Photo: Massachusetts Bankruptcy Center

Prominent journalist Ginette González dropped a bombshell in her Twitter account earlier this afternoon. Covering a meeting between the Banking Association (ASOBANCA) and its regulator, the Banking Superintendency (SUDEBAN), she reports dire warnings made by the president of ASOBANCA, veteran banker Arístides Maza Tirado.

Maza told the Banking Superintendent, Lieutenant Colonel Antonio Morales, that there are no banks in the country currently at low risk, that the banking sector was not viable under the hyperinflation and that he (Maza) was scared.

None of this is unexpected. In late 2016, we reviewed Econanalítica’s estimates on the financial sector’s risk exposure. In short, the sector was shrinking at a pace eerily similar to the 1994-95 financial crisis. This is how it looked back then:

We don’t have more up-to-date estimates, because the government stopped releasing these figures years ago, but we have indirect ways of gauging how the banks are doing.

Contrary to what communists say, banks serve a purpose. They “multiply” the money in the economy; let’s say the Central Bank prints 100 bolivars, which end up as the salary of María, who takes them to her back. Out of this 100, the bank lends 50 to Juan. So María has 100 in her account, and Juan has 50, which means there’s 150 bolivars in the economy. The 100 Bs. have been multiplied by 1,5.

We can estimate, then, how much banks are multiplying money in the economy. In Venezuela, the multiplier during 2014 and most of 2016 was between 2,4 and 3. Around July 2016, it started to drop almost non-stop, and it’s now 1,3.

As the Venezuelan economy shrinks, the banks are shrinking too. They can’t loan money as fast as the government prints it, their profits are drying up, and they loan capacity can’t keep up with prices. To finance a major a project today, you’d need five or more banks to band together and make the loan.

What’s frightening is that, amid hyperinflation, the banking system’s collapse isn’t even that big a story. It’s like a house fire in the middle of a nuclear attack: it would be very serious in normal circumstances, but in this context, well…

Whether this turns into a major bank crisis will depend on how the government handles it. Unlike past banking crisis in Venezuela, no savings are at risk, because no one saves in Bs. anymore. However, banking crises are paid by printing money. The cost of rescuing banks during the crisis of 1994-95 was 13% of GDP. Cash is already being printed like crazy, having to print more to rescue banks would add more fuel to the hyperinflation fire.

Venezuela is in no condition to withstand more shocks. And this one would be major indeed.

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33 COMMENTS

  1. “Whether this turns into a major bank crisis will depend on how the government handles it.”

    Didn’t you just answer your own question?

    • The smart money is already out of Venezuela. Bankers are not dumb.

      I doubt that even if Maduro decided to nationalize every private bank, what he would be left with is the real estate these bank buildings stand upon.

      There is NOTHING to invest in, in Venezuela. Unless there is some sort of bizarro “short sale” scenario in which investors bet on even higher levels of hyperinflation.

  2. And to show how insane and out-of-whack everything is here, stepdaughter No. 2 just called and said she was offered 80% today for whatever cash she could find. 80%. Amount not important.

    Now obviously, whoever is paying 80% for cash, has a buyer at an even higher level, probably on the order of 120% or more because no one works for cheap here. Hell, practically no one here works, period.

    • MRubio,
      I always enjoy your comments on this blog. But, I’m not understanding what you mean – She is offered 80% of what for cash? Do you mean a discount of 80% on the price of something if paid in cash? Is the extreme inflation of prices in parallel with extreme inflation in the value of Bs as a commodity?

      • I tried to ask a similar question but am having problems posting from my phone, message below. I believe you are correct about hyper-inflation combined with a physical shortage of currency. Remember just of a year ago, Maduro tried to “outlaw” the 100BF’s bills virtually overnight, supposedly to be replaced with higher “value” notes. Of course he could not make payment on delivery causing chaos. I believe the new bills are not in circulation yet or at least not widespread circulation, not that they would help much in a hyper-inflation scenario. I do not know the percentage of deterioration of physical paper bills year over year but without replacements and the Gov’t/Bank of Venezuela printing money (guessing this is just numbers on a screen) you can imagine the combination of difficulties this causes.

