Overnight rates soar, as Chavez takes over monetary policy

September 6, 2007

If it were not so pathetic, it would actually be funny what happened today in monetary markets in Venezuela, when the overnight inter bank rate actually went as high as 120% at one moment due to the stupidity of Central Bank authorities.

As I reported on Monday, the autocrat actually believes he knows everything, which makes him extremely dangerous. In his infinite ignorance, Chavez suggested that the Central Bank should stop “aiding the oligarchs”, lending to banks and begin helping the poor. Even worse, the Board of the Central Bank sucked up to the autocrat and yesterday that institution announced that it was following Chavez’s orders and would no longer do what is locally called as operations of monetary injection, in which it lends money to banks that are short overnight. This is somewhat like the discount window of the Federal Reserve Bank in the US and a mechanism that is used by all Central Banks of the world.

Well, the move took banks, mainly small ones, by surprise and given that they could not go to the Central Bank they began borrowing from other banks driving the overnight rate very quickly to 120% interest rate. By that time, it appears as if the Central Bank realized how much it had screwed up and intervened lending to the banks and driving the rate down to 30% bringing back some semblance of stability to the markets.

The whole thing was almost comical as it turned out that most of the banks requiring help were small financial institutions, with low credit ratings and an inordinate amounts of Government deposits. And the reason they needed money in many cases was even funnier, if you can find the whole thing to have some humor, in that many of them needed Bolivars to pay for the structured notes that the Government sold them earlier in the week with favorable conditions and in many cases leaving many people wondering why those institutions were the beneficiaries of the Government’s largesse.

Of course, the crisis was induced by Chavez himself and precisely because these smaller banks are bad credit risks and do no have credit lines with the more solvent and well run large financial institutions.

More remarkable, some foreign “analysts” tried to find some sort of ominous interpretation to the crisis, thinking that there was indeed a monetary crisis in the works in Venezuela, some sort of liquidity crunch that in the era of derivatives could extend abroad. No such luck, plenty of liquidity here in Venezuela, but it is in the healthy financial institutions and not in the vaults of the novel pro-robolutionary banking institutions. It was just the fact that loyalists who understand monetary matters follow the bumbling directives of the ignorant autocrat.

Remarkably, the Venezuelan currency strengthened as market players and investors decided to play it safe until the extent of the liquidity problem was clear. By the end of the afternoon, it was back up, following the more logical route already set by the excess monetary liquidity in the country.

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