Hugo hurls Venezuela into the void

President Hugo Chavez signed the reformed Ley de Ilicitos Cambiarios on 16 May. The “permuta” swap market is dead, anyone who trades foreign currencies is now a criminal, and Venezuela has been pushed over a precipice with no bottom in sight.

*The legal definition of foreign currency now includes all dollar-denominated securities issued in Venezuela or internationally. Apparently, the new definition of foreign currency also extends to all securities denominated in foreign currency that may be held by Venezuelan citizens including Venezuelans who live abroad, and foreign nationals living in Venezuela, according to some analysts.

*It is now illegal for anyone in Venezuela to buy/sell any securities denominated in foreign currency (dollars, euros, etc.) except through the Central Bank, based on new official procedures which have not been defined precisely yet.

It also appears that Venezuelan nationals outside the country who trade any securities denominated in foreign currency technically are breaking the reformed law even if the securities in question were not issued by Venezuelan entities. Also, it appears that any foreign entity or individual that trades Venezuelan-issued securities outside the country is breaking the law.

*The Central Bank now has a total monopoly on all transactions in foreign currencies and bonds.

Cadivi’s future is unclear, and this could bring Chavez some unexpected problems with the military-controlled gangs that operate Cadivi’s parallel networks through which bribes are paid to ensure that foreign currency applications are officially approved.

Also unclear is what happens now to the billions of dollars that Cadivi has approved over the past 12-18 months which as yet have not been disbursed to the companies and individuals that applied for this foreign currency legally through Cadivi.

*Government entities authorized to enforce the reformed law now include Indebapis (consumer protection), Onidex (immigration and customs); Seniat (tax authority), CNV (National securities Commission), the superintendent of banks, and the insurance superintendent, among others.

The reformed law is a windfall for the corrupt activities that flourish at all Venezuelan ports of international departure/entry.

Caracas Gringo predicts that as of today all Venezuelans and foreign nationals traveling out of Venezuela will be at permanent risk of arbitrary searches of their luggage and persons by National Guard and other law enforcement authorities at the country’s airports, seaports and land border crossings who will be looking for illegal hoards of cash.

Of course, not everyone will be searched, but the reformed law implicitly empowers any security official at any international point of departure/entry to conduct searches of travelers at the official’s discretion. Now that trading foreign currency is illegal excepot through the Central Bank, these officials have a new mission that will line their pockets: the interdiction of illicit dollars and euros held by travelers.

*Anyone who is caught illegally buying or selling foreign currencies (including any securities) will be fined up to $10,000 if the amount is between $10,000 and $20,000, and jailed for 2-6 years for trading any amount over $20,000.

*It appears that the trading of bonds held by Venezuelan companies (i.e. banks) is now prohibited, except through the Central Bank. This is very bad news for private banks that are heavily exposed in government-issued secuties.

With the exception of less than a half-dozen banks, ALL private Venezuelan banks carry substantial portfolios of government-issued securities including Pdvsa bonds. Since the banks now can only trade these securities through the Central Bank under rules (and exchange rates) set by the Central Bank, these securities essentially are now even less valuable than junk bonds.

What happens now?

First, all of Venezuela’s traditional, legitimate brokers shut down their foreign currency operations on 12 May. However, all government-related brokers continued to buy and sell foreign dollars that they received directly from the Venezuelan Treasury. Today is a bank holiday in Venezuela, so we must wait until 18 May to see if government-related brokers will continue trading foreign currency this week.

Second, the regime sent “inspectors” to the offices of all of the traditional currency brokers starting two weeks ago with orders to find anything that looks like “proof” of illicit activities. Caracas Gringo also hears from several financial sources that the owners of at least three brokerage firms – Italcambio, Banvalor and Positiva – could be arrested as soon as this week. But we stress that these reports have not been confirmed yet.

Third, an informal black market has already sprung into existence. Before end-June 2010, the BsF likely will be trading between BsF 10-12 per dollar in this market, which likely will operate in Venezuela and abroad.

Fourth, a formal black market also will appear outside Venezuela, though more slowly because companies, individuals and brokers in Venezuela still have to figure out how to justify, with the compliance departments of foreign banks, large sums of cash changing hands outside Venezuela.

