Maduro's stealth devaluation

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dolares_bolivares_cambioIt’s easy to be dispirited by Maduro’s address last night.

The three-hour rant was only occasionally peppered with substantive announcements, and none of them were clear enough to really know where the government is headed. But even if we take the most optimistic of views about the substance of what he said – and this note by Reuters’ Andrew Cawthorne and Alexandra Ulmer is the closest you can get to interpreting Maduro seriously – what was announced is still not enough to get us out of this jam.

If we interpret Maduro correctly, we can expect a devaluation in the near future. The official 6.3 exchange rate will remain for “priority imports,” and the two other official rates (of 12-ish and 50-ish) will be changed. The 12 and 50 rate will be merged into a single exchange rate – details coming soon, we hope – and a new, free exchange rate will also be set up.

The end result will probably be a devaluation. Just what the doctor ordered, right?

Wrong.

By keeping in place the multi-tier system, Maduro is doing nothing to tackle the underlying distortions that are actually at the root of this economic mess. It makes no sense to devalue and leave the underlying distortions in place. No matter how much you devalue, people will still try to game the system, taking advantage of the cheap exchange rate to make a buck with the unofficial one and leaving stores depleted in the process.

As Ricardo Hausmann pointed out in his rebuttal to Francisco Rodríguez a few weeks ago,

Selling Venezuela the illusion that this can be fixed with a simple exchange rate measure that is practically cost-free and does not involve anyone is a deep analytical mistake. The problems run much deeper that that, and one more devaluation (one of many), while leaving the rest of the policies intact, is just that: one more devaluation.

The devaluation doesn’t even solve the country’s fiscal mess. It makes no sense to devalue and at the same time announce a massive public spending program which will ultimately drive up inflation and leave the government in the same place it started. Ultimately, spending will have to rise because everyhting will be more expensive. It’s the path to hyperinflation the one we are embarked on.

And let’s not even begin discussing his commitment to “debating” a rise in gasoline…

That, to me, was the most disappointing part. Maduro made it sound as if he was taking substantive measures, but he really wasn’t. As he said, he is only “deepening” the model that led us here.

The end result will be a “deepening” of the problems we are facing.

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1 COMMENT

      • Although the most interesting part of the “Cuenta Cuento” was Maduro recognizing publicly that the price oil of US$100 will not come back. I think that was a pretty harsh declaration for Maduro.

  1. I just had to post what our friend Omar put on his FB page:

    “La frase “Dios proveerá” equivale al abandono total de la voluntad. Es entragarse completamente a las fuerzas externas y poderosas que no controlamos. Es admitir que el destino no depende de nuestras acciones. En cierta forma, Maduro si renunció esta noche en la AN.”

    • A Maduro no le interesa renunciar, ni quiso renunciar con la frase que emitió anoche. Lo que su frase mostró fue más bien su entrega a lo místico porque en el fondo sabe que no puede controlar fuerzas económicas por su falta de preparación adecuada, aspecto compartido con los que lo rodean. Lo místico es refugio de ovejas con miedo que se entregan porque se sienten inseguros y saben que no tienen suficiente preparación.

      • Su frase no tiene nada de inseguro, su frase es el cénit de la sinvergüenzura chavista: “ESTE PEO NO ES CULPA MÍA NI DE SHIABBE”

        • tienes razón: sinvergüenzura cubana-marxista-chavista-idiotista, un terreno poblado de soñadores que llegan al poder a través de su lengua de oro y sus delirios (de grandeza), faltando una buena preparación si apenas, porque bueno nadie sabe más que ellos. Puras Alicias en el país de maravillas, apoyadas por un pueblo ingenuo, hasta que sea demasiado tarde. Pobre Venezuela.

          Lo que dije del misticismo es una generalidad, y claro hablo de aquellos que usan el misticismo para sus propósitos de manipulación, u otros que se refugian demasiado en ello.

    • I couldn’t agree more.
      He understands what everyone with a sense of how economy works is saying, but he refuses to take the measures because “socialism is the way, with all its mistakes, it’s the only way.”

      If you refuse to change the system, sólo te queda entregarte. “Que pase lo que tenga que pasar, porque este sistema no lo vamos a quitar”.

  2. In his speech, did Maduro really bring up a tweet from Capriles (or some other opposition figure) asking him if he brought back milk from his trip?

