Venezuela's Economic Problems Could Soon Be Spain's as Well

Includes: EWP, LDF, SNF
by: Bruce Krasting

Some interesting developments in Venezuela over the weekend. The government of Cesar Chavez devalued the Bolivar, twice. The official rate was devalued from 2.15B/$ to 2.6B/$, a change of 21%. This is of little consequence. The official rate is not used for any significant transactions.

They established a new exchange rate regime as well. There is now a two-tiered official rate. The second rate was set at 4.3. This rate is intended for “Non Essential” imports. There is supposed to be a list forthcoming of 430 items. The list will include all luxury products. This is something that will not go over too well in Caracas.

But that step is probably irrelevant as well. As of last week the “Parallel Market” (AKA Black Market) was trading the Bolivar at around 6 to the dollar. President Chavez announced new plans to crack down on speculators. It was not clear if he was referring to the currency traders or the shopkeepers who have been driving up prices at a torrid (30+%pa) pace. Probably both.

I would put no faith in the numbers that are available from Venezuela. By way of example the following chart is derived from info from the CIA World Fact Book. This chart makes me think there should be no problems. What can go wrong when you have a $39B Current Account surplus?

This chart is from Banco Central De Venezuela. The information only covers through March of 2009. But looking at this it is very difficult to believe that the $39b surplus forecast by CIA was realized.

I have lived through a few dozen Latin American financial crises. This one does not look so different from those in the past. A natural resource dependent country gets financially clobbered when the resource they are peddling falls dramatically in price. My guess is that actual reserves at the Central bank have fallen to dangerously low levels. (less than $10b. Down from $40b in 08) The black market and the dramatic actions by the government prove that they must have been getting close to an empty cupboard. The two-tiered currency regime will not work. It never has in the past. It encourages speculation and hoarding. It will lead to shortages of all manner of goods. It will prove to be socially disruptive.

In the scale of importance to the rest of the world I would give this a 2 out of 10. Really no big deal by itself. We all knew that Venezuela was a basket case so who cares?

But now look at this report prepared by the Bank for International Settlements (click to enlarge):

We see from this that the problems in Venezuela are soon to be the problems in Spain. Not only are their banks exposed to the trade credits outstanding but the exporters must have been making a fair buck in selling the stuff to Venezuela that are behind these credits. So the sovereign risk story in Venezuela is soon to become a sovereign risk story in Spain.

The great sucking noise of credit contraction is continuing. Today it is Viet Nam and Venezuela; tomorrow it will be with those that trade with the weak ones. Sooner or later there will be no strong ones left. As this process progresses it will rise to the top.

Note: I went to Caracas for business a number of times in the 80’s. I found nice people, good restaurants and interesting things to capture my attention. I liked it, but would not have suggested it as a destination. My last trip was in 1988. I was there shortly after a spate of domestic violence that brought the military out. At night I heard shooting throughout the city. I asked someone what this was about. The explanation was, “The people who are angry shoot guns in they sky.” I wonder if they are still shooting off guns at night in Caracas. I am sure there are plenty of angry people.