Venezuela and Argentina have become rather cosy over the past two years. With Argentina unable to access the international capital markets during that time, Venezuela has proved to be a rather fruitful source of funding for Argentina. The Andean nation has invested nearly $3 billion in Argentine sovereign bonds. Venezuela has not invested for purely philanthropic reasons. The purchases have helped boost Venezuelan president Hugo Chávez’s image as a regional leader. Moreover, his government has made healthy returns by selling the debt on to local banks, which have found the bonds handy as a way to convert bolivares into dollars, so circumventing Venezuela’s currency controls.
But now the relationship between the two nations is about to take a new twist. It appears that Argentina is planning to raise funds by getting Venezuela to issue a 10-year global bond on its behalf. The Argentine government reckons (rightly) that this is a much cheaper way to borrow than if it went to the market directly. Details are still hazy, although Venezuela’s finance minister has said that more information will be forthcoming in the next three months and that the deal would entail both Argentine and Venezuelan risk. Furthermore, he has said that the bond would be “a completely new instrument” and that it would comply with “international legal regulations”.
The idea is bizarre and raises more questions than answers. How, for example, would the bond be structured? Would it be issued by Argentina but carry a guarantee from Venezuela? Would it be issued in Venezuela’s name but with Argentina fulfilling the interest and principal payments? Would it be the first of many transactions or a one-off? What’s in it for Venezuela, especially as the deal might well increase its stock of debt and hit its spreads? Most important of all, how will Argentina’s hold-out creditors react? Argentina still faces possible legal injunctions from those investors that refused to take part in the sovereign’s debt exchange last year. These hold-outs, who have about $20 billion of defaulted debt on their books, could try to seize Argentina’s assets if it issued an international bond, irrespective of whether Venezuela took on any of the risk. Argentina should beware: by trying to outsmart these investors it could find itself hoist by its own petard.
