above events makes sense, unless the plan is to have the country default on its foreign debt the moment oil prices drop. The excuse? Easy: The revolution needs the funds. With no debt in the US, no property in the US and no exports to the US, the effect on Venezuela will be minimal.

If not, look at Argentina. It not only defaulted, but restructured its debt under terms extremely negative for debt holders who had no recourse but accept. If Argentina can do it, why canít revolutionary Venezuela do it too?

Investor beware.

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