Saturday, October 01, 2005
When a dollar's not a dollar any more
Yesterday while speaking at a South American conference president Chavez revealed that all of Venezuela’s foreign reserves have been moved out of the United States, principally to Europe. He didn’t say how much of the reserves had been in the United States in the first place or when they had been moved but their removal from the U.S. would be a significant departure from past practices.
Currently Venezuela has over $30 billion dollars in foreign reserves, the largest amount ever in its history. These reserves serve the purpose of a safety net so that a country can still meet its foreign obligations, such as paying its debt, even if something should happen to its income or exports. For example, a few years ago during the opposition led oil strike Venezuela lost almost all its income for a while as oil exports stopped. They had to rely on their foreign reserves to be able to meet their debt payments and pay for vital imports such as food and gasoline (yes, Venezuela actually had to pay for gasoline as their own refineries were shut down by the strike). So in this sense, the foreign reserves of a country are completely analogous to the bank saving people keep around for a “rainy day”.
These savings are generally kept in things like gold or “hard currencies” such as those of the U.S., Western European countries or Japan. Some of this is held as cash in regular banks such as Citibank or Chase Manhattan and some in bonds such as U.S. treasury bonds.
Chavez said that Venezuela had sold all its U.S. treasury bonds and that the money was now in Europe. The reason he gave was due to the deterioration in the relations between Venezuela and the U.S. he feared the U.S. may at some point simply seize these assets. This is not an unfounded fear as the U.S. has a track record of doing this to other countries. For example when relations deteriorated between the U.S. and Iran in the early 80’s the U.S. froze all Iranian assets in the U.S. The U.S. later did the same thing to Iraq and in a bitterly ironic action used those same funds to help pay for the occupation of that country (meaning most of the money probably wound up in Halliburton’s pockets rather than doing anything to benefit Iraqi’s). Given this track record Chavez acted prudently.
However, there is another reason why moving these funds out of the U.S. would be wise and made me surprised that Venezuela had any funds there in the first place. And that is the declining value of the dollar. Before its recent rally the US dollar had lost between 25% and 30% of its value versus other major currencies such as the Euro and the Yen. And in all likelihood it will resume its decline in the future given the huge trade deficits that the United States has. [an interesting tangent to this is that the surge in oil prices in recent years isn’t all increased cost in oil – rather part of it is simply due to the decline in value of the US dollar which oil is priced in. For this reason some oil exporters have talked about pricing oil in Euros rather than dollars]
What would be the effect of this decline on Venezuelan reserves in the U.S.? To answer that lets assume that Venezuela had $10 billion dollars of its reserves held in the U.S. If the dollar declined 25% that means the Venezuelan government would have lost $2.5 billion!!! That loss could have been averted completely if the money had been kept in another place such as Europe. So for this reason alone there are huge economic reasons for Venezuela to move its money.
In the end what we are left with here is another very wise, if belated, decision by the Venezuelan government
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Currently Venezuela has over $30 billion dollars in foreign reserves, the largest amount ever in its history. These reserves serve the purpose of a safety net so that a country can still meet its foreign obligations, such as paying its debt, even if something should happen to its income or exports. For example, a few years ago during the opposition led oil strike Venezuela lost almost all its income for a while as oil exports stopped. They had to rely on their foreign reserves to be able to meet their debt payments and pay for vital imports such as food and gasoline (yes, Venezuela actually had to pay for gasoline as their own refineries were shut down by the strike). So in this sense, the foreign reserves of a country are completely analogous to the bank saving people keep around for a “rainy day”.
These savings are generally kept in things like gold or “hard currencies” such as those of the U.S., Western European countries or Japan. Some of this is held as cash in regular banks such as Citibank or Chase Manhattan and some in bonds such as U.S. treasury bonds.
Chavez said that Venezuela had sold all its U.S. treasury bonds and that the money was now in Europe. The reason he gave was due to the deterioration in the relations between Venezuela and the U.S. he feared the U.S. may at some point simply seize these assets. This is not an unfounded fear as the U.S. has a track record of doing this to other countries. For example when relations deteriorated between the U.S. and Iran in the early 80’s the U.S. froze all Iranian assets in the U.S. The U.S. later did the same thing to Iraq and in a bitterly ironic action used those same funds to help pay for the occupation of that country (meaning most of the money probably wound up in Halliburton’s pockets rather than doing anything to benefit Iraqi’s). Given this track record Chavez acted prudently.
However, there is another reason why moving these funds out of the U.S. would be wise and made me surprised that Venezuela had any funds there in the first place. And that is the declining value of the dollar. Before its recent rally the US dollar had lost between 25% and 30% of its value versus other major currencies such as the Euro and the Yen. And in all likelihood it will resume its decline in the future given the huge trade deficits that the United States has. [an interesting tangent to this is that the surge in oil prices in recent years isn’t all increased cost in oil – rather part of it is simply due to the decline in value of the US dollar which oil is priced in. For this reason some oil exporters have talked about pricing oil in Euros rather than dollars]
What would be the effect of this decline on Venezuelan reserves in the U.S.? To answer that lets assume that Venezuela had $10 billion dollars of its reserves held in the U.S. If the dollar declined 25% that means the Venezuelan government would have lost $2.5 billion!!! That loss could have been averted completely if the money had been kept in another place such as Europe. So for this reason alone there are huge economic reasons for Venezuela to move its money.
In the end what we are left with here is another very wise, if belated, decision by the Venezuelan government
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