February 10, 2014 / 6:10 PM / in 4 years

UPDATE 1-Venezuela bonds soar on plans for new currency market

By Brian Ellsworth

CARACAS, Feb 10 (Reuters) - Venezuelan dollar-denominated bonds soared on Monday following comments by a top official that the government this month will open a new foreign exchange mechanism to boost the flow of dollars that has slowed to a trickle under the country’s 11-year-old currency controls.

The OPEC nation’s sovereign bonds rose over 3 percent and the bonds from the state oil company jumped more than 9 percent after Oil Minister Rafael Ramirez said the creation of a long-awaited swap or “permuta” foreign exchange system would be in place before the end of February.

The system would allow the exchange of bonds in bolivars for dollars at a rate weaker than the official one.

Ramirez, who is also Venezuela’s vice president for the economy, told local media the new system “will be more transparent and would allow different public and private players to participate and bring foreign currency in.”

He offered no more details but the news of the revival of the swap system was positive for bondholders because it would likely signify another devaluation of the bolivar currency. That would help spur economic growth by improving access to dollars and boosting government resources to make debt payments.

“The words from Ramirez were what the market needed to hear and caused shorts to run for cover,” said Russ Dallen of Caracas Capital Markets in a note to clients.

“The Government has been vacillating for years that it will bring back the ‘permuta’ market, but it would finally seem that they are getting closer.”

The swap or “permuta” system was created after late socialist leader Hugo Chavez established currency controls in 2003, but was shuttered by authorities in 2010 on the grounds that it was speculative activity that was harming the economy.


On international markets, the price of Venezuela’s benchmark global dollar-denominated bond maturing in 2027 rose 3.1 percent to bid 66.76 points, yielding 15.05 percent.

The last time the bond rose more than 3 percent in a one-day session was on Sept. 16.

The price of state-oil PDVSA’s dollar-denominated bond maturing in 2027 soared 9.42 percent to bid 52.250, yielding 13.064 percent.

The current dual-exchange rate currency controls distribute greenbacks at 6.3 bolivars for preferential goods and 11.3 bolivars for other items.

But the system has been amply riddled by corruption due to the ease of making a quick by buying acquiring dollars at those rates and flipping them on through black market where they fetch 80 bolivars each.

Businesses complain they cannot obtain hard dollars due to delays in the currency controls, meaning they cannot import items ranging from auto parts and machinery to toilet paper - creating shortages of goods across the economy.

President Nicolas Maduro blames these problems on an “economic war” launched by political rivals.

Maduro first spoke of creating such a mechanism in September, but the government has repeatedly postponed its launch while offering few details about how it would work.

Launching the platform would weaken the exchange rate for some imports, which risks further spurring inflation that reached 56.2 percent last year.

Some ruling Socialist Party hardliners see the exchange controls as the principal pillar of Chavez’s economic legacy and have balked at allowing supply and demand determine the exchange rate.

An auction system known as Sicad that was created last year has set a de facto upper limit on how much bidders can pay for dollars, leading critics to complain that it is an arbitrary distribution mechanism rather than an market-based system.

Demand for dollars has seemed insatiable in part because of a nearly 70 percent expansion in monetary liquidity in 2013.

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