A Patchwork Orange

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Ever notice how chavismo’s instinct, when facing a clear policy failure, is always to see how they can patch it up?

Take SITME – the Central Bank’s baroquely controlled alternative to the just-as-baroquely-controlled CADIVI foreign exchange control system. SITME amounts a patch on the old parallel dollar market, which the government tolerated as a patch on the sclerotic CADIVI system which was itself a clumsy patch against inflation pressures. (What was that phrase they used again?…the "Forex Anchor".)

Well, it turns out that SITME – the patch on the patch on the patch on inflation – needs a patch!

The proximate cause is that Venezuela’s banks are fast running out of the types of bonds that SITME requires (and whose valuations SITME distorts) in order to transmogrify bolivars into dollars.

Without getting too technical, SITME works by allowing banks to sell some of the bonds on their books to their customers, for bolivars, and then allowing those customers to re-sell the same bonds abroad, for dollars.

Of course that can only work if the banks actually have some of these magical, dual-use bonds to sell in the first place. Under current regulations, only Venezuelan sovereign bonds (i.e., government IOUs) and PDVSA bonds can be used for SITME operations. 

Trouble is, the traffic in SITME is all one way: the system caters only to people who have bolivars and want dollars. So the net outcome of every SITME operation is one less bond in the banks’ books and one more bond held abroad. It doesn’t take a rocket scientist to figure out that, if you do it that way, the banks are eventually going to run out of bonds – and sooner rather than later. And when that happens…a llorar pa’l valle…

But, never fear!

Nelson Merentes has thought up….a patch! 

If the banks are running out of criollo bonds to feed into the SITME machine…why not just let them transact any bond through SITME? Brazilian Treasury bonds, Argentinian bodens…you name it. Hell, why not U.S. T-Bills, too, while we’re at it? 

Frankly, I can’t begin to see how this patch makes any sense, even in its own (extremely convoluted) terms. Because even if BCV lets the banks unload their Foreign Bond holdings to their customers for bolivars so they can trade them for dollars…aren’t we going to end up in exactly the same place where we started? In a few months, aren’t the banks going to run out of those other foreign assets as well?!

This is what you get when you have a government endlessly chasing symptoms and ignoring causes. Because, when you stop to think about it, it’s entirely obvious that the banks are going to run out of any asset BCV lets them use as an intermediary if it lets people trade 5.30 bolivars for a shiny dollar.

At that exchange rate, you could allow SITME to transact rocks and Venezuela would run out of ’em.

Rhetorical curlicues aside, the 5.30 rate is fake. No amount of financial shamanism is going to make it unfake. 

What’s funny is that, remember, this whole two-bit farce of a Foreign Exchange Policy started back in 2002 2003 as a way of bringing inflation under control. Seven years later, Venezuela is 220th out of 222 in the World League Table for Inflation.

By any reasonable standard, the entire thing has been a debacle…but it’s not about that anymore, is it? By now, the whole Patchwork Orange has a life of its own, entirely unhinged from any kind of defensible policy goal.

The whole crazy machine runs entirely on its own inertia…it really is a sight to behold.

CORRECTION: CADIVI launched in 2003, not 2002. Good catch, Moses

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