SITME Bond Yield Voodoo


The kicker is that your bank has to document every step of that operation to the Central Bank, which is thereby empowered to effectively control the implicit price you pay for each dollar, and the total amounts involved.

That, as I grasp it, is the short version.

Now, it seems very clear to me that this mechanism is bound to distort the market for Venezuela’s sovereign debt.

Under the old permuta system, Brokers were also supposed to go through this whole bond-swapping rigamarole. In practice, though, they often didn’t. They faked the paperwork and just sold dollars for bolivars – which is why a bunch of them have ended up in trouble with the law.

What the government didn’t quite grasp is that brokers were doing it a favor by skipping the actual bond-swapping two-step. Keeping Venezuelan debt out of it limited the parallel market’s impact on PDVSA and sovereign bond prices. By creating a system that forces traders to use actual bond sales to get cheap dollars, they end up artificially depressing those bonds’ values and boosting their yields.

These days, by contrast, the bolivar-denominated bond market is dominated by SITME operations. Nobody buys Venezuela bonds because they want to invest in Venezuelan sovereign debt anymore. Everybody who buys Venezuelan debt in bolivars is doing it as a means to an end: to turn those bolivars into dollars.

What interests me is what that mechanism may be doing to distort the price of the paper used to mediate these barely-disguised Forex trades. 

Here I’m real unsure if I’m grasping the dynamic right, so if you know about this stuff, please pipe up in comments and correct me. But wouldn’t the cumulative effect of lots of people trying to sell bonds for dollars at whatever price they can get be to depress the dollar price of the bonds, and to raise their yields?

And wouldn’t that largely explain why Venezuelan sovereign bond yields are now ridiculously, impossibly high?

Because, screwed up as the country is these days, it does seem a little peculiar that Venezuela should now have the highest country-risk in the world, bar none. I mean, we’re talking about a country that has never defaulted on its debt, and one that basically floats on an ocean of crude oil. How can a country like that possibly be judged likelier to default than any other place in the world?

It doesn’t add up.

So I guess this post is mostly a cry for help…tell me, am I getting this right?

Because my gut tells me that what we’re seeing here is the Law of Unintended Consequences kicking the government in the ass for the umpteenth time.

Could it be that, in launching SITME, the brainiac-squad surrounding Merentes just didn’t stop to think SITME would make it both urgent for the government to issue more and more debt (to keep the system supplied with paper) and mind-bendingly expensive to do so?


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