About ten days ago, I quoted from an article by Francisco Faraco, a bank analyst on the financial time bomb facing the banking system. Today, Victor Salmeron, without any doubt the best local reporter of the economic beat, interviews Faraco in El Universal, touching up on many subjects. This post may be a little long, but I want to make sure people understand all of the implications of what he is saying.
The article begins by pointing out that the Central Bank on January 23d. said referring to the controversy about the Central Bank handing over US$ 1 billion to the Government: “the public sector has deposits in the banking system that amount to Bs. 13.47 trillion”
Now, let us first understand this number. Bs. 13.47 trillion is US$ 8.41 billion at the exchange rate that prevailed for much of 2003 and was in effect on the day the Central Bank pointed this out. Now, the country’s budget in 2003 was US$ 22.8 billion and all of the deposits of the banking system amount to US$ 33.8.Thus, as the article points out, the public sector maintains in the banking system 37% of the 2003 budget and 25% of all of the deposits in the banking system.
Let’s continue the logic. This means that 37% of the public budget was not spent. Moreover, last year the Government had to issue Bs. 10 trillion in binds at 25-30% interest, in order to finance its spending. Get it? The Government has US$ 8.41 billion in the bank getting interest rates of 13-16%, while it borrows at 25-30% rates to be able to give money to the same institutions that have those deposits. Would you do that?
Historically, the ratio of deposits to budget, according to Faraco, has been around 2-3%, now it stands at 37%.
The first question to Faraco is why is it that the Central Bank talks about Bs. 13.47 trillion (US$8.41 billion), while the balance sheet of the banking system says it is only Bs. 4.4 trillion (US$ 2.75 billion). Faraco answers that a lot of the money is under trusts or securities endorsed to the public institutions.
Let me explain this point. The Bs.4.4 trillion is that deposited directly under the name of public institutions at banks. Additionally, these public institutions may open a trust for a public institution or have the bank endorse a public debt bond over to the public institution. This is done to be able to pay more interest, as neither trusts nor these endorsed securities force the banks to have special reserves, at no interest, at the Central Bank which is imposed on public deposits.
Now, let me explain something else. The world of public deposits is a world of corruption via commissions. Many banks have to pay part of the spread somehow in order to capture these deposits. This means that these US$ 8.41 billion generate huge amounts for those that receive these commissions. Note also that these are paid regularly, as most of these are short term deposits rarely above thirty days.
If you have a dirty mind (God forbid!) you may even think that the only reason for the dramatic increase in public debt was simply to generate these commissions. You will probably be right. The only thing I don’t really know is whether some individuals are getting rich or the revolution is being financed. My guess is that it is actually both, but I have no way of knowing it or proving it.
If you think this is too perverse, listen to what Faraco literally says: “it has been the State that has funded the banks so they can buy its own debt and hang on the country an over issuing of debt, this loots the country and I propose the Comptroller….the external auditors that never reflected anything, the Finance Committee of the Assembly as well as the bankers, give an explanation”
If by now you are not outraged enough, then Faraco continues referring to the fact that the Government now wants to swap this Bolivar denominated debt for US dollars: “They over indebted us and now they want to swap that for debt in hard currency?”
Note that that of one of the main beneficiaries of this perversity is the banking system, which is presided by the same “oligarchs” that the Government and some readers of this blog are always blaming for all the country’s problems. Some people in both the Government and the banking system are getting VERY rich, but the supporters of the revolution say nothing. Why? These are the same perversities of the IVth. Republic, except that have been magnified in size by three orders of magnitude!
This is what the impunity of this Government has led us to. This is what happens when a country has no checks and balances. This is incredibly obscene. The country is being sold, looted and mortgaged for a fistful of dollars or bolivars. Long live the “pretty” revolution!