Chavez' 'dead-on-arrival' Bolivar-Dollar regime

VenEconomy: After three weeks of forced suspension of operations in the swap market, this Thursday, President Chavez urged private banks to get rid of all their foreign-currency-denominated bonds or run the risk of being taken over by the State. It is worth noting that the demand for foreign currency that has built up during those three weeks already comes to $1.5 billion.

Besides the arbitrary nature of the order and repeated threats to the banks, during his lecture, Chavez also let slip some information that speak volumes of the country's precarious financial situation. He stated, for example, that the state-owned banks apparently have available only $126 million in foreign-currency-denominated bonds, merely 2.3% of the total registered in the system. The nominal value of those bonds, according to Chavez, is apparently in the order of $5.5 billion and not $40 billion as he mentioned some days ago.

But that figure of $5.5 billion is not quite accurate either, as the market value of those bonds is only around $3.3 billion, barely enough to cover demand for one and a half months in the swap market. So, after that, what?

These risible figures give a glimpse of the true problem: the fact that it was the government itself that was supplying the swap market with foreign currency and that this source has dried up.

Added to that, the international reserves are showing no signs of recovery, even though the average oil price is at $71.29/bbl (25% higher than in 2009). Today, the reserves amount to $27.8 billion, 5.8% less than at the same time last year ($29.4 billion). This shrinkage is due mainly to the fact that PDVSA, besides producing less than last year, is sending oil abroad in payment of money already received for its uncontrolled future sales. Added to the mix are the company's high operating costs, bad administration, and less than transparent handling of its resources.

Now the new system will inflict more damage on the country's deteriorated economy. On the one hand, it will force the banks and anyone who holds a dollar-denominated bond to trade in a controlled market; and on the other, it will make the banks more vulnerable when it comes to responding for or guaranteeing foreign currency operations engaged in abroad.

Moreover, depending on how those bonds are valued and paid, this could put the financial system in difficulties.

Last, but not least, is the position of small savers and investors who believed in the government's proposal. Today, they are between a rock and a hard place: hanging on to the bonds until maturity or selling them to the Central Bank at a price it decides.

It looks as though this new scheme is stillborn. Once the bonds in the possession of the banks and a handful of non-institutional holders have run out, who will offer their foreign currency at a value that is clearly below the true market value?