Venezuela's debt and voluntary debt swap

<a href=www.vheadline.com>Venezuela's Electronic news Posted: Monday, June 09, 2003 By: Jose Gregorio Pineda

VenAmCham's (chief economist) Jose Gregorio Pineda writes: The current exchange control system has provoked excess liquidity in the market, providing a large source of credit for the government. The economic agents' inability to legally acquire external assets leaves the system flush with idle funds, and given the deep contraction of the economy and the enormous operating difficulties with which Venezuelan companies are struggling, the only use the financial system can make of those funds is to buy public securities.

Given the serious Treasury problems, the government plans to issue 4.88 trillion bolivares of internal bonds or the equivalent in dollar, yen, or euro-denominated securities. 3.85 trillion bolivares of that amount will be used to cover internal and external debt service, and 1.02 trillion bolivares for spending this year.

• This month the government will have to make large scale public debt service payments, both externally (US$909 million) and internally (Bs.760 billion).

It is important to note the terms on which the external bonds sales are being made; the dollar-denominated bonds may pay extremely high yields, of as much as 17.65%. There is no question that, in the fact of this extremely high cost of overseas bond issues, the domestic market will continue to be the chief option at the government's disposal.

The availability of funds for public financing, generated by the exchange controls, has allowed the Finance Ministry to carry out its internal debt market restructuring through "voluntary" swaps. Naturally, in the absence of exchange controls, and consequently, the "forced" excess of liquidity, many of the scheduled internal debt swaps would become much less "voluntary" than they now seem.