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Venezuela: Bank Nationalizations

Summary

The Venezuelan government announced that it nationalized another three banks Dec. 8, bringing the total to seven. The takeover emphasizes the government’s anxiety about general economic unsteadiness, the need for resources and has also served clear political purposes. Continued nationalizations could very well tip off a crisis leading to bank runs and severe economic instability.

Analysis

The Venezuelan government officially nationalized three small banks on Dec. 8. The official announcement comes after a week of financial turmoil as the Venezuelan government has nationalized a total of seven banks. While the government’s official story has been that the banks were making too many profits and that bank leaders and associates were guilty of crimes, the real reasons for the takeovers are likely myriad.

This is not the first time the government of Venezuelan President Hugo Chavez has gone after the banking industry. In August 2008, Chavez announced the nationalization of the Bank of Venezuela, a part of Spanish company Santander. The nationalization was handled professionally, with Venezuela purchasing the bank from its parent company to the tune of $1 billion. A second bank — Stanford Bank Venezuela — was taken over by the Venezuelan government in February of 2009 after the bank suffered legal difficulties. The bank was eventually sold off to a Venezuelan bank.

This time around things are a bit different. All seven banks have been outright seized. Banpro Banco Universal and Banco Canarias SA have been liquidated; the resources of Banco Confederado SA, Central Banco Universal and Banco Real will form part of a new bank announced by Chavez, called Banco Bicentenario. In addition, federal agents raided insurance company La Previsora and brokerage firms U21 Servicios Financieros SA and Interbursa for alleged links to these banks. The banks account for eight percent of total deposits, and the nationalization puts the Venezuelan government in charge of about a quarter of the Venezuelan banking sector’s deposits.

This financial restructuring is likely — in part — a symptom of the government’s anxiety about general economic unsteadiness. High oil revenues throughout 2007 and 2008 led to a boost in cash available through the banks, which were able to lend cash out at lower rates. The government subsidies on gasoline and other goods in the Venezuelan economy kept prices concurrently low. Cheap credit and cheap goods drive high demand and boost economic activity. With the decline in oil prices to well below the highs of 2008, however, capital has become scarcer and borrowers’ ability to pay has dropped — putting the banking system in a precarious position.

Gaining control over a larger portion of the banking sector gives the government more ability to control monetary flows through the country. The government has been using bond issuances to attempt to soak up bolivares to reduce the supply and thus increase its value — a strategy designed to bring the value of the bolivar closer to the value of the dollar.

The seizures also represent a grab at controlling much-needed resources. The government of Venezuela has engaged in massive spending above and beyond its own revenues and although Venezuelan oil remains above $70 per barrel, production is very likely declining while expenditures continue to rise.

But there are non-financial explanations for the moves, as well. In going after the banks and prosecuting the individuals involved, it is clear that there is a political agenda linked to the struggle for control over these assets. The individuals brought down through this scandal have included individuals such as Arne Chacon (brother of the now-resigned government minister Jesse Chacon), who came from humble roots to be a multimillionaire through his involvement in the banking sector. The individuals who have profited by having control over sections of Chavez’s system of Bolivarian socialism have come to be called “boligarchs,” and represent a new breed of elite that has been able to siphon off huge amounts of money for personal use. In addition to needing to secure access to these funds himself, Chavez may have been making a play against individuals who had become altogether too powerful for his liking.

For now, the turmoil in the banking sector is unlikely to tip off the kind of crisis that could lead to bank runs and severe instability in Venezuela. Should the government decide to go after Venezuela’s larger banks, severe unrest is likely and the consequences for the tenure of the Chavez administration could be dire. Chavez knows this as well as anyone, however, and so will likely opt for a more moderate path in the meantime. However, with the state of the economy entirely shaky, and Chavez’s continual search to balance his political and economic needs, it is difficult to say whether or not the leader will be forced to take bigger bites out of the banking sector.

The Economist Intelligence

Caribbean: ALBA members reject currency

The participation of Dominica, St Vincent and the Grenadines, and Antigua-Barbuda in the leftist Venezuela-led Alternativa Bolivariana para las Americas (ALBA, the Bolivarian Alternative for the Americas, a trade and integration pact) has raised questions over the compatibility of existing regional organisations—such as the Organisation of Eastern Caribbean States (OECS) and the Caribbean Community (Caricom)—with external groups and their economic and defence policies. Several recent rejections of ALBA initiatives by its Caribbean members have underscored this awkward relationship.

In November the three countries announced that they would not join a new “virtual” currency called Sucre (Sistema Único de Compensación Regional, designed to replace the US dollar for international transactions between ALBA member countries (which include Venezuela, Bolivia, Cuba, Nicaragua, Honduras and Ecuador). There are also no plans for the Caribbean ALBA member countries to join a “defensive military alliance” proposed byVenezuela’s president, Hugo Chávez.