What’s it going to cost us for Maduro to appear not to be pissing on Chávez’s legacy?

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Greek? Moi?!
Greek? Moi?!

Having trouble figuring out what Goldman Sachs is doing with our gold reserves? Well, if it’s any consolation, so is Bloomberg.

Yet, in an illuminating blog post, their Matt Levine can’t help but see the Greek overtones to the deal apparently on offer:

…despite the word “swap” here, my best guess about what is going on here is that it is really just a secured loan and so barely a derivative at all.

Ask yourself, what is the purpose of this trade? I won’t tell you the answer, because I don’t know, but it sure seems to be for Venezuela to get some money for its gold without “selling” it. Which is the sort of sleight of hand that, as a bank, in 2013, you might want to avoid. Unless, again, it pays well.

As far as anyone can make out then, Venezuela is incurring needless costs for the purpose of securing money from its gold reserves without appearing to sell them, and fattening up some Wall St. bankers’ bonuses in the process. Why the hell would a revolutionary left-wing government want to do that?

Oh, I forgot: so Nicolás Maduro can pretend not to think Hugo Chávez goldbuggery was the enormous boondoggle it very clearly was.

1 COMMENT

  1. “Pero José Arcadio Buendía […] cambió su mulo y una partida de chivos por los dos lingotes imantados. Úrsula Iguarán, su mujer, que contaba con aquellos animales para ensanchar el desmedrado patrimonio doméstico, no consiguió disuadirlo. ‘Muy pronto ha de sobrarnos oro para empedrar la casa’, replicó su marido.”

    • Si, pero la comparación termina ahí. José Arcadio Buendía fue capaz de calcular la curvatura terrestre a partir de sus observaciones astronómicas. Dudo que semejante hazaña intelectual sea posible en un cerebro zombie-chavista

  2. Has this gold that is being used for collateral been moved back to secure international storage somewhere? I cannot see Goldman Sachs accepting collateral for a loan that can all too easily be liquidated.

  3. Venezuela: best real-time economics lesson about HCA during hyperinflation in an oil-rich country

    Venezuela: Historical Cost Accounting 101 during hyperinflation in an oil-rich country

    1. The real value of the Bolivar (a monetary item) is being destroyed by Historical Cost Accounting. Proof: If all monetary items (items expressed in Bolivars) in Venezuela were inflation-indexed DAILY there would be no loss of real value in these items. Like Brazil did with many monetary items (not all) from 1964 to 1994. There would, however, still be hyperinflation while the Central Bank of Venezuela keeps on creating too many Bolivars. But, there would be no destruction of real value over time in Bolivar monetary items in Venezuela. Prof Steve Hanke said this is an interesting idea.

    Who is to blame: The International Accounting Standards Board.

    Why? The IASB requires Venezuela to implement IAS 29 Financial Reporting in Hyperinflationary Economies in terms of the MONTHLY published CPI. It has been implemented in Venezuela since 2009.

    Solution: The IASB should change IAS 29 to require DAILY INDEXING instead of the use of the monthly published CPI. This was done very successfully in Brazil and other Latin American countries in the past. The IASB simply ignores that.

    2. The real value of variable real value non-monetary items (e.g. electrical appliances) is being destroyed by Nicolas Maduro´s price fixing.

    Who is to blame: Nicolas Maduro and his advisers.

    Solution: These variable real value non-monetary items should be valued at the parallel rate and normal forces of competitive demand and supply should be allowed to rule in the market. There would – ceteris paribus – be no loss of real value in these items.

    3. The real value of constant real value non-monetary items, e.g., salaries, wages, rents, trade debtors, trade creditors, etc. is being destroyed by Historical Cost Accounting. Proof: If they were measured in units of constant purchasing power in terms of a DAILY INDEX there would be no loss of real value in these items, i.e., no loss of real value in salaries, wages, rents, trade debtors, trade creditors, etc. Like Brazil did from 1964 to 1994.

    Who is to blame: The International Accounting Standards Board.

    Why? The IASB requires Venezuela to implement IAS 29 Financial Reporting in Hyperinflationary Economies in terms of the MONTHLY published CPI. It has been implemented in Venezuela since 2009.

    Solution: The IASB should change IAS 29 to require DAILY INDEXING instead of the use of the monthly published CPI. This was done very successfully in Brazil and other Latin American countries in the past. The IASB simply ignores what happened in Brazil in the past.

