The Devil's Excrement

I am now back, but the Internet Gods have not been very nice
to me lately, as I get home and find no DSL connection as I have fallen
into the new CANTV billing system, which was unable to collect its
automatic payment from the bank for the last two months. This has nothing
to do with the new management, as the billing system has been a headache
since February, but this is the first time it catches me.

I have
looked at one month of newspapers (Can’t claim I read them!) and really,
not much has happened since I left, it is just more of the same, the same
crazy or illogical statements by Government officials, the same internal
bickering within the Chavez administration that to me is fairly irrelevant,
least of all when it now involves an old General who has been a victim of
the Chavez praying mantis effect before, but came back for more injuries to
his dignity and ego. This time, he tells us that he is somewhat of a
megalomaniac, as he wanted to be a bullfighter, a priest and later a
soldier, and he lets us know that he thinks the Chavez Government is
showing signs of anarchy as if we have had any order in the last eight
years.

The highlight of the month was of course the purchase of five
submarines by Chavez in Russia, which simply ratifies Venezuela continues
to be an underdeveloped country, where five useless submarines can be
purchased to add to the other three already in place since the 60’s, so
that our Navy officers can play games and feel important. It would cheaper
to buy the Playstations or Wii’s with the appropriate programs. The money
could in fact be used elsewhere, as the cost of five submarines would be
sufficient to build a tunnel through the Avila mountain and generate
economic growth in Vargas State or enough to build thousands of housing
units, which the Government could ask the private (and oligarchic!) private
sector to build, much like the viaduct was built without Government
intervention. But you know this is a revolution, where ideology, silly
ideas and vaporous projects are the rule of the day and spending US$ 40
billion in imports seems more important that economic development of the
country.

And speaking of silly ideas, in mid-June the President of
the Venezuelan Central bank was still defending the 12% target for 2007
inflation, but really set in with June’s numbers which suggest a 20% level
despite the one shot help of the cut in the VAT. Thus, the illustrious
Minister of Finance admits the goal will not be met just after a Deputy in
her wisdom or ignorance states that anyone that does not align itself with
the 12% goal is a traitor. And as he shows his earlier prediction is
impossible, the same Minister dares make another predicting there will be
no devaluation in Venezuela in the next five years. Watch out!

And
despite high oil prices, Venezuela’s and Pdvsa’s debt have taken a beating
in the last few weeks, as the numbers are simply not adding up. The US$ 60
billion budget of January is already up to US$ 66 billion, but income is
trailing last year’s and the VAT cut will have an impact, which has yet to
be taken into account. But who cares? Let’s sell some structured notes to
some friendly banks, helping them make money in a non-transparent way as a
way of containing the parallel market. And since we are visiting the issue,
let’s make it illegal for the “media” to quote any exchange rate that is
different from the official one, as if we ignoring its existence may make
it go away. I wonder if salon, blogspot and other blog hosts will have to
worry about this regulation.

And who cares about the law and the
Constitution, let’s also forbid demonstrations during a sports event, after
all, the country’s image is more important that basic rights like freedom
of speech or expression. In fact, it is Chavez’ image which is above all
the most important goal of the “process”, forget results, reality and the
like, the leader is above all, including the old Constitution. And by old I
mean the “old” Chavez one, the one that now makes home so uncomfortable
that he wants to change most of it. Yeap, the same one he used to call the
“best” Constitution in the world is no longer cool, it des not let him
confiscate for example and even worse, he might not even be able to make
the changes he wants without a Constituent Assembly, so he is looking for
ways to bypass it.

What else is new?

Really not much. Recall
referenda that nobody cares about, most careers at the Bolivarian
University are illegal as they have no certification or even approval from
the Ministry, heavy crude partners leave the country, Chavez threatens to
withdraw his application to Mercosur as he promises to export gasoline to
Iran, when the country is no longer even self-sufficient.

In
closing, I thank distinguished blogger Jorge Arena for his contributions,
as well as both Bruni, Spinoza and Daniel for their contributions to keep the blog
breathing in my absence. This time I will not raise their salary, but just
promise to pay them with the new undevaluable Bolivar Fuerte.