      • AG, I’m talking about cash, as in “efectivo”. Physical notes of Venezuelan currency from 50 bs on up. For each physical note of 100 bs she gives the guy, he transfers to her account 180 bs……..80% profit for her on the transaction.

        If you’re not in the country, you may not realize how hard it is to find physical currency today and not everyone has an account from which they can send transfers to buy products or receive transfers for services and products offered. Many vendors cannot accept wire transfers, or simply refuse to do so, they want cash instead.

        She didn’t say anything about the new, larger notes, 500 bs on up, but I wouldn’t be surprised if he wouldn’t pay an additional premium on those. From what I understand, this cash is headed for the mines to the south.

        We charge our customers here 20% for cash. For instance, they wire 120,000 bs to our account, we confirm the wire, and then we give them 100,000 bs in cash. In essence, they deposit our cash for us so we don’t have to risk hauling sacks of money to the bank.

        That rate might sound steep but when the banks don’t have cash the day you arrive, or “the platform is down”, or there’s no power at the bank, you leave the bank with NOTHING. And most people here do not own their own cars. From our pueblo to the nearest bank costs 20,000 bs for transport……..to take out 20,000 bs if you’re lucky? No way. Just another reason the banking system is collapsing along with the rest of the country.

        It’s a cluster fuck of epic proportions.

        • Thanks for the details. I was close – there is a hot market for cash, especially large denomination cash. The irony is that you cannot access your electronic money “profit” from the mark-up without paying a reverse premium – right?
          And, unless you can purchase goods using electronic transfers, how do you get these Bs out of your account quickly, so you can convert them into a more stable asset?

          • Simple, we buy as many products as possible via wire transfer. My woman goes to the city weekly and if you’re going to spend 50 or 100 million with a chinese merchant, he doesn’t expect you to pay that with cash, of course. So we pay with a wire transfer on the spot.

            Cigarettes, which for us are a huge weekly purchase in bolivares, we also pay via wire transfer. More and more vendors are going to wire transfer because they have no other option if they wish to remain in business. Heck, we’re now paying the casabe vendor via wire transfer! LOL.

            The good thing for us is that here at the bodega, 90% or more of the purchases still occur in cash. I have no idea where these people get money but they keep coming and they spend every singe bolivar they have in their pocket because tomorrow it’ll buy less.

            And then there’s barter. The kid who now brings us coffee from up in the mountains, leaves here with some cash, but also other stuff. Tonight he left with chimo (Venezuela’s version snuff I guess) cigarettes, and motorbike spark plugs, innertubes, etc. He said up in the mountains he can sell all of this stuff for a huge markup because it costs so much to travel these days.

            Win/win for both parties. We get some of the best freshly-ground coffee I’ve ever had and which our customers love, and he makes money on both legs of the trip.

            We’ve also traded sacks of maiz trillado for brown and white beans as well as black caraota and other products. Tonight we bought auyama, Venezuelan pumpkins……the guy didn’t want cash, he wanted chimo. Done!!!!

            Gotta be fleet of foot to make ends meet here. It’s a trip.

      • Yeah, another gringo, it is totally surreal here. My girlfriend is accountant for hardware store/panaderia (same owner) and buys cash at 50%. I buy 500,000bsf every week just so we have taxi money (BTW It costs now between 25,000-45,000 for a taxi now so that 500,000 is gone in a flash).

        Yes, in a disastrous economy, you have to look for every opportunity possible and it is easier to sell cash than actual products. On the other hand, NO HAY, and whenever there are shortages, there will be speculation…or just laws of supply and demand.

        I have been hearing in Estado Bolivar they are paying 200% for cash in some areas to pay all the illegal mining operations. Remember 2016 when Maduro announced the 100bsf note was no longer legal tender and there was massive rioting in Ciuidad Bolivar? Well you have to pay these miners cash or something really bad will happen. The owners of the mines and corrupt generals are earning in real money, so paying double for cash is nothing for them. Therefore I can see this black market for cash going on for a while.

        • Guacharacha – wow! –

          If you don’t mind my asking, when you buy your weekly 500000 Bs cash – do you also pay with a 750000 Bs (+50%) electronic transfer? What are the denominations of the bank notes? Are you taking heavy bags of cash with you each taxi trip? Because everything will double in the next few weeks – then what happens – bigger bags???