  3. By the way, that was a great play-by-play yesterday, kudos to ED especially for putting a greatly entertaining spin on the 3 hour logorreathon.

    The take home message is clearly: don’t expect much from Maduro.

    But now I have to play devil’s advocate and ask, if the top tier of the exchange rate is allowed to float, and the bottom tier amounts to a fixed volume of dollars at a fixed rate , isn’t that coming close to a solution?
    As I see it, the bottom tier amounts to a subsidy on whatever goods are bought with those dollars, in other words, they can just say: “we are going to continue to use X amount of dollars from the oil income to sell cheap Y and Z to the poorest sectors in state run stores.”

    To me that is better than the gas subsidy which must be reigned in and definitely an improvement over outlawing exchange at a floating rate. In fact, it is a handout, but much more reasonably allocated (barring corruption, smuggling etc), not very different from food stamps or other subsidies to needy families. The biggest problem in Venezuela is that there are gradations of neediness and a level of corruption that make implementation of even the most reasonable assistance program difficult.

    I know what you are gonna say: I am appeasing, selling out, etc, but you have to distinguish between questioning the ability of the chavista team to carry out these measures cleanly and efficiently, and what they mean on paper, which in my eyes is not that unreasonable.

  4. My Take on the Hausmann/FRod debate:

    A patient comes into the E.R. He’s passed out. His has acute cirrosis of the liver due to years of too much drinking. He has advanced diabetes and signs of drug-resistent tuberculosis, linked to a history of intravenous drug use. His eyesight is failing due to mismanaged glaucoma. His blood-pressure has been elevated for years.
    Oh and one more thing: he’s bleeding profusely from a .38 caliber bullet wound to his left shoulder.

    Now nobody would say that once you’ve treated the bullet-wound, the guy’s honky-dory.

    Nobody.

    And yet, if you’re the doctor on call at that ER, the absolute first thing you’re going to try to do is try to patch up the bullet wound. Not because the other stuff isn’t important, but because blood-loss from an open bullet wound is the thing that’s likeliest to kill the guy in the next 10 minutes.

    In Venezuela, the insane multiple-exchange rate regime is the bullet wound to the shoulder.
    Arguing forcefully that you MUST address it RIGHT NOW and ahead of everything else in no way implies that the other problems aren’t extremely serious. They are. But the problem you address first must be the one causing the patient to bleed to death right in front of you.

    Maduro, for his part, refuses on principle to stanch the bleeding. It’s sickening.

    • Quico, ese es el plan.

      They are putting Vzla in such a desperate situation that people will have no choice but fight or flight.

      Assuming that they have complete control of the armed forces, whoever fights will end up in jail/dead, and whoever flights is one less person to feed/provide toilet paper.

      They do not care if a famine starts, if a civil war starts, if they default on payments. They want to stay in power and that is it. In power of a shitty country, but that is probably better for them.

      It is dire and dangerous for them, but way more dire and dangerous for us. They are criminals and they are basically saying to all of us that they rule and you shut up and follow or else.

    • Except that FRod DID said that an unified FX sistem (under the same arrangment of FX controls), at a high enough rate, would make superfluos further adjustments in the external sector (the adjustment already happened), would get rid of the distortion by making disapear the parallel market (superdevaluation), would get rid of the fiscal deficit and make further monetary financing from the BCV unnecesary, and all the move would be not inflationary and expansionary (!).

      In my book, my friend, that accounts for your diabetic-cirrotic-TB-hypertense-drug addict shot by a .38 pistol, walking out the hospital in a pretty good shape.

      • But that would kill the fallacy of “highest minimum wage in the whole world, 1097 dollars, baby!” and the “we’re protecting you people with cheap medicines and food!” lie too.

        And for this regime (And communists in general) propaganda is ALWAYS more important than the people.

      • Agree, EconVzla. Quico gets so easily titillated by these minor star players (F-Rod or earlier, encuesta guys) that their motives never come under question. Bizarre behaviour for a “journalist”. Even weirder are the continued efforts to defend earlier positions, clearly wrong, grosso modo.

        What drives F-Rod to say what he does has nothing to do with doctors or Emergency rooms (what a stretched analogy) and everything to do with sales, salary, bonuses and job maintenance. Sigh.

