The New Foreign Exchange Market at the Venezuelan Central Bank

May 30, 2010

According to the Venezuelan Central Bank, the new parallel market in which dollar bonds will be traded within a price band at that bank, will begin operating next week. In tune with the revolution, the system will be implement by that evil/capitalist/gringo company called Bloomberg. I doubt the new system will be in place before the end of next week, it is not only the platform that matters, but also the regulations which go from how to order at your bank, to how the band system will exactly work. Since brokers are banned from this, the banks have to train personnel, print forms and learn how to run the system. I think it will be at least another week before this is implemented and trading begins.

Which means that three weeks would have gone by without any access to foreign currency other than Cadivi, the foreign exchange control office. Since Cadivi is quite stingy, that means inventories are being drawn down fast and there will be accumulated demand in the parallel system when it opens. How much? Well, if the old, and now banned, swap system used to trade 80-100 million $ a day that means there will be 1.2 billion to 1.5 billion dollars ready to buy, not a small amount.

Thus, the question is who will supply this money to the buyers. Minister Giordani has said the Government will not do it, that the money will have to come from the US$ 40 billion in Pdvsa and Venezuela bonds that the Government has issued. Except that not only are these bonds largely in the hands of foreigners that want or need no Bolivars, but they are all trading below their face value, roughly at 65% of their face or nominal value on average, so what’s out there is less than US$ 26 billion in actual, real dollars, which is what matters to this fx market.

Chavez has threatened to force local banks to sell their bonds for Bolivars, Analysts estimate this is somewhere between 10 and 17 billion dollars, with the Government saying it is US$ 11 billion, but these numbers are guesstimates based on calculations of the limit on dollars that banks can hold, as established by the Government.

A much simpler and precise estimate is to look at how much banks had in Venezuela and PDVSA bonds as of Dec. 31st. last year, a number that should not have changed much since then. That tabulation gives a much lower number of at most US$ 5 billion in nominal or face value, which corresponds to a cash dollar value of only US$ 3.4 billion give or take one hundred million for each.

That is not much. In fact, that is barely the needs of the parallel market for five to six weeks, of which three have already gone by. Which means that even if the Government forces banks to sell their bonds for Bolivars it is barely a scratch on the surface and in two months, this new market will need a new source of funds or a different structure.

Which implies that problems will continue for the foreseeable future and the Government will, once again, have to improvise a “new, new” system before September.

Not pretty at all.

87 Responses to “The New Foreign Exchange Market at the Venezuelan Central Bank”

  1. Kevin Says:

    I have a question. If the local banks have dollar assets, do those in any way correspond to dollar liabilities such as deposits? It seems a logical assumption. If the banks are forced to disgorge their dollar assets it might lead to a run on dollar deposits (or their implicit or explicit seizure). Is this the way the banking system ends? It just doesn’t seem to add up to an outsider.

  2. moctavio Says:

    No, there are no dollar accounts in any local banks, it is not allowed. Banks own dollars as a hedge against devaluation.

  3. Kevin Says:

    Miguel,

    But if the banks don’t have dollar liabilities, they shouldn’t need a dollar hedge against deflation.

    But let me ask another question again.

    Bloomberg had a recent headline, “Venezuela to Ban Brokerages From Bolivar Debt Sales.” Also according to information on Bloomberg (not a story just listed as information on bond auctions) there have been several apparently failed bond auctions in the last few days.

    I’m wondering if the GBV is losing the ability to do debt financing. If they lose that, they will have to resort directly to the printing press. THAT is the final step to hyperinflation.

  4. moctavio Says:

    Well, you want to protect your equity from devaluation, if there is 700% devaluation in ten years and there are exchange controls, you do need a hedge.

    Well, the Government, as usual is acting rashly, by banning brokers, bonds will be sold thru banks only, banks dont find that interesting, for brokers it was an important business. Brokers are more flexible, you cant train the workforce of a bank for something that happens three times a year.

    The auctions have failed, because the Government forced brokers to eliminate a product which ahd lots of local bonds, banks bought those, that reduced their appetitate for bolivar bonds. Since decisions are made by people who don’t understand they dont measure the implications. No Chavez is threatening to remove the Government’s deposits from the private system, if he does, he will be unable to sell Bs. debt to banks, they will have no money and the bonds will drop sharply in price, the whole financial system is so distorted, its like the skin of a drum you touch one side, it is felt on the other.

