Kyle Bass Interview on BBC HardTalk

Kyle Bass was interviewed on BBC HardTalk — the 25 minute interview dates back from the 15th of November, showing just how much catching up I have to do — but is still very interesting.

It's amazing how the interviewer is trying to use the speculator in Kyle Bass as a culprit and the cause of the crisis, blaming him for making money by betting against governments, and taking short positions, and so forth...

The 2 part interview is available on YouTube.

Part 1:

Part 2:

Reports on Ireland

Max Kaiser did a very good job summarizing the current state of matters in Ireland in a video report available on YouTube in two parts: part 1, part 2.

A few things you knew already:

• The bailout was really a bailout of the foreign banks which held the debt of the Irish banks.
• European banks who have been bailed out are actually lending the money for this bail out, so they are making a double whammy for being stupid enough to lend money to these insolvent institutions.
• That debt is not going to be paid out, default/massive haircut is the only solution given the massive amounts of debt involved.

A few things that might be new to you (they were new to me):

• There are currently more than 300,000 excess properties in a country of 4.5 million people
• There are many ghost towns spread around Dublin
• If you default on your debt and your home is repossessed, you can be jailed, as the debt is not erased.
• As a consequence of the previous point, there have been, and are still, waves of emigrations. People who cannot afford their homes anymore — or who do not want to be a debt slave for the next 20-25 years — are now emigrating in mass to the US and Australia

Michael Lewis also wrote a great report on Ireland, available on VanityFair:

When Irish Eyes Are Crying
First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic. In 2000, suddenly among the richest people in Europe, the Irish decided to buy their country—from one another. After which their banks and government really screwed them. So where’s the rage?

By Michael Lewis, March 2011

Finally, as a sign of how mad the markets participants have become, here's a nice story published by Bloomberg a few weeks ago. One must be seriously mad to believe that this is the beginning of the sovereign debt crisis in Europe. Just a quick look at the sovereign yields would confirm that. And of course, the fact that RBC bought BlueBay is yet another sign that the banking sector is still very much entrenched in its willing to speculate...

April 8 (Bloomberg) -- BlueBay Asset Management, which oversees $39 billion in assets, is buying Irish government bonds because pessimism surrounding the country’s finances has reached “unrealistic” proportions.
[...]
Dowding began buying Irish bonds last week after the government said it wouldn’t penalize investors in Irish bank debt. BlueBay now holds more Irish debt than the level recommended by the index it uses to measure performance, a so- called overweight position.

“Ireland’s economy has more competitive advantage compared with Portugal’s,” Dowding said in an interview. “We like the fact that the interests of European Central Bank and European Union policy makers are very much being observed by the new government. A near-term restructuring of Irish government debt is extremely unlikely.”
[...]
“There is a sense in the market that the European authorities may have managed to engineer the beginning of the end of this stage of the euro-sovereign debt crisis,” he said. “The outlook for peripheral countries is turning somewhat more positive. However, our long-term assessment on Portugal remains one where we are very concerned about its growth prospects.”

BlueBay was bought by Royal Bank of Canada in December.

Portugal Government Collapses — Irish Readying a Hair Cut on Bond Holders — Euro Euphoria Sill On

I do not like to state the obvious, but...

... It was obvious that asking the people of Portugal whether they wanted an austerity plan after 40 years of borrowing to spend and living beyond their means had absolutely no chance of succeeding. Moreover, the debt is currently so high, that no austerity plan can make these sovereign countries solvent again. So it is just wasted efforts and time to the ineluctable end game: default (partial or complete) on the debt. This is what Ireland is discovering, and what Greece will discover soon, and then the dominos will start falling.

The statement made by Socrates: "This crisis occurs in the worst possible moment" actually made me laugh. Crisis always occur at the worst possible moment, since they were in the making for 20 or more years, but nobody wants to tighten their belt during the "good times" and when money is flowing like someone was actually printing it — or was it actually the case??

And as usual, economists come with their suggestion that these insolvent countries should borrow from the IMF and the EU in order to become solvent. Good lord. One doesn't become solvent by borrowing more and getting more into debt. I think a 5 year old would understand that.

In case you missed this video, it's a fantastic one:

March 23 (Bloomberg) Portuguese Prime Minister Jose Socrates said he presented his resignation to President Anibal Cavaco Silva after parliament rejected the government’s deficit- cutting plan, raising the chance of an international bailout.