Miguel is the economy guy. There is an important number out today and it
needs reporting even if Miguel is baking in Palermo.

The good news for the consumer is that as of Sunday the VAT is 9%, down 2%.
One of the lowest in Latin America. I think it is crazy but the government
of Chavez will do anything to control inflation, even compromising its
revenue source.

But the good news comes with an expiration date: today the BCV announced an
inflation of 1.8% for June, 0.2% above what experts anticipated.

In other words, the Venezuelan consumer is paying about 0.2% less on July 2
grocery bill than it paid in June 2. Somewhere some chavista is preparing
some celebratory poster or TV ad to come out. You can count on that, almost
as much as a positive inflation number at the end of July, VAT going down
notwithstanding.

Note: the June inflation is about the inflation rate FOR A FULL YEAR in some
other countries or South America.

Spinoza

After the cooler weather and Teutonic order of the Baltic
Sea, I have moved to the much warmer and rather chaotic South of Italy, a
choice that may sound strange, but with such low fares from one point of
Europe to the other, distances have become meaningless. While I came for
some history, I found a different kind of historical facts, some surprising
“roots” around here for my own Venezuelan heritage, which while known, only
strikes you when you are actually here.

First, there is the
traffic. For those that think Venezuelans are unruly drivers, just come
here one day and be amazed that it can actually get worse somewhere in the
planet. At times, Southern Italians make Venezuelans seem almost British in
their driving habits. Rules seem to be there to be disobeyed, as
practically no rules are respected as drivers, go through red lights, and
merge at will and simply drive in a scary and fairly chaotic fashion.
Parking is no better, with cars parking anywhere where they may fit,
whether sidewalks, no parking zones or whatever and the term parallel
parking is simply a misnomer, if you can fit it at an angle, then who
cares?

Thus, I deduct that some of our driving habits are deeply
rooted in the South of Italy and as suggested by my fellow travelers, just
recall that most driving schools in Venezuelan were run by Italians, so the
connection is not as tenuous as some of you may think. Thus the Venezuelan
training came in quite handy in weaving around Sicily and
Calabria.

The second cultural influence that was uncanny was that of
construction techniques and how building and houses look around the South
of Italy, particularly in Sicily. In fact, driving from Messina to
Palermo, the sea on your right, it is hard to tell whether you are in
Sicily or in Venezuela driving towards Puerto La Cruz. The same brick
houses, same balconies, fences, construction style and yes, very
non-uniform, disorganized and random.

This is in fact not
surprising, Italian and Sicilian immigration was not only very string in
the 50’s, but it was Sicilian construction workers who helped build housing
and buildings at that time. But it is really uncanny, down to the details,
brick buildings, same balconies and the same randomness you see in
Venezuela. Both in Sicily and Venezuela, construction goes right up to the
street and sometimes one floor is turned into many in a few years. Truly
incredible to see the origins of Venezuelan construction habits
“live”.

Unfortunately, we have not copied other construction habits.
Road are magnificent and you can see in a few miles in Sicily and Calabria,
dozens of viaducts that make the new Caracas-La Guaira viaduct pale,
another sign that as a nation we have lost the ability to think big. In the
50’s we were world leaders in viaducts, today we not only build them too
late, but we think we have done something out of the ordinary. I have seen
amazing viaducts, twice as long and in a curve and even turning 360 degrees
just in from of your eyes in thin air. Sometimes, like near the Greek
temples in Segesta, long and high viaducts have been built over
agricultural areas, making me wonder why, it would seem they could have
done the job cheaper don below, maybe corruption also has some origin in
our Sicilian ancestors.

Thus, I came to see Norman, Arab and Roman
history and monuments (or ruins) but I did find surprisingly a bit of our
own cultural origins in this part of the world.

And I cannot leave
without mentioning the Sirocco from the Sahara that we felt in Palermo. It
was not the first time I felt 36-42 C weather, but it was something else to
turn and feel that hot blast of air that feels as if you just stuck your
head inside an oven. I do not wish that on anyone, but it is indeed quite
an experience, I just did not think t could get that hot and uncomfortable
anywhere on this planet. It felt like Mars.