  5. Kevin Says:

    Miguel,

    So, in the end, aren’t you saying that the government is losing the capacity to meet its cash needs by bond financing? Stupidity may help explain it (Stupidity explains many phenomena.) but in the end, the government will wind up resorting to the printing press to finance its deficit in order to meet its cash needs for salaries and government programs. And when it hits the printing press and in combination with foreign exchange controls, the economy will move to hyperinflation. No?

  6. moctavio Says:

    The Government is losing its capacity to maneuver. It devalued thinking that solved its problems, it run out of funds in the parallel funds, banks dont want to buy more debt, its becoming harder to borrow in US$, all very ugly, hyperinflation my be here already and shortages will flourish soon.

  7. Ken Price Says:

    Without doubt, the next few weeks are going to be “interesting”, in the extreme. Obviously, Chavez has absolutely NO understanding of the laws of economics. Who, in their right minds, is going to sell dollars in exchange for Bolivars? The market for foreign exchange is going to freeze up almost immediately, and dollars, other than what PDVSA can put into the system, will disappear, followed by shortages of almost everything imported. It’s going to be “interesting”, something like watching your Mother-in-Law drive your new car over a cliff!

  8. NicaCat56 Says:

    This news sounds so terrible. Miguel, please know that I’m keeping you, Daniel, JC and others (of whose existence I don’t know, just to know that they’re totally against HC) in my thoughts and prayers.

  9. jscubap Says:

    Miguel, who used to supply the dollars with the old swap system? All pdvsa??

  10. Kiozzo Says:

    My humble view –

    This is a binary scenario –

    Current problem leads to two outcomes –
    1) Govt will continue to to push for more controls leading to total destruction of the financial system, thus leading to a complicated and improvised solution for the govt to remain in power in the short-medium term – SELL ALL YOUR $ BONDS _ YOU CAN BUY THEM LATER AT A VERY GOOD PRICE
    2) Govt will realizes that this last measure to curtail inflation, devaluation, shortage (only to say a few of the worst to come) is completly wrong and will only lead to a political demise given that they will not have any funds in the short-medium term to finance the revolution – BUY $ BONDS IN A COUPLE OF WEEKS- SUPPLY WILL NEVER BE ENOUGH TO SATISFY BACK LOGED DEMAND (for a few days or limited weeks)… MAKE SURE THAT YO DON’T KEEP THEM UNTIL MATURITY UNLESS THE YIELD/RISK IS PRICED

    Apply your probabilities and contiune to the binary option Tree…..

    My humble opinion

  11. Kiozzo Says:

    Amendment to the last post:

    My humble view –

    This is a binary scenario –

    Current problem leads to two outcomes –
    1) Govt will continue to to push for more controls leading to total destruction of the financial system, thus leading to a complicated and improvised solution for the govt to remain in power in the short-medium term – SELL ALL YOUR $ BONDS _ YOU CAN BUY THEM LATER AT A VERY GOOD PRICE – IF GOVT FAILS PRICES WILL PROBABLY GO UP IN THE SHORT TERM (CONFIDENCE), IF NOT LOOK AT NUMBER 2 BELOW
    2) Govt will realize that this last measure to curtail inflation, devaluation, shortage (only to say a few of the worst to come) is completly wrong and will only lead to a political demise given that they will not have any funds in the short-medium term to finance the revolution – BUY $ BONDS IN A COUPLE OF WEEKS- SUPPLY WILL NEVER BE ENOUGH TO SATISFY BACK LOGED DEMAND (for a few days or limited weeks)… MAKE SURE THAT YO DON’T KEEP THEM UNTIL MATURITY UNLESS THE YIELD/RISK IS PRICED ACCORDING TO YOUR MEDICAL TOLERANCE!!!

    Apply your probabilities and contiune to the binary option Tree…..

    My humble opinion

  12. Kevin Says:

    Miguel,

    Please clarify something.

    The gross $40 billion of “dollar denominated” bonds I presume are a mixture of bonds that are payable in dollars and are registered abroad (genuine international debt) and TICCs which are dollar denominated but payable in bolivars and are really just a form of indexed domestic debt.

    I would imagine that the banks have TICCs which are much less attractive to foreign investors. In order to buy imports with dollars, the bonds must be sold abroad for dollars. Am I right in assuming that the TICCs the banks have will sell at a much steeper discount than true dollar-denominated, payable-in-dollars bonds? And if all these TICCs are unloaded at the same time as Hugo establishes more 21st Century Socialism, won’t the discounts get even steeper?

  13. Kiozzo Says:

    Just play the yield curve with US$ or OTHER CURRENCY (NON Bs. or BsF) PAPER

  14. moctavio Says:

    Kevn: The 40 billion does not include TICCs (inflation adjusted bonds, denominated in $ and which trade in Bs.). It only includes Reoublic and PDVSA. TICC’s trade in Bs. thus, they could not be used as supply in this market.

