In Our Opinion...

"A lie gets halfway around the world before the truth has a chance to get its pants on"....Sir Winston Churchill

In our opinion, the strategy is clear, tell a lie, and keep repeating it until you believe it is the truth: So first was the Commandant who claimed That the Casas de Bolsa in Venezuela were plotting against his government in a “Financial Coup” by pushing down the value of his beloved Bolivar Fuerte against the US dollar, with the sole purpose of creating shortages and inflation; then was the turn of the Attorney General which was followed by the Minister of Justice and finally to close the act, it was the turn of the one in charge of regulating the capital markets, the president of the “Comision Nacional de Valores.”

The worst blind is the one who refuses to see. When the exchange control was implemented, the Chavez administration allowed a loophole permitting the private sector to access hard currency through a swap exchange mechanism, or “permuta”. The reasoning behind the decision was simple; those transactions were private transactions that did not affect the international reserves of the nation.

The problems with controls are that they might be effective when applied for a short period of time, but have proven to be highly ineffective otherwise.

As is the case with every market, the price of the permuta dollar depended on the laws of the supply and demand. The Casas de Bolsa became the market makers of the permuta market with the responsibility of providing liquidity to it. The pivot point was the 2007 Constitutional referendum, which became Chavez first and only political lost.

At that point Chavez plotted the real coup against the Venezuelan democracy, as he decided to use the extraordinary powers given to him by the Venezuelan National Assembly through an “Enabling Law” which allowed him to pass laws on specific issues as decrees: He passed a law changing the country administrative structure and a law ending the autonomy of the central bank. Furthermore, his rhetoric changed dramatically shifting from a Bolivarian Nationalist to a Marxist Socialist. The pace of Nationalizations accelerated and the war against the private sector became his top political agenda.

He nationalized the oil production sites; metal companies; mining companies; transport companies; service companies. In addition the government seized the coffee, cement and electricity and communications sectors and large parts of the banking sector. By nationalizing scores of companies and entire industries the Chavez administration dried up the supply of dollars of the permuta market and created a large imbalance that could no longer be addressed by the Casa de Bolsas.

His economic team recognized the one in a lifetime opportunity, to create wealth for themselves. In exchange for very lucrative commissions, the Ministry of Finance started to sell to a selected group of bankers, structured notes denominated in dollars but payable in Bolivars at the official rate of 2.15 per US dollar. The notes were sold with large premiums, which allowed the Ministry of Finance to record large profits in Bolivars, and provided the selected financial institutions with large foreign exchange profits.

In addition, in 2009 alone, the Chavez Administration issued USD14.84 Billion in Bolivar-Dollar issues pressured by the declining oil prices, difficulties cutting the budget and a parallel foreign exchange market that demanded a higher supply of US dollars. According to the Central Bank of Venezuela the external debt jumped 81 percent in the last 3 years and amounts to 48.3 Billion US dollars.

In a bid to jump-start the recession-hit economy, on January 9th, 2010, the Chavez Administration devalued the currency for the first time since 2005, a decision that the market anticipated for a long time. The new two-tiered exchange system offers the Bsf. 2.6 per dollar for goods deemed essential including food, medicine and industrial machinery. Other products, including cars and telephones, are imported at the higher Bsf. 4.3 per dollar.

The Financial Coup was not created by the Casas de Bolsa as the Chavez administration wants us to believe, it came with Chavez’s yearly orders to transfer US$ from the International Reserves managed by the Central Bank to the Development Fund “Fonden.” The latest one in January of this year, a whooping US$7 Billion, which proved to be highly irresponsible because monetary liquidity was at Bsf. 236 Billion while the International Reserves were left at US$28 Billion which created an equilibrium price of Bsf. 8.42 per US$ of reserve.