So, from down south in
Italy, where Internet access is quite difficult I send these notes on what
I found here, as I have little idea of what is going on in Venezuela.
Internet access is difficult and expensive, so I read some of my mail and
have little idea of what is happening at home. I guess you could call this
truly a vacation!

It seems that Miguel trip through the Baltic countries is having an
effect. Chavez is in Russia and we are met with this news that the
Putin dominated Duma voted against receiving Chavez. The communist
party of Russia wanted Chavez to make a speech there. The vote was not
even close, 232 to 131.

And looking at Russian statistics, Chavez is visiting Russia for the
5th time whereas there is not talk of Putin coming over here. How
come? Chavez praised the “resistance” of Russia to the empire. Putin
seems to be keeping Chavez at bay while he is packing to go and spend a
weekend at Kennebunkport.

Does Chavez know what Kennebunkport means?

No word yet as to this affecting the much talked about purchase of
totally unnecessary 9 submarines. In the end, it will depend on some
sweet back room deals more than any Vodka laced Caviar toast..

Meanwhile, back at the Mercosur summit where Chavez should be instead
of buying Fabergé eggs, Celso Amorim, Brazil’s foreign minister, said
that full adhesion to Mercosur by Venezuela would depend on a heartfelt
apology by Chavez to the Brazilian senate. Must we conclude that the
Brazilian Senate is miffed enough that Lula does not want to risk a
negative vote? The suspense is high: will Chavez apologize for
treating the Brazilian Senate of Bush’s parrot?
(
).

Spinoza,
accidental guest blogger who does not grow tomatoes.

Internet
access has been much worse than I expected in these parts of the world
(Sydney, I have been to Russia, Estonia and Germany so far). Thus, surfing
has been very limited and I have mostly looked at emails.

Thanks to
friends, I receive the speech Spanish Judge Baltazar Garzon gave in
Venezuela, which contained general references to miscarriage of Justice and
Human Rights, but had not direct reference to Chavez’ Government. (Except
that he did say in the Q&A that shutti g down RCTV was bad for human
rights.

Well, the Government reacted in its best irked style
(http://www.abc.es/20070621/internacional-internacional/gobierno-chavez-tild
a-garzon_200706211046.html), calling Garzon a clown and a coward. As
many as three Government officials: the Minister of Foreign Relations, the
Vice-President and the Head of the Supreme Court felt “offended” by
Garzon’s remarks.

Thus, the Government sends another warning shot to
the world about what it thinks about justice and human rights when it
attacks someone who has an unblemished track record on human rights and
fighting them. To us, this is nothing new, the Chavez administration has
demonstarted over and over it cares little about human rights and freedom.
Chavez upcoming visit to Teheran at a time of more crackdowns in that
country and recent attempts at limiting fre speech in Venezuela because of
a silly sports events taking place in the country, simply prove the point
once more.

Add to that the attaks on the students attempting to
brand them as “opposition”, as if opposition were a bad word and you get
the picture. Unfortunately all we have gaiend is that the world now
understands that Chavez does not defend human rights and is no democrat,
the question is what will we be able to do about it in the absence of
honest judges willing to condemn the Government’s actions.

I have not been able to use the
Internet much since I left, so that I only know superficial facts about
events since my departure. Interesting that after not allowing the students
to march a couple of times before their appearance in front of the National
Assembly because of “law and order”, the authorities allowed pro-Chavez
supporters not only to surround the Capitol building, but many of them
happened to be heavily armed, in another display of how there is a double
standard today and two class of citizens in Venezuela and how the students
calling for everyone to be treated the same is so valid.

But since I
have not kept up with events in Venezuela in the last eight or nine days,
it would be difficult for me to write about my own country. However, having
visited a couple of former communist countries in the last few days, I
can’t help but see the dozens of analogies that I have witnessed in the
last week to the so called Chavista revolution, except that I get this
feeling that I am watching the same movie backwards in the countries of the
former Soviet Union, where I am.

The similarities are uncanny, even
if the Chavez revolution is unfolding in slow motion, compared to the speed
that transformed these countries into Communism. And somehow, while the
Soviet regime failed, it was able to show more successful experiences than
our tropical Dictator, despite the fact that he has had extraordinary
resources, but has very little to show for it in terms of the well being of
the people he claims to care so much for.