  15. Alex Dalmady Says:

    I haven’t been following this very closely, Miguel. So here’s my (stupid) question.

    If I am an importer who needs $$ to pay some receivables, I’d go to my bank and say “I need some USD, please put me in the new auction mechanism”.
    Then, if I manage to get some $$$ assigned, I’d pay with my Bs., but receive PDVSA or ROV bonds, right?
    But then I couldn’t sell those PDVSA or ROV bonds in the foreign markets, because I’d be violating the new exchange law. So I’d have to “give” (swap?) them to my supplier and let him sell them, which is pretty ridiculous.
    Or am I missing something?

  16. Miguel Octavio Says:

    The way I understand it, the Bcv would “sell” you the bond, but then you ask the Bcv to sell it for you and give you $ the bcv would sell it for you in the international markets.

    Of course, it is ridiculous, we usef bonds and swapped them before so as to comply with the control laws, now we will buy and sell bonds through the BCV for the same reason, why not say therr will be a third cash market at the BCV? Appearances, thats all.

  17. Kevin Says:

    “Chavez has threatened to force local banks to sell their bonds for Bolivars, Analysts estimate this is somewhere between 10 and 17 billion dollars, with the Government saying it is US$ 11 billion, but these numbers are guesstimates”

    In the beginning, the bond is in the portfolio of the bank.

    So in the end, in whose portfolio is the bond?

  18. Miguel Octavio Says:

    Either the bcv could buy them and keep them if they are PDVSA or they could sell them internationally and it ends up in the portfolio of a hedge fund or mutual fund or pension fund

  19. Kevin Says:

    If the BCV buys them, it will have to run down its dollar reserves.

    If it tries to sell them abroad, this is a sad market with little appetite for this sort of extreme speculative risk. The discount will be steep.

  20. HalfEmpty Says:

    The way I understand it, the Bcv would “sell” you the bond, but then you ask the Bcv to sell it for you and give you $ the bcv would sell it for you in the international markets.

    Humm, nice. Oil isn’t the only way to make a little cash. John Frum would be pleased with this effort.

  21. island canuck Says:

    MO says: “…now we will buy and sell bonds through the BCV for the same reason,”

    The REALLY big difference between the old system & the new is going to be the paper work.

    I can’t believe that they will not demand CADIVI style documentation in order to place the order. Most businesses will do the same as with CADIVI – forget it.

    CADIVI’s requirements have become so draconian that many people, including myself, just gave up.

  22. Miguel Octavio Says:

    Kevin , that is whyItookthe trouble to calculate the amount, makes a big difference ifit is 3 or 10 billion.

    ic: the bigdifference isyoucould buy all you want, now you will only a fraction

  23. gomezcal Says:

    Off topic: I suspect someone is learning to type in his new Ipad…

  24. Miguel Octavio Says:

    This post was completly written in an iPad

  25. Kevin Says:

    Well, then there must be some foreign exchange available!

  26. moctavio Says:

    Pre-ordered on March 12th. long before the you know what hit the fan!!!
    :-)

  27. Majiks Says:

    So, after all that, what is the exchange rate band going to be? At last count it was at 8:1. Will the govt make it worse?

  28. anonymous Says:

    Miguel

    At what rate did you get the dollars to buy the Ipad? Did they come from Cadavi or the days of old?

  29. bruni Says:

    my silly silly question. All this mess is because of the rate control…then why doesn’t the goverment just liberate the bolivar?

    Do you think it will be worse than the hyperinflation scenario we are guessing?

  30. An Interested Observer Says:

    “Appearances, thats all”

    Appearances, plus the fact that this creates some new government jobs. And will certainly provide a healthy cut for the new middlemen in the process, who will be free (if by free, one means “coerced”) to offer sweetheart deals to designated individuals.

  31. island canuck Says:

    So does anyone have a realistic idea when this market will actually begin?

  32. moctavio Says:

    Bruni: It’s all about control

    ic: Not until next week in my opinion.

  33. A_Antonio Says:

    MO, today your web page looks rare, Only your post and comments, nothing else, around the screen.

    Should we be worry?

    Regards

  34. island canuck Says:

    I’m using Chrome & it looks normal

  35. moctavio Says:

    I see it fine in Firefox

  36. moses Says:

    Saw in @descifrado that they are going to intervene BBO. Is that true ?

