TMCnet News

= Joint Argentina-Venezuela Bond Aimed At Different Problems
[February 21, 2007]

= Joint Argentina-Venezuela Bond Aimed At Different Problems

(Comtex Finance Via Thomson Dialog NewsEdge) Feb 21, 2007 (Dow Jones Commodities News Select via Comtex) --By Michael Casey and Raul Gallegos


CARACAS (Dow Jones)--Argentina and Venezuela will next week jointly issue their second "Bond of the South" and in so doing will attack the distinctly different financial problems confronting Latin American's two most inflation-challenged countries.

In a back-slapping exchange in Venezuela's capital which was filled with talk of bilateral "integration," Presidents Nestor Kirchner of Argentina and Hugo Chavez of Venezuela agreed to auction a $1.5 billion joint bond next Monday. The sale follows a similar $1 billion offering last year.

The first phase of the complex operation, involving a transfer to Venezuela of an Argentine Boden 2015 bond in exchange for $750 million in cash was completed Tuesday, Argentine officials said in Caracas. That bond will then be repackaged with a security worth the same amount from Venezuela and sold on to the market.

The joint operation, Kirchner said, "will permit us to meet the challenges of growth" and development.

Neither leader spoke, however, of the ulterior motives that have likely brought the two sides together.

For Venezuela, the bond is aimed at stemming an inflationary slide in its currency. For Argentina, it's a source of finance at rates considerably cheaper than those the market would normally charge to the biggest defaulter in history.

Chavez said Tuesday that the Bond of the South will be available for a minimum investment of 2.15 million bolivars, or $1,000, and that he expects many small-scale investors and cooperatives to invest in the paper.

With this sale, the government is letting people use their rapidly devaluing bolivars to buy the rights to a stream of dollars at an affordable official rate of VEB2,150.

That will be a boon to import-dependent Venezuelans afflicted by a scarcity of dollars, one that has pushed up the price of the U.S. currency in the black market to almost twice the official rate. If the operation succeeds in absorbing some of their dollar demand from the black market, it may also take some pressure off local prices.

Last year, Venezuelan inflation flared to 17%, the highest in the region, and many expect it to surpass 20% in 2007. Argentina's 10% official rate puts it in second place in the region.

For Argentina, the bond deal means it can delay facing a difficult offshore bond market.

Given the risk of asset seizures by holders of $20 billion in defaulted bonds excluded from Argentina's $100 billion debt restructuring in 2005, it has long been thought that investors would demand too high a price for Argentine bonds issued under foreign jurisdictions.

Until recently, that hasn't been a big problem. The country's finances are healthy and when it has sold debt, risk-hungry investors have been willing to buy it under Argentine law, turning a blind eye to the inherent contract risks in return for the security of knowing that their assets are out of the reach of "holdout" bondholders.

But following a recent scandal related to alleged manipulation of the country's consumer price index, the Kirchner government has seen access to one of its local markets severely curtailed. Investors are no longer keen on CPI-linked peso-denominated bonds when the nominal 10% inflation rate might be under-representing a considerably higher real rate.

That leaves the government with access to just the local dollar bond market, which it tapped with some success in a $500 million auction last week. But with doors shut to the foreign law market, Argentina continues to pay a higher price on its debt than it would if the holdout risk didn't exist. It is why many believe it should simply settle with the holdouts.

Moreover, the government will face major problems if Argentine finances deteriorate in, say, a global market crisis. "They are vulnerable in case of an accident. And accidents do happen," notes Federico Thomsen, an economic consultant in Buenos Aires. "They need a lifejacket."

Over the past two years, Venezuela has been Argentina's "lifejacket," buying bonds to the tune of $4 billion from the Kirchner government. The Chavez government subsequently flipped much of that paper over to local Venezuelan banks - also at official bolivar rates - to help them get around their dollar scarcity problems.

Those deals gave Argentina access to the Venezuelan government's petrodollar-stuffed coffers, and were priced based on secondary market rates for tis existing debt.

Now, the Bond of the South gets it into another, potentially deeper source of buying power: that of the Venezuelan population. Amid the mounting currency crisis, Venezuelans are expected to be quite willing to forego high interest rates in return for dollars that they would otherwise have to get at almost twice the price.

Indeed, Kirchner predicted that next week's sale would be done at "an excellent rate."

The rest of what the Argentine President said in Caracas Tuesday during an official visit accompanied by a large entourage of ministers, legislators and businessmen, would have sounded highly palatable to his hosts.

He described the financing deal and other joint initiatives, such as the two countries' plans for a "Bank of the South" in sweeping terms that heaped praise on the leftist Chavez. He also took a thinly veiled shot at the U.S. government, which is seeking to build anti-Chavez alliances with friendlier governments such Brazil.

"It should not bother anyone that our people want to integrate," Kirchner said.

"Some have the case of President Lula (of Brazil), or in my case, that we have to contain President Chavez. That is an absolute mistake," Kirchner said. "We are building with our brother and comrade President Chavez a South America for the dignity of our people."

-By Michael Casey, Dow Jones Newswires;; 54-11-4313 1918

(END) Dow Jones Newswires

02-21-07 1735ET

Copyright (c) 2007 Dow Jones & Company, Inc.

[ Back To's Homepage ]