Latin Finance turned to Turan Corporation’s experience and the Riches Among the Ruins blog for analysis on the struggle between Lulismo and Chavismo in Latin America.
Brazil’s election is looming, with the electorate divided between Lula’s hand-picked successor Dilma Roussef and the Sao Paulo state governor, Jose Serra.
My latest op-ed for the Providence Journal is now available online. I discuss the crisis in Greece and the lessons it holds for the United States.
Read it online at Projo.com, and join the discussion there!
International headlines have recently focused on Greece, one of the 16 countries in the European Union whose currency is the euro.
Greece is in danger of defaulting on its national debt. The reasons are obvious: too much spending and not enough tax collection. The Greek budget deficit reaches 12.7 percent of its gross domestic product and its national debt represents 113 percent of GDP. These numbers are worryingly similar to our own balance sheet, with debt equal to 73 percent of our GDP (but growing fast) and budget deficits at 10.6 percent.
Greece’s potential default has sent shockwaves through global bond and stock markets, which could end up equaling or even dwarfing our subprime housing and banking crisis. As a result, the U.S. dollar has strengthened against the euro and the interest buyers demand on Greek bonds has gone up. A few other E.U. countries, perhaps most notably Spain and Portugal, are also in trouble because of their uncontrolled borrowing and spending.
A few days ago, Venezuelan president Hugo Chavez devalued the bolivar. This comes as no surprise. As I wrote in this space in November,
Buffeted by the fall in oil prices and high inflation, there are signs that the Venezuelan economy, and with it Chavez himself, is almost certainly going to implode. He may be able to buy time with various measures to stabilize his currency (the bolivar), such as the sale of dollar-denominated bonds to those willing to risk the investment, but the long-term outlook for the economy is dim…
Inflation is the highest in Western hemisphere, officially around 30%, but likely higher. All this drives demand for a more stable currency such as the dollar. The recent issuance of dollar-denominated Venezuelan bonds, purchasable in bolivars, is intended to soak up the demand for dollars and allow the purchaser to obtain a rate somewhere between the official and the parallel market rate. The big question, of course, is whether Venezuela can make good on the promise…
This weekend, Chavez devalued the bolivar right on cue, sending the people of Venezuela scrambling to buy goods which will spike in price once the measures take effect. The country actually has two exchange rates now – one of 4.3 bolivars/dollar, close to current black market rates, and the other subsidized at 2.6/dollar. The second rate applies to a few classes of goods deemed necessary for the country, including heavy industrial equipment, food and medicine, reported Reuters.
As usual, this will create privileged class of well-connected cronies who snag contracts to buy at 2.6 and sell at 4.3. This has been a recurring problem with the current CADIVI (the government office which controls foreign exchange policy in Venezuela) regime, and it remains a serious criticism of Venezuela’s tightly managed currency regime. Dual exchange rates have a long and ignominious history in Latin America, from Mexico to Argentina. Indeed, Venezuela used to have a body called RECADI in the 1990′s, which established preferential exchange rates to strengthen certain sectors of the economy. As the black market adjusts to the new system and people strive to take advantage of the difference in rates, Chavez will find that the dual rate is not a sustainable system.
The move will benefit certain politically and economically vital industries, said several Venezuelan officials. State oil company PDVSA will get relief from stagnant oil prices, as each barrel of oil sold in dollars yields more local currency with which to pay many of its outstanding debts. Export industries like coffee will find their competitiveness increasing as Venezuelan exports become cheaper.
Chavez’s popularity may take a hit as prices rise. Indeed, the president has threatened to deploy the army in order to shut down and seize the stocks of speculators seeking to take advantage of price differences and shortages, according to the Financial Times. “Go ahead and speculate if you want, but we will take your business away and give it to the workers, to the people,” the British financial paper quoted him as saying.
At this time last year, Chavez did not even acknowledge the existence of a parallel market in the bolivar. For him to now create a dual-rate exchange scheme set near the level of that same black market deals a serious blow to the regime’s credibility and confidence.
Control of his planned economy is slipping through Chavez’s fingers. Eventually, he may realize that trying to strangle private enterprise and market forces will simply delay the inevitable. Hopefully, that realization comes before the country suffers too much more, as Venezuela faces a long and painful road back to economic health no matter what it does.
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