    RT @microjurisve: Se interviene BBO Casa de Bolsa, Strategos Sociedad de Corretaje e Innova Capital Sociedad de Corretaje según GO 39.435
    hace cerca de 1 hora via TweetDeck

  37. moctavio Says:

    The Casa de Bolsa was intervened ten days ago when the raid took place, it appeared in today’s Gaceta.

  38. A_Antonio Says:

    I am using Internet Explorer 8.

    Just to check if Blog is not blocked someway or “intervenido”.

    Looks simple and reports errors went I charge it, others like Yahoo, don’t.

    Well, just a comment.

  39. Gordo Says:

    I recently read that importers will have to document their source of dollars. That will be additional paperwork? Up until now, I have been trading dollars for Bv’s by depositing dollars in US accounts of people who release Bv’s in Venezuelan accounts. Is this about to become dangerous?

  40. moctavio Says:

    Gordo: Be careful, it could be considered illegal in the US.

    As to the other part I have heard about it, but I understood before you had to do that too.

  41. A_Antonio Says:

    MO, Now the problem of view of your blog is fixed.

    I do not know why.

  42. Gordo Says:

    Well, the exchange rate is either 2.4 or 8.5! Which would you choose?

  43. Sergio Says:

    Octavio – you wrote, “Gordo: Be careful, it could be considered illegal in the US.” Could you please tell us why a bank to bank transfer inside the US could be considered illegal? Thanks for your help with all of this. It’s important!


  44. The Patriot’s Act requires that you can prove the origin and source of funds that comes into your account, if trading Bs. For $ is illegal, then the funds going into the account could be put into question by the receiving bank.


  45. A bank to bank transfer is considered illegal if one does not have an appropriate
    money transmitting license and is using the bank as such business. It is not really
    illegal to transfer money in general, only when it becomes a business, like the one,
    you Gordo, proposed. Even if you are using a business account, the bank regulations require you to operate as a money transmitter with a good compliance department.

    Look at 31cfr103.125 and FINCEN in general. Or send me your email and I will advise you regarding compliance requirements in the US.

    Now, your true problem is that it is illegal in Venezuela to do such a thing, and by extension, the US can charge you with engaging in abating corruption/illegal activities in other countries.


  46. Miguel

    “The 40 billion does not include TICCs (inflation adjusted bonds, denominated in $ and which trade in Bs.). It only includes Reoublic and PDVSA. TICC’s trade in Bs. thus, they could not be used as supply in this market.”

    1. a. I thought Titulos de Interes and Capital Cubierto could be bought and sold in dollars?

    b. Is the yield paid in dollars?

    c. Are these bonds bought by US hedge funds, mutual funds, and pension?

    2. a. Can Republic and PDVSA be bought and sold in dollars? Is the yield paid in dollars?

    b. Is the yield paid in dollars?

    c. Are these bonds bought by US hedge funds, mutual funds, and pension?


  47. Kevin,

    Banks hedge in the sense that dollars (symbolically represented as bonds or paper money) retain their value while bolivares do not; it is similar to banks in the US hedging by buying gold because it retains its value while dollars (paper money) does not.

  48. Kevin Says:

    bruni

    I have a different answer to your “silly silly question. All this mess is because of the rate control…then why doesn’t the goverment just liberate the bolivar?”

    Miguel says it is all about control. To an extent, he may be correct, that is Hugo’s reflexive response to everything.

    But many governments have done this in the past, just with disastrous results. The last was Zimbabwe. It used to be common in Africa and Latin America (Brazil, Argentina, Peru) in the 1950s and 60s. It was used in Europe after the two World Wars.

    The reason Hugo won’t just “liberate the bolivar” (sell them at auction for the highest price the government or PDVSA can get) is because they believe that allowing an official devaluation will cause more inflation. The higher the price of foreign exchange — the higher the price of imports. That raises the price level. The Bolivarian Government noticed this and that is why they tried so hard to control the parallel rate. The parallel rate was the price of the last imported item in the store and helped determine the overall price level. (That is the way that they fix the rate in well-managed countries – the central bank buys or sells as much foreign currency as is needed at the official rate – until it runs out of reserves.) So the bolivarian government did not want to allow the parallel rate to depreciate.

    When BCV finally realized that they couldn’t sell enough dollars to maintain the parallel exchange rate they had to do something else. So they suspended convertibility. Now, the official price of the dollar will go from 8.1 bs to 4.3bs. Will that make imports cheaper? No, because 4.3 is not the rate at which you can buy the dollars necessary to buy imports. 4.3 is now the rate at which you CANNOT buy the dollars necessary to buy imports. That rate will not determine the price of the last imported item. Because dollars, and thus imports, are rationed, there will be less supply of imports – which means that imports will cost more. Thus the whole new scheme will be counterproductive of its intended purpose.