But the stories I heard
this week are quite similar. State planning that simply stifled private
initiative, producing shortages and making everyone equally poor. The rise
of a new rich oligarchy closely associated not only to power, but also to
the alliance between the military and the politicians. The use of State
resources to support party activities without checks and balances. Nepotism
all over the place. The exaltation of personalities. The leader who cannot
be questioned. Control of the media. Expropriation of property and
facilities which then proceed to deteriorate very fast. Allowance of
“dissent” to show that there were liberties, but mayor “dissenters” were
jailed or sometimes worse. Rotation of Government officials from one
position to the other, independent of competence in the area. Of course,
things got much worse at times than what we have witnessed so far, but we
should not forget the Chavez story is still unfolding.

I met nobody
who expressed nostalgia for the Soviets, even if not everything is fine in
these Republics these days. But they are still some around, those that
benefited from state populism and who did little and long for those days.
But in general, there is this thriving new economy, where people are happy,
not only because they have private property rights, but also because they
have freedom to do and say what they want. The young have particularly
embraced these values the strongest. Despite decades of communism, there is
a religious revival. Someone told me that Putin’s popularity arises in part
from the fact that he is the first President they have had who goes to
church and is a practicing orthodox.

But the biggest changes are in
the economy even if they have yet to be all ironed out. Traffic is a mess,
but gas is not cheap like in Venezuela, as more and more people can afford
cars. There is more construction and dock activity that I have seen
anywhere in recent years, including other European ports and Singapore. In
fact, the main gripe I heard is not about poverty or availability of goods,
but surprisingly, illegal immigration and how it is straining state
resources as immigrants from other former republics and Asia are coming in
droves to benefit form the economic resurgence.

You still see the
remnants for the Soviet era in many attitudes. You see many state employees
that do nothing, or the use of authority to deny something. I saw a tour
guide back down when she was told she could not do something, but I saw
another one get away with what she wanted just by being more forceful than
the other person.

I could write lots more, but being here these
last few days makes me wonder how anyone can think that these autocratic,
authoritarian regimes with planed economies can survive, least of all in
our countries, where disorganization, corruption and inefficiency are the
norm. History should teach people a lesson, but there are still people who
refuse to understand such economic realities.

All in all, a very
clear reminder of why Venezuela has taken the wrong path and why I felt I
was sort of watching the same movie, but backwards. Venezuela does indeed
seem to be the country where downside is up, and logic has given the way to
idiotic ideology.

The Peace of Democracy by Yon Goicoechea

Originally published here:
http://buscador.eluniversal.com/2007/06/01/opi_45239_art_la-paz-de-la-democra_301865.shtml

We are standing up, not to defend obscure interests, but for the
principles that should reign in a country that is constitutionally
declared democratic.

We demand to the Power to allow us exist in liberty. We demand to the
Power to recognize the legitimacy and the strength of the student
movement and ask them to abstain from intimidating acts or
manifestations that violate our rights.

We ask the police and the military authorities to abstain from the use
of fire arms and toxic substances to control the protests. We say that
there is no foundation on the criticism of high ranking civil servants
that, using their position, reiterate that our protests are political
and are part of a destabilizing plan from the CIA. We are not puppets of
any empire, except of one: the empire of democratic values.

We believe in Peace, in Concord, in Dialogue. Many years ago, when most
of us had not been born yet, a hairy man raised his voice of protest
with a sentence that, in its time, was the flag of those that are
attacking us now: “All we are saying, is give Peace a chance”. He was
John Lennon, who later died in the hands of a fanatic.

Many years later, a chinese student confronted a tank in Tianamen
square, in China. The tank could do nothing against the strength of the
ideas.

Fanatism destroys. A goverment that does not respect the values of
democracy, the right of freedom of expresion and the right of protest, a
Goverment that takes the path of imposition of violence, will always
find us standing up, in peace, but standing up. It is irresponsible the
calling of radical groups to confront us. It is unworthy that something
like that would happen in a Republic that is founded on Bolivar’s
values. We do not call for a strike, because we do not believe in
strikes, we believe in work and progress. Our call is for Peace. For
Peace and respect of Democracy.

