On August 8th, my third day in Venezuela, the Bolivarian Republic announced that it would be buying another tranche of Argentine bonds, worth US$1.5 billion. So what happened? Something unexpected: the price of Argentine bonds tanked, and the gap between the yield on Argentine bonds and U.S. Treasuries spiked above 7 percentage points.
The vertical white line is August 8th.
Now why would a bond purchase by a flush buyer cause investors to worry? It’s not that Argentina overissued. The country had only sold $7.46 billion of bonds to Venezuela, all of which involved refinancing existing debt, since the country is still running a budget surplus. Nor is it the country’s recent default and repudiation: that risk was already priced in.
Well, the Bolivarian Republic bought the bonds from Argentina, but it sold them on to Venezuelan banks instead of holding on to them. Why? To soak up bolívares held by the banks before the banks lent them out. It turns out the banks didn't hold on to these issues, but dumped them that very day “at practically whatever price,” in the words of La Nación’s business page.
Moody’s downgrade from “positive” to “stable” followed along on August 14th, like clockwork.
Of course, as you can see, the Bolivarian Republic’s own bonds aren’t doing too well either. Strange, for a country in the midst of an oil boom, and supposedly known for its prudent budgeting ... no, really.
This is not going to end well. More on that later, after a brief diversion into Bolivia’s gas nationalization.
At some point I really am going to have to start making those AFOE posts that I’ve been promising. Too much real work, that’s my excuse. Say ... are there any topics that I promised to blog about and never got around to?
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