    But in fairness, many conventionally trained economists (people who go to Harvard, work for the IMF or investment banks) only understand the rules about devaluation as they apply to CONVERTIBLE currencies. They know what they were taught and will use it even when it is clearly inappropriate to the facts. They were taught that the exchange rate is the price at which you can buy foreign currency (and all you want). If you devalue, imports become more expensive. In Venezuela, that is not the case. In Venezuela, the exchange rate is the price at which you are NOT allowed to buy foreign currency. But these people are very good students and believe the teacher. But I hope that you recognize that you live in a different world from their theory.

  49. Gordo Says:

    Well, the exchange rate is either 2.4 or 8.5! Which would you choose?

    So, if I give somebody USD’s in the United States, what exactly is the crime? Isn’t that outside the jurisdiction of Venezuela anyway? Secondly, if somebody pays me back in Bolivars in Venezuela, what Venezuelan law is being infringed? Why am I confused?

  50. Gordo Says:

    I also want to point out that I met with a principal of USB (Swiss Bank) who advised me that I can deposit USD’s in a Swiss Bank Account, and that I can borrow Bolivars against them (dollars as collataral). So, what then. What law is being broken?

    Actually, borrowing against dollars is preferred, because I can pay off the loan with cheaper Bolivars later.

  51. Gordo Says:

    Thirdly, can I ship items to Venezuela and be paid in Bolivars which are then deposited into my Venezuelan bank account?

  52. franklin carvajal Says:

    Gordo,

    1. So, if I give somebody USD’s in the United States, what exactly is the crime?
    It depends what you mean by give. If you are transferring money via a separate financial entity, this entity is governed by the laws of the USA. The USA is extremely weary of too many transfers because of money laundering. As a matter of fact, every so many transfers transactions are stopped by the USA and examined before the funds are released.
    Foreign exchange is a money business legal category.

    2. Isn’t that outside the jurisdiction of Venezuela anyway?

    If the USA can demonstrate that you are engaging in a criminal activity in Venezuela (Cambio ilicito) you are by extension engaging in a crime of corruption. It is just a possibility. When Vyasulu got caught the DEA wanted to know if he was engaging in any illegal activity in Venezuela. Why do you think they wanted that?

    3. Secondly, if somebody pays me back in Bolivars in Venezuela, what Venezuelan law is being infringed? Why am I confused?

    You are still engaging in Foreign Exchange.

  53. franklin carvajal Says:

    1. I also want to point out that I met with a principal of USB (Swiss Bank) who advised me that I can deposit USD’s in a Swiss Bank Account, and that I can borrow Bolivars against them (dollars as collataral). So, what then. What law is being broken?

    Switzerland is not the USA. They do not have the same laws. They are way more liberal in many, many ways.

  54. franklin carvajal Says:

    1. Thirdly, can I ship items to Venezuela and be paid in Bolivars which are then deposited into my Venezuelan bank account?

    Absolutely. The problem for anyone who wants to do any type of business with Venezuela is currency exchange risk. It all depends on how much risk you want to take. Everyone foreign person I know definitely does not want any assets in Venezuelan currency (except for Venezuelans who live in Venezuela).

  55. moctavio Says:

    Franklin: I know of no bank that would do that today, theer is no exchange mechanism, least of all an international bank.

    Look, in the post 9/11 world source of funds is very important. If US company A gets a transfer from a Venezuelan in US$, most banks would feel uncomfortable with it. If you say that you got that in exchange for Bs., you are in trouble, no compliance department at a well-run bank would accept that. Likely response: Sends funds back, they come from an illegal transaction.

  56. An Interested Observer Says:

    “Bruni: It’s all about control”

    I was going to address this point, but Kevin did it much better than I would have. He’s exactly right – it was all about control at the beginning, but it’s gotten much more problematic by now.

  57. moctavio Says:

    Yes, it is more problematic, because everything is distorted, but freeing the exchange rate today would likely drop the rate to around Bs. 5, this would give you a spike in inflation because the few items at Bs. 2.15 would have to rise, but it would lower those at Bs. 8 too. You talk to Chavistas and to them removing the controls is simply not possible, the “oligarchs” would take the reserves of the people”. I guess its ok when Chavez takes them…

  58. Kepler Says:

    Miguel, freeing the exchange rate probably would lead to a much higher level than 8 now: people would buy en masse and this would have a reinforcing effect now. We would have the major real devaluation we have ever had.

