Latest on Ecuador's defaulted bonds buyback

So she ain't that pretty, but who cares? She got the full respected talent.
Maria Elsa Viteri, the Susan Boyle of Ecuador finances.

Yesterday we heard that Ecuador would pay 35c on the dollar to buy back the those defaulted Global 12s and Global 30s with the big day set for June 3rd. Today the news is that the tendering date has been put back to June 12th. According to FinMin Viteri, the extra nine days are to give more time for reflection to those holders she talked to yesterday that are still threatening to hold out. There's clearly a game of cat and mouse going on now, but I'd suppose the fact they're playing these chess games augers well for a happy MuffinEnding.

Meanwhile, Reuters reports the Global 2015s, those bonds originally threatened to be included in the default package but eventually allow to roam free and undefaulted, are now trading at 52.75c on the dollar (yield 24%)....quite a comeback from the 25c prices of December and January.

The Venezuelan telephone game*

1. Eight days ago, Otto hears about how Venezuela is thinking about buying back debt.

2. Otto posts on the subject (title "Venezuela to buy back sovereign debt") one week ago. Adds charts, background information etc and explains the sound logic and why it's a good idea.

3. Bloomberg misses the significance of this buyback completely and blames same-day currency movements clearly related to the plan on ridiculous supposition.

4. Otto points out the error (and gets unwarranted and boring flak from certain people sitting at certain desks in a certain S.Am city).

5. El Universal today runs story on how Venezuela is thinking about buying back debt.

6. Bloomberg runs the story in English, and finally informs those who don't read this blog about what's really going on.

Moral of the story: To find out what's going on down here, read more blogs and less mainstream media. Abiding with tell you the same. So will borev. So will Bina. So will Mickey Fulp. So will The Mex Files. And so will Sapitos......................


*Also known as "Chinese Whispers" in other places

Venezuela to buy back sovereign debt

The is the total Venezuela external debt burden by quarter. Bonds and short term
notes make up around U$21.7Bn of the current $56.2Bn total.
(Click to enlarge)

You (probably) heard it here first, dudes and dudettes. The jungle drums tell Otto that Venezuela is going to use about U$1.5Bn of its very healthy international currency reserves (around U$37.7Bn as of last week) to buy back a chunk of sovereign debt, most probably the benchmark Global2027.

Bond and 'pagaré' (short term paper) debt, 2003 to date
(click to enlarge)

This would represent about 7% of total current bonds debt and is a smart move by Venezuela because:

• With the paper at around $65, they get to buy back at a considerable discount (think of it this way, sell something at $100, buy it back later at $35, say "thank you for your business, please call again")

• Venezuela will avoid paying interest on that debt (yield at 13% or so right now)

• It improves their debt profile (a fancy way of saying the world will like the news because they don't owe so much)

• It will likely give a boost to the country risk, as people buy into Venezuela debt thinking "Well, if they do it once they may well do it again". This creates a virtuous circle and all debt paper is revalued.

• The dollars in the Central Bank sit there and do nothing anyway. Of course they are important to hold, and the bigger the reserve holding the stronger the country's position. But there is a limit to the effectiveness of a large reserve holding, and for a country of under 30m people, U$37.7Bn is arguably far too much to hold. The U$100m or so that Venezuela will save in interest payments is enough reason to do this transaction.

• Be prepared for those that can see no right in anything Chávez does to worry about the use of reserve dollars like this, by the way. Sour grapes of the highest order on the menu, because this is good financial housekeeping whichever way you look at it.

Also, there is a political message to this buyback (and as we all know, Chávez loves his political messages). At a time when the USA is frantically bailing out the largest of its large financial entities and effectively nationalizing them to the cost of the shareholder, Venezuela is adding value to its position by buying up cheap assets.

The advantages of a net exporting country over a net importing country? Plain to see, no?