Member of the Student Center of UCAB.

Translated by Jorge Arena,
Distinguished Ghost.
—————————————–

Once a year I do take a long vacation and I will be away until the first week in July. For the first 12 days I am pretty sure I will not be able to connect to the Internet at all, so my ghost bloggers will take care of it. After that Internet access will be there and I will try to post once in a while. I hope things are quiet while I am away although in te past they have stirred up in my absence (no connection!). Thanks for reading!

I have been meaning to write about the economy, but between
work, travel and the recent events, it has been hard to sit down and do it. The
Venezuelan economy continues to be dominated by the distortions that
I have described before, except that they are much worse than they were
last time I wrote a long article about it. In September of last year, economic
variables looked much better than they do today. International Reserves were
higher, the deficit was lower, inflation was lower, monetary liquidity was
lower, the parallel rate was lower and Venezuela had a healthy balance of
payments pictures. Thus, the economic outlook has deteriorated, but the
authorities continue to act as if there was no problem In fact, the new
Minister of Finance Rodrigo Cabezas, insists that what is needed is a policy of
increasing Government spending in order to maintain growth, but it is precisely
the high growth of Government spending, which has been the primary driver in
the creation of these distortions. Spending has grown by 25% in real terms for
the last two years, which is simply unsustainable and this has created a wide
variety of distortions in the economy, which will sooner or later lead to a
financial crisis of such proportions, that it will take years to overcome it.

While the Government hailed the growth in first quarter GDP,
which came at 8% over the same quarter of 2007, the numbers are less pretty than
they may look at first sight. First, while the non-oil economy grew at a 10.6%
clip, fueled by high Government spending, the non-oil economy dropped 5.6% due
to lower oil production. Within non-oil sectors, those that grew were propelled
by Government spending and high monetary liquidity with the commerce,
construction and financial sectors growing by over 20% and more worrisome 9 of
the 12 showed slower growth. Unfortunately, we don’t know much about the
agricultural sector, as it is no longer reported by the Central Bank (funny,
no?) individually, but grouped with “others”.

But it was the balance of payments numbers that looked
worrisome, which showed a deficit of US$ 5.21 billion, down from a surplus a
year earlier. The current account surplus, which has been running positive in Venezuela and the rest of Latin
America thanks to the commodities boom, was only US$ 3.6 billion
down 47.7% from the same period in 2006. This was the result of the drop in oil
exports, but also due to the high levels of imports during the first quarter.
Imports were US$ 9.1 billion, a huge number for what is typically the slowest
quarter for imports in the year and up 47$ over the first quarter 2006.

To put the deficit in the balance of payments in
perspective, it is the largest of the last ten years, at a time when oil income
is booming. What this means is that once again, the economy is being run on the
back of the oil cycle and it is simply oil income which is providing growth,
while internal variables continue to deteriorate. Nothing new on the
mishandling of the Venezuelan economy, all previous recent crisis in ‘82, ‘89,
’94 and ‘02 were not that different. 
What is probably different this time around is that the huge imports are
destroying both agricultural and industrial capacity, as local inflation and
fear of controls have limited investment and made local production less
competitive.

In the end, the balance of payment numbers indicate that
devaluation is looming in the horizon, no matter what the Government says. Unfortunately,
the more it is postponed, the larger it will be and the bigger the crisis
facing the country as these adjustments always lead to a contraction of the
economy and it takes time for people to recuperate their purchasing power and
for the economy to settle.

Then, the Ministry of Finance just published expenditures
for the first quarter and during those months, the Government spent US$ 15.2
billion and the deficit was US$ 3.8 billion an remarkable clip for what is
typically the slowest quarter of the year. What is worse is that since then,
the Government has cut the VAT, will cut it again on July 1^st. and
will have to budget some  US$ 3 billion
for the salary increase for public workers announced on May 1^st. Thus,
the revenue/expenses pictures will simply get worse.