Socrates made the announcement tonight in an address to the nation after meeting with Cavaco Silva at the president’s residence in Lisbon. “This crisis occurs in the worst possible moment for Portugal,” Socrates said.
[...]
“If parliament decides on a motion against the stability and growth program, that means the government is not in a condition to make commitments internationally,” Socrates said on March 15. “That would mean a political crisis. In my understanding, the consequence of a political crisis is the worsening of the financing risks of our economy and would lead Portugal to request external intervention.”
[...]
Portugal intends to sell as much as 20 billion euros of bonds this year to finance its budget and cover the cost of maturing debt. Portugal faces bond redemptions in April and June worth about 9 billion euros in total. It also faces bill maturities in July, August, September, October and November.

“With bond yields stubbornly high and heavy debt redemptions due over the next few months, it appears all but inevitable that Portugal will be forced to follow Greece and Ireland in accepting financial support,” economists Emilie Gay, Roger Bootle and Jonathan Loynes of Capital Economics Ltd. wrote in a note yesterday.

March 17 (Bloomberg) -- Irish Prime Minister Enda Kenny said it’s “grossly unfair” that taxpayers alone should carry the cost of bailing out the country’s banks as he pushed for lower rates on a European-led rescue loan.

Kenny, on a visit to Washington where he says he’s trying to repair Ireland’s “damaged” reputation, called for changes to the aid package by the European Union and the International Monetary Fund to avoid a situation where Ireland struggles to pay back its loan and can’t generate economic growth.

“It is grossly unfair to expect the taxpayer to have to pay 100 percent for the reckless lending practices of banks which caused this in the first instance,” Kenny said yesterday in an interview with Bloomberg Television’s “InBusiness With Margaret Brennan” broadcast today. The 5.8 percent average rate Ireland pays for its loans is “too severe,” he said.

Kenny’s Fine Gael party took power last week after pledging to seek a European agreement on sharing the cost of rescuing the financial system with senior bank bondholders. His government is counting on ongoing stress tests to reveal the full extent of potential losses at the country’s lenders, after injecting 46.3 billion euros ($64.4 billion) into the financial system over the past two years.

Kenny stopped short of saying who should pay along with taxpayers. Asked about the treatment of senior bondholders, Kenny said that his government will put no additional cash into banks “until you see the scale of what the liability is, until there is an understanding of what might be here.”

Kenny met with Treasury Secretary Timothy F. Geithner yesterday as part of his U.S. visit. He will hold talks with President Barack Obama today and attend the annual White House reception for St. Patrick’s Day, Ireland’s national holiday.

The Irish prime minister vowed to keep the nation’s corporate tax rate “intact” to attract foreign investors, adding that his country is “open for business.”

Less than a week after failing to obtain a discount on the rate charged by the EU because of Ireland’s refusal to increase the country’s 12.5 percent company tax, Kenny repeated he is not willing to negotiate it.

“It’s not correct to equate a conditionality of a reduction in interest rates with the condition that a corporate tax is increased,” he said. “I am not prepared to compromise on something that is the individual competence of each country in respect of our corporate tax rates.”

The premium investors charge to hold Irish 10-year debt over the equivalent German bunds, Europe’s benchmark, was little changed today at 641 basis points. It reached a record of 680 on November 30, two days after the bailout.

Citigroup Inc. Chief Economist Willem Buiter said EU leaders are “playing with fire” by not acceding to Ireland’s request as it may force the country to restructure its debt unilaterally.

“They have to come up with something for Ireland,” Buiter said. “They’re going to have to make concession or Ireland will have no option but to go it alone.”

French President Nicolas Sarkozy and German Chancellor Angela Merkel at a March 11 euro-area leaders summit refused to extend a cut of Greece’s borrowing costs to Ireland as Kenny pushed back on taxes. Ireland has used the rate, which is about half the EU average, to lure companies such as Hewlett-Packard Co. and Pfizer Inc.

Ireland pays an average 5.8 percent interest rate on the 67.5 billion euros of aid from the IMF and the EU. Kenny said he expects to obtain “some flexibility” from Europe.

Feb. 28 (Bloomberg) -- Enda Kenny will push for the quick formation of an Irish government and the re-negotiation of an international bailout after what he called a “democratic revolution” reshaped the nation’s political landscape.
[...]
He’s seeking to lower the 5.8 percent interest rate on the bailout loans and end the protection of senior bank bondholders.

