The Chávez play - Venezuela and Argentina

The Chávez play - Venezuela and Argentina

Why did Hugo Chávez buy Argentina's debt? Venezuela's president tries his hand at financial
arbitrage.

Just as Venezuela is known for its exports of crude, Argentina is famous for its exports of IOUs. Less than two years after it handed its creditors a world-record loss in a sovereign
debt-exchange, Argentina's government has found an eager new patron in its oil-rich ally. Over the last year, the government in Caracas has bought some $3.1 billion in Argentine bonds. Is this a case of Hugo Chávez, Venezuela's tub-thumping president, putting political solidarity ahead of fiscal prudence? Look
closer.

The roots of the deal lie in the currency controls Mr Chávez imposed on his country during the economic meltdown of 2003. To halt capital flight, he pegged the bolívar, Venezuela's currency, to the dollar (the official rate is now 2,150 to 1), and sharply curtailed opportunities to
buy dollars at that price. As a result, a black market in foreign exchange soon opened up. The
bolívar could not hold its value at the kerbside—a dollar has traded for anything from 2,400 to 2,900 bolívars in the past year—adding to inflationary pressures.

However, unlike most of his countrymen, Mr Chávez can help himself to dollars from the state oil company, PDVSA, or from his own central bank at the official rate. This he did to acquire the $3.1 billion he needed to buy the dollar bonds from Argentina's government, which started
issuing debt with indecent haste after completing its huge bond restructuring in mid-2005.

Argentina's president, Néstor Kirchner, was more than pleased to borrow directly from Venezuela. Doing business with a fellow Latin American leftist is more palatable than asking for money
from the private international lenders he repeatedly bashes. Moreover, Mr Chávez was, in effect, offering to underwrite his debt issue. Venezuela's big purchases meant that Mr Kirchner did not need to test the market's appetite for his government's bonds too deeply.

But almost as soon as he got the Argentine paper, Mr Chávez began to sell it to local Venezuelan banks, at the rate of 2,400 bolívars to the dollar. All told, his government off-loaded $2.4 billion-worth of bonds, pocketing a tidy profit. How tidy? His finance team eagerly announced a
gain of $309m to the press last month; though the true figure may be a bit different.

The banks too were happy. They were free to sell the bonds abroad for dollars, which they promptly did for a handsome profit. Some of them converted the greenbacks back into bolívars at black-market rates, others hung on to them. Either way, this new source of foreign exchange
has relieved pressure on the black market; the bolívar has stabilised and one source of inflationary pressure has eased.

Within Venezuela, critics have complained not about the deal itself, but about who was in on it, and who wasn't. The government has still not revealed its method of choosing which banks would be eligible for a chunk of the massive return Mr Chávez was offering. “Any operation that
hands out $300m discretionally, regardless of the mechanism, is a clear incentive forcorruption,” says Alejandro Grisanti of the Caracas consultancy Ecoanalítica. In the absence of an open bidding process, government officials were free to route the Argentine bonds to banks
already supportive of Mr Chávez, to tie the sale to future support, or to receive payments or favours in exchange for offering them.

But despite this carping, can the two presidents not congratulate themselves on a clever financial manoeuvre that had something for everybody who was party to it? Argentina's government found a reliable customer for its debt; Mr Chávez achieved lower inflation and a $309m
profit for the Venezuelan exchequer; and the local banks divvied up a further gain of $250m-300m.

Unfortunately, there are no free lunches, and there is one big, hidden loser in this transaction: the Venezuelan central bank. Mr Chávez, in effect, plundered its reserves for about $580m, both by forcing it to sell him dollars at the official exchange rate, and by taking dollars
from the state oil company that traditionally went to the central bank. That is a heavy loss to the country, which might need its reserves in a pinch. “But no one's going to complain,” says Walter Molano of BCP Securities, “because nobody owns that money.”