A Currency Affair
It seems we cannot avoid talking about Venezuela here in ECRG Intelligence. That’s because barely a week goes by in which another shoe doesn’t fall. And we are now way into centipede footwear here.
The drama of a collapsing Venezuelan oil sector took another turn on Sunday. During the latest installment of President Nicolas Maduro’s weekly and hours-long broadcast to an increasingly hostile population, Los Domingos con Maduro (“The Sundays with Maduro”), the president unveiled his most recent attempt to deflect attention from an imploding domestic economy.
Sunday’s edition was over five hours long. Despite having Christmas singing and dancing, there was little real holiday cheer.
The president’s newest move involves the “petro,” a cryptocurrency supposedly based on the country’s crude oil, gold, and diamond reserves. Opposition leaders have been quick to label the move a “farce,” and suggest it will never be implemented.
But with the recent (and hotly contested) transformation of the national legislature into a rubber stamp for whatever whim comes into the president’s head, the outcome is hardly certain.
In his accelerating attempt to grasp at any straw to avoid a financial meltdown that may already be a fait accompli, Maduro is faced with staggering inflation, the bolivar has lost almost 60% against the dollar over the last month alone and in the streets has little, if any, genuine exchange value remaining.
Take That, Bitcoin!
The devaluation of the currency has been astounding by any measure. Replacing the 100-bolivar note with a 500-bolivar piece of script was just the beginning. By early this year, Caracas had released a 20,000-bolivar note, followed last month by a 100,000-bolivar moving into circulation.
When anything as drastic as this take place, forget official exchange rates. The genuine value of the currency is determined by what it attracts in street trade. As of last week, that new six-digit note was effectively valued at less than $2.50 on the black market, if there was any interest in taking it at all.
For some time now, the bulk of the Venezuelan economy has moved to a volatile combination of barter and theft amidst a cascading environment of accelerating shortages.
For a leader as desperate as Maduro, what has been happening on the bitcoin market is certainly enticing. There, prices have appreciated over 1,000% in less than a year. Unfortunately, over the past two years, the bolivar has declined almost 111,000% against the dollar.
No, that is not a typo. The situation is by far the worst example of hyperinflation the global market has ever experienced. To put maters in perspective, the value of the bolivar has collapsed 111 times faster than bitcoins have appreciated.
These numbers alone indicate movement to a cryptocurrency is not the answer. That is, unless you have something else in mind.
A Bad Penny
Maduro has destructively mismanaged both Venezuela’s economy and its financial infrastructure. In the process, both the international bonds floated by national oil company PDVSA and the state’s sovereign debt integrally linked to them have moved into default.
The president blames additional US sanctions introduced earlier this year. On the other hand, most international bankers I work with have a simpler explanation. The disintegration of Venezuela lies squarely at the door of administrative incompetence.
Crude oil sales are at the center of everything. They account for about 90% of all national hard currency revenues. Yet attempting to base essential oil operations, servicing a spiraling national debt and valueless currency, subsidizing food and medical imports, while at the same time bankrolling an expanding and failed state provision of services on oil sales, has become untenable.
I have discussed much of these problems in previous editions of ECRG Intelligence. For our purposes today, there are four overriding points to keep in mind.
First, moving to the petro is thought by some in Maduro’s entourage as a way of evading both US financial sanctions and the responsibility to pay back due debt interest. Of course, nobody I know in either PDVSA/professional oil circles or what is left of a legitimate Venezuelan banking community believes this evasion is either sustainable or legitimate.
Second, any issuance of debt (current or future), economic parameter, or underlying value of any financial instrument is ultimately predicated on the market value of reserves (crude, diamonds, gold). Since most of that is oil-based, we immediately have the problem of the same assets being employed to base the value of more than one vehicle.
And all of this assumes that the bitcoin-induced inflation is sustainable, that there is no global bubble forming, and that the intense volatility of daily value witnessed in worldwide bitcoin exchange is not intensified once a sovereign nation enters the market. With bitcoin options and futures contracts about to be introduced, this is hardly a transparent environment in which to place an entire nation.
Third, as an extension of this observation, moving to the petro means what is left of tangible domestic market asset value is no longer based on anything that can be valued or traded in that market itself. Put simply, unless internal transactions become cryptocurrency based, the crisis is compounded by the fiscal equivalent of an apples and oranges problem.
Finally, Venezuela has entered into a series of loan programs with foreign governments, state-run banks, and state-run energy companies in a desperate attempt to secure declining amounts of capital. All of these transactions have been collateralized either by oil sales or oil reserves.
If I were an exec with CNPC, Gazprombank, or Rosneft, I would now have some concern over the integrity of lines of credit already issued.
Makes one sympathize with early settlers in New Amsterdam (later New York City) negotiating an exchange in wampum.
Maduro will fail here too. Only this time, there is even less leverage to navigate a catastrophe.