          Selling cash sounds very profitable if you have cash. Maybe the Venny banks can right their balance sheets by going out of the loan business, and into the “selling cash for a suitable mark-up” business. (Man would the Aporreans go ape shit if that were to happen!)

          • Epale Gringo, yes, I deposit 750,000 and then I get paid out in cash. I prefer big bills, but take what I can get.

            I have paid for a taxis before with a huge wad of 50 bsf. Honestly I feel embarrassed when I do that, but usually the taxi drivers know this is because of the shitty situation here. Solo en Venezuela.

            There is a new app that is available for some banks (and I do not have Banesco) and you can request a driver who has that app when you call a taxi service. It works kind of like pay pal, but in Bolivares. Nevertheless, I have a small bank and I am stuck with paying with cash or a taxi driver who accepts transfer (but usually those taxi drivers are not 24/7 whenever you want them).

            But, yeah, it is going to get crazy. One of my friends is a taxi driver, and he is saying F*ck it and is moving to Peru.

    • Marco, how come in many of your posts, you reference Chinese merchants you do business with.

      I know it’s not a racist thing. Is it because they simply do business differently than Venezuelans?

      • Yes Ira, I mention them by name because they seem to do business differently than Venezuelans. For the record, they’re generally despised by the locals but I find them to be nothing more than strict in the way they do business. Doesn’t bother me, though even my woman complains about them often. She prefers that I do all the face to face business with them here locally.

        As an example, the locals often claim that Chinese are “closed, or tight”……that they don’t trust others, only other Chinese. I can understand them trusting other Chinese more than someone who is not from their culture, but lacking trust is not something I’ve noted. Heck, I have credit with local guy, have had credit with him for a long while actually. He’ll let me load up the vehicle and then wire transfer what I owe once I get back to the shop. The Venezuelan girls who work for him have told me that he doesn’t normally do business that way, at least not with the locals.

  3. And to further help you guys understand what’s going on here, there’s now a tiered system for payments. I know for a fact that is taking place all across the country…..everyone talks about it here. The most targeted products are sugar, rice, harina pan (corn meal) and pasta.

    Here’s a good example of what’s going on:

    A vendor might charge 95,000 bs for a kilo of sugar if you pay by wire transfer (assuming he’ll accept a wire transfer, many don’t).

    If you offer to pay the same vendor with the old bills of 50 bs and 100 bs, he might charge you 85,000 bs for the same kilo of sugar because now you’re offering him cash.

    If you offer to pay him with the new bills of 500, 1000, 2,000, 5,000, 10,000, 20,000 or the latest bill 100,000 bs note, he might charge you 75,000 for that same kilo of sugar.

    Stepdaughter No. 2 has told us that in Barcelona, Pta La Cruz, many vendors now accept only wires or the new bills. They’re not accepting the bills of 50 bs and 100 bs because they’re too bulky and paper weighs A LOT. I know because every day I send some poor bastard away with a 50 kilo sack full of these bills. We’ve seen a huge increase in the number of 50 bs notes in this area so I suspect what she’s saying is taking place in Barcelona is quite widespread.

      • 100 bills (any denomination) weigh roughly 110 grams. When rushed we often weigh bills on an electronic scale just to get close. Thank god we’ve got a bill counter.

        • OK – so at 1.1 gr per bill, that’s nearly 45,500 bills = about 2,273,000 bs in 50 b notes. At 191.2 bs per DT as I type this, that’s just under $12 US. I can see why 50 b notes are not very useful.

  4. Yes, the value of Bs. is rising quickly, and I guess that the reason is 1) a lack in local cash and 2) a cash “exportation” in frontier states (Tachira, Bolivar, Apure, Zulia).

  5. CJMP—can you expand upon your “exportation” comment. I have read about a few (two, I believe, confiscations in Brazil and Paraguay), of large sums (weighing tons) in the past. It was thought that the physical paper would be good for making counterfeit US dollars. Do you know anything more about this?

    • waltz, not trying to answer for CJMP, but would like to comment on the question you asked.