“We can count on a good match forthcoming with Germany and France in one corner and Ireland in the other as a Battle Royale gets played out in front of a worldwide audience,” Mark Grant, managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, said in an e-mail yesterday.
[...]
Kenny said the bailout cost is “too much” and he’ll seek agreement to ease the terms, including the existing protection of senior bank bondholders. EU Economic and Monetary Affairs Commissioner Olli Rehn said on Feb. 15 there is “no appetite” for imposing losses on senior bondholders at Irish banks.
[...]

Ivory Coast Defaults

Not much to add to the following Bloomberg report, except maybe the now common "I told you so". Once this overbullish and irrational exuberance settles, and the markets get sober again, equities and commodities will hit the wall of reality: we are not in V-shaped recovery. We are in the midst of the Greater Depression.

Ivory Coast bonds sank to a record low 36 cents on the dollar on speculation the West African nation will be in default on $2.3 billion of securities today.
[...]
While the International Monetary Fund said the nation had $3.28 billion of foreign-currency reserves as of September, the government is unlikely to make the $29 million interest payment initially due Dec. 31 before a 30-day grace period expires, said Felix Dornaus, who holds Ivory Coast bonds at Erste Sparinvest KAG in Vienna. President Laurent Gbagbo, 65, and his rival Alassane Ouattara, 69, who both claimed victory in the November elections, say the other is responsible for the payment.

A “last minute payment cannot be excluded, but is very unlikely,” Dornaus, who helps manage about 1.4 billion euros ($1.9 billion) in emerging-market debt, said yesterday. Thierry Desjardins, the Paris-based chairman of the London Club group of commercial bank creditors that hold Ivory Coast debt and vice president of sovereign debt restructuring at BNP Paribas SA, said he was unaware of any payment being made.

The Emerging Markets Traders Association in New York posted a “market practice recommendation” for Ivory Coast bonds on its website yesterday, following consultations with “major market participants.” The bonds should, unless otherwise agreed, trade “flat” and settle at an all-in price without additional payment for accrued interest. Buyers will be entitled to unpaid interest and related claims, according to the recommendation.

Romania asks IMF-EU Precautionary Loan to Strengthen Credibility

Here's another foolish statement and another proof that things are topping and will be on the way to decline from here when it comes to sovereign solvency: Romania is asking the EU and IMF for a precautionary loan. The reason? They are now out of the recession and things are just fine again.

Will this strengthen their credibility, and solvency as stated by their President? Actually, it's quite the opposite: taking on more loans and debt makes less credit-worthy, more insolvent. But in the rosy-world of politicians, it maybe does.

(Bloomberg) Romania said it set parameters for a new precautionary loan from the International Monetary Fund and the European Union as the Balkan nation emerges from a recession.

The central bank in Bucharest gave no details of the parameters in a statement today, saying that fiscal consolidation and “structural reforms” are “essential” for economic growth. The credit line may be about 3.6 billion euros ($4.7 billion) and tapped in case of an emergency, Mediafax newswire reported, citing unidentified government officials.
[...]
Romania, which has been relying on a 20 billion-euro bailout led by the IMF to stay afloat, may take a precautionary loan from the Washington-based lender in April to strengthen its credibility, streamline the fiscal system and help absorb EU funds worth as much as 32 billion euros available through 2013, President Traian Basescu said yesterday.
[...]
The government will probably seek a one-year precautionary loan after the current two-year bailout agreement expires in May because of general elections in 2012, Bucharest-based Mediafax said.

[Thanks to blbl for sending me a report.]

Get ready for Eastern european countries failures (or bailouts)

This is an interesting story covered by Bloomberg:

May 14 (Bloomberg) -- The European Bank for Reconstruction and Development’s shareholders are meeting today to increase the bank’s resources for the next five years and foster the post- crisis recovery from central Europe to central Asia.
[...]
“The world economic outlook is fragile and external circumstances remain perilous,” said Mirow. “Concerns remain. Recent developments in the euro zone reflect this fragility and we commend the decisive measures adopted by the EU and the International Monetary Fund towards calming the markets.”