Fifth, Devil’s Excrement thinks that a five-tier exchange market has been created: 2.6, 4.3, BCV, informal black and formal black.

The regime’s idiotic scheme is completely unsustainable. Two things will happen: either the regime’s new scheme will unravel quickly, or Venezuela’s economy will unravel first.

The Chavez regime does not have the slightest clue with respect to the tsunami that is about to strike the Central Bank in terms of demand for foreign currencies. Just to function normally, the economy needs between $60 million and $80 million per day – or roughly $15 billion to $20 billion per year.

The ONLY way that Central Bank can meet this demand is to stop giving dollars to Cadivi, but that would constitute a de facto devaluation.

Serious shortages of everything already exist, but they’re about to worsen much faster than anyone anticipates.

There won’t be a Central Bank forex market for at least another week, if not longer, and that alone could be sufficient to hurl the black market FX rate over BsF 10 per dollar before the end of May.

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About Caracas Gringo

Representing less than 0.00000000001515152% of the world population as of 31 December 2011.
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14 Responses to Hugo hurls Venezuela into the void

  1. Lazarus says:

    Olibaron may be right, but it is still up in the US. Today it is:

    “official” = 8.45

    Aeorpuerto Maquetia = 7.10

    Like

  2. olibaron says:

    In venezuela it is blocked but they have other sites with the same info:http://www.dolar.nu/ and http://www.pampatar.tk/

    I read a post of the owner saying he wrote an email to the chavez administration they are pathetic people abusing the country. Problem was that he used info@dollar.nu, by mistake, as his email address. So the site got blocked.

    Like

  3. olibaron says:

    The site mentioned uses a quite accurate calculation, and yes it is real.

    Like

  4. Lazarus says:

    Found this, not sure if it is real or accurate:

    http://dollar.nu/

    Like

  5. Rugged says:

    Caracas Gringo, thank you for another good article. It left me wondering how quickly the average barrio person will feel the negative effects. If they happen too slowly the impact on the upcoming AN election will be limited. Whether venezuelans will conform to the idea of very limited availability of food and other basic necessities, or whether they will be upset enough to do something about it during the election. The only way to get rid of Chavez (if at all) is through gradually recuperating government power in every upcoming election. Any other way to get rid of him escapes regular average people and would require an intervention with a lot of muscle behind it.

    Like

  6. olibaron says:

    The way the venezuelan government is handling the economic problems is, and I read it somewhere else, “like a monkey trying to solve a Rubik’s Cube by banging it repeatedly against a rock”.

    But there is a problem right now. Because the permuta market was legal, it was a good instrument to value the real rate of the Bolivar “Fuerte”. Because this instrument is gone the real rate can is the rate that the illegal brokers are willing to give. I heard that the brokers on Maiquetia actually do not have a clue what to use as a exchange rate.

    One of the calculations which is being used is this one:
    IBC / Dow Jones * 1.43.
    According to this calculation, the dollar is valued right now at 8.40. But this calculation has practically no economic foundation. Does anyone have a better way of calculating?

    Like

    • Hugo Groening says:

      What some economists do -as a rule of thumb-, is divide the amount of Bs. in the hands of the public, by the international reserves in $. If so, the reserves currently total BsF. 236.000 million, according to an article published today in TalCual http://bit.ly/dmMz5h. According to the same source, international reserves are at the $28.000 million level. If you divide the first by the second, the result is 8.43, which is surprisingly close to recent rates quoted by “permuta” agents.

      Things might get a little hectic if you add into the equation, the not-so-far-out hypothesis that the quoted number for international reserves also include -at face value-, cuban, bolivian, argentinian, etc. bonds and other securities supposedly held by BCV. That in itself throws an awful lot of uncertainty into the calculation. If, for example, you were to assume that “operative” int’l reserves only mount to 50% of the quoted figure, you’d then have to duplicate the “fair” price of the greenback.

      All in all not a pretty picture.

      Like

  7. Hugo Groening says:

    I can’t help thinking that Chávez well knows what he’s doing. He’s out to destroy de economic infrastructure in the country, so that he be the sole producer/importer in Venezuela. The idea would be to force everyone’s lifeline to depend on him. That is: you eat only if he bestows on you such grace. And if you don’t conform, you have two choices: either starve or flee the country.

