Tag Archives: Financial Times

Venezuela’s Latest Currency Devaluation

Venezuela is South America’s forth largest economy. Many people forget that it was one of the founding countries of OPEC. By the early 1990s Venezuela was the third largest oil producing  nation in the world. These facts get lost in the never-ending debate over the effects of President Hugo Chavez’s push towards socialism.

The late Hugo Chavez was considered a defender of the poor. He was admired by many of his contemporaries because of his ability to stand up to Western imperialism. The left-leaning South American presidents supported President Chavez’s efforts to lead Venezuela down a path to socialism. In my opinion no head of state of any South America country have Chavez’s political sophistication or ability to manipulate public opinion. For years President Chavez convinced his supporters that their lot in life had improved because of his leadership. Without Chavez’s imposing personality and fiery rhetoric it is likely that Venezuelans will start to question the nation’s economic health. The Venezuelan community be surprised to learn that President Chavez ruined the nation’s oil industry by using its revenues like a piggy bank to fund his socialist experiment. It is time for Venezuelans to ask where the government gets the money to fund so many expensive social programs.

After waging a long battle with cancer Hugo Chavez died on March 5, 2013. According to a statement released by the military he died of a massive heart attack. Most commentators believe that he had returned from Cuba because no further treatment would arrest the progress of his disease. If is safe to assume that Chavez knew that his time was up. I do not believe that Chavez was actually in charge of the country’s daily operations during his last few weeks. The late president was probably consulted on major policy decisions and actions.

On February 8, 2013 the government devalued its currency by 32%. At that time it was suggested that this action was designed to clear the decks for a new economic regime. Most economists concluded that the devaluation by itself would not lead to an appreciable improvement in the economy. I think that the devaluation was part of a strategy to give the President’s presumptive successor a political advantage in the soon to be held elections.  I do not believe that this monetary action was taken to improve the lives of poor Venezuelans. 

Generally speaking the value of a given currency is determined by its relativity to the value of another currency. This exchange rate is normally based upon the amount of the home currency which is needed to purchase one unit of the foreign currency. It is common for countries to base their currencies upon the U.S. dollar or Eurozone euro. Currencies rise and fall depending on movements in the financial markets. Today major currencies are said to “float” along with market conditions.

Many third world nations have elected to fix the value of their currencies. The New York Fed. Reserve Bank explains how this method of evaluating a country’s currency works:

 “Under a fixed exchange rate system, only a decision by a country’s government or monetary authority can alter the official value of the currency. Governments do, occasionally, take such measures, often in response to unusual market pressures. Devaluation, the deliberate downward adjustment in the official exchange rate, reduces the currency’s value; in contrast, a revaluation is an upward change in the currency’s value.”

Venezuela’s national currency is the bolivar. Its exchange rate is fixed to the US dollar. Many of the world’s Third World Nations’ currencies are fixed. In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves to purchase all offers of its currency at the established rate. Because of the Venezuela’s political and economic isolation the country has always had problems maintaining an adequate amount of foreign reserves. Over the last few years Venezuela has not been able to support (defend) its currency. The country has devalued the Bolivar numerous times the last decade. Most commentators and financial experts believe that Venezuela’s economic problems cannot be addressed by constantly devaluing the Bolivar.

Continued Problems for the Eurozone and Greece

This past week German Chancellor Angela Merkel received some good news in her battle to save the EZ. The German Federal Constitutional Court , a highly respected institution in Germany, ruled in favor of the chancellor’s power and right to take part in bailouts of debt ridden EZ members. An interest group who opposed the  bailout of Greece filed the case that was decided. The Court’s ruling did not give the Chancellor a complete victory.  The Court held that the Chancellor had to seek the Bundestag’s (legislature’s) approval for  any future bailouts. Still, Chancellor Merkel hailed the decision as an endorsement of her policy to use German resources to save the Euro. I disagree with the Chancellor’s interpretation of the Court’s decision. The German head of state must understand that the Court issued a legal ruling and not a political statement supporting the bailouts. The decision  does not address the merits of the Chancellor’s decisions, policies  or actions relative to the bailouts.  Unfortunately, the Chancellor’s political fortunes are tied to the success or failure of the already issued bailouts. I doubt that there will be any more large bailouts in the future.

The week’s bad news for Chancellor Merkel was that Greece had not yet taken any affirmative steps to carry out the agreed upon austerity measures. Greece’s failure to follow EZ indicts hastens the demise of the financial organization.

In a earlier posting I argued against a financial bailout of Greece’s economy.  In a later post I warned that continued financial help to Greece would lead to the collapse of the EZ. I did not understand the logic behind promising to lend more money to Greece before it took any real steps to implement the required austerity measures. In the past Greece had failed to carry out agreed upon austerity measures. Why would the EZ leaders think that this time Greece would (or could) start to organize its finances? I posed the simply question; what would the EZ do if Greece failed to carry out (again) the austerity measures?  I think that Chancellor Merkel has to now face her worst nightmare and consider the possibility of this eventuality.

This week EZ leaders expressed their dismay with the lack of progress Greece had made in implementing the austerity measures. Evangelos Venizelos, Greece’s finance minister, defended his government’s efforts to comply with the EZ’s budgetary package. He asserted that Greece’s relationship with the troika, experts and monitors from the EU, IMF and ECB, were on an even keel. Yet, it is widely known that the troika suspended its latest monitoring mission to Greece. It is believe that the leaders of these groups are frustrated by Greece’s foot dragging and excuses. Now Greece seeks to delay the implementation of many of the agreed upon reforms. Experts are now predicting that Greece will miss its deficit target unless it immediately slashes spending.

Peter Spiegal, Brussels Bureau Chief of the Financial Times, recounts his conversations about Greece with attendees at this year’s Ambrosetti  conference. The workshops and forums were held in Northern Italy from September 2 2001 and concluding on September 4, 2011. Mr. Spiegal expressed surprise that many attendees were willing to discuss the possibility that Greece might not continue as a member in the EZ. He stated in the interview that many  of the attendees now believe that it might be necessary to force Greece out.  The Brussels Chief said that six months ago many people would not have considered this a possibility. You can see the video of Mr. Spiegal’s interview on his conversations with attendees at the Ambrosetti conference.

In another related development the chief of the International Monetary Fund, Christine Lagard, urged policy makers of the Group of 7 to take bold and joint action to curb the global economy crisis. She set the stage for the finance ministers’ meeting in France. Ms. Lagard correctly described  the world as “collectively suffering from a crisis of confidence in the face of a deteriorating economic outlook.” The IMF chief specifically alluded to the EZ countries that had already received EU and IMF rescues. Ms. Lagarde said publically what most leaders and experts are privately saying; Ireland, Portugal and Greece shoulder the burden of meeting their deficit targets. Her subtle though firm message was that these countries would not receive any further financial help.

Against the back drop that Greece was not implementing the austerity measures, the G-7 finance ministers and central bank governors met in Marseilles France. Their two-day meeting did not produce a joint strategy for jump starting their stalled economies. Actually the meeting failed to produce any tangible or meaningful results. Just like the EZ the G-7 consists of nations that have divergent sovereign interests that prevent unity of purpose and action. The G-7 meeting concluded on a note of resignation  and unfulfilled promises.