The EBRD is preparing to increase its capital by 50 percent to 30 billion euros ($38.8 billion) at the meeting today, enabling it to invest about 52 billion euros until 2015. It helped limit the impact of the financial crisis, which hit emerging Europe the hardest, by persuading western banks to remain in the 30 countries in which it operates and providing them with funds to lend to businesses.
[...]
The former communist countries in Europe and central Asia are recovering from the deepest recession since switching to free-market policies two decades ago. While the EBRD now expects most countries where it operates to recover, the rebound will be protracted. The bank will give new economic forecasts tomorrow.

The EBRD, owned by 61 countries and two intergovernmental institutions, was created in 1991 to invest in former communist countries from the Balkans to Asia to help them transform their economies.

European market's rally 10% after the European TARP is announced: It's déjà-vu!

Flashback on the 13th of October 2008:

Oct. 13 (Bloomberg) -- U.S. stocks staged the biggest rally in seven decades on a government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars.

The Standard &Poor's 500 Index rebounded from its worst week in 75 years with an 11.6 percent advance, its steepest since 1939, and the Dow Jones Industrial Average climbed more than 936 points.

What happened then? The 14th of October the markets went slightly down. The 15th of October, the markets dropped about 10% and give back all the gains from the 13th of October.

Flashback on the 1st of December 2009, when Dubai World was defaulting on its interest repayments, I wrote:

[A] note to all those that think that "markets overreacted" and that "Dubai World's liabilities are so small": the problem is not in my opinion that the liabilities are small or not. It's rather that it just confirms to those who thought the worst is over that they couldn't be further from the truth. It's now time for the sovereigns to default.

Now, back in 2010, Sunday the 9th of May, the ECB and the UE announce a $1 trillion bailout plan for the sovereign countries. By doing so, the ECB acts illegally. So was Hank Paulson in 2008. It doesn't prevent them from doing it...

Monday the 10th of May, the European markets soar by 8 to 12%.

Tuesday the 11th of May, the European markets drop slightly 1-2%.

Does it mean tomorrow we'll have a repeat of what happened in the US?? And a massive 8-9% drop? Or will we have to wait a few more days/weeks to get it?

Wait&Pray.

Could John R. Taylor, Jr be more wrong?

ZeroHedge has published a report from FX Concept, by John R. Taylor Jr which I'm quoting here:


John Taylor of the world's largest currency hedge fund FX Concepts, whom we recently presented as opining that the Euro would drop to $1.20, is pretty much certain what the final outcome from the events in Europe will be: "The powerful elite political forces, and their co-opted market allies, involved in this  fanciful decision-making can not control the economic reality that will eventually destroy Greece and Europe." That's about as short and sweet as it gets.

Greece Is Out, We Just Have To Sort Out the Details
April 8, 2010
By John R. Taylor, Jr.
Chief Investment Officer
Global monetary and macro economics have become more like the literary nonsense in Alice in Wonderland. It is great fun to read, but unfortunately for all of us, we are living through this economic house of mirrors, which is more and more rapidly spinning out of control. The situation in Greece is the most poignant example at the moment. Although there do not seem to be more than 100 people in all of New York City that have any interest or concept of what is going on in Greece and within the euro, the events of the next few months will have a tremendous impact on the world. If the political actors in this tragedy-comedy play their roles well – staving off collapse – our suffering will be worse. There is no way to win. The powerful elite political forces, and their co-opted market allies, involved in this fanciful decision-making can not control the economic reality that will eventually destroy Greece and Europe. Hopefully, they will be forced to give up before the damage is too severe. The quicker the crisis comes, the better for the world, but almost everyone is working in the other direction, stretching it out to inflict maximum pain. At this point, the best way out for Greece is very clear. Greece should pull out of the euro this weekend, issue new drachma notes as soon as possible, and let the lawyers clean up the mess. If I were running Portugal, Italy, or Spain I would do the same thing – the first one out is the winner.

It's sad to read such a quote coming out of the largest currency hedge fund.

I've already mentioned it in the past, but the best solution for the Greeks is to do the exact opposite of what you've just read: stay in the Euro, default on their debt, wipe out the lenders who didn't do their homework and due diligence and start over on a sound foundation, by reducing drastically the size of the state, privatizing as much as possible, reducing taxes and getting rid of as much public servants as possible.

Government debt and future obligations compared to GDP

The NYTimes has published a report on the mess in Greece, and along that, a nice table containing the various debt and liabilities of many countries compared to their GDP (thanks Mish for pointing to this report). Click for bigger image.