  59. moctavio Says:

    I disagree. In 1995 people made the same argument, with the rate at Bs. (old) 540 per $, Caldera freed the official rate (Bs. 170) and the rate dropped to Bs. 450-460 where it stayed for about two years. If reserves are not being faked, the BCV should be able to withstand the rush to buy dollars. Of course, you would have to do other things like free interest rates and the like and have the BCV aborb monetary liquidity.

  60. Kepler Says:

    Was Caldera claiming to be at the head of a revolution? Did he say he would transform the whole system and if need be rule for more than 30 years etc?
    Did he say his system would last for centuries?
    I don’t think so.

  61. A_Antonio Says:

    I think it is now like at 9. You know who.

    What do you think?

  62. moctavio Says:

    To me its mathematical. If all Bolivars are converted to $, the equilibrium rate is Bs. 8.5, so that is the upper bound. People need Bs. to function, not everyone is going after $ all the time. The equilibirum rate when there were no controls has typically been below the “impicit exchnage rate”

    You can see it here:

    http://devilsexcrement.com/2009/01/31/a-long-term-view-of-monetary-liquidity-and-international-rserves-in-venezuela/

  63. A_Antonio Says:

    Thanks, just to check against others resourses.

  64. Juan Carlos Says:

    Have you seen Chavezcandanga twitter mssg?; yesterday evening, mr president sent to adriana## a twit in regards to her petition to go to Disney world:

    @adrianacordovac. Ok Adriana. Ponte a esperar, pero sentadita!!

    and this one; was sent to TARECK by someone else:

    @TareckPSUV: TARECK Q PASO EL PRESIDENTE TE DIO LA ORDEN Y NO ME HAS LLAMADO POR FAVOR 02617310278

    As you can see, the president and ministers as puppets are very busy calling people and asking twitter petitions, there are plenty of these things over there… all sorts………….OMG, what a country we have?…

  65. Gordo Says:

    What I see is probably what Hugo Chavez sees. That is, Venezuela has a huge oil reserve that is worth muchisimos dolares. Hence, the exchange rate and inflation are simply an extension of a “cash-flow” problem. My hunch is that Chavez simply wants to buy time to slow down the outflow of USD’s. In the meantime, he is anxiously borrowing money in the form of sovereign transactions (between governments) to keep the oil enterprise operational and petroleum revenues coming in, and he’s selling bonds (or any kind of semi-negotiable paper) to keep the government solvent.

    These activities all help buy time, but the plan can only work if increased oil revenues arrive in time to save the day. However this can only be possible if and when the price of oil goes up and/or oil production can be increased. Otherwise, the efforts to keep solvent will get evermore desperate and oppressive.

    As circumstances become more and more alarming, Chavez has to be mindful of the coming elections, and he must cater to his political base. He employs his populist socialism strategy to do this. The seizing of private enterprises is simply throwing “meat” to his wolves.

    Meanwhile, his draconian efforts to arrest his defectors and opposition leaders, is to stall the erosion of his chain of command.

    All this is to buy time. However, as events get harder to control, gradually the events start to control him rather than the other way around.

    My thesis is that there could be an imminent collapse, and a good topic for debate is what are the possible scenarios of what happens next. For example, I think there will be a big economic boom as investment comes back, and the question is how to position one’s self now for that event.

  66. moctavio Says:

    I agree, but only oil prices can save him, not oil production. None of these agreements signed recently will produce oil within a reasonable time framework. In fact, I am pretty sure that most of those that signed these deals knew that this was just buying a future lottery ticket on the country’s oil.

    My feeling is that this may blow up if prices drop below $70 as Europe drags the world economy down. JPMorgan estimated $8 is the current break even point and I think it is optimistic.

  67. Gordo Says:

    Moctavio,

    The solvency crisis is aggravated by capital flight and by inflationary pressures to buy consumer goods before prices go up. However, prices for houses and business are crashing! The so-called “oligarchy” is liquidating. If and when Chavez’s revolution undergoes a collapse, the oligarchy will come back swiftly. Timing is everything. Is anybody beside me thinking about this?

  68. moses Says:

    Tests of new band system start:

    Arrancan pruebas operativas del Sistema de Bandas del BCV

    http://www.reporte360.com/detalle.php?id=37444&c=3

  69. Kevin Says:

    Kepler, Miguel,

    If they floated the exchange rate (sold whatever the government and PDVSA wished to sell at auction and allowed others to sell to the highest bidder), the exchange rate would probably fall relative to the old parallel rate (assuming the same rate of government foreign exchange sales).

