Hugo Chávez, darling of Wall Street


Bloomberg’s Ye Xie and Nathan Crooks have a very interesting article profiling the cozy relationship between Hugo Chávez and his bondholders. They make the case that, in spite of all his rhetoric, Chávez has never missed a bond payment, and the 14.7 percent per year Venezuelan bonds have yielded in the last 13 years or so far outstrips the performance of comparable assets.

The money quote after the break:

While calling debt the tool used by the U.S. “empire” to exploit Venezuela, Chavez honored his obligations even after a three-month nationwide strike in 2003 all but shut down the country’s oil industry and caused the economy to shrink 7.6 percent that year. He made an interest payment on a bond that is tied to oil prices in 2005 after a four-month delay prompted S&P to temporally downgrade Venezuela’s credit rating to selective default.

Chavez paid off the debt because non-payment would lead creditors to seize Venezuelan oil shipments, which supply half of the government’s revenue, according to Simon Nocera, a former economist at the International Monetary Fund. Bond investors can also freeze Venezuelan assets overseas, including refineries and gas stations of Citgo Petroleum Corp., a subsidiary of PDVSA, he said.

My only quibble with the piece is the net debt to GDP ratio of 22 percent that they cite. Even chavista mouthpieces such as the CEPR estimate it at 45.5 percent of GDP, saying that it’s 25 percent if you exclude PDVSA, which you really shouldn’t. But those numbers are probably inflated because of how GDP calculations are affected by the price of oil and Venezuela’s overvalued exchange rate (although, admittedly, I have not looked at this issue carefully). Perhaps one of our resident macroeconomists can chip in.

Regardless, it’s a terrific piece, so go read it now.

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    • Well, that’s kind of misleading, because it’s 681% over many, many years. People hear that and compare that percentage to the percentage they get on their savings account (which is annual), and the comparison wouldn’t be right.

    • I rather like the CDS valuations. It is rather telling to me. And of course, the banks don’t mind sucking up the returns in the meantime because they usually are the first ones to run and have the ability to dump the bonds quickly in a firesale if things go awry.

      What isn’t mentioned is the unwinding that is going on by holders of the bonds. From anecdotal evidence, talks with asset managers, and other off the books stuff, lots of what you’d call “premium” bond holders have begun to shift their positions. The JP Morgans and GS type-holders are giving way to the NML Capital folks in the last year or so.

      The uncertainty is not doing wonders for the market. Regime change? Likely. Good regime change? Not so sure.

  1. The difference is the net in the net debt ratio. They are substracting their estimation of the liquid financial assets in hand of the governemnt (Funds, deposits of any sort, etc)

    • So they’re subtracting their best guess about what’s left in Fonden (+ Fondo Alan, + Fondo Morrocoya-de-Rosinés, y pare Ud. de contar) from the debt!?!?!

      But but, but, but but…but…but…


      That’s the whole point!

      Coño pana…en esa vaina creerá Alice in Wonderland Capital Partners LLC nojoda…

      • It is normal to mark to market based on substantive numbers available from independent analysis and consistent governmentally supplied numbers.

        However, this is marked to make believe based on information supplied by conjective rumor and the Ministry of Imaginary Numbers.

        That said, the numbers can also be extrapolated from oil shipments for delivery based on short-term anticipated revenue. It isn’t a good way to calculate cash flows because of the potential volatility in oil prices, but those numbers are supplied third party from numerous sources and are remarkably consistent. Not great, but when in the dark any light source will do.

        Chavismo has it right in one aspect, albeit they tend to apply it incorrectly. In the financial markets, hoarding, speculation and gossip are affecting the price.

      • Thta´s why ai mentioned “their estimation” I shold´ve added “whatever it is”. I´ve been always cautious about information generated by and for consumption of Wall Street

  2. This shows how reliable Venezuela is as a payer of its debts no matter how you spin it Quico. And now you have to take into account that the Caracas Stock Exchange is the best performing on the planet at least in the last year. (about 117,000 to 492,000 = +320% rise which far outstrips inflation and devlauation cmbined.)

