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DE RUEHCV #1670/01 2341715
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INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
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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 
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¶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