      • Bueno let’s torture this analogy all the way to the morgue.

        I think of the diabetes/cirrosis/TB stuff as the structural micro-policy framework that limits growth potential: weak property rights, awful opaque policy-making, an insane labour law framework, etc. etc. etc. Patch up the patient’s short term macro-imbalances and he does have a fighting chance of walking – or at least hobbling – out of the hospital, but he’s going to win no marathons and struggle even with stairs. And if he doesn’t change the self-destructive behaviours that got him shot in the shoulder in the past, then yes, there *is* every probability he’s going to turn up with another gunshot wound next week. All of these things are true. Quién lo duda?

        But right here right now facing the guy bleeding in front of him on the operating table, how could you not shout yourself hoarse demanding a frigging tourniquet to stop the bleeding? It’s a triage problem. When the guy is bleeding all over the table is not the right time to discuss the finer points of diabetes management and insulin dosing. You stanch the bleeding first, coño.

        I find it bizarre and appalling that FRod’s patriotism is called into question simply for advising the government take the very most evident reform that everybody ought to be able to see is the obvious first step in a loooooooong process towards recovery. I just don’t get that.

        • Have never doubted FRods patriotism , hes just a concerned top knotch professional calling the shots as he sees them , no reason to question his professionalism even if some see things a tad differently .

          By coincidence the Minister of Finance just tweeted that he was having a meeting with reps of various foreign investors and Bank of america , going over yesterdays announcements and that there was total confidence in the country’s prospects . Moreover he tweeted ” Hablamos sobre el nuevo sistema cambiario: 6:30 para import. esenciales, Sicad y oper. de canje de títulos valores”

          Apparently the new market Maduro mentioned yesterday, where all could transact their dollars is going to take the form of a ‘financial paper exchange’. maybe something reminiscent of the system which was used a couple of years ago until Giordani had it shut down.

          A UBS report on the state of the countrys finances came out last january 15. entitled ¨Venezuela in the Direst of Dire Straits” , makes for some depressing reading !!

          • “judging by the spreads on its CD’s Venezuela has a 29% probability of defaulting on its sovereign debt within 3 months and an 82% probability within a year”

        • Hay es donde estas equivocado,Venezuela esta sandrando, los enchufados estan chupando la sangre, nos esta robando todos los dias con su cadivi/cencoex/sicad.

        • Well, I think it’s pretty clear I was not questioning FRod’s patriotism or intentions and, for the record, I do believe he is one of the better intellectually equipped Venezuelan economists. Over time I’ve had some controversies with him, but it’s been always over technical points. This time, for example, while nobody doubts the convinience of getting rid of the multiple FX system, I do think he was overselling the stabilization properties of the FX unification.

        • Who the hell is calling into question FRod’s patriotism? And what does that have to do with the price of beans? Irrelevant call, if not a red herring. F-Rod looks after BofA as he must, and by extension, F-Rod. The day that F-Rod’s patriotism to Vzla takes over his duties to a US bank is the day that F-Rod will be told he no longer services the needs of the corporation that pays him.

          Some folks reeeally need to work on Wall Street, or any other consolidated financial market, to get a better idea of ‘como se bate el cobre’. And just maybe, some folks may have to disclose potential conflicts of interest … just sayin’, because all the triage muddying of waters doesn’t pass the sniff test.

      • Daily Indexing of the entire monetary and constant real value non-monetary economy would do that too – also at no cost and over a short period of time.

    • Francisco,

      You have the analogy nearly perfect. Except that in this case, the doctor’s buddies and family are all vampires, and they are all happily sucking up the blood draining from patient’s bullet wound.

  5. I understood that Cencoex rate for priority imports will be 6.3 (on an apllication mechanism) and SICAD will be at 12 on an auction mechanism.. SICAD 2 will merge with the parallel rate.

    The fact that there will be fewer dollars due to the fall in the oil price means that the new SICAD 2 / parallel rate will be a “free market” where people can buy and sell dollars using brokers such as Italcambio. The details have not yet been published but there are certain questions: do you need a dolalr denominated account in a state bank to use this mechanism, for example? Can you trade cash dollars? How bureaucratic will the mechanism be?