    Chavez is not just doing something right – he is 1000% right in his policies.

    Now better buy some harina pan on line from Amazon……..:-) plenty of it in Excelsior Gama in Santa Edivigis thid morning……hahahahaha.

    It would be better to divert attention from these superb accomplishements by talking about Iris Varela and the prisons….correct?

    • Please please please nobody respond to this ignorant chavista logic. Its not worth it, resist the urge.

      PDVSA owes more than $70 billion dollars to creditors and suppliers, and production has dropped by 1 million barrels per day in the last ten years. 1 million barrels! Thats over $30 billion in crude sales revenue per year lost due to mismanagment at the highest levels. The pueblo is in charge, and the results speak for themselves….they suck.

      I have been working here for 6 plus years trying to help, but there is no logic, no rationale, no rule of law, no contract sanctity. Ramirez and Parada are so obviuosly corrupt it is sickening, and everyone is too afraid to say anything.

      Its not going to get better, for generations. I agree with Miguel, if you can get out, do it. I will soon con mi bella maracucha.

      • Lobo,

        Can you tell us where you got the 70 billion dollar number? PDVSA’s balance sheet puts debt at 40 billion. Is the 30 billion financing from suppliers?

    • Seriously? You do realize that the IBC/BVC equities are so lightly traded and are so fundamentally irrelevant to the rest of the securities world that its literally a private park for those with the desire, insider information and capital, to vastly move the handful of stocks that trade on it. And it is a spectacularly tiny amount of companies that trade so thinly that any movement of the majority weighted components should create a shift.

      Do you pay attention to the volume? The trades? What was it, 12 trades for a total of ~53k in volume today? Banco Provincial and Dominguez & CIA? Banks and plastic containers, the only two companies that trade today? That’s like calling the guy who fixed the numbers and then won the lottery a “saavy investor” for his wealth. Is it true? Kind of, but not so much.

      I grant you, the BVC serves as a debt paper trading site…after all, the bonds need to trade somewhere, but as far as the equities go, its pretty laughable.

      An easy way to prove a point? How about if all the readers of this blog were to donate to a kickstarter a few bolivars/dollars for a charity investment in PPWSA on the CSX. All proceeds going to…well…how about that school that needed tools and other items? Shares are trading at about 6200 Cam. riel…or $1.50. Phnom Penh Water Supply Authority is the only stock trading on it, so a sufficient movement, even if artificial, would bump the IBC. Right?

      Now, about your dig about the Iris Varela post… doesn’t it seem somewhat hypocritical that you are a chavista espousing socialism trumpeting the “triumph” of the IBC, which is, when all is said and done, a manifestation of one of the highest forms of capitalism? Isn’t that similar to the Grand Dragon of the KKK receiving the lifetime achievement award from the NAACP?

  3. Paying foreign debts and subsidizing imports while instituting domestic price controls and nationalizing private enterprises all have something in common. They all pander to foreign interests while crippling domestic production and lay waste to domestic infrastructure.

    Venezuela is competing well as a high quality debtor nation vis-a-vis Latin American emerging economies, but according to Wold Economic Council Reprot: “The Global Competitiveness Report 2011-2012”: Venezuela ranks close to the bottom among the least competitive economies of the world, and continues to deteriorate!! I quote:

    “The poor quality of the country’s (Venezuela’s) public institutions is ranked the worst in the sample at 142nd place. This dismal showing, coupled with severe weaknesses in its markets efficiency—especially for its goods and labor markets, where the country repeats as the worst performer.”


    How is this not a factor in Venezuela’s bond ratings?

