May

9

Hugo and Fidel whistling Some time ago I wrote that Venezuela bonds are overpriced. I still think that they are. There seems to be a bit of complacency in the world that communism is dead, and that Chavez just has a big mouth. Unfortunately, every incremental piece of information coming out of Venezuela suggests that Chavez is the real deal, and that he means what he says. He is on a more accelerated track than Mugabe was at this point in his reign.

What is going on right now is that Venezuela's dollar bonds have a provision that if Venezuela pulls out of the IMF, then they have defaulted, and bondholders can demand to be paid back. Certain bonds are trading below par, while others are trading well above par.

If the bondholders owning the bonds that are trading below par demand payment, it will be an interesting situation. If Chavez pays, the sub par holders are helped; the above par holders get creamed. The above par holders are likely going to lobby the US and Venezuela governments to see that the notes are not repaid.

At the same time, the US government might have its own interests, perhaps wanting a default judgment against Chavez in order to speed up his destruction of the country. In any event, one might want to look at going long the sub par bonds and short the above par bonds.


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