Tuesday, May 18, 2010

Venezuela Suspends Forex Market, Plans Trading Band


By Dan Molinski Of DOW JONES NEWSWIRES CARACAS (Dow Jones)--Venezuela's government, hoping to prevent its currency from falling further, said Tuesday it is suspending currency trading in the unregulated market while it creates a high-tech trading platform that would eliminate speculation in the market.

The new platform, officials said, will provide a clear picture of supply and demand, and would set up an unbreakable trading band to hem the bolivar into a tight range against the dollar.

In a much-awaited press conference designed to explain the new restrictions, Finance Minister Jorge Giordani said that to ensure the plan's success, the central bank will be given complete control over the up-to-now unregulated market, which sees about $100 million a day in trading volume.

Giordani also indicated brokerage houses would be excluded from forex trading and would continue to be investigated for irregularities. The government has been blaming "speculative" brokerages for the bolivar's troubles.

Central Bank President Nelson Merentes said during the press conference that the trading band will be the key to creating a well-functioning trading market that serves the people.

The bolivar is 25% weaker this year in the unregulated market, and was recently trading at about eight bolivars for $1 in the unregulated market.

The government also has an official fixed rate of 4.3 bolivars for $1, and another rate of 2.6 bolivars for $1, which is given to importers of essential items such as medicine. But both of those rates require government authorization, which is difficult and sometimes impossible to get.

Analysts say the trading band in the unregulated market might stretch between VEF5 and VEF7 for $1, whenever the band is created.

Venezuela has begun to burn through its foreign reserves in recent months, and they recently hit a nearly three-year low under $28 billion.

The drop in reserves is partly due to heavy social spending by the government of leftist President Hugo Chavez ahead of September legislative elections. But the government has also used some reserves in a futile effort to mop up dollar demand, and Giordani said the use of reserves for this purpose must cease.

"Were the [speculators] trying to use up all our reserves?" Giordani rhetorically asked reporters at the press conference. "Yes, they were."

The controls are all part of Chavez's push toward a socialist society in oil-rich Venezuela. He already controls huge sectors of the economy, but the financial and banking sector has so far remained partially in private hands.

The latest currency rule may change that. Chavez said Sunday he could care less if the new restrictions wipe out local brokerages altogether, calling them a model of "savage capitalism."

Brokerage houses in the capital say they may indeed be forced to close.

"For many brokers, it is a life-or-death situation," said Russ Dallen at Caracas-based BBO Financial Services. "Investment banking, stock trading on the Caracas Bolsa--much less IPOs [initial public offerings]--are all but nonexistent, and forex trading was their only profit-center."

Critics say the government's new currency controls may make the bolivar's problems even worse, as it could push investors toward a black market that would make speculation even more pronounced.

That could send inflation, which is already running at an annual 30%, even higher, and worsen the country's long-running economic recession.

The unregulated currency market, in practice, has already been suspended for the past week or so as nervous brokerages refused to make trades before knowing details of the new rules. More delays in currency trading are going to provide more headaches to importers that need U.S. currency to pay for shipments of goods.

Lawmakers approved the new currency rules last week, and Chavez signed the bill on Sunday.

Until now, the unregulated market was a legally murky arena. Though technically illegal, forex trading was rarely prosecuted by the government, because it provided an avenue for people and companies to access dollars when they couldn't get approval from the government for the official rates.

But the government made it clear over the weekend that it intends to prosecute any and all people or companies that trade currency without strict approval. Government agents raided several trading houses, arrested at least one person, and said it also is going after websites that provide pricing for the unregulated market.

Chavez, during his Sunday television program, urged citizens to report anyone selling dollars. He told them to denounce the crimes by sending him a message at his Twitter account, @chavezcandanga.

In a sign of the Chavez government's increasing control over society, only state media were allowed to attend the "press conference" where the the new currency restrictions were announced. Privately owned media and the international press were told to stay home and watch the event on live television, where they were unable to ask questions.

-By Dan Molinski, Dow Jones Newswires; 58-414-120-5738; dan.molinski@dowjones.com


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