  4. The discussion about the Caracas Stock Exchange is a silly one, however, it keeps coming up from time to time by retarded individuals that do not understand that the volume is so low that it is not representative of anything. On the other hand, I completely agree with the Bloomberg article and all I have to say is: screw all the political/economics pundits that rant on the Venezuelan media regularly and bash those who invest in Venny/PDVSA bonds. These pseudo-experts have no clue whatsoever and some don’t even have real jobs, let alone a job in a place where they actually understand the dynamics of fixed income markets (by the way, I am not saying that all banks/funds are a role model and understand these markets, as the majority has also been mistaken regarding Venny/PDVSA.). It is funny to see that these pseudo-experts who regularly bash these securities are also the same ones that are also experts on whatever is the topic of the day in Venezuelan media (weathers and floods, food scarcity, kidnappings, etc). They are just professionals in talking crap on T.V., and as a consequence, many people have missed out on 681% returns and even more if you were creative enough. Very few people have actually been able to analyse the situation objectively because they have been blinded by the government’s political paraphernalia. Regardless of all the anti-economic and irrational measures that the Govt. has taken, it has paid bondholders and it would probably continue to do so. A default would be the very last of a long list of measures that the Govt. would take to manage a potential debt problem. They will probably continue devaluating the currency as they’ve done in the past, which is much more effective considering that 80% of the population doesn’t even care (remember the two last devaluations? No riots, no protests, nothing) and are numbed by populism. Defaulting is equivalent to committing suicide due to the excessive reliance on oil revenues. Full stop. Nothing more to analyse. Stop listening to pseudo-specialists in Globovision or wherever else.

  5. Venny: The high return on Ven Bonds is well earned considering the percieved risk of the Govt defaulting on their payment . This risk perception is not linked to the govts behaviour in the financial markets ( which is almost flawless) but to its largely lawless rethoric and behaviour in other areas . Then there is the risk factor associated with the govts general mismanagement of its activities and Pdvsa’s corporate operations and finances which consequences are cummulative in character , getting more difficult to handle as each year passes. Still you are probably right that the last thing this govt will want is to default on its international debt obligations because of the dreadful image it would give it as a financially weak govt. This govt really cares about appearances ,about keeping up the appearance of being financially unsinkable and all powerful, they hate nothing more than being percieved as weak and vulnerable. this gives a strong edge of protection to bond payments . Still there are some little advertised details of various Pdvsa money-production problems that might give you food for thought. Mean time enjoy the feast …for as long as you can!!

  6. Bill,

    I agree with most of what you say.

    In the end one has to make decisions when deciding to allocate capital and comparing among alternatives. To me, buying Venny/PDVSA bonds has been by far less riskier than investing in some of the alternatives around. That is the point. I believe that the majority of the people perceive this risk incorrectly and thus excessively punish the prices of Venny/PDVSA bonds without a sound justification. To be honest, that is fine by me as it has opened the door to incredible opportunities. When you talk about the little advertised details, then I will tell you to also have a look at the “not even advertised details” of developed economies at the brink of default (e.g. Spain, Portugal, Italy, U.S.). Some might argue that these would never default, etc. but thats another discussion. The truth is that all these economies had equally fragile or even more fragile fundamentals in some cases and for years payed extremely low coupons. Not only this but to make it even worse, they transmitted a false sense of safety, thus encouraging investors to allocate even higher amounts of capital since classic portfolio theory would recommend you to invest a higher proportion of your capital in “low risk” assets. So in the end, the fact that Venny/PDVSA bonds pay high coupons at least gives me some tranquility because I know I am being well rewarded by running the risks that at least I know exist. That is fine for me. Yeah, it might not last forever but that is the same everywhere you go right? Some things blow up every now and then, some things don´t, just try not to get caught on the wrong side of the fence more times than you should. And frankly, after many years of good returns in Venny/PDVSA, most people have accumulated a nice cushion than can tolerate certain degree of losses even now.

  7. Glad you are happy with ur investment , as they say nothing wagered nothing gained , the risk will increase with each years passing but maybe youll end up ahead with a big fat cushion to console you of any ultimate fall, which, with a bit of luck might never ocurr !! I find being too happy with an investment a bit dangerous because one tends to become overconfident and overplay ones hand !! but then again you appear to be a professional and for a profesional its all part of the game . Ortega y Gasset had a saying ” a thinker should not be afraid of mistakes just as a soldier should not be afraid of being hurt or killed on entering battle , for in both cases they face risks which are part of their chosen lives”


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