Here's a link to related post I wrote in Feb, comparing external debt per capital and to GDP for many countries.

Iceland Walks Out of Icesave Talks

A friend sent me this Bloomberg report published yesterday. This is really a follow up on the post I wrote a couple of months ago. As expected, Iceland is walking out of the talks about Icesave, and the government is not going to force the Icelandic people to bailout their failed bank. Why should they anyway?

Feb. 25 (Bloomberg) -- Iceland walked out of talks with the U.K. and Netherlands on how to settle foreign claims, after both sides failed to reach an agreement on the terms of a loan the north Atlantic nation needs to cover depositor losses.
[...]
The government of Prime Minister Johanna Sigurdardottir has been trying to resolve the so-called Icesave dispute since the failure of Landsbanki Islands hf more than a year ago left thousands of U.K. and Dutch depositors wondering how to recoup their savings, triggering an international spat that has stalled the island’s international bailout. A government level agreement was blocked last month after President Olafur R. Grimsson said the bill needed to go to a referendum.
[...]
A U.K. Treasury official today said the British and Dutch governments are disappointed because Iceland has rejected the “best offer” that could be made available. The two countries had proposed a floating interest rate on the loan instead of the fixed rate originally agreed.
[...]
The existing accord is due to go to a March 6 referendum, which most polls show Icelanders will reject.

The great new piece of information is that last line. It's hard to believe that the people would actually freely vote to approve from themselves to pay out about $41,000 each to bailout the British and Dutch citizens who have been fooled by abnormally high interest rates.

Sovereign defaults could start where nobody's watching [UPDATED]

According to this slideshow from CNBC, a lot highly leveraged/indebted countries are not currently under the radar of most. Here's a list of the 20 most debtor nation according to CNBC (data might need to be checked, and off-balance debt and liabilities added - pensions/social securities/etc. which don't appear as debt on many sovereign countries).

Country	External Debt to GDP	External Debt per capita	Gross Q2 2009 external debt
United States	94.3%	$44,000	$13.5 trillion
Hungary	105.7%	$21,000	$210 billion
Australia	111.3%	$42,000	$900 billion
Italy	126.7%	$40,000	$2.3 trillion
Greece	161.1%	$52,000	$553 billion
Spain	171.1%	$60,000	$2.4 trillion
Germany	178.5%	$63,000	$5.2 trillion
Finland	188.5%	$70,000	$365 billion
Sweden	194.3%	$74,000	$670 billion
Norway	199%	$117,000	$550 billion
Hong Kong	205.8%	$90,000	$631 billion
Portugal	214.4%	$47,000	$507 billion
France	236%	$78,000	$5 trillion
Austria	252.5%	$101,000	$832 billion
Denmark	298.3%	$110,000	$607 billion
Belgium	320%	$119,000	$1.25 trillion
Netherlands	365%	$147,000	$2.5 trillion
United Kingdom	408.3%	$148,000	$9 trillion
Switzerland	422.7%	$176,000	$1.34 trillion
Ireland	1,267%	$568,000	$2.4 trillion

Notes:

• I have rounded some figures, mostly the debt per capita
• Q2 2009 debt is way outdated, since the second half of 2009 was a real collapse in tax income and that 2010 is likely as bad...

Conclusions:

• Anybody who lends to any of these countries exposing himself to losing a big part of his investment, for a yield completely ridiculous compared to the risk.
• The scandinavian model praised on all the newspapers and by most socialist-economists is actually a big failure and scandinavian failures will most likely default at the same time as many European countries...
• While I have kind of forecasting a default coming from Denmark, I wasn't aware that Belgium and Netherlands where in such a big hole.
• Who knew for Switzerland? How did they dig in such a deep hole for themselves? Are people investing in the CHF totally insane?
• Ireland is bust

[Update] My friend "blbl" points me to this Wikipedia entry containing a list of countries by gross (i.e. total) external debt and by external debt per capita. It also provides the definition of external debt:

The external debt of a country is defined as the "total public and private debt owed to nonresidents repayable in foreign currency, goods, or services"

This is really important, as the debt also includes the private one (both individuals and corporations). It's not clear if it has to be in foreign currency or not, though I doubt it, given that the US for example, have only borrowed in their own currency.

He also thinks that Luxembourg and Switzerland are in the top list because they tend to attract lots of "shell companies" and their debt. Which makes sense I believe.