      I too have heard about bills making their way to Colombia because they’re supposedly good for making counterfeit US dollars. My woman’s son lives in Tachira near the Colombian border and one day I had an opportunity to speak to him at length about the subject. His take was quite a bit different though he agreed that the Colombians are great targets for such claims as being expert counterfeiters.

      What he told me is that most people who live in the interior have no idea of the sheer volume of business, both legal and illegal that goes on (or did go on) near the border and across the borders. Colombians come into Venezuela to buy products that are dirt-cheap for them when changing dollars, and Venezuelans cross the border to buy products that are almost impossible to find here for resale at huge markups to other Venezuelans back home.

      Of course, commercial interests across the border accepted the bolivar notes which not too long ago were not in short supply. Those bills then slowly worked their way back across the border into Venezuela. As he explained and as we’ve discussed in this same thread, shear volume of the devauling Venezuelan currency made movement of the funds difficult. Those same commercial interets therefore always gave discounts for payments received in the largest bills possible. Not too long ago, goods could still be purchased with bills 2, 5, 10, and 20 bs which were widely circulated. At the time, the 100 bs note was as big as it got.

      He then reminded me that back when Maduro wanted to take the 100 bs note from circulation and was looking for excuses to do so, Chavez TV showed businesses in Colombian border towns with tables stacked with 100 bs notes. At first glance the volume of bills looked impressive. But when one analyzed the photos, what looked like huge amounts of cash was really only, at most, a few hundred dollars worth of Venezuelan bills. And as he said, what border town commerciante doesn’t do a few hundred dollars worth of business in a single day?

      So when taking all that into consideration, it’s not hard to imagine TONS of Venezeulan bills building up near the border. With today’s shortages of cash though, I imagine most of those bills now work their way back across the border much quicker than before…….and, of course, crossing the border has been made much more difficult as the regime attempts to hide what’s going on within the country.

      • MRubio, all your comments here are again better than the article itself… thanks from Spain for all the information… those down-to-earth examples and experiences are always very helpful to understand what’s going on…

  6. Regarding the mining in Bolivar, in satellite pictures one can easily see dozens(hundreds?) of 50+ hectare sites near rivers employing hydraulic mining(probably gold mining). This area is now malaria infested and the gold extraction uses mercury (which is boiled off to leave the gold behind,) so the miners do not fare well. The Spanish series “Amazonas Clandestino” did an eye-opening episode about Las Cristinas.

  7. Maybe the loss of their meager savings for good would be the final straw for those who are still thinking that they can “survive by ducking before chavismo”?

    • Our business absolutely accepts US Dollars. Heck, we encourage it.

      In much of Venezuela today if you’re going to buy a new car, a late model car, or a piece of heavy equipment, more often than not the deal is done in US dollars. Ironically, Maduro’s mismanagement of the economy is pushing it towards dollarization.

  8. Can’t stores just say “Screw it! Everything is now in dollars!”? And why wouldn’t the population agree? Demanded to be paid in dollars. Buy goods and services in dollars. In other words, dollarize without the government’s blessing.

    • You are talking of the same government that has announced that you sell at December prices (in a place where monthly inflation is what, 50%?) or “the full weight of the law” (a.k.a the full weight of arbitrariness) will fall on you. The same place where they send you an “inspector” that forces you to sell at discount or take you to jail.

      • 50% inflation per month would be a huge improvement. More like 100% and increasing. The shelves will stay empty, and if some merchant is dumb enough (or coerced under threat of violence or imprisonment) to pay to restock at what will be a huge loss, well, that business plan will fail soon enough.

    • Ron, there’s not enough dollars here for the average Joe to deal in dollars, that’s the problem. But for businessmen who have access to dollars or those who work with products that require large sums, dollars are the way to go.

      This morning I offered dollars to a producer of yellow corn who starts harvesting today. This is the last corn I may be able to buy this year. Once dollars were on the table, we quickly agreed on the value of the dollars and the price per kilo of the corn……7500 kilos. Before making the offer of dollars, he’d been exceptionally squirrely on closing a deal.

      I swear, until the moment the deal is actually sealed, it’s not sealed! Everyone is looking to squeeze the most out of every deal.

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