The problem is that this time around there may be too many
distortions in the system to make the adjustment a normal one. First of all,
interest rates are deeply negative, which encourages people to spend and go
into debt, creating a potential time bomb for the financial system. But even
worse, in previous crisis, the Government had some way of making and adjustment
but this time around, it has little room for maneuver:

Inflation: May
inflation just came in and the rate continues to accelerate. CPI was 1.7% for
May, giving an accumulated value of 5.9% for the year, ahead of 2006, but this
includes a fairly artificial lowering of the inflation rate, because the Government
simply cut the Value Added Tax rate in March, which gave the rate a one time
kick down which has nothing to do with fundamentals. Even more worrisome, food
inflation is 29.6% and that does not take into account the fact that 30% of the
items under control can’t even be found in the markets, so the price remains
“constant” according to the Central Bank’s methodology.

Inflation is not going down, because of the excess monetary
liquidity and the lower offer of goods as noted in the first quarter report by
the Central Bank. Simply put: Too much money chasing for too few goods. There
is little encouragement to manufacture, if you can import the same product, get
controlled dollars and make the same profit at the end. That is why the
commerce sector is the best one to be in.

But even worse, such high level of inflation is what makes
the decision to devalue so difficult: Imagine adding fuel to the fire, adding
20% devaluation to the currency. It would be terrible for everyone, but would
hurt the poor the most. Unfortunately it is simply inevitable unless oil prices
were suddenly to jump up.

International
Reserves: International Reserves are currently at US$ 24.4 billion, an
incredibly low level, given the strength in oil prices. This is the result of
removing the so called “excess” reserves for the development fund Fonden, together
with trying to fight the high monetary liquidity using a PDVSA bond and buying
the CANTV and Electricidad de Caracas shares. We are told repeatedly that this
should be of no concern, as the Government has lots of money in the development
funds, but I do not expect them to return these to the international reserves
and in any case, Fonden has already committed all but US$ 9.7 billion of its
funds, so the day they are needed they may not be there after all.

While the Minister of Finance has said that he expects
reserves to recover near US$ 30 billion by the end of the year, even if true,
it will not help much given that monetary liquidity is expected to increase by
another 45% by year’s end. And is this huge growth in monetary liquidity that
has been pressuring the currency via the parallel market and the dropping
reserves have also begun to unnerve foreign investors. It is the typical
mismanagement of the oil cycle, where the Government feels invulnerable to any
setback in the oil markets, but it is more vulnerable than ever.

Monetary Liquidity:
The Government seemed to finally realize that the huge growth in monetary
liquidity last year was pressuring the parallel market, which in turn was
pressuring inflation. Thus, it decided to do something and issued first Bono
del SUR II, and later US$ 7.5 billion in PDVSA bonds, a staggering amount for a
private issue. The theory was that this US$ 9 billion (There was US$ 750
million in a dollar linked bond in local currency in the Bono del Sur) would
push the parallel rate lower, by increasing dollar supply to the market and
reducing monetary liquidity. The problem is that despite this huge issuance,
monetary liquidity is only US$ 3 billion below its peak and pressures have not
been reduced. And guess what? After an initial psychological drop the parallel
rate is above Bs. 4,000 once again and not the Bs. 3,000 that Government
experts had predicted.

As we describe below, this becomes worse going forward, as
the amount of issuance in the next few months is limited by the announced
withdrawal from the IMF as well as the fact that the PDVSA bonds are still
being digested by the market.

Parallel Rate:
The parallel rate, which was at Bs. 2,700 last September shot up near Bs. 4.500
early in the year, dropped to Bs. 3,500 when the PDVSA bond was issued, but the
impact was only psychological and the price is now near Bs. 4,100. And it seems
extremely unlikely to drop at this time. There are three factors that influence
this market. Monetary liquidity, psychology and Government intervention.
Monetary liquidity is excessive and unlikely to drop, psychology is very
negative as people worry about Government threats to the private sector and
dropping reserves and recent issuance shows that Government intervention only
has a very brief and temporary effect. Thus, you can expect the parallel rate
to simply drift lower between now and the end of the year. And this, in turn,
will continue to pressure inflation.