    Why does the IASB not change IAS 29 to require DAILY indexing?

    (i) The IASB does not understand financial capital maintenance in units of constant purchasing power in terms of a DAILY index. The IASB is too arrogant to spend the time to properly find out the benefits of Daily Indexing. Financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation was authorised by the IASB twenty four years ago in the original Framework (1989), Par. 104 (a) which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”

    (ii) According to Michael Stewart, the Director of Implementation Activities – the IASB´s view is that financial reporting has no effect on the economy.

    (iii) The IASB is not responsible enough to take financial capital maintenance in units of constant purchasing power in terms of a DAILY INDEX seriously.

    (iv) Venezuela and Belarus are relatively small economies and thus not important to the IASB. When the world economy was crippled during the 2008 financial crisis, the IASB had a special task force to deal with fair value accounting. The IASB has not even included research regarding Daily Indexing in Research projects on which preliminary work is not expected to commence until after the 2015 agenda consultation. After an agenda consultation, the IASB normally takes one year to come to conclusions regarding the consultation. They are very laid back at the IASB. The research project Financial Reporting in High Inflationary Economies is now included by the IASB in Research projects for which the timing of preliminary work has not yet been confirmed, i.e., perhaps in 2017 or later.

    (v) According to Michael Stewart, the IASB is incapable of expressing a view regarding whether IAS 29 had a positive or negative effect on Zimbabwe´s hyperinflationary economy in the past since the Board has not yet had a special review of the problem while all other accountants in the world would generally agree that it is very, very obvious that IAS 29 had no positive effect on Zimbabwe´s economy like it is currently not having a positive effect on the Venezuelan economy. The IASB cannot grasp that.

    • Ok. Mr. single issue. I ask again:
      What good is this daily inflation index for savings in VEF? Wouldn’t they depreciate just as fast as they do know or even faster? (daily instead of monthly)
      If people fully adopt the mindset of ending every month with 0 bolivars to protect their assets against inflation, how is this daily index going to curb on it?
      Isn’t the daily index a measure to protect the worth of assets rather than the worth of VEF?

      • The income of all those whose income is a result of an accounting system would be increased as per the daily (sometimes more than daily) indexing. So, even if their VEFs are diminishing in value, the number of VEFs that they are receiving is being increased to match their loss of value. In purchasing power terms, the would not feel a difference. They would need bigger wallets…

        • Ok. So if salaries, rents and “future” payments are indexed daily, then inflation becomes merely a tax on savings. Correct?

          • How is this any different than switching currencies to “Unidad Tributaria”? Isn’t that kind of a dual currency set up like Cuban Pesos CUP and Cuban Convertible Pesos (CUC)?

          • No, it is not like CUP and CUC. There would only be one currency – the VEF, but, all items expressed in VEF would be updated daily – thus they would increase in NOMINAL value daily, but their real values would stay the same.

            This happens 98% in countries with 2% inflation. 2% inflation is – almost – the same as 98% daily indexing.

          • How can daily inflation-indexing be a TAX ON SAVINGS? All monetary items in the economy are inflation-indexed daily and ALL constant real value non-monetary items are measured in units of constant purchasing power (which is technically the same as inflation-indexing.)

            Obviously complete coordination is needed in the economy: everybody has to do it to all items and all money has to be in the banks.

          • But savings in VEF are not “non-monetary” items.

            Anywho. I’m not an economist nor an accountant. And you want to sell this idea to all of us. Let’s do a step by step. Suppose daily indexation is approved and is to start on January 1st 2014.

            ON JANUARY 1ST: Luis Pérez has a salary of VEF 12,000 (VEF 400 daily). He pays VEF 1,500 in rent (VEF 50 daily). A daily lunch is VEF 90. His savings account holds VEF 20,000 (current interest rate is 12% yearly). He owes VEF 100,000 on a loan for a car (current interest rate is 24% yearly). The car is worth VEF 350,000. The black market rate is VEF 100 to USD 1.

            Then BCV announces that during January 1st, prices rose 1%.

            Can you tell me, by JANUARY 2nd, how are affected Luis Perez’ salary, rent, lunch, savings, loan and car value? How is the exchange rate affected?

