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Cablegate: Monetary Conversion: Ready or Not Here It Comes

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RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #1670/01 2341715
ZNR UUUUU ZZH
R 221715Z AUG 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 9542
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 04 CARACAS 001670

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR MMALLOY AND KAUSTIN
COMMERCE FOR 4431/MAC/WH/MCAMERON
ENERGY FOR ALOCKWOOD AND CDAY
NSC FOR JCARDENAS
HQ SOUTHCOM ALSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON EFIN VE
SUBJECT: MONETARY CONVERSION: READY OR NOT HERE IT COMES


This message is sensitive, but unclassified. Please treat
accordingly.

-------
SUMMARY
-------

1. (SBU) The BRV is charging ahead with its project to
introduce the new "Bolivar Fuerte," or Strong Bolivar
currency on January 1, 2008. With a little over four months
before the conversion, and only one month before companies
must express prices in both old and new currencies,
businesses are beginning to worry about the logistical
headaches imposed by the conversion. Most contacts agree
that the Central Bank is doing its best to smooth out the
process, although the Bank has yet to deal with many of their
concerns. The speed with which this project has been carried
out also raises questions, as most monetary conversions are
usually planned out over years rather than months. Given the
determination of Finance Minister Cabezas and President
Chavez, the conversion will come, ready or not.

------------
THE BENEFITS
------------

2. (SBU) The Central Bank (BCV) cites the benefits of
simplifying transactions and accounting procedures as a
primary reason for the conversion. Bankers admit that their
systems are taxed by the amount of zeroes required, and that
removing three zeroes will make accounting simpler for large
banks as well as small business owners. The BRV also hopes
that inflation will be reduced by making price increases more
noticeable to the average Venezuelan consumer. However, the
most important factor for Chavez is psychological -- smaller
denominations will make goods seem "cheaper" and thus give
Venezuelans the perception of increased purchasing power.
Chavez has frequently waxed philosophic about his memories of
a "strong bolivar" and many contacts believe that, at least
initially, the bolivar fuerte will make Venezuelans feel
richer. However, given the lack of any reforms to fiscal or
monetary policy, any temporary effect should soon be offset
by continued liquidity creation and high inflation.

------------
THE TIMELINE
------------

3. (SBU) The conversion process has already begun with the
BCV and various law firms hosting almost weekly seminars and
discussions as businesses prepare for the first deadline in
the process on October 1. On October 1, all prices have to
be expressed in both "old" and "new" bolivars. Then, on
January 1, 2008, the new currency will be introduced and all
accounts will be converted to the new BsF. Banking sector
contacts have confided to econoffs that they are concerned
about the rapidity of the process, especially the requirement
to change over all of their systems between midnight on
December 31 and opening of business on January 2 (January 1
is a holiday in Venezuela). The banking association has
asked the government to declare January 2 a banking holiday
to ease this process, though even then it is likely that
smaller businesses will have problems changing over their
systems.

-----------------
SHOW ME THE MONEY
-----------------

4. (SBU) Both new and old bolivar currency will be valid for
a period of six months (this period may be extended at the
BCV's discretion). According to a former BCV official, the
BRV may barely make its deadline for distributing the bills,
but there will not be a sufficient amount of coins in the
country until the end of February, at the earliest. This
could cause massive confusion as Venezuelans begin to try to
pay with BsF and receive Bs in change (so a bill for 5.25 BsF
could be paid by a 10 BsF bill and receive 4 BsF and 750 Bs
in change). Cash registers are not designed to tally in
multiple currencies, and as anyone who has shopped for

CARACAS 00001670 002 OF 004


groceries in Venezuela knows, the ability of cashiers to
handle such problems on their own is questionable, at best.

---------------------
FREEDOM OF EXPRESSION
---------------------

5. (SBU) The requirement to express prices in both versions
of the currency is causing massive headaches for retailers.
Most cash registers are incapable of assigning and expressing
two different prices simultaneously. The simple problem of
fitting the goods and prices on a receipt is difficult given
the limited horizontal space per item. Additionally,
accounting and banking systems are often not designed for
such a system. According to the President of a large
Venezuelan bank, technicians will have to visit each and
every ATM and credit card reader in the country to reprogram
the software.

6. (SBU) Venezuelan securities (stocks, bonds, etc.) are
expressed in old bolivars. Some government debt, such as the
TICC bonds, are fixed to the bolivar/dollar exchange rate and
as such may convert seamlessly to the new bolivar fuerte/
dollar rate. For other bonds, however it remains unclear
whether the government will have to issue new paper or amend
Venezuelan law to attribute new valuations to these bonds.
An oversight could make local Venezuelan bonds worthless on
January 1. According to the Ministry of Finance there is a
little over USD 16 billion (at the official exchange rate) in
outstanding government debt in the local economy.

---------------------
CHECKING AND BALANCES
---------------------

7. (SBU) Bankers are also worried about processing checks.
Banks will have to assume that any check written on December
31 is in old bolivars and any check dated January 1 is in new
bolivars. The potential for mistakes is high, which could
result in someone writing a check for one thousand times as
much as they intended. In addition, the BCV has said that it
will only process old checks through the end of January.
After January 31, anyone with an old bolivar-denominated
check will have to take it to a bank in person to be cashed,
increasing transaction costs and bank lines significantly.

