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.
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April 6, 2010 at 12:08 pm
hi… It’s too early to tell if Chavez will benefit of this, but is undeniable that he’s trying to get the best out of this mess, which a very important part of the blame lies with him. I agree with what concerned wrote as a very possible scenario. The country’s future still looks very bleak for all of us…
December 11, 2009 at 3:44 am
Hi .. What’s funny is that is exactly what the smarter economists are saying about the USA. Including the part Island Canuck added:
“You also have to get rid of the incompetent fools who are running the economy.
If you don’t do this nothing will change.” ..
December 9, 2009 at 5:55 pm
Karthikeya wrote-
“All the steps the govt. has been taking are only delaying the inevitable, all the while building up the magnitude of the imminent downfall.
The only solution I see is to let the crash happen sooner rather than later. ”
What’s funny is that is exactly what the smarter economists are saying about the USA. Including the part Island Canuck added:
“You also have to get rid of the incompetent fools who are running the economy.
If you don’t do this nothing will change.”
Venezuela has no monopoly on criminal bankers looting the nation, nor on incompetent fools running the economy.
Anyone notice the cartoon about the US Debt Clock over at CaracasGringo’s blog?
December 9, 2009 at 11:36 am
the article in El Nacional by Marianella Salazar that states RFB was negotiating with USG is bullshit to the best of my knowledge. RFB was trying to get his confiscated jet back and was dealing through lawyers. Never directly with law enforcement.
This went nowhere as RFB was popped before the meetings took place.
December 9, 2009 at 11:28 am
It’s too early to tell if Chavez will benefit of this, but is undeniable that he’s trying to get the best out of this mess, which a very important part of the blame lies with him. I agree with what concerned wrote as a very possible scenario. The country’s future still looks very bleak for all of us.
December 9, 2009 at 10:13 am
Chavez has succeeded in fooling most of the people most of the time. That’s all he needs.
He will achieve his bank nationalization desires where the government will control all the banks, think Cuba, and he will have the people thanking him all the way for “attacking corruption.”
It might be soon that you hear a repeat of the sermon over how he caused the PDVSA crisis in 2002 so he could take it over, except this time will be about banks and giving banking back to the people.
December 9, 2009 at 9:08 am
What counts is money in people’s pockets. If the poor and middle class cannot pay their bills, feed their families, provide shelter, and get medical help, then Chavez will take the blame. People still realize the billions of dollars Chavez has given to other countries (i.e. Cuba) or to purchase arms from Russia.
It seems to me, that the Chavez family alone has enough stolen assets to bail out the banking industry alone.
December 9, 2009 at 8:59 am
You’re being way premature on this “Chavez turns crisis in his favor.” Based on what data? Medium- and long-term consequences (for the banking system, for his credibility) are still too difficult to predict. Even short-term consequences are not clear at this point. Just because Luis Vicente leon tweets Chavez is turning this in his favor does not make it true, sorry.
December 9, 2009 at 5:17 am
“Let the economy crash and start fresh, that’s the only solution I see.”
You are forgetting 1 key ingredient. You also have to get rid of the incompetent fools who are running the economy.
If you don’t do this nothing will change.
December 9, 2009 at 2:04 am
Theorising several permutations and combinations of economic and fiscal measures that a normal economy would take to recover from a crash seems to be completely fruitless in the case of Venezuela.
There is no practical set of steps that can alleviate the situation in Venezuela (not that Chavez even seems to have any idea of any of the possible solutions). All the steps the govt. has been taking are only delaying the inevitable, all the while building up the magnitude of the imminent downfall.
The only solution I see is to let the crash happen sooner rather than later. Devaluing the currency is no longer an option (not unless oil hits 200 USD), it will only push the country into hyper inflation zone. The lack of any real industry or source of productivity (caused by incessant nationalisation) further reduces the efficacy of any such measures.
Let the economy crash and start fresh, that’s the only solution I see.
December 8, 2009 at 11:49 pm
From Veneconomy:
“The financial statements (both audited and not) published by PDVSA reveal that the corporation is facing a cash flow crisis. According to analysts, this has had a knock-on effect in other areas. For example, it is said that this could explain, among other things, the takeover of PDVSA’s 96 contractors on the Eastern Shore of Lake Maracaibo and in the eastern part of the country in May this year. There are reports that what sparked off the takeover was $5 billion that PDVSA owed these contractors. According to “revolutionary” logic, once these companies were turned over to PDVSA, the debt would simply disappear.
These analysts maintain that this “brilliant” strategy has been repeated this month with the intervention of four banks belonging to Grupo Financiero Bolívar owned by Ricardo Fernández Barrueco, a member of the “Boli-bourgeoisie.” According to them, PDVSA owed different companies belonging to Fernández Barrueco a total of Bs.F.1.6 billion and had no way of paying them. So, the easiest solution was to intervene his banks and, thanks to a ricochet effect, expropriate his companies to make the debts go away.”
Could it be only this simple logic and not the war on corruption that Chavez is now claiming? Who else will Chavez throw to the wolves to bail out PDVSA or to gain political favor?