Greece, Latvia, Lithuania on the verge of default

Dec. 8 (Bloomberg) Fitch Ratings cut Greece one step to BBB+ today, the third- lowest investment grade. S&P put Greece’s A- rating on watch for a possible downgrade yesterday, signaling it may be reduced within two months.

I wrote, on the 1st of December 2009:

Second, a note to all those that think that "markets overreacted" and that "Dubai World's liabilities are so small": the problem is not in my opinion that the liabilities are small or not. It's rather that it just confirms to those who thought the worst is over that they couldn't be further from the truth. It's now time for the sovereigns to default. That's what is scary and dangerous, not the tiny $60 billion of liabilities that Dubai World is defaulting on.

Today, Mish writes:

Many think the market reaction to the Dubai default was way overdone. I prefer to think of it as a huge warning shot.
[...]
According to Fitch, Baltic Ratings Remain Under ‘Downward Pressure’
Fitch Ratings said Latvia and Lithuania’s sovereign ratings remain under “downward pressure” as the Baltic states’ economic plight sends their deficit and debt levels higher.

Even though the markets are still showing irrational exuberance, these news are all very bullish for gold (which is declining quite violently from a very overbought position) and bearish for stocks in general and any bond other than US Treasuries and German Bunds. Also bearish for the EUR, bullish USD.

Chavez has been busy in Venezuela

It looks like tensions are rising in Latin America, and we might see failures/defaults/ there.
Please consider the following reports from Bloomberg.

I think the main points are:

• Venezuela charged the owner of the four banks, Ricardo Fernandez Barrueco, with diverting deposits, improperly issuing credit to the owner’s companies and failing to prove the origin of funds.
• President Hugo Chavez said yesterday that any private bank that breaks the nation’s laws will be seized, and that he has “no problem” nationalizing the banking sector. The four banks represented about 6 percent of total deposits in Venezuela.

People are concerned because Chavez is sending bankers who have done unlawful things to prison? And shutting down banks which have become insolvent? Isn't that what you should see in the US and Europe and Japan, instead of bailouts and mega bonuses for failed bankers?
Then the question is: what are the laws that have been broken? Maybe Chavez just came up with his own sets of laws just to take over these institutions. Which wouldn't be surprising neither...

Nov. 30 (Bloomberg) -- Venezuela’s government will close Banpro Banco Universal and Banco Canarias de Venezuela CA, two of the four banks it seized Nov. 20, and ensure depositors get their funds, Finance Minister Ali Rodriguez said.

Rodriguez said the other two banks, Banco Confederado SA and Bolivar Banco CA, will be administered by the government in order to try and “rehabilitate” the institutions. Clients won’t have access to their deposits at those banks while the government is administering them, he said.

Venezuela charged the owner of the four banks, Ricardo Fernandez Barrueco, with diverting deposits, improperly issuing credit to the owner’s companies and failing to prove the origin of funds. The attorney general barred 16 of the bank’s executives from leaving the country and a brokerage owned by Canarias, U21 Casa de Bolsa CA, was searched by authorities. “The damage caused has been of such a degree as to severely compromise the solvency of these institutions and obliges us to perform a closed-door intervention,” Rodriguez said in comments on state television today. Attempts by Bloomberg News to reach Barrueco, who is detained by police, or a lawyer representing him weren’t successful. Neither Barrueco, nor his lawyers have commented in public since he was detained.

President Hugo Chavez said yesterday that any private bank that breaks the nation’s laws will be seized, and that he has “no problem” nationalizing the banking sector. The four banks represented about 6 percent of total deposits in Venezuela.

The banking sector had 248 billion bolivars ($115.5 billion) in deposits among 50 institutions at the end of October, according to Softline Consultores, a banking consulting firm in Caracas. Confederado, Banpro and Bolivar had combined losses of 19.5 million bolivars through September, according to the banking superintendent.

Dec. 2 (Bloomberg) -- Venezuela’s benchmark dollar bonds plunged, sending yields to a four-month high, after President Hugo Chavez threatened to seize more banks following the government’s takeover of four lenders.

Local banks and brokerages dumped dollar bonds to raise cash in bolivars and meet redemptions after Chavez’s comments prompted some depositors to withdraw funds, said Russell Dallen, head trader at Caracas Capital Markets at BBO Financial Services. The interbank lending rate surged as high as 28 percent from 15.1 percent yesterday as cash-strapped banks sought overnight funding, brokerage Banco Fondo Comun said.