    The question is, “Does the government still have the will and the dollars to keep selling dollars at the same pace?” Maybe they didn’t want or couldn’t afford to sell so many dollars and that is why they shut down the old swaps market.

    But as a general rule, any time you have rationing scheme and a black market price, the black market price is usually higher that what would have been the market price.

    It’s an open question whether elimination of the old, favored rates would contribute to inflation. Do you believe that the government-favored importer who gets dollars at the favored rate of 2.6 bs per dollar sells at a lower retail price than the importer who must pay 8 bs to the dollar?

  70. moctavio Says:

    Some things are indeed sold at the right import price, but many are not, for the simple reason that you have no clue at what price they were imported. That is a huge part of the problem. Now we have three rates, all controlled. But guess what? What I hear is that people are getting $ at 2.6, but not at 4.3, thus we had a combination of of old swap rate and 2.6. Now we will have a controlled parallel rate and 2.6. Not pretty.

  71. Franklin Says:

    Octavio,

    “Look, in the post 9/11 world source of funds is very important. If US company A gets a transfer from a Venezuelan in US$, most banks would feel uncomfortable with it. If you say that you got that in exchange for Bs., you are in trouble, no compliance department at a well-run bank would accept that. Likely response: Sends funds back, they come from an illegal transaction.”

    1. Venezuelans open accounts in Panama through Citibank all of the time and use them to transfer funds back and for. Compliance is not as strict as you think given that Vyasulu was able to develop his structure using a computer and a cell phone.

    2. You can legally say that you exchange bolivares for dollars and vice versa BUT you need a money services account (something Vyasulu had). That is what is hard to get.

    3. It is best to establish a business, a money service business of the type: Currency exchanger/dealer.

  72. moctavio Says:

    Yes, there are holes, but as a general rule, if you say it comes from a Bs./US$ transaction, the money will be sent back, I know many banks doing it already. Panama is frowned upon, Vyasulu cost at least one bank its license, so its not as easy as you suggest. You can not legally say yu exchange Bs. for $ , it is absolutely illegal, no compliance department worth its salt would pass that.


  73. 1. Vyasulu did most of his work at Bank of America. The largest Bank in the USA. He opened a money transmitting account and then the bank allows you to open “sub-accounts” that can be operated by yourself or whoever you give the power to. Each sub-account has its own username and password.

    2. It is legal in the USA to say that you are exchanging Bolivares to Dollars currency; however, the bank may not allow you to open an account.

    3. If this was not the case, how come some of the most “well established” casa de bolsas have accounts in the USA? They must have brokerage accounts in these USA banks that in essence are foreign exchange accounts. Otherwise, how do they transfer dollars from and to US accounts?

    4. How did they used to swap bonds and transfer money? They need accounts in the USA and they have to report transactions as foreign exchange transactions.

    5. Money laundering is money laundering, whether it is done with bonds or with actual cash. Venezuela’s financial regulatory entities are so corrupted that it is impossible at times for USA banks to tell whether the 1 billion that came due to a “bond” transaction actually came from a bond transaction or just people exchanging money and making up documents in the USA. Banks in the USA cannot tell what exactly is going on in Venezuela because even the banks in that country operate in a vary opaque, at times corrupted manner.


  74. I meant making up documents in Venezuela.

  75. moctavio Says:

    Carvajal: It was legal until two weeks ago to do this, but the law was changed and it is no longer legal.

    1.- Vyasulu faked sub-accounts, he called them all the same name, they were not. They had a number that changed, he was misrepresenting what he was doing by registering a few dozen Rosemount Corporations with different letters distingushing them, making believe that there were no third party transfers.

    2.- It is no longer legal to say that, ask the compliance department of any bank familiar with the problem. If only Bs. can be exchanged via the Central Bank, you can not receive money into your account which comes from a personal transaction which is illegal.

    3.- Casas de Bolsa have accounts, but they can no longer transfer dollars that come from a Bs./$ operation since they are illegal. This is true since the new illicit exchange operation Bill was published in the official gazette two weeks ago.

    4) USED TO, this is past tense, no longer possible. Under the new law: bond in US$=foreign currency. Period, can not be converted to Bs. or back except via the Central Bank.

    5. I will not get into that. It’s a whole different matter.


  76. 1. Agreed. I Keep on thinking about past tense.

    2. Vyasulu did not faked sub-accounts. He used one of the Rosemonts (P) and from the platform that Bank of America provides you, you can from the convenience of your home open sub-accounts using your computer. Then, there are specifications you can provide that allow you to offer others the power to transfer money from those sub-accounts if you want or you can transfer the money yourself. Vyasulu gave each sub-account the name of each of the Venezuelan companies he was doing business with. The main account has its bank account number, the “sub-accounts” do not have specific numbers.


