Plan to narrow interest rate spreads could make things worse.
The repos were created 11 years ago when the government incurred a large debt with BCV to finance a Brady plan debt refinancing operation. The government has since started to repay that debt with DPN bonds, which have accumulated in the BCV's coffers. Through the repos, BCV is in effect re-selling those bonds on the open market, but with a twist. Rather than reselling them outright, the bonds are resold along with a repossession contract, through which BCV pledges to repurchase the bonds later at a stipulated date and for a set price. That repossession date and price yields the implied interest rate of the instruments, which is expected to be about 13%.
Even though a government bond is involved in the operation, ultimately it is the central bank that is legally responsible for the repo contracts. Markets perceive the risk of lending to the BCV as lower than that of lending to the government.
Repos seem to have a good chance of establishing themselves as the de facto benchmark setters for domestic interest rates, taking over a role that had fallen to DPN bonds, which were never designed for that purpose.
The repos are the latest weapon in the BCV's fight to bring inflation under control by limiting liquidity, since bolivars spent buying repo contracts will effectively be taken out of circulation until the bond matures. The bank seems increasingly concerned about the bolivar's overvaluation and is trying to soak up excess liquidity to forestall a potential speculative attack on the currency. However, analysts have questioned the wisdom of continuing to choke off liquidity at a time when growth remains sluggish.
Another cause for concern is repos' potential impact on domestic interest rates. The BCV hopes that the repos will force banks to boost their savings interest rates, and thus narrow the spread between saving and lending rates. But analysts are skeptical: a similar instrument (the notorious TEM bonds) issued in the mid-90s with a similar rationale failed to boost savings rates and instead generated a series of macroeconomic imbalances. In fact, analysts have warned that the repos could widen the spread between saving and lending rates. Although, at 13%, repos yield significantly less than DPNs, (which currently average around 20%) they also are less risky. Given the government's precarious fiscal situation, some analysts believe that the 7% premium will not be enough to lure investors away from repos and onto DPNs. For this reason some analysts believe that the repo contracts could end up boosting the cost of financing government deficits and bump the entire spectrum of lending rates up even higher.
President Hugo Chavez has expressed outrage about the high cost of credit and has recently gone as far as to give the banks an ultimatum to drop their rates or else. The fear is that this latest BCV initiative could force rates to climb even higher, generating even more political friction between the banking sector and the executive branch.
One of the main reasons interest rates are so high is that great quantities of money are tied up in DPNs. Private sector borrowers have trouble offering the same rates of return for banks with the same level of security.
The only clear winners from the initiative are the banks, who gain access to a near-zero risk investment paying interest rates 4% above inflation. Somehow, despite the president's animosity towards them, Venezuelan bankers have displayed an amazing knack for lining up one free-lunch after another, at the state's expense.
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|Title Annotation:||economy, Venezuela|
|Article Type:||Brief Article|
|Date:||May 17, 2001|
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