“People are rushing to withdraw funds from the banks and that’s what’s putting pressure on the Venezuela dollar bonds,” said Boris Segura, a Latin America economist at RBS Securities Inc. in Stamford, Connecticut. “The concern is Chavez is going to nationalize the whole banking system. That’s what is on the back of people’s mind.”

Chavez, who has used Venezuela’s oil wealth to pay for nationalizations of companies in the utilities, metals and cement industries, said today the government is monitoring another group of banks after ordering the seizure of four and jailing their owner on Nov. 20. The government also closed a brokerage and raided another as part of investigations into businessman Ricardo Fernandez Barrueco, who was charged with diverting deposits and making unauthorized stock operations.

Venezuela’s 9.25 percent bonds maturing in 2027 tumbled 2.75 cents on the dollar to 69.50 cents at 3:43 p.m. in New York, according to JPMorgan Chase & Co. The yield surged 55 basis points to 13.92 percent, the highest since July 29. A basis point equals 0.01 percentage point.

“If I need to take over all the Venezuelan banks, I’ll do it,” Chavez said on state television today. “Gentlemen of the oligarchy, the bank that slips will be taken over. This sort of situation allows us to sharpen our swords. The ones that should be taking care now are the private bankers, because I’ve got my eye on them. The public bank sector will have a hegemony.”

[...]

The securities regulator closed U21 Casa de Bolsa SA, a brokerage owned by Barrueco, and authorities raided brokerage Interbursa Casa de Bolsa to collect evidence of possible criminal activity, the attorney general’s office said in an emailed statement today.

“There’s been a massive sell-off and everything is way down,” BBO’s Dallen said in a telephone interview. “The banking system is not in good shape.”

The extra yield investors demand to own the country’s dollar bonds instead of U.S. Treasuries swelled 39 basis points to 11.59 percentage points, according to JPMorgan.

At least four international banks have a presence in Venezuela, including Spain’s Banco Bilbao Vizcaya Argentaria SA, Amsterdam-based ABN Amro Holding NV and U.S.-based Citigroup Inc.

Venezuela’s banking sector had 248 billion bolivars ($115.5 billion) in deposits among 50 institutions at the end of October, according to Softline Consultores, a consulting firm in Caracas.

The government this year took control of Stanford Bank SA Banco Comercial and closed the local offices of Antigua-based Stanford International Bank Ltd. after the owner, R. Allen Stanford, was accused of defrauding investors of $8 billion. Venezuelan investors had as much as $3 billion in Stanford’s Antigua bank, the banking superintendent said in February.

Chavez ordered the government to buy Banco de Venezuela, a unit of Spain’s Banco Santander SA, for $1.05 billion to expand the state’s presence in the banking sector this year.

“The president should choose his words carefully because they aren’t necessarily calming depositors,” Alejandro Grisanti, an economist at Barclays Plc in New York said in a telephone interview. “As the nervousness grows in the Venezuelan financial system, brokerages will be looking to boost liquidity levels in bolivars by selling off positions in dollar assets.”


Dec. 2 (Bloomberg) -- Colombian President Alvaro Uribe said Venezuela has put up an illegal trade embargo that is becoming a “Berlin Wall,” cutting off the South American neighbors.

“People have complained so much about the embargo against Cuba, and now Venezuela has an embargo against Colombia,” Uribe said, according to the transcript of a radio interview posted today on the presidential Web site. “And what worries me, because it generates distrust, is that other countries have taken the opportunity to go to the Venezuelan market and substitute Colombian products.”

Venezuelan President Hugo Chavez said in July he was “freezing” ties with his second-biggest trading partner and would do away with Colombian imports as Uribe moved ahead with a plan to allow the U.S. military access to seven Colombian bases. The following month Argentina agreed to send Venezuela $1 billion in goods, including 10,000 cars originally slated to come from Colombia.

Tensions worsened last month after Venezuelan soldiers blew up two foot bridges along the shared border. Venezuelan General Eusebio Aguero said last week troops plan to destroy six more such bridges on suspicion they’re being used to traffic drugs and contraband. Colombia says they’re community crossings.

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Trade between the two countries last year totaled about $7 billion. In September, Colombian exports to Venezuela fell 50 percent from the same month a year earlier, according to the national statistics agency.