Another problem with the parallel rate shooting up is that
arbitrage opportunities become more attractive. When the difference between the
official rate of Bs. 2,150 to the US$ and the parallel rate was Bs.
400, the difference was not too significant for people to find ways to play it.
But today, with the parallel rate at Bs. 4,100, the difference is almost 100%
and it is too interesting to pass up. First of all, everyone that can do it
takes advantage of requesting Internet dollars, which everyone is entitled to
US$ 3,500, at the official rate. I have heard of the existence of outfits that
go around buying the Internet allocations for those that do not have the Bs. To
do it and even the credit card to do it. This seems to be more widespread, as
one hears about it more and more.

Then there is travel. After two and half years of fixed
exchange rate and significant inflation, buying airline tickets at the official
rate of Bs. 2,150 to the US$ is one of the best deals in town, much like cars
subsidized at that rate are such a bargain. Thus people are traveling more and
more and taking advantage of the US$ 5,400 per person everyone is entitled to.
(Of course, only the well to do can afford it!)

Then there is the fact that if you get official dollars for
whatever you sell or make, with the inflation rate running at 20%, people are
actually borrowing to import products and raw materials and bringing two to
three years of stock at the favorable official exchange rate.

And then there is of course, corruption.

Sovereign bonds: For
the last three years the Venezuelan Government has used the issuance of dollar
denominated bond in local currency as a way of relieving some of the pressures
in the economy. The strategy worked for a while, but as shown by the issuance
of the PDVSA bond, the impact of these issues is not what it used to be due the
huge growth in monetary liquidity. But now, with the decision to withdraw from
the IMF, the Government ahs complicated matters by announcing a measure which
most international analysts find illogical due to its consequences.

Basically, Chavez himself made this decision and it was
clear that the full consequences were not known to him or his collaborators.
The main problem is that all of 
Venezuela’s debt was issued with conditions among which was one which if
this happened, 25% of the holders of each bond issued by the country could get
together and ask for the acceleration, the early payment of the bond.

Obviously, if the bond is above 100, you have no interest in
doing this, but if it is below 100, you can make some money by voting to accelerate.
As the Government keeps saying that it will withdraw, investors have been
buying bonds below 100 and going short those above 100. Essentially when you go
short, you borrow the bond from someone else and sell it, in the belief that it
will go down and you can buy it at a lower price later.

Combine this with lower reserves, deteriorating balance of
payments and there has been an important sell off of Venezuelan bonds in the
last two months. On top of that, many investors have been selling Venezuelan bonds
to purchase PDVSA ones, because they have a higher yield and because PDVSA owns
CITGO, which is worth more than the amount of bonds outstanding of PDVSA and
thus CITGO represents a guarantee if the company ever decided to stop making
payments. 

This sell off and volatility in the country’s bonds limit
the ability of the country to place new debt, so, for the time being at least,
the main strategy used by the Government in the past to reduce the distortions
in the economy, will not be available. Even if it were, the large PDVSA issue
and the small impact it had on monetary liquidity and the parallel rate,
demonstrates that the Government is running out of tools to control the
economy.

It is somewhat ironic that by threatening to withdraw from
the multilateral agencies, the Chávez Government has exchanged institutions
that do show some degree of solidarity with countries, for the biggest
investors and speculators on the planet, who are the primary investors in the
country’s debt. These investors could care less about Venezuela and
are always looking to make an extra amount using a variety of complex
strategies.

At the current clip, there is only so much longer that the
country can continue to spend, create monetary liquidity without something
yielding and creating a crisis. The obvious solution would be to slow the
spending rate, but it is clear that this is not being contemplated.
Unfortunately, the longer this continues without any adjustment, the bigger the
crisis that will take place in the end. There is, of course, the perverse
obvious solution, which is simply to devalue. When this type of adjustment
comes, it will be the average Venezuelan that will be hit, inflation will
accelerate, consumer loans will default, imports will become very expensive helping
local industry temporarily, but given the distortions the adjustment may have
to be so large, that its consequences may be simply unpredictable.

While on the picture above left it may seem as if Chavez is explaining how to use Kirchoff’s Laws to simplify electrical circuits to the Foreign Press, he is actually displaying his newest coup theory, the “slow fuse coup” which is currently being carried out by who else…yeap, you got it, the US Government! By contrast, on the right, you have Weil’s simple explanation of the fast sleight of hand that Chavez himself has pulled on our rights and freedoms during the last few years.