March 20, 2009

Parallel exchange market freaks out on fears Chávez is about to move on banks

Quico says: A reliably AAA, gold-plated source chips in with a theory that's just crazy enough to be plausible. Apparently, on VTV yesterday, Chávez launched into a lunatic rant about the evils of the "encaje legal" - the commercial banks' legal reserve requirements, which they're bound by law to hold at the Central Bank.

The Fat Man in the Palace railed against the iniquity of "bankers" earning interest for simply parking their money in the Central bank without mentioning the fact that they are obligated to do so by law. Tantalizingly, he pointed out that there's "a huge wad of cash there, more than the entire government budget."

In fact, there's $22.5 billion, according to our source, and Chávez being Chávez, he can't understand why he can't go out and spend it. After all, the Central Bank is his bank!

The rest of the rant was enough to give any Venezuelan saver nightmares:
I have the banking report right here, what they have, bank by bank, the reserve requirements in the Central Bank, monetary liquidity, all that...a total X-ray of the resources of the private national banking system
Reserve requirements everywhere act as a source of financial support for the banking system, a backstop against a bank run. Chávez's hint that the revolution might be making a grab for those funds is a sure-fire way to set off a crisis of confidence in the financial system, which may be part of the reason the parallel exchange market is freaking the hell out today, even more than it had been in recent days.

(I could tell you exactly how much, but then I'd go to jail.)

The possibility of the government seizing the banks' reserve requirements fits in with the perverse logic of the Revolution. A traditional adjustment package - even a severe one - wouldn't come close to filling the truly massive hole in the public sector finances this year. Devaluing to Bs.3.50/$, quadrupling the price of gas and hiking VAT from 9% to 12%, for instance, would have a massive impact on people's pocketbooks, but might cover less than half the fiscal shortfall the government can expect if oil prices don't rise sharply this year. But the banks' reserves requirements would handily cover the shortfall, and then some.

In effect, a grab like this works just like printing money, since bank's reserve requirements don't actually circulate, they just sit in a BCV account. If they're taken over and spent, they would enter the money supply, end up as deposits in a bank and end up in the BCV, right where they started. In the process, the government multiplies the money in circulation, and more money supply means more inflation.

Aside from the inflation hit, the additional "minor" drawback is that the move would set off an immediate set of bank runs. Knowing that your deposit insurance is being spent by the government and, worse, that the government is printing money like this immediately makes you want to take your money out and convert it into dollars.

This would make some kind of broad-based intervention unavoidable in the banking sector which, as far as chavismo is concerned, is a feature, not a bug. It's a golden opportunity to nationalize not this bank, or that, but the entire sector.

But nationalization alone won't prevent people from wanting to withdraw their money, which may be an invitation for further restrictions on the banking sector. What's the Barinas term for "corralito"?

Granted, this is all just a case of Rumint - kremlinologically-based speculation and very possibly a red herring. The government could simply be floating these stories to manipulate the parallel exchange market, which is increasingly PDVSA's preferred venue for turning petrodollars into bolívars.

Still, Chávez's decision-making process has been getting weirder and weirder. Apparently, Banco de Venezuela's people found out that their on-and-off nationalization was on again from the TV yesterday! So it no longer seems safe to dismiss any idea, crazy though it might seem.

Which explains why Caracas' financial people are incredibly jittery in anticipation of tomorrow's announcement. And if its centerpiece does turn out to be a Reserve Requirement grab ... remember where you read it first ... or second, if in fact Jose Guerra was talking about it this morning.

But then, if it doesn't, kindly forget this whole post!