Colombia is taking steps to secure free trade agreements with countries including the Dominican Republic, Japan, South Korea and Australia, according to the trade ministry. Accords with several Central American and European countries went into effect this year.



Dec. 3 (Bloomberg) -- Venezuelan President Hugo Chavez’s threats to seize banks as part of a drive to nationalize strategic parts of the economy should be taken at “face value,” Goldman Sachs Group Inc.’s Alberto Ramos said.

After seizing four banks and a brokerage on charges that their owner diverted deposits and failed to show the origin of funds, Chavez said yesterday that he has another group of banks on his “radar.” He vowed to nationalize the private banking industry if lenders don’t follow Venezuelan law.

“We should take his statements at face value,” Ramos said. “It’s one of the key sectors of the economy that the government hasn’t yet taken substantial control of.”

Chavez, a 55-year-old former paratrooper and self- proclaimed socialist, has said banks aren’t doing enough to promote development with loans for housing, agriculture or construction. The government’s purchase of Banco de Venezuela from Banco Santander SA for $1.05 billion this year hasn’t created enough competition for private banks, Chavez said.

“Venezuelan banks have degenerated,” Chavez said on state television. “Instead of fulfilling their objective to support development, they specialize in financial speculation.”

Chavez’s past battles with private businesses resulted in the seizure of assets from U.S. oil giants Exxon Mobil Corp. and ConocoPhillips, and the nationalization of the country’s largest steel mill from Luxembourg-based Ternium SA. Venezuela is in talks with Cemex SAB, the largest cement maker in the Americas, over compensation for the takeover of its local subsidiary.

This year, Chavez created a ministry of public banking, increased directed lending percentages for so-called productive sectors and boosted the government’s stake in the banking industry to 21 percent with the purchase of the Santander unit.

Chavez said he personally ordered the seizure of Banco Canarias de Venezuela CA, Banpro Banco Universal, Banco Confederado SA and Bolivar Banco CA on Nov. 20 and that their owner, Ricardo Fernandez Barrueco, is being jailed for not proving the origin of funds used to buy new banks.

Fernandez is a victim of “poor interpretation” by banking authorities, his lawyer, Antonio Guerrero, was quoted as saying yesterday in Caracas newspaper El Mundo.
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Venezuelans concerned about the safety of their deposits after Chavez’s comments may move their money to bigger, established banks, Goldman’s Ramos said. Eventually, depositors may flock toward state institutions seeking safety because of an “implicit blanket government guarantee.”

The “financial oligarchs” spread capitalist values of greed and riches in the population and are trying to provoke a run on banks to try to topple the government, Chavez said yesterday.

“If the oligarchs think that the attacks that began to provoke a run on the banks is going to topple Chavez, the private banking sector will fall,” he said.

Chavez will likely proceed gradually in seizing smaller banks that fail to comply with regulatory capital and lending requirements rather than nationalizing the larger, more solvent banks, Jose Guerra, a former central bank director, said in a telephone interview.

“These are credible threats,” he said. “I have the impression this will be a gradual process where small banks could be seized. He doesn’t have the justification to go after the biggest ones.”

The bolivar has tumbled 3.5 percent to 5.73 per dollar in unregulated parallel market trading from 5.53 on Nov. 20, when the government announced it took over the four banks, according to traders. Venezuelans buy dollars in the parallel market when they can’t get government authorization to purchase them at the official exchange rate of 2.15 per dollar.

“This is a delicate situation and the government has to be careful in containing it to avoid a run on banks,” said Maikel Bello, an analyst at Caracas-based economic consultant Ecoanalitica. “The parallel rate will likely continue to weaken as the deteriorated confidence in the banking system leads people to seek dollars.”

Bello forecasts the bolivar will fall toward 6 per dollar in the unregulated market this month should the concerns about the banking system continue.

Venezuela’s benchmark dollar bonds plunged yesterday, sending yields to a four-month high after Chavez’s comments. The extra yield investors demand to own the country’s dollar bonds instead of U.S. treasures swelled 37 basis points to 11.58 percentage points, according to JPMorgan.

The seizure of the four banks for non-compliance with regulatory requirements is a sign of the crisis of capitalism, Chavez said.

“This is part of the crisis of capitalist values, the money, riches, the mechanisms the bourgeoisie uses to rob and pillage the people,” he said. “I won’t permit this to continue.”