Archive for December 8th, 2009

Chavez turns crisis around in his favor, but will it hold?

December 8, 2009

You have to hand it to Hugo Chavez, after mishandling the crisis of the banking system for the first few days, he made a 180 degree turn, turned it into his personal fight against corruption and since most people can not tell a Fernandez Barrueco from a Torres Ciliberto, many have believed him, as he seeks to “help” the people have their money for Christmas and has plans to refloat the intervened banks and create yet another Government bank.

The problem is that imagine you had your money in Banco Confederado and on Dec. 21st. you can go to Chavez’ new Banco Bicentenario run by the Government. What will you do?

Well, even if it makes little sense, you will take your money out. Little sense, because if it is already a Government-run bank, why take the money out? This may sound logical, except that if everyone thinks like you and takes their money out, Banco Bicentenario may be in trouble (again) in a very short time.

Of course, the Government may deposit more of its funds in the new bank so that people can continue taking it out. That is certainly throwing good money after bad. And that good money is going to get worse, because this whole thing is going to cost lots of money. The same way that the Government spent US$ 11 billion in trying to lower the swap rate and it is now creeping up to a more realistic value.

But on top of that, this crisis is far from over, because to start with, the Government has not released much in the way of information on the health of the banks which had problems. In fact, we haven’t been even told why it was that they had to shutdown Canarias and Banpro and why Bolivar and Confederado can supposedly be saved.

Curiously, the only Government official to have been removed from his position (Will he be charged with anything?) is the former President of the Comision Nacional de Valores, who was replaced today by someone with no experience in capital markets.

And the crisis is not over because there are too many interconnections left that will still cause some pain. How much, is hard to tell, but it can’t be this simple when you look at the numbers and the concerns. To this day, we don’t know how much various brokers had in Banco Canarias, U21 and/or Banpro and lost most of their money. Or how much certain banks can withstand the run on their deposits. I still think the best option would have been to merge all four banks, two and a half weeks ago, into Banco de Venezuela and take it from there. Too late now, nobody asked me.

And at this point we can see a number of secondary effects from the crisis: First, more inflation as the Government is going to have to print Bolivars to replace the missing money. A higher swap rate, which is also inflationary. More banks in the hands of the Government which has proven to be completely incompetent in managing banks. A significant drop in the country’s bond prices which limits the ability of the Government to issue more bonds (Which I think is good). A total mistrust between financial institutions, which limits economic activity. Flight to quality in banks and currencies, which is clearly a negative.

All of which may get more complicated in the upcoming days. This time around, Chavez has managed to convince the uninitiated that this is about fighting corruption, but he may be over promising on what he can do and most people can’t be fooled all of the time.

So, while we say goodbye to Jesse Chacon, as Chavez’ token sacrifice in the financial crisis, there may be more that have to the gallows in order to be truly convincing.Thus, Chavez has turned the crisis in his favor, but his victory may be ephemeral and not hold if other problems were to surface. And we expect they will.