Hugo Chavez using the US as a scapegoat for Venezuela's financial woes.

"If sentencing is to be done," said Chavez earlier this week, "the first one to be given the most severe sentence this planet has to offer should be the president of the United States, if we're talking about genocidal presidents," the Miami Herald reported Thursday.

In a TOTALLY unrelated story:

"Nov. 10 (Bloomberg) -- Venezuelan President Hugo Chavez said the nation's banks are ``more solid'' than ever, in response to speculation that some lenders were facing cash shortages."

Basically, Venezuela instituted a series of "reforms" to trap money in the economy, basically by preventing banks from investing the money outside the country.

"The $25.8 billion of government debt held by 36 of Venezuela's largest financial institutions accounted for 46 percent of their investments at the end of June, up from 34 percent at the start of 2003, Fitch said. The banks held 5.2 times their equity in government debt at that time, the most in 10 years, up from 2.3 times in 2003.

Banks in Venezuela face limited investment options because currency restrictions imposed by Chavez in 2003 trap the cash that rising government spending pumps into the economy. Left to buy bonds, banks are more reliant on the government and on the oil revenue fueling Chavez's spending plans. Venezuela is the world's fifth-largest supplier of crude."


One of the major problems facing Venezuela is massive inflation. Take a look at the exchange rate of the Venezeulan Bolivar (VEB) with the US dollar (USD) (source)

2001: 723.7
2002: 1,161
2003: 1,607
2004: 1,891.3
2005: 2,089.8
Today: 2,147.3

Over a 5 year span, the Bolivar has dropped in value by almost 1/3 against the dollar. That works out to an average rate of inflation over the period of 24.3%.

Here's what REALLY doesn't make sense. Venezuela has unimaginable oil wealth. They have proven reserves of 75.6 Billion barrels - at the current spot price of $61.17, this is 4.6 Trillion Dollars worth of oil. Venezuela exports 2.1MM barrels of oil per day, equal to $128.5MM at current prices, or $46.87 Billion per year. At current rates, their proven reserve will last for 67 years.

You would think that the government would not be having problems with money. The entire population is only 25.7MM people, yet there is 12.2% unemployment and 47% of the population is below the poverty line. Well, the government spends more than it takes in: 39.63B in revenues, 41.27B in expenditures. They have a public debt of $36.2 Billion.

If inflation is 24.3% (16% for consumer prices per the CIA), this means banks need to lend money out somewhere in the 18%-26.3% range. Since it appears that there aren't many takers at this outrageous interest rate - the banks have been investing the money in government bonds at 4.61% for a 90 day government bond. The 36 banks in the Bloomberg story have 4.96 Billion in equity, which I suppose means they have something like $62 Billion in total capital.

It appears that the government has been partially funding itself by forcing banks to invest in government debt, then expanding the currency supply to make that debt worthless. 4.61% yield - 16% inflation = -11.39%.

The reports of cash shortages are symptomatic of some of the banks having a duration of debt that is much shorter than the duration of their loans and bond holdings. This means they will be unable to come up with the cash for payments that become due. Another possibility is that they have already burned through their equity and are now zombie financial institutions - deadly to an economy.

Hugo's policies are clearly hurting his economy directly. Inflation is out of control, the government is spending more than it takes in, and monetary policies are preventing banks from moving money out of the country. Instead of fixing these problems, he's decided to put the finger of blame on his countries biggest customer for oil - the United States.