Poor Venezuela doesn't understand its leverage


Instead of pawning its gold, Venezuela should try demanding gold as payment for its oil. The banks would start paying Venezuela monthly protection money just for the country's refraining from doing that.

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Goldman, Bank of America Pitch Venezuela Gold Deals to Drum Up Dollars

By Michael J. Moore, Corina Pons, and Nathan Crooks
Bloomberg News
Wednesday, November 27, 2013


Goldman Sachs Group Inc. and Bank of America Corp. are among Wall Street firms that offered deals to help Venezuela obtain U.S. dollars amid a plunge in the nation's foreign reserves.

A swap proposed by Goldman Sachs would provide $1.68 billion in cash and be backed by $1.85 billion of the central bank's gold, documents obtained by Bloomberg News show. Bank of America said it could be an intermediary for $3 billion in payments to firms seeking U.S. dollars, documents show. Neither deal has been completed, a government official with direct knowledge of the matter said, requesting anonymity because the talks are private.

Dollars are becoming scarce in Venezuela, limiting the supply of products from medicine to toilet paper in a nation that imports about three-quarters of the goods it consumes. Foreign reserves dropped 28 percent this year, touching a nine-year low of $20.7 billion this month, largely because 70 percent of the assets are in gold. The metal plunged 26 percent in the period.

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"The fact you have dollar shortages is symptomatic of an economy that's completely broken down," Robert Abad, who helps oversee $53 billion in emerging-market debt at Western Asset Management Co., said yesterday in a telephone interview from Pasadena, California. "This is something that's just incredibly unnecessary, very unfortunate, and the victim of all of this is the real economy, real people."

Goldman Sachs' total-return swap would bear interest of 7.5 percent plus the three-month London interbank offered rate, for $818 million in estimated financing costs over seven years, the documents show. The swap would allow Venezuela to keep its exposure to gold, with the nation posting the precious metal or cash to a margin account if the price falls and Goldman Sachs posting U.S. dollars if it rises, the documents show.

"This is your classic, emerging market, non-transparent story," Abad said of the possibility that Venezuela would seek to monetize its gold reserves. "You have to use deduction to try and guesstimate where things are going."

Jeffrey Currie, head of commodities research at Goldman Sachs, predicted last month that gold will fall next year, calling it a "slam dunk" sell for 2014 as the U.S. economy extends its recovery. After a decade-long gold rally rewarded Venezuela, the metal's fall this year has compromised the government's ability to repay foreign debt.

Bank of America would pay Venezuelan companies less than the official exchange rate for bolivars they seek to trade, according to the documents. The Charlotte, North Carolina-based lender would get a 1.25 percent commission as intermediary, allowing the central bank to avoid directly dealing at an exchange rate weaker than the official one.

Kerrie McHugh, a Bank of America spokeswoman, and Goldman Sachs' Michael DuVally declined to comment. A Venezuela central bank official, requesting anonymity in keeping with ministry policy, said she had no information about the proposals. The nation's finance ministry didn't respond to a telephone message seeking comment on the proposals.

Former President Hugo Chavez, who died of cancer in March, stepped up Venezuela's bet on gold in an effort to move away from what he called the "dictatorship of the dollar."

From 1999, Chavez's first year in office, through 2012, Venezuela bought 75.3 metric tons of gold, according to data on the International Monetary Fund's website. Those purchases cost $1 billion based on average annual gold prices and would be valued at $3.03 billion at today’s price of $1,251.96 an ounce, meaning the additions would have made $2.03 billion. The country also sold 13.1 tons of bullion during that period, the IMF data show.

Venezuela's gold reserves total 367.6 tons, making it the 14th largest holding by country, according to the London-based World Gold Council. The metal accounts for 70 percent of the nation's foreign reserves, compared with 7.6 percent for Argentina and less than 1 percent for Brazil.

"It's our gold," Chavez, a self-proclaimed socialist who nationalized hundreds of companies and imposed curbs on currency trading, said on state television in November 2011. "It's the economic reserve for our kids. It's growing and it's going to keep growing, both gold and economic reserves."

Venezuela's currency board, known as Cadivi, sells greenbacks at the official exchange rate of 6.3 bolivars per dollar. The government, which devalued the bolivar by 32 percent in February, has failed to stem the currency's slide on the black market, where companies and people not authorized to use the official rate pay about 60 bolivars per dollar.

Cadivi has fallen behind on payments to companies and has yet to distribute about $8.2 billion that already has been approved, Asdrubal Oliveros, director of Caracas-based consulting firm Ecoanalitica, said in a telephone interview.

Venezuelan President Nicolas Maduro, who succeeded Chavez, used the military this month to order stores to reduce prices after annual inflation accelerated to 54 percent in October, the highest rate in 16 years and the fastest in the world. The former bus driver on Nov. 19 obtained authorization from Congress to pass economic laws by decree.

Average prices of Venezuelan crude exports, responsible for 95 percent of the nation's foreign-currency earnings, fell to a 16-month low this month and ended last week at $93.98 a barrel. Each $1 dollar decline in a barrel of oil costs Venezuela about $700 million per year, according to estimates from state-owned Petroleos de Venezuela SA.

Venezuela's debt securities have declined 7.7 percent this month as borrowing costs touched a 22-month high of 14.56 percent, according to JPMorgan Chase & Co. The extra compensation that investors demand to own Venezuelan bonds instead of U.S. Treasuries rose to 11.68 percentage points this month, the highest in emerging markets, according to JPMorgan.

PDVSA, as the state oil company is known, this month sold $4.5 billion of new bonds in a private placement to the central bank and oil-service providers. The sale was the first by a state entity since May 2012.

El Nacional, the Caracas-based newspaper, reported on the talks between Goldman Sachs and the central bank last week.

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