Tuesday, October 04, 2005

Making a big bet on the Euro 

I previously mentioned that Venezuela was moving its foriegn reserves out of the United States to other places such as Europe. Despite some contradictory messages in the Venezuelan press as to whether or not this had happened yet we now have confirmation that it has:

CARACAS (AFX) - Venezuela has transferred 20 bln usd worth of its reserves, to the Bank for International Settlements in Switzerland, Venezuela's central bank director Domingo Maza Zavala said, confirming an action foreshadowed by President Hugo Chavez last week.

Maza Zavala told daily EL Nacional that the dollar has weakened against the euro, so it seemed appropriate to increase holdings in euros and decrease those in dollar.

The funds transferred were held in the form of US Treasurys and represent 60 pct of the cental bank's total holdings.

The remaining 40 pct are deposited with European banks in the US, while a small proportion remains invested in US Treasurys.

Now the numbers given in this article change my previous calculations somewhat. Recall that I pointed at that if Venezuela had $10 billion in the United States and the dollar declined by 25% (as it did a couple of years ago) Venezuela stood to lose $2.5 billion - a very large sum of money by anyones standards (ok, not by U.S. standards - they piss away that much in just a few days in Iraq).

But according to this article they had 60% of their money in US Treasurys which would be over $18 billion dollars given that their total reserves are more than $30 billion. So that means if the US dollar sank 25% then Venezuela would lose $4.5 billion dollars!!! Now its not a given that the US dollar will lose value but given how heavily indebted that country is and the fact that it is going further into debt everyday its probable that the US currency will lose value over the next few years. So getting the money the heck out of there sure sounds like a good idea to me.


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