    It is obvious that the phrase used by Maduro “optimización” means that dollars will be moe difficult to comeby at 6.3 and SICAD at 12. Hence – where do you do? To the “free market” which is now legal..

    My guess is that demand will be high as SICAD 2 is abolished and there are fewer dollars overall.

    Si…………….we will pay many more bolívares for dollars that do not come from the Venezuelan state coffers but from private and company sources.Thus, there is no chance that the BCV will run out of dollars as this is controlled by Cencoex and SICAD.

    You capitalists should all be very happy with this move towards a free market in dollars that you have always wanted since 2003. But there will be a hefty price to pay if you want dollars.

    I wonder if the dólares viajeros will be abolished soon?

    • “The fact that there will be fewer dollars due to the fall in the oil price means that the new SICAD 2 / parallel rate will be a “free market” where people can buy and sell dollars…”
      The “ley de ilícitos cambiarios” could send your sorry ass to like 10 years to a jail for only DARING to buy a penny from anything other than regime-sanctioned systems.

      “… using brokers such as Italcambio…”
      Brokers that were ordered to be arrested and jailed by the wax doll himself, so this means maburro is sticking a jagged dagger in shiabbe’s back and taking a piss in his “legacy”, AGAIN.

      “It is obvious that the phrase used by Maduro “optimización” means that dollars will be moe difficult to comeby at 6.3 and SICAD at 12”
      Except for corruption and stews (diablodiado and all his briefcase enterprises)

      “My guess is that demand will be high as SICAD 2 is abolished and there are fewer dollars overall.”
      My guess is that every sicad will be skyrocketed straight to 50 or more bolivars, 1 and 2.

      “…To the “free market” which is now legal…”
      Yet the stupid “law of fair prices” insists that you have to sell your stuff at 6,3 rate, regardless of how much you paid for it, because it falls in the inspector’s will to decide if you’re “cheating the people or not”.

      “You capitalists should all be very happy with this move towards a free market in dollars that you have always wanted since 2003…”
      And I imagine you’re very happy with the most disgusting monopoly created by that idiot who’s now dead.

      “…But there will be a hefty price to pay if you want dollars.”
      As there has always been, thanks to your stupidity of limiting the currency due to a “pinchazo de culo”.

      “I wonder if the dólares viajeros will be abolished soon?…”
      I wonder when the “dólares para las vacaciones de maburro” and “dólares para los guisos de diablodiado” will be abolished?

  6. IF ONLY that third exchange rate really and literally float like a stock market, then we are really seeing a BIG improvement, pero “Del dicho al hecho, hay un largo trecho”

    • In fact, when they came up with SICAD 2, the first thing they said was that with the new mechanism the dollar was going to be allowed to float. I didn’t believe it then (and turned out to be right), and I don’t believe it now.

      • You are absolutely right. Why didn’t they let the rate float???

        There had to be a reason for putting the policy in place. Was it even implemented for a short period of time? There is no reason to think the new policy will be any better than the old.

  7. One crucial aspect of the multi – tier exchange policy is that it keeps the ‘official’ rate at an absurd low, not necessarily for basic imports (it’s not like pharmacies and supermarkets are full of stock) but to keep national accounts artificially overvalued. If it suddenly hikes, GDP will officially shrink, poverty rates hike and the GINI “survey” worsen.

  8. And let’s not even begin discussing his commitment to “debating” a rise in gasoline…

    If only to point out that the Chavista form of debate is to shout “escualido” or “yanqui de mierda” as loud as possible.

  9. Maduro has some big problems in trying to communicate things , last night left us with some vague intimations of a change in the exchange rate system but very little on what it will specifically involve .

    My own take ( and there can be others equally plausible)

    1.- The regime will set aside part of its foreign currency earnings and use it to maintain the flow of certain subsidized food and medical stapples to its favoured political constituency.

    2.- Another part it will use selectively to help certain vulnerable industries or activities to get foreign currency at a cheaper rate than a free market rate . This second part will be made up of a merger of the Sicad 1 and Sicad 2 systems .

