In Our Opinion...

The Venezuelan Central bank announced today in its web page that they are developing an efficient technological Platform that will be transparent and of easy use for all the individuals and corporations who wish to purchase Venezuelan bonds denominated in dollars. They went further and assured that “with their mechanism, speculation will not take place since the central bank will limit its role to maintain an equilibrium between the supply and demand”. Furthermore, they said that the price of the bonds would be determined by their reference value in the international markets, which will enable the Central bank to establish a system of bands with a floor and a ceiling determined by them.

In our opinion, this statement clearly points out to the Central Bank lack of understanding of how the “Permuta” market operates: First of all, individuals and corporations who choose to be part of the “Permuta” market are not Bond investors. The Permuta, which is a swap mechanism to do an exchange between a Bolivar and a Dollar denominated asset, is purely and solely a way to document a foreign exchange transaction, through a loophole that was left purposely by the Venezuelan legislators, when they enacted the foreign exchange law after the exchange controls were established by the Chavez Administration.

Individuals and Corporations who need to sell or buy US Dollars establish a relationship with a Brokerage firm or “Casa de Bolsa” (as they are commonly known in Venezuela) and place their orders to buy or sell the hard currency. The brokers then have the choice to act as principal or an agent in which case they must find the other side of the trade, which could be one of their clients or in some instances, a ‘Professional Counter party”, or another Casa de Bolsa.

The laws of supply and demand then determine the prices. Once both parties agree on the price, the rest is simple: The Casa de Bolsa documents the transaction with a permuta in a way that after all is said and done the seller of the dollars ends up with the Bolivars and the Buyer with the Dollars and none of them with Bonds.

Yesterday, Chavez had the audacity to request every individual or Corporation to register their Bonds with the Government. Once again the Socialist Commandant, proves his lack of knowledge of the subject. Doesn’t he know that in Venezuela the Central Bank is already the sole custodian of these Bonds?

The Central Bank Platform will only work if the Central bank provides liquidity to the market and by that we mean ample supply of US Dollars given the restricted access to Dollars at the official rates of 2.60 and 4.30 and the fact than more than half of the imports had been depending on the parallel market.

What he does not seen to understand is that the Casas de Bolsa or the, “Savage Venezuelan Bourgeoisie”, as he has been calling them recently, were the market makers and among the most important providers of Dollars in the market.