    Of course, were this to be the case, you’d wonder how long venezuelans will endure such humiliating impositions by a psychopath, while much of the rest of the world entertains the sychophantic notion that he’s a self styled Robin Hood.

    I’m sure there’s a lot of incompetence & corruption behind the regime’s failures. More than ever, in fact. But not all is what it seems. Crime in the streets, kidnappings, for example, could also be seen as a way of carrying the class struggle to the “bourgeois” enemy that dwells in the suburbs. Hence, far from controlling it, he promotes class violence every time he goes on national TV.

    The country seems to have been transformed into a gigantic social engineering experiment. Teams of venezuelans and foreigners, mainly cubans, brought here for that purpose are writing the prescriptions which -they think-, will finally give way to the “new man” that will be the acting agent for the coming “creation of Heaven on earth” (sic) in which there will be no social classes and every human being will be devoid of any trace of selfishness.

    I’m not exaggerating. Much of this hoopla rests in some very official documents such as the new LOE (Education Organic Law)

    Like

    • I think you have hit the nail on the head. It is part of the revolutionist handbook. You cannot fundementally change a country with out first destroying it.

      Then you can rebuild it back into the image you want.

      Like

  8. Juancho says:

    Some months ago Caracas Gringo warned that turning the treasury and banking sector over to a hare-brained Cubano with no experience, whatsoever, with capitol markets, was economic suicide. Here we are, with our heads under the falling blade and our carterras nigh empty.

    While worldwide, economics is a crucial, complex and involved study, Chavez has once again considered proper economics to be nothing more than a fabricated faux-field contrived by bourgeois fat cats out to screw the “pueblo.”

    This guy is so stupid that if you moved his plato three inches to the left, he’d fucking starve to death.

    Juancho

    Like

  9. island canuck says:

    CC said:
    “Caracas Gringo predicts that as of today all Venezuelans and foreign nationals traveling out of Venezuela will be at permanent risk of arbitrary searches of their luggage and persons by National Guard and other law enforcement authorities at the country’s airports, seaports and land border crossings who will be looking for illegal hoards of cash.”

    This has been happening for some time. When we left through Barcelona last May a number of people were taken into one of the bathrooms & searched for currency. I was challenged 3 or 4 times by the GN as to how much cash I had & answered only that I had less than $10,000. They held our passports until about 4 minutes before the departure of the flight.

    CC also said:
    “*It is now illegal for anyone in Venezuela to buy/sell any securities denominated in foreign currency (dollars, euros, etc.) except through the Central Bank, based on new official procedures which have not been defined precisely yet.”

    What of all the companies in the tourist industry – hotels, tour agencies, etc. who receive their payments in US$ or Euros outside the country. Do they just stop taking reservations??

    There are probably many more examples.

    It looks like the magic number is US$10,000. As long as you keep under that number it looks like they will leave you alone.

    In other words if a tourist arrives in Venezuela this week or next & changes a few hundred dollars in the street nothing will happen. If a Venezuelan buys a few thousand for his trip outside then the same thing.

    Like

  10. KillChavez says:

    I bet that Venezuela’s economy will be pulled apart first…

    Birdbrain Chavez has been acting as irrational as his stupidity enables him.

    But as human stupidity is considered infinite, it also explains how 11 years after, 2.5million voters still support him…. It is very difficult to blame one single guy in all this messy s##* hole.

    Now, as s result of government’s tremendous incompetence, US currency in the black market will reach Mars by all means: external debts need to be paid at any cost, hence; product prices will go up; then hyperinflation to come.

    But, due to the lack of intelligence, BCV´s regulation will strangle the economy no matter the consequences…. That suffocation will open the most diabolic door of all; “Show me the money and I will give you the approval..” so, better get ready all business dudes in here; a rampage of an outbreak of evil in corruption will start over; at least, dinner has already been served for that… BCV and Finance Mins, are giving the final touch-ups..

    I’m starting to believe in reincarnation though; Moe and Pol Pot reincarnated in one person.

    Like

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