Venezuela's Chavez Uses `Hedge Fund' to Buy Bonds, Sway Region Listen
Dec. 19 (Bloomberg) -- When Citigroup Inc. and JPMorgan Chase & Co., the two biggest U.S. banks in Latin America, balked at buying Argentine debt at an October government sale, Venezuela's President Hugo Chavez stepped in.
Chavez bought $337 million of bonds from Argentina's government Oct. 26, the biggest purchase of the nation's debt by a single investor since its 2001 default. Chavez bought more than half the debt offered.
The bond purchases are part of a broader plan by Chavez to use record revenue from oil exports to influence social, economic and political policies and encourage opposition to the U.S. Chavez has dubbed President George W. Bush ``Mr. Danger'' and sought to embarrass him by offering subsidized heating oil to low income families in Boston and New York.
``A Hugo Chavez hedge fund; it's terrifically ironic,'' said James Barrineau, senior vice president responsible for Latin American economic analysis at Alliance Capital Management LP in New York, which manages $163 billion in fixed income securities and had $8 billion in emerging market debt as of Dec. 1. ``The dangers are when the market heads south and they want to dump the bonds.''
Chavez, 51, has accumulated as much as $986 million of bonds this year from Argentina, more than any of the 10 largest U.S.-based mutual funds that focus on emerging markets, according to Bloomberg data.
Ecuador
Chavez's government on Dec. 7 bought $25 million of bonds due in 215 from the government of Ecuador, which defaulted on $6.5 billion of debt in 1999. Venezuela offered to buy ``way more than it purchased,'' said Patricio Naranjo, a spokesman for Ecuador's central bank in Quito. The bonds, issued at 91.692 cents on the dollar, since have climbed to 93.5 cents.
``These operations appear to be motivated mainly by President Chavez's attempt to be supportive of some regional countries and in the process, gain greater regional standing,'' said Mohamed El-Erian, a managing director at Newport Beach, California-based Pacific Investment Management Co. since 1999 named in October to take over as head of Harvard University's endowment next year. ``They're mainly an attempted political investment, and not primarily a financial investment.''
Chavez said during a visit to Uruguay on Dec. 8 that he wants to make the region less dependent on policies endorsed by the World Bank and International Monetary Fund, and by extension, the U.S., which leads both organizations.
Investing in the U.S.
As president since 1999, Chavez has taken measures he says will help the poor, including seizing private property and setting price limits on some goods as well as lending rates.
``We have to become independent of the IMF and the World Bank,'' Chavez said Nov. 21 in Caracas. ``This enslaves us. This puts a rope around our neck.''
Chavez also says the U.S. is an unsafe place to invest. On Nov. 27, he warned investors against investing in the U.S., saying during his weekly television program that the U.S. budget deficit is out of control. The U.S. had a $319 billion deficit in the fiscal year ended Sept. 30, four years after recording a surplus of $127 billion.
Venezuela's central bank sold $10 billion of U.S. bonds and other U.S. assets in the first half of 2005.
`Be Careful'
``I do not recommend you invest in the U.S.,'' Chavez said on his weekly radio show ``Alo, Presidente'' Nov. 27. ``Be careful -- that economy is reeling. This has nothing to do with my relationship with Mr. Danger's government. It's an objective opinion.''
In Uruguay this month, Chavez called on central banks in Latin America to distance themselves from the IMF and other ``global powers.''
``We are building alternatives to the excessive dependence on the international financial system that has badly hurt our countries,'' Chavez, who is seeking re-election next year, said in Montevideo, Uruguay on Dec. 8.
Chavez can support other countries in the region as record revenue from exports of oil swells reserves. Oil reached a record $70.85 a barrel on Aug. 30. Venezuela's reserves have more than doubled to $28.8 billion from $11 billion in January 2003.
Venezuela, the world's No. 5 oil exporter, is also exerting his influence through trade and energy accords. Earlier this month Venezuela joined the South American trade group Mercosur to strengthen regional agreements and thwart a U.S.-sponsored free trade proposal for the hemisphere. Chavez also plans to invest in gas pipelines and oil refineries in Bolivia, Brazil, Argentina and Uruguay and last week called for the creation of the ``Bank of the South,'' to be created with reserves from nations in the region.
Canceled Auction
Chavez began buying Argentine debt in May as President Nestor Kirchner's government was completing a restructuring of $104 billion of defaulted debt. Kirchner, who called Chavez's purchases ``a clear gesture of confidence toward our country,'' canceled a planned $800 million sale of 10-year securities in September after investors demanded higher yields than the government wanted to pay. Kirchner then turned to Chavez.
Venezuela on Oct. 26 bought more than 50 percent of Argentina's sale of 10-year bonds, which were priced to yield 8.75 percent, 1 percentage point less than investors demanded, said Boris Segura, senior economist at Standish Mellon Asset Management in Boston. That difference cost Chavez's government about $22 million, Segura said.
New York-based JPMorgan and Citigroup didn't participate in the October sale, according to the Economy Ministry. JPMorgan spokeswoman Brooke Harlow declined to comment. Citigroup spokesman Joseph Christinat said the bank doesn't comment on market activity.
Buying and Selling
Four weeks after the October purchase, Venezuela sold some of its Argentine bonds, earning a $40 million profit, Venezuelan Finance Minister Nelson Merentes said at a Nov. 28 press conference in Caracas.
``We plan to buy and sell more Argentine debt,'' Merentes said. The country is also studying the purchase of Brazilian, Chinese and Paraguayan debt but no transactions are imminent, he said.
``Money talks -- if countries in the region get their money from Venezuela and not the IMF, that's where governments will go,'' said David Dowsett, who manages $1.6 billion of emerging- market assets, including about $50 million of Venezuelan bonds, for BlueBay Asset Management in London. ``Venezuela is taking advantage of a power vacuum that exists because of a lack of interest by the U.S. in Latin America.''
Buying Back Debt
Morgan Harting, an analyst with Fitch Ratings in New York, said Chavez's strategy puts his own nation's finances at risk.
``Chavez is taking on more debt to buy other nation's debt,'' said Harting, an analyst at Fitch in New York, which rates Venezuela's long-term foreign currency debt BB-, three levels below investment grade. ``He should be paying off Venezuela's debt.''
Venezuela's opposition leaders including Julio Borges, a former deputy and the First Justice Party candidate for president in next year's election, said the money spent on Argentine bonds could be better spent on alleviating poverty in the country.
``Countries will take his money,'' Alliance Capital's Barrineau said. ``But whether they will buy into his politics is another matter.''
