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Credit crunch hits Venezuela
Fri, Sep 7 2007, 13:14 GMT
by Lars Christensen, Lars Rasmussen
The credit crunch has come to Venezuela. Today money market rates rose dramatically, going up to as much as 90% after the central bank announced that it had suspended open market operations in order to inject liquidity into the market. Yesterday the average overnight was 22%. The squeeze was further enhanced by the government issuing a 2012 bond yesterday thus draining local markets for liquidity.
The squeeze in the Venezuelan money market is yet another example that the global credit crunch is becoming visible in Emerging markets especially in the most imbalanced economies and in countries with a weak financial architecture like Venezuela.
The squeeze in the Venezuelan money market also has to be seen in the light of investors reducing exposure to high-risk markets. Despite increasing political and economic problems in Venezuela, money has been pouring into the Venezuelan markets. This might very well be coming to an end.
We are bearish on the outlook for the Venezuelan economy and markets for the following reasons:
- • President Chavezs regime is increasingly totalitarian
- • The economy is going for a boom-bust with overheating spurred by reckless and pro-cyclical fiscal policies
- • Inflation pressures remain very high
- • Venezuelas current account surplus is shrinking dramatically in spite of historically high oil prices.
This story is not an isolated Venezuela story, but rather a developing trend. It is well known that the developed countries money markets are not functioning well at the moment and the same can be said for the money markets in many Emerging markets.
While the developed economies in general have a strong banking sector this can not be said for many Emerging markets and hence the risk of banking and financial distress is much larger in Emerging markets than for example in Euroland and the US.
Published on Fri, Sep 7 2007, 13:16 GMT
Danske Bank
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