    3.- A new market will be set up where public and private parties may freely offer their dollars for sale at a market rate to whichver parties want to buy them . If this is done right it will have two good consequences , one it will allow Pdvsa to sell its spare dollars (not used to serve systems 1 and 2) at a very high price which will help for instance Pdvsa to cover its operating deficits ( and thus reduce the amount of bs been printed by the BCV , helping lower inflation) and secondly if the private parties are allowed to price their goods and services at a rational level to recover enough bs to substitute the dollars originally spent to bring needed imports then the supply situation will improve although prices will limb at least during an initial period until people get accostumed to trust the new system.

    As Madacol says it , this last part would be a BIG IMPROVEMENT if only they could get it to work .

    My own doubt is whether there are enough dollars this year to allow the regime to cover its costs under 1 and 2 and keep itself going !! The prospects of default are now very much closer !!

      • “Maduro has some big problems in trying to communicate things”
        lol This made me laugh as well.

        In all seriousness, I think it doesn’t help when he doesn’t fully understand some of the things he is trying to communicate.

        • Aside from the fact that Maduro is probably not the sharpest knife in the drawer and that he doesn’t really have any education in… well… much of anything. Just consider the people who are advising him… Is it any wonder the message comes out garbled?

          • Some people who went to high school with him and his sisters are always amazed that he got to be president , they remember him as a very poor student , someone who was constantly absent from class , always loafing , playing hooky , someone who never applied himself to anything , not even sports . In contrast his sister or sisters were remembered as very dutiful and hard working , apparently one of them is now a physician.

            His records as an employee of the Metro ( as a busdriver) also show him to have been a chronically absent worker, always ‘sick’ or occupied with urgent personal matters. Aside from his obvious intellectual handicaps he is also bone lazy. !!!

          • “Aside from his obvious intellectual handicaps he is also bone lazy. !!!”

            Only in Socialism/Communism could such a nobody rise to the top. The only thing the Chavistas value in a person is loyalty to “el revolucion” and personal loyalty to whoever is their boss. Any other personal qualifications such as intelligence, knowledge, creativity, dedication, persistence, etc. are disdained as characteristics of Capitalism. Anyone displaying any of those traits could never survive in within the culture of Chavismo.

  10. That idiot won’t ever do the only thing that must be done with the exchange rates: Dismantle the whole monopoly, devaluing the bolivar won’t do shit to help the economy because the “bullet in the wound” is actually the hoarding mafia that denies the dollars so they can steal them all.

    If he touches the monopoly, the monopoly mafia kills him, easy as a pie, the same thing goes for gasoline, he can’t touch the gasoline price, because the gasoline mafia will kill him.

    Or, not kill him, but will kick him from chimpanflores instead.

  11. I know this is way off topic, but have you seen this?:

    http://www.eluniversal.com/nacional-y-politica/150122/fiscalia-apelara-a-linguista-para-probar-culpa-de-lopez

    A linguist? Really? Can it get any more ridiculous than this?

    The money outrageous quote:

    “Aunque en el discurso del exprecandidato presidencial del 23 de enero pidió a los venezolanos impulsar una lucha “pacífica, popular, constitucional y democrática”, Asuaje, en su informe, considera que “no estableció lineamientos precisos sobre las características de las protestas” y esto “sin duda” fue “un detonante que pudo coadyuvar en la exacerbación de sus seguidores debido a la polarización política actual”.”

    So the government not only attacks freedom of expression. Now it is also attacking the “freedom of non-expression”! Lopez is being judged for what he didn’t say!!!!

    • It is more like he is being judged not for what he said, but for what he was thinking. So, now we can be judged and punished, not just for our actions, but for our innermost thoughts… which means I will probably be executed in the near future.

      • Welcome to the world of thoughtcrime. I didn’t think they could become more Orwellian.

        Or, in the words of Prince: “If a man is considered guilty for what goes on in his mind, then give me the electric chair for all my future crimes.”

  12. Según el BM el PIB de Venezuela suma 438.3 millardos de dólares.

    Según Dolartoday.com la deuda externa venezolana es de 113 millardos.

    Entonces, un ratio deuda-PIB debe estar alrededor del 26%, contando con que sea un pelo mas de lo que dice el gobierno. A ver, tampoco es catastrófico. Los economistas que me corrijan si esta cuenta de servilleta que acabo de hacer no tiene nada que ver con la realidad.

    Con el barril para 2015 alrededor de 30USD, tampoco tan mal. Conio, es que nos olvidamos que en 1999 estaba a 8 USD.

