A STRONG BOLIVAR FOR A STRONG BOLIVARIAN

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SUBJECT: A STRONG BOLIVAR FOR A STRONG BOLIVARIAN

REF: A. CARACAS 358


B. CARACAS 493


1. (SBU) SUMMARY: The Central Bank plans to introduce a new
currency in Venezuela on January 1, 2008. The new currency,
to be called the "Bolivar Fuerte" (or Strong Bolivar),and
will have the same value as the current Bolivar, minus three
zeros. Prices are supposed to be quoted in the new currency
beginning October 2007. Hardly anyone expects the new
currency to alleviate Venezuela's economic problems,
including high inflation, an increasing money supply, and a
parallel market that values the Bolivar at about half the
official rate. This represents the first monetary conversion
in Venezuela's modern history. END SUMMARY.


2. (SBU) On February 14 during his weekly "Alo Presidente"
television show, Chavez announced that Venezuela would adopt
a new currency to replace the Bolivar (reftel A). At the
official exchange rate, 2,150 Bolivars (Bs.) are worth USD 1.
According to Chavez, the new currency will be called the
Bolivar Fuerte (Bs.F.) and will eliminate three zeroes from
the old currency, so that 2.15 Bs.F. will equal one U.S.
dollar. The law decreeing this new currency was published in
the Official Gazette on March 6.


3. (U) According to the law, as of October 1, 2007 prices in
Venezuela will be quoted in both Bs. and Bs.F., and on
January 1, 2008 the currency will begin to circulate, with
all prices, from goods to salaries to financial statements to
contracts to tax payments having to be expressed in the new
currency. Central Bank (BCV) President Gaston Parra noted on
March 8 that current plans are for both currencies to
circulate for six months, though an extension is possible if
logistical problems cause delays in replacing the old
currency.


4. (SBU) The currency will supposedly be similar in
appearance to the euro or Brazilian real. The representative
of one of the major currency printing firms told Econoff that
they could supply sufficient currency to the BCV in time and
noted that they expected to receive the new designs before
the end of March. Economist and former head of research at
the BCV Jose Guerra confirmed that the BCV had the capacity
to distribute the new currency. (COMMENT: Given the BRV's
capacity problems in just about every other sphere, Post is
skeptical that this will go off without a hitch. END
COMMENT.)


5. (SBU) At 2,150/dollar, the official exchange rate is
anywhere from 25 to 55 percent overvalued. The recent Bonos
del Sur issuance revealed an implicit value of between 2700
and 2800 Bs./dollar and the current parallel exchange rate
for the dollar is around 4,000Bs./dollar (reftel B). Many
economists expect the BRV to use this opportunity to mask a
devaluation, wherein 2,150 old Bolivars would equal 2.7 or
even 3 new Bolivars Fuertes (in essence a 25-40 percent
devaluation). Government spokespersons, including the
Minister for People's Power of Finance (MPPF) Rodrigo
Cabezas, have stated emphatically that the government will
not use this opportunity to devalue the Bolivar, noting that
the only change is to eliminate three zeroes. During one
televised event Cabezas went so far as to say that there was
no plan to devalue the Bolivar in either the short, medium or
long term.


6. (SBU) Most economists agree that the monetary conversion
will do nothing to strengthen the Bolivar. Former BCV Vice
President Omar Bello explained that the continued
intervention by other government institutions in currency
exchange markets (including PDVSA, the Venezuelan Development
Bank (BANDES),the National Development Fund (FONDEN),and
the Treasury Bank) have resulted in the loss of control over
monetary policy by the Central Bank. The transfer of BCV
reserves to FONDEN has decreased the implicit weighted value
of the Bolivar as it is backed up by less hard currency and
the planned elimination of what remains of the BCV's autonomy
during the upcoming constitutional reform later this year
will not help matters. As of March 9, the rate derived by
dividing M2/FX Reserves was 3283 Bolivars/ dollar.


7. (SBU) It is entirely possible that this new currency will
generate more inflation. As was seen with the introduction

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of the euro in 2002, businesses in many countries took
advantage of the smaller denominations to round up prices.
In addition, about half of Venezuela's labor force is
employed in the informal sector. As was the case with the
euro conversion, it is likely many individuals and firms will
be reluctant to take all of their cash to the bank
(particularly if the BRV uses the conversion to mask a
devaluation),and thus declare it to the government and tax
authorities, in order to receive new bank notes. Instead,
many will try to use up their old Bolivars while still valid.
Given the shortages prevalent in the Venezuelan economy, it
is possible that the additional funds chasing the limited
supply of goods will push inflation up higher.


8. (SBU) The new law gives the Public Defender, the Institute
for the Defense of the Consumer (INDECU),the Superintendency
of Banks (SUDEBAN) and the tax authority (SENIAT) the power
to enforce the law and punish violators. This presumably
would include those that round up or otherwise increase
prices after the conversion in violation of the first article
of the law and could allow these institutions to selectively
target companies or individuals.


9. (SBU) COMMENT: Chavez, Cabezas, and other BRV officials
claim that the introduction of the new currency will brake
inflation and help right many of the distortions evident in
the Venezuelan economy. However, introducing a new currency
without reducing fiscal expenditures or instituting a new
monetary policy will do nothing to alleviate the problems of
liquidity, inflation, shortages, or the rising gap between
official and parallel exchange rates. In the end, these
measures serve more as a smoke screen to distract Venezuelans
from the country's mounting economic distortions and
represent more of a political statement than a sound economic
policy. The monetary conversion may help accounting problems
posed by the mere number of zeroes, however it is hard to
argue that this sole benefit outweighs the cost (in the tens
of millions of dollars) of introducing a quasi-new currency.
END COMMENT.


BROWNFIELD