  77. 1. Agreed. I Keep on thinking about past tense.

    2. Vyasulu did not fake sub-accounts. He used one of the Rosemonts (P) and from the platform that Bank of America provides you, you can from the convenience of your home open sub-accounts using your computer. Then, there are specifications you can provide that allow you to offer others the power to transfer money from those sub-accounts if you want or you can transfer the money yourself. Vyasulu gave each sub-account the name of each of the Venezuelan companies he was doing business with. The main account has its bank account number, the “sub-accounts” do not have specific numbers.

  78. Gordo Says:

    Just on the issue of “source of funds.” Whenever I deposit money, the issue of its “source” only comes up when it is a large amount of cash. Once the money is in the account, it is been through the process of being certified clean. Now, money that is transferred either by ATF, check, wire, etc. is not needed to be scrutinized.

    Therefore, the issue of money laundering is not an issue.

    The following is just for the sake of argument….

    My being paid in Venezuela by check, I don’t see any issues. Why would that be an issue? If I deposit a Venezuelan check into my Venezuelan account, why is anybody going to ask me about the source of funds? I suppose I would just explain that this is just a check to pay me for a loan, or something else. What the heck?

  79. moctavio Says:

    Caravajal: I have read the indictments and checked the Fla. registry. Vyasulu created Rosemont A,B,C,D,….all the way trough Z. Alll sub accounts were called Rosemont, but thye belonged to each broker in reality. Each broker was given a security device for each sub account and they would use it from Venezuela to transfer and exchange funds.

    Even worse, money transmittal licenses are only supposed to be for that, transmitting funds, but Rosemont would keep millions of dollars for weeks, while the law says you should not have it for more than 5 days.


  80. Octavio,

    Sub Accounts are not the same as actual accounts.

    1. Vyasulu would have to go to the same bank or banks and opened multiple accounts, BUT, one has to fill out a money transmitting form plus a number of other documents and send them to the Compliance Department of the bank. In the form, one specifies the license number, Tax ID number, and type of money transmitting business.

    2. Vyasulu had a money transmitting license attached to Rosemont P, (not A, B…Z). The money transmitting license says Rosemont P and the bank will make sure to record the company as Rosemont P (not A…Z). They are very detailed when it comes to money transmitting businesses.

    3. Vyasulu had only one money transmitting license which can be used only for one money transmitting account.

    4. One cannot have more than one money transmitting license, it is not allowed.

    5. Unless, Vyasulu used 25 or so banks and gave each the same money transmitting license, there is no other way, in which case the IRS would have asked him a few questions way early on.

    6. Therefore, the sub-accounts would have to be either: (a) A large number of Rosemont P actual acccounts each belonging to a different bank but tied to the same Tax ID and money transmitting license number or (b) One actual account and a number of “sub-accounts” all belonging to the same actual account. One of the few banks that provide an easy way to create this structure is BOA. The bank that had the “sub-accounts” belonging to a “parent account”.

    7. In my opinion, there is confusion between sub-accounts and actual accounts. Sub-accounts all belong to the same actual account, but they do not belong to separate banks.


  81. Forgot to mention, one must register the company, in his case, Rosemont P, with FINCEN before the bank opens a MT account. If he was to register 25 or so Rosemonts corporations (A…Z) with the same money transmitting license, guess what?


  82. Gordo,

    1. Money laundering is always, always an issue. Become familiar with the standard terms for money laundering, especially layering and integration.

    2. If you deposit small amounts at the same time in various banks you will raise flags, it is called a Suspicious Transaction and must be reported. There are other activities that fall under Suspicious Transaction Reports.

    3. As I said before, even electronically transmitted currency is some times detained for a day or so to be analyzed by the US designated agencies and then released. Why do you
    think they do so?

    4. I agree, there is no problem putting Bolivars in a Venezuelan account in Venezuela. The banks are so laxed with their rules that anyone can make any story and put money anywhere.

  83. moctavio Says:

    Read the indictment, he would transfer from P to A. He violated wire transmital rules. Look it up in the Florida business register, its all there.


  84. Well, in that case, even the compliance departments of some of the biggest
    most powerful banks in the USA (BOA) are not as strict
    as we think, because he only got caught due to the DEA sting and later on
    indicted with other charges.

    I am quite sure that if the way he did it is the way they actually reported it, then, there are serious compliance department problems at big banks in the USA.


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