------------------
DECIMALS, ROUNDERS
------------------

8. (SBU) The monetary conversion law makes it illegal to
raise prices in conjunction with the monetary conversion and
the requirement to express prices in both currencies is in
part designed to prevent price increases. Most contacts
expect inflation to increase in the last four months of the
year. Typically inflation increases during this time period
as government and consumer spending increase. In addition,
it is likely that the government will open the fiscal taps to
build support in advance of the proposed December referendum
on constitutional changes, further pressuring prices. Given
these almost universal expectations and the threat of raising
prices during the conversion process, it is likely that
businesses will raise prices in August and September, in
advance of the October 1 deadline.

9. (SBU) Almost all prices will be expressed in two decimals,
however gasoline, LPG, utilities, and stock prices can
continue to be quoted with more decimal points. The law also
instructs firms to round up when the third decimal point is 5
or above and to round down from 4 and below. Unfortunately,
the law does not state when this rounding is to take place.
The total cost of a basket of goods will depend on how it is
rounded--whether each item is individually rounded up/down or
whether they are added together and then the total is rounded
up or down. This provides additional opportunities for
merchants to take advantage of the process to raise prices.
Banks are expected to profit from rounding as the fractions
of cents will go to them instead of to clients, who will only
be paid interest up to two decimal points.


CARACAS 00001670 003 OF 004


-------------------------------
RUMORS, RUMORS, AND MORE RUMORS
-------------------------------

10. (SBU) Caracas is rife with rumors as to the BRV's "true
intentions" for monetary conversion. Some analysts expect
the BRV to package a devaluation with the monetary
conversion, setting the new bolivar fuerte at 2.5, 3, or even
4.3 to the dollar. Minister Cabezas, however, effusively
denied a devaluation would accompany the monetary conversion
again on August 18. One former BCV official suspects just
the opposite, that the BRV could revalue the bolivar fuerte
at 2/dollar (as opposed to 2.15) to prove to the population
that the currency is indeed stronger.

11. (SBU) There are also rumors that the BRV will take
advantage of the conversion to tax or freeze bank accounts,
for example by refusing to convert more than a certain amount
of old bolivars to bolivars fuerte. A local broker expects
cash withdrawals to shoot up in the months leading up to the
conversion due to these fears as well as fears that the BRV
may attempt to freeze bank accounts if the process hiccups.
A process similar to the "corralito" in Argentina in 2001,
this rumor supposes that the BRV would prevent Venezuelans
from withdrawing more than a certain amount of money from
their accounts, or would tax withdrawals above a certain
amount, in order to restrict the money supply (read: to
reduce inflationary pressures).

12. (SBU) The BCV has already begun reducing its printing of
old bolivars and the number of bills in circulation seems to
be falling, especially for small denominations. The
reduction in bills and coins coupled with a spike in the
demand for cash could lead to shortages and spook
Venezuelans, leading to government intervention to prevent a
run on the banks.

----------------
WHAT'S THE RUSH?
----------------

13. (SBU) A presentation to VenAmCham on the Brazilian
monetary conversion experience by a Vice President at
Brazil's Liberal Institute, Roberto Fendt, noted (the
obvious) that merely changing a currency's name and removing
zeroes does not curtail inflation or make a currency
stronger. According to his presentation, Brazil changed its
currency eight times between 1942 and 1994, and during that
time accumulated inflation was over one quadrillion percent
(1 with 16 zeroes). According to Fendt, the creation of the
Brazilian Real did work because it included many other
factors, including: restriction of government expenditures,
creation of a new unit of account to reduce indexing,
aggressive trade liberalization, and a new foreign exchange
rate management policy. The BRV appears uninterested in any
of these methods, convinced that merely removing three zeroes
will have the desired effect.

14. (SBU) A recent PriceWaterhouseCoopers presentation
claimed that the software programming required to change
currency valuations requires three times as much as work as
that required to fix the Y2K bug. The speed of the
conversion has been surprising; announced by Chavez in
January, the law which was passed via the ley habilitante, or
enabling law in March and will go into effect in October. The
new currency will be introduced in January. In total, less
than a year from start to finish. The BCV reportedly
requested three to four years to plan out a monetary
conversion, and former BCV director Maza Zavala once
estimated it would take five to six years to properly carry
the conversion.

15. (SBU) While most contacts agree that the conversion is
too little too fast, no one seems to know why the BRV is so
seized with the idea. Finance Minister Cabezas has promoted
removing three zeroes form the currency since as early as
2005 as a means to fight inflation, and Chavez had mentioned
the possibility of introducing a new currency previously,
however many contacts wonder, why the rush? The more
pessimistic/conspiratorial of Post's contacts believe that

CARACAS 00001670 004 OF 004


the BRV is trying to provoke a crisis that would give it an
excuse to nationalize part or all of the banking sector.

-------
COMMENT
-------

16. (SBU) The logistical problems currently facing the
monetary conversion process are largely surmountable if the
BCV and private sector get their acts together and come up
with workable solutions. The larger problems of inflation
and financial sector instability will not be addressed by the
conversion. These problems may, in fact become worse as
inflation continues to grow and worried Venezuelans move to
cash or hard assets in advance of a conversion many expect to
be botched. The rumors circulating are part and parcel of
the lack of transparency that is the hallmark of the BRV.
While post does put much faith in most of them, it does not
discount the propensity for Chavez to surprise the private
sector with bad news. Chavez has previously attacked the
banking sector for not directing enough lending to his pet
areas and for making too much money, though to nationalize
the sector would be drastic, and could lead to a financial
panic which he seems keen to avoid thus far.

FRENCH

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