Another sweet deal for the financial system: The Revolution marches on!

May 31, 2006

You have
to wonder about this Government and the financial system. So much ideology,
attacks on the oligarchs and the rich, but the Venezuelan banking system has
made money hand over fist ever since the ignorant Colonel became President. I have
outlined in these pages how the Venezuelan financial system has benefited from
so many Government operations and gifts that simply make no sense. Yes, they are stuck with
absurd amounts of Government paper, but they keep making money as the boats

The latest
measure this week was for the Central Bank
to increase the amount of foreign currency the banks may have from 15% of their
equity to 30%. So, in the midst of exchange controls, now all of a sudden banks
can increase their net dollar position by a factor of two!. Not even in the horrible times of the
IVth. Republic did this limit go above 15%, but now the revolutionaries double
it! Your everyday Venezuelan can’t protect himself or herself from devaluation,
but banks are allowed to increase their protection. What gives?

ostensible explanation given by Government officials is that this will allow
the Government to reduce the excess monetary liquidity without having the
Central Bank, which is already in the red and in deep trouble, issue more CD’s.
Well, as we say in the vernacular, this
explanation is simply “mierda de toro”.

You see,
banks have no access to CADIVI or exchange-controlled dollars, thus, if they want
to purchase dollars, they have to go to the parallel market or the Argentinean
bond market, controlled by the Government. In either of these, the Bolivars they pay for the dollars don’t
get sterilized or disappear from the money supply, but they simply go back into
the system. This only happens when you go through the Central Bank. In the swap
market the Bolivars go to whoever is selling the dollars. In the case of the Argentinean
bonds, they go to Fonden which in this way gets bolivars, since it only got
dollars when it was funded from the “excess” reserves taken away from the Central
Bank. The only reason Fonden wants to have Bolivars is to spend them, so the
Bolivars go back into the monetary liquidity very fast.

Thus, the
only likely mechanism for the banks to go from 15% to 30% of their equity in
foreign currency is to buy Argentinean bonds or buy Venezuelan Government bonds
directly from the Government whenever it offers one of those Bs/US$ sweet

And that
is probably where the explanation lays. In the last few weeks emerging bond
markets have been jittery and both Argentinean and Venezuelan Government bonds
have been very volatile. By “sweetening” the deal for the banks, they will be
more amenable to take the risk of acquiring foreign currency to protect their
equity via these bonds. Thus, the Government with this new measure has simply
guaranteed that they can place the US$ 600 million in Argentinean bonds it
still has in stock or any new Bs./US$ bond they may want to issue in the near

Thus, the revolution
ain’t got any principles my friends and is willing to let the oligarchic capitalists
make a bundle if it fits their goals. The average Venezuelan can go screw his
or herself and remain unprotected from any devaluation, which of course will
make them poorer, but Chavez and the politicians simply don’t care. Politics above all!


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