VZCZCXRO6653
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #0568/01 0741637
ZNR UUUUU ZZH
R 151637Z MAR 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 8145
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 CARACAS 000568 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
PASS TO FEDERAL RESERVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VE
SUBJECT: A STRONG BOLIVAR FOR A STRONG BOLIVARIAN 
 
REF: A. CARACAS 358 
 
     ¶B. CARACAS 493 
 
¶1. (SBU) SUMMARY:  The Central Bank plans to introduce a new 
currency in Venezuela on January 1, 2008.  The new currency, 
to be called the "Bolivar Fuerte" (or Strong Bolivar), and 
will have the same value as the current Bolivar, minus three 
zeros.  Prices are supposed to be quoted in the new currency 
beginning October 2007.  Hardly anyone expects the new 
currency to alleviate Venezuela's economic problems, 
including high inflation, an increasing money supply, and a 
parallel market that values the Bolivar at about half the 
official rate.  This represents the first monetary conversion 
in Venezuela's modern history.  END SUMMARY. 
 
¶2. (SBU) On February 14 during his weekly "Alo Presidente" 
television show, Chavez announced that Venezuela would adopt 
a new currency to replace the Bolivar (reftel A).  At the 
official exchange rate, 2,150 Bolivars (Bs.) are worth USD 1. 
 According to Chavez, the new currency will be called the 
Bolivar Fuerte (Bs.F.) and will eliminate three zeroes from 
the old currency, so that 2.15 Bs.F. will equal one U.S. 
dollar.  The law decreeing this new currency was published in 
the Official Gazette on March 6. 
 
¶3. (U) According to the law, as of October 1, 2007 prices in 
Venezuela will be quoted in both Bs. and Bs.F., and on 
January 1, 2008 the currency will begin to circulate, with 
all prices, from goods to salaries to financial statements to 
contracts to tax payments having to be expressed in the new 
currency.  Central Bank (BCV) President Gaston Parra noted on 
March 8 that current plans are for both currencies to 
circulate for six months, though an extension is possible if 
logistical problems cause delays in replacing the old 
currency. 
 
¶4. (SBU) The currency will supposedly be similar in 
appearance to the euro or Brazilian real.  The representative 
of one of the major currency printing firms told Econoff that 
they could supply sufficient currency to the BCV in time and 
noted that they expected to receive the new designs before 
the end of March.  Economist and former head of research at 
the BCV Jose Guerra confirmed that the BCV had the capacity 
to distribute the new currency.  (COMMENT: Given the BRV's 
capacity problems in just about every other sphere, Post is 
skeptical that this will go off without a hitch.  END 
COMMENT.) 
 
¶5. (SBU) At 2,150/dollar, the official exchange rate is 
anywhere from 25 to 55 percent overvalued.  The recent Bonos 
del Sur issuance revealed an implicit value of between 2700 
and 2800 Bs./dollar and the current parallel exchange rate 
for the dollar is around 4,000Bs./dollar (reftel B).  Many 
economists expect the BRV to use this opportunity to mask a 
devaluation, wherein 2,150 old Bolivars would equal 2.7 or 
even 3 new Bolivars Fuertes (in essence a 25-40 percent 
devaluation).  Government spokespersons, including the 
Minister for People's Power of Finance (MPPF) Rodrigo 
Cabezas, have stated emphatically that the government will 
not use this opportunity to devalue the Bolivar, noting that 
the only change is to eliminate three zeroes.  During one 
televised event Cabezas went so far as to say that there was 
no plan to devalue the Bolivar in either the short, medium or 
long term. 
 
¶6. (SBU) Most economists agree that the monetary conversion 
will do nothing to strengthen the Bolivar.  Former BCV Vice 
President Omar Bello explained that the continued 
intervention by other government institutions in currency 
exchange markets (including PDVSA, the Venezuelan Development 
Bank (BANDES), the National Development Fund (FONDEN), and 
the Treasury Bank) have resulted in the loss of control over 
monetary policy by the Central Bank.  The transfer of BCV 
reserves to FONDEN has decreased the implicit weighted value 
of the Bolivar as it is backed up by less hard currency and 
the planned elimination of what remains of the BCV's autonomy 
during the upcoming constitutional reform later this year 
will not help matters.  As of March 9, the rate derived by 
dividing M2/FX Reserves was 3283 Bolivars/ dollar. 
 
¶7. (SBU) It is entirely possible that this new currency will 
generate more inflation.  As was seen with the introduction 
 
CARACAS 00000568  002 OF 002 
 
 
of the euro in 2002, businesses in many countries took 
advantage of the smaller denominations to round up prices. 
In addition, about half of Venezuela's labor force is 
employed in the informal sector.  As was the case with the 
euro conversion, it is likely many individuals and firms will 
be reluctant to take all of their cash to the bank 
(particularly if the BRV uses the conversion to mask a 
devaluation), and thus declare it to the government and tax 
authorities, in order to receive new bank notes.  Instead, 
many will try to use up their old Bolivars while still valid. 
 Given the shortages prevalent in the Venezuelan economy, it 
is possible that the additional funds chasing the limited 
supply of goods will push inflation up higher. 
 
¶8. (SBU) The new law gives the Public Defender, the Institute 
for the Defense of the Consumer (INDECU), the Superintendency 
of Banks (SUDEBAN) and the tax authority (SENIAT) the power 
to enforce the law and punish violators.  This presumably 
would include those that round up or otherwise increase 
prices after the conversion in violation of the first article 
of the law and could allow these institutions to selectively 
target companies or individuals. 
 
¶9. (SBU) COMMENT: Chavez, Cabezas, and other BRV officials 
claim that the introduction of the new currency will brake 
inflation and help right many of the distortions evident in 
the Venezuelan economy.  However, introducing a new currency 
without reducing fiscal expenditures or instituting a new 
monetary policy will do nothing to alleviate the problems of 
liquidity, inflation, shortages, or the rising gap between 
official and parallel exchange rates.  In the end, these 
measures serve more as a smoke screen to distract Venezuelans 
from the country's mounting economic distortions and 
represent more of a political statement than a sound economic 
policy.  The monetary conversion may help accounting problems 
posed by the mere number of zeroes, however it is hard to 
argue that this sole benefit outweighs the cost (in the tens 
of millions of dollars) of introducing a quasi-new currency. 
END COMMENT. 
 
 
BROWNFIELD