The corrupt socialist government of Venezuela is quickly running out of options, and running out of gold. Widely considered the country most likely to default this year (beating out countries such as Greece and Ukraine,) the almost total lack of hard currency has pushed the Maduro regime into engaging in a fire sale of Venezuela's gold reserves. Venezuela has sold $1.7 billion worth of gold just in the first three months of this year, bringing its level of gold reserves to the lowest point ever.
But this last-ditch effort may not be enough. As the gold vaults run dry in Caracas and food riots rock the nation, the days of the socialist revolution in Venezuela are likely drawing to a messy close.
Oil Isn't Enough
Venezuela was staggering on the brink of collapse long before oil prices fell 70%. Even at $80 a barrel, the socialist government was finding that income was not covering expenses. The global oil glut and crash in prices in late 2014 pushed a bad situation to crisis levels. Fifteen years of the Chavistas using the state-run oil company as a piggy bank meant that Venezuela's petroleum sector was breaking down, right when the country desperately needed increased production.
As a result, Venezuela became heavily indebted to China, pledging future oil output as collateral on cash loans. The over $52 billion in loans since 2008 were not used to develop the economy or grow the oil industry. It was rather used to keep Chavez and his socialist party in power.
What seemed like a reasonable deal has become a nightmare for Venezuela. As the price of oil has fallen, the amount of oil needed to meet the monthly payments on the loans has tripled, to almost 800,000 barrels every day. Even after making a deal with China to stretch oil payments out, there is little spare production to sell on the open market for desperately needed dollars.
Adios, Oro (Goodbye, Gold)
This has led to the Maduro government shipping Venezuela's gold reserves to Switzerland for sale or use in gold swaps. These sales started in March 2015, but have accelerated as the Venezuelan economy has fallen into collapse. CNN reported that $1.3 billion of Venezuela's gold reserves were sold in January, apparently to help meet $2.3 billion of debt payments in February. Additionally, the IMF estimates that Venezuela sold over 40 metric tons of gold in February and March.
One way Venezuela is trying to get critically needed hard cash, but still get its gold back, is to enter into gold swaps. A gold swap involves the central bank lending out its gold in return for foreign currency for a duration of a week to a year. The idea is to have enough money at the end of the swap term to buy the gold back (plus the fee.) Venezuela's central bank engaged in gold swaps with the Bank of International Settlements (BIS) until last year, when the BIS terminated the agreement due to mounting concerns of the ability of the Maduro government to pay the loans back.
The government has also approached large commercial banks regarding gold swaps. A gold swap was made with Citicorp last year, but apparently is not interested in another round. Instead, Venezuela has recently negotiated with Deutsche Bank about setting up a series of gold swaps.
One problem that Venezuela is encountering both in selling and lending its gold reserves is the need to have each bar re-certified. This is necessary because the late Hugo Chavez repatriated Venezuela's gold reserves in 2011. Once any gold bar leaves the LBMA or COMEX Good Delivery system, it is not longer eligible for use in interbank transactions and must be re-certified. This involves melting the bar down, testing the purity of the metal, then casting a new bar from the bullion.
Putting Foreign Investors Ahead of Food
The Maduro government has put avoiding default ahead of feeding its people. Officials have announced that the government would drastically cut imports to save vitally needed foreign currency, even if the country is already falling into chaos over shortages of food and medicine.
Vice President for Economic Policy Miguel Perez Abad told reporters that the government aimed to cut imports nearly in half. He fell back on the party line blaming any hardship suffered by the people on a plot by the right wing and the US to overthrow the socialist government, saying “We’re going to maintain this level of restriction to force the productive sector of the economy to increase output."
The question arises: What will the Maduro government do when the last little bit of gold runs out?
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