    Me dirán ustedes si una oposición seria no puede armar un plan creíble con estos recursos. ¿No fueron todos a Harvard y Oxford?

    De bolas, da dolor pensar en todo el dinero tirado a la poceta, pero tampoco es que se acabo el país.

    Ya lo se, los venezolanos son como bestias salvajes devorándose unos a otros. Pero los colombianos y brasileños no son mejores y miren como les va.

    Por mas brutos que sean los chavistas, hostia, que son como los animales de la selva, ya lo se, no pueden ser totalmente impermeables a una explicación clara de por que hay que reformar esta vaina y como hacerlo.

    No que las reformas sean fáciles, o exentas de consecuencias, pero la pinga, saber que se esta yendo en el camino del sentido común es mejor que desvariar en el descampado de demencia revolucionaria.

    • Los chavistas necesitan tener por lo menos seis meses de patria de verdad verdad para recapacitar.
      Todavía no hemos llegado a la etapa de la patria de verdad verdad.

    • “¿No fueron todos a Harvard y Oxford?”

      No.

      Muchos políticos son universitarios y algunos hasta tienen posgrado, pero otros son TSU y otros son bachilleres.

      Dudo que haya más de 10 diputados opositores en la Asamblea Nacional con estudios en Harvard, Oxford o cualquier universidad competitiva con la Ivy League.

      De aquellos que tienen educación universitaria, los economistas tampoco son los más numerosos, ni siquiera si los agrupas con otras carreras del área, como contaduría o administración. Mi percepción es que más numerosos son los abogados, politólogos o sociólogos.

      Para muestra un botón: Ramos Allup cree que el problema no es que exista un control de cambios, si no que no lo están aplicando bien.

      “[…]Pero en medio de esas medidas hubo algunos necios en la oposición que en vez de culpar al Gobierno por haber distribuido mal los dólares preferenciales para que se produjera toda esa especulación, salieron a defender a los comerciantes que especulaban.[…]”

      http://www.eluniversal.com/nacional-y-politica/131218/ramos-allup-en-la-mesa-no-nos-estamos-hablando-con-sinceridad

  13. The word “recapacitar” is not in their dialect. As long as they get crumbs they will not care for the country. When the crumbs go away for a sustained period of time, then things will change.

      • He was writing hot and heavy last February, decrying “foriegn’ powers behind the mass protest movement. That’s the last I heard from him. Either he is no longer getting paid, or he developed a conscious.

        • “developed a conscience”… Mark Weisbrot? No way.

          He gave up on Venezuela because he realized that being an apologist for the Chavistas was making him look silly, and he knew it would compromise his ability to sell his services to other “Socialists” in need of legitimacy.

  14. What is different about the current system and the following idea:

    (1) Lift the ceiling on the top exchange rate
    (2) Drop price controls
    (3) Raise gas prices
    (4) Shut down subsidies in markets
    (5) Hand out food stamps and bus cards

    If the country is so corrupt, #5 must be at least just as bad as subsidizing food markets and transportation by setting prices centrally.

  15. Looking forward, I know that the MUD is supposed to present their counter-proposals tomorrow at 5:00pm. Will it be televised? Will the regime block it with a cadena? Who is presenting it? Anyone know anything?

  16. Call me cynic, but I think we’ll go from a situation with CADIVI, SICAD 1 and SICAD 2 to a situation with CENCOEX, SICAD 2 and SICAD 3.

    The hype around the “free exchange rate” reminds me of the hype before SITME, SICAD1 and SICAD2. My guess is when the exchange rate of “SICAD3” goes over some arbitrary but plausible line, like VEF 100 or VEF 150, the new system will be intervened and new obstacles will be put in place. Just like SICAD 2 started as an approachable mechanism, and then they set a minimum purchase amount of USD 500, began asking for more paperwork, excluded new companies, excluded companies that hadn’t have enough profits to pay taxes, etc.

  17. Right now in la Patilla there is an article entitled Las Personas naturales podran participar….with a picture of the Finance Minister meeting with some foreign investors , the laughing person next to him on the left looks kind of familiar …any one knows who he is?

  18. “You can ignore reality, but you cannot ignore the consequences of reality.” Ayn Rand

    “The problem with socialism is that sooner or later you run out of money.” Margaret Thatcher

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