      • “What good is this daily inflation index for savings in VEF? Wouldn’t they depreciate just as fast as they do know or even faster? (daily instead of monthly)”
        Yes, all money all over the world depreciates on a daily basis – even more than once per day during hyperinflation: you in Venezuela will experience that when your hyperinflation reaches 3000% per annum and above.
        When all monetary items are inflation-adjusted -at least- DAILY, then they NEVER lose real value. That happens TODAY worldwide with 2.4 Trillion US Dollars worth of Government capital inflation-indexed bonds indexed DAILY worldwide in terms of DAILY CPI´s in different countries – including in Venezuela according to Miguel Octavio (your banks hold those government inflation-indexed bonds very tightly).

        “If people fully adopt the mindset of ending every month with 0 bolivars to protect their assets against inflation, how is this daily index going to curb on it?”

        I do not understand what you are asking.

        Of course, once all monetary loans, bank deposits, etc. are all inflation-indexed daily, you do not have to spend your daily inflation-indexed Bolivars. You have to put them in the bank, of course to get them inflation-indexed daily. You get them back inflation-adjusted from the bank. You will never lose real value. Everything will go up in NOMINAL VALUE every time the general price level changes, i.e., AT LEAST daily. Your salary, wages, rents, transport costs, everything. But, everything will stay the same in REAL VALUE.

        “Isn’t the daily index a measure to protect the worth of assets rather than the worth of VEF?”

        The VEF is an asset too. A very liquid one. It is acceptable everywhere in Venezuela and your economy is accounted in VEF. As Prof Steve Hanke agreed: it is a very interesting idea, because it would protect the worth of the VEF in the same way 2.4 Trillion US Dollars worth in government capital inflation-indexed bonds´ real worth is TODAY being protected world wide with DAILY indexing in terms of Daily CPI´s. I have a few links to Daily CPI´s on my blog. Every country that issues government capital inflation-indexed bonds already has a Daily CPI – including Venezuela (according to Miguel Octavio). The most liquid markets are TIPS in the US, Gilts in the UK and the French market.

        • All 90 day bank deposits in Chile are inflation-indexed daily. And money other items in their economy. Chile has a daily index, the Unidad de Fomento, that they started in 1967 and they never re-adjusted it for anything. It became a daily index since 1990. Chile has a very strong capital market and construction industry because of them using the Daily UF. Colombia daily indexes ALL mortgages in the country daily with their Real Value Unit which is their daily index. The daily index in Brazil was the URV – the Unidade Real de Valor.

  4. From Citibank’s Macroflash:

    “Although we were anticipating for economic activity to decelerate, it seems that this process started sooner than we expected. There are several factors that lead us to think that the economy should continue displaying poor GDP results in 4Q13 and 2014, namely lower government spending, bottlenecks in local production, and reduction in investment.”

    To which I say…. no shit, Einstein! But still… oy vey.

  5. Venezuela seems to have too much gold bullion as part of its foreign reserves. Gold has lost much value this past year and therefore the Venezuelan reserves have also fallen proportionally to its gold holdings. Venezuela can thank el imbecil galactico for this failed policy. But given the present state of affairs and putting yourself in the shoes of BCV, trying to raise capital funds leveraging its gold does not seem a bad idea after all. Providing the documentation is well drawn up (is this fantasy?), all the legal angles have been taken care of (more fantasy) this operation seems pretty normal in a normal financial setting. I am no expert the total size of the gold market so I can’t tell if an operation this size could in itself move the price of gold (therefore I can’t comment on the suitability or ethics of the operation.) But what really gets my attention is the cost, 8%!!! This is a margin loan. Risk should not be viewed as Venezuela’s ability to pay (like if it was an uncollateralized bond), but on the fluctuations of the price of gold relative to the amount of the loan. There is also an interest payment risk but that is way smaller than the capital risk. The 10% margin should take care of this, that is why it exists as a condition in the first place. You could even make that margin wider, say 15% instead of 10%. As far as I read the articles Goldman is doing a “margin” contract. To me 8% a year, given that it is a margin loan is way way too high. If I am right, which I hope some of you brains can correct me if I am not, “who” is embolsillando the diference between the market interest rate and this 8%?…..I do hope I am wrong, we are talking about a lot of money……

    • It wouldn’t surprise me if it were 8% per year, that was my understanding.

      Countries only go to Goldman Sachs when things are desperate.

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