Venezuela Bonds Rally on Currency Swap Market Promise

Venezuelan dollar bonds rallied the most in almost eight months after Economy Vice President Rafael Ramirez said last week the country planned to start operating a new currency swap market before the end of the month.

The South American country’s benchmark dollar bond due in 2027 rose 0.99 cents on the dollar to 67.69 cents at 11:14 a.m. in New York. The yield on the bond fell 23 basis points to 14.84 percent after falling 66 basis points on Ramirez’s Feb. 7 comments, the biggest two-day decline since June 27.

The “complementary” system will be different from a previous swap market closed in 2010, which lent itself to irregularities, Ramirez said on Feb. 7, according to state news agency AVN. Public and private companies can participate, and the transactions can take place once the country’s foreign exchange law is modified, he said.

“Unlike in 2010, this new market will have a controlled price, and they will also likely continue to ration dollars there because demand will be too high as international companies try to take earnings out of the country,” Henkel Garcia, director of Caracas-based consultancy Econometrica, said today in a telephone interview.

Venezuela will resume dollar auctions on a secondary system today after scrapping last week’s installment because of what the government called fraudulent bids. The government partially devalued the bolivar last month by moving airlines, incoming foreign investment and travel allowances to a secondary rate set at auctions amid a 10-year-low in reserves.

‘More Transparent’

The auction system, known as Sicad, last sold dollars for 11.36 bolivars, compared to the primary rate of 6.3. One dollar sells for about 81 bolivars on the black market, according to, a website that tracks the rate on the Colombian border.

“It will be more transparent,” Ramirez said, referring to the swap market. “The private sector should be able sell its foreign currency so that our economy can function. With our public funds from oil we’re going to guarantee what we consider essential to our priorities.”

Venezuela will release $42.5 billion of foreign currency to the economy this year, including $11.4 billion through auctions in the Sicad system, as it tries to ameliorate dollar shortages that are causing irregular supply of imported goods ranging from shaving blades to milk. Consumer prices are increasing at the fastest pace in the world, with annual inflation of 56 percent.

‘Parasitic Bourgeoisie’

“We cut the dollars to the parasitic bourgeoisie and we’re not going to give them a single dollar more, even if they cry, yell and kick,” Venezuela President Nicolas Maduro said Feb. 8. “The homeland’s dollars are for producing.”

Former President Hugo Chavez in 2010 closed the so-called “permuta” currency swap market amid accelerated inflation and an increasingly weak bolivar.

The crackdown led to more than 50 brokerages going out of business, while four partners at Econoinvest Casa de Bolsa CA, the country’s largest brokerage, were arrested. Chavez called the financiers, who were accused of illegal currency trading, “a nest of mafiosos.” The partners have said they are innocent of the charges.

The bolivar traded at 8 to the dollar when the permuta market shut, less than twice the official rate of 4.3, Russ Dallen, the Miami-based head trader at Caracas Capital Markets, said today in an e-mailed note to clients.

‘Government Struggling’

“The problem with a free market in the bolivar is, of course, that the rate would become not only widely known but widely used to price things,” he wrote.

If the government let the exchange rate slide to around 30 bolivars per dollar on the swap market, inflation in 2014 would exceed 100 percent, Garcia said.

Maduro on Feb. 8 ordered Industry Minister Wilmer Barrientos to meet with representatives from Toyota Motor Corp., the world’s largest automaker, after it said it is halting production in Venezuela as of Feb. 13 due to a delay in receiving customs clearance for parts.

“Every time there’s a difficulty, it’s the same news: Toyota’s leaving,” Maduro said on state television. “You don’t have to be very intelligent to find that behind these things there are always political interests.”

Companies in Venezuela demand dollars without developing production capacity, Maduro said.

Car sales in Venezuela fell 87 percent in January from a year ago to 722 units, the Caracas-based automotive chamber of commerce Cavenez said Feb. 6. Ford Motor Co., the second-largest U.S. automaker, said last month that it was reducing production in the country as the availability of U.S. dollars crimps its ability to pay suppliers.

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