- The Washington Times - Saturday, March 13, 2010

SANTIAGO, Chile

There is a good deal of whispering and smirking behind the computers in the trading rooms just now about Venezuela’s sovereign bonds. Although they are priced at a hefty 12 percent interest, they are selling at 50 percent of their face value on the floor.

A novice might well ask why any investor would want to hold them at all - given the increasing difficulties for lifetime President Hugo Chavez and his country despite a currently rising oil price. A knowledgeable banker explains it this way: Primo, the Venezuelan government bonds, although sovereign issues, carry the upside of a codicil that submits them to arbitrage in U.S. courts in case of default. (Too many investors over decades were caught with useless Latin dictators’ securities.) But the clincher is that PDVSA, the wholly owned government oil company, in turn owns Citgo. This U.S. downstream refinery and distribution network has a strong following, not least because of an almost chauvinistic advertising campaign emphasizing its “typical” American dedication to the local communities it serves. Its nominal value is $8 billion, but some traders believe even in a fire sale it could bring $16 billion.

If Mr. Chavez - or his unhappy successors - should default on the Venezuelan “guilt edge” paper, the speculators reckon they would be saved by a New York City court selling off what is Caracas’ main asset after the extensive unexploited petroleum reserves.

But in the present relatively cautious financial climate, the market value of the bonds keeps falling without an end in sight as long as Mr. Chavez continues to rape the private sector and tries to buy popularity with handouts. Every populist new attitude, every “nationalization” or suppression of the media is just another reason to bring down these bonds, not to mention Mr. Chavez’s reported - as yet unfulfilled - $20 billion loan request to China. China’s largesse might be loaded. Beijing’s lending, for example, to oil producers in Africa, despite all the propaganda, has been largely cash on the barrelhead for oil deliveries or sometimes paid for with no-bid, corrupt infrastructure projects for Chinese companies that add injury to insult by importing large numbers of Chinese workers. That, even were it to come through, wouldn’t do much to stop the downward plunge.

Albert Ades is a Brazilian businessman, publisher and sportsman living in Chile. Sol Sanders is international business editor for The Washington Times.