From the Editors of VenEconomy

The Ministry of Economy and Finance has announced two new international sovereign bond issues, one for a minimum of $1.5 billion, at ten years and 7.75%, and the other for $1.5 billion at 15 years and 8.25%, giving a total of $3 billion (=Bs.F.6.45 billion at the Bs.F2.15:$ exchange rate).

According to the official announcement, this combined offer seeks to cover “the financing of projects as well as current spending.”

VenEconomy has done some calculations that might help to measure the impact that these new bond issues will have on Venezuelans.

1. Assuming that the market absorbs these new issues without difficulty and that they are quoted at prices similar to the “yield curve” of Venezuelan bonds on the international market, it could be inferred that they will be traded at between approximately 71% and 74% of their face value.



2. That being the case, it can be inferred that the price of the bonds in bolivars could be in the order of 160%-170% of their face value, which means that the government would collect some Bs.F.10.5 to Bs.F.11 billion, allowing it to shore up spending in what is shaping up as an election year.



3. Moreover, if those bolivars are used to buy dollars at Bs.F.2.15:$, the government could pay off some $5.1 billion of its foreign debt. Such are the mirages generated by a dual exchange rate system.



4. This accounting mirage could end up costing the country dear. The future of Venezuelans is being mortgaged. According to the Central Bank, Venezuela’s public foreign debt amounted to $48.3 billion as at June 30. With the new issue, that figure would go up to $51.3 billion, equivalent to Bs.F.110.3 billion at the Bs.F.2.15:$ exchange rate. That is equivalent to 63% of fiscal spending for 2009 and 30% of GDP. However, if account is taken of the current value of the competitive parity, which would be around Bs.F.5:$, the debt would shoot up to Bs.F.256.5 billion or 150% of this year’s current spending and 30% of GDP. What is more, bearing in mind that this debt would be paid in 2019 and 2024, when, obviously, the bolivar will have been devalued several times, the debt will be much greater.

True, it should come as no surprise when, in moments of crisis, governments resort to borrowing in order to keep the economies of their countries afloat. That’s normal.

However, in Venezuela’s case, these two issues come on top of an extraordinary build-up of debt incurred by this administration during the years of the oil revenue bonanza. According to the Central Bank, Venezuela’s foreign debt went from $28.45 billion in 1998 to $48.32 billion as at June 30, 2009; and domestic debt, according to the Finance Ministry, went from Bs.F.2.5 billion in 1998 to Bs.F.43.9 billion in 2009.

In short, thanks to these new issues, the government will be able to continue its spending spree for a while longer, while it puts the future of all the Venezuelans dangerously in hock.

Put another way, future generations will pay dearly for this “revolutionary’s” imprudence and squandering.

VenEconomy has been a leading provider of consultancy on financial, political and economic data in Venezuela since 1982.

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