08/05/08

What the nationalization of Banco de Venezuela means

by Larry Email  835 words

Thanks to one of my loyal readers, Luis from "Diario de la Crisis", I woke up on Friday to the news of the most recent whim of Hugo Chávez: the nationalization of Banco de Venezuela, a subsidiary of the Spanish group Santander Central Hispano.

There are so many wrong things with this announcement that I spent several hours thinking where to begin.

So, where to begin? The first thing is that if the intentions of the government are materialized, it will add one more huge private business to the list of nationalized assets. One has to consider then, something I wrote back in April, when the nationalization of SIDOR and the Cement companies were announced: As socialization of the means of production progresses, the capacity of the "planners" to perform economic calculation shrinks, and as von Mises showed several decades ago, the impossibility of economic calculation in the socialist system is what it dooms it to failure. In this sense the transfer of Banco de Venezuela to state ownership represents one more step towards economic chaos. And it is not a small step. We would be talking about of litle more than 3.8 billion dollars (13 billion Bolívares Fuertes at the parallel exchange rate) in the loan portfolio of the bank and 5.28 billion dollars in deposits (18 billion Bolívares Fuertes). Banco de Venezuela is the third largest bank in the country and has 11,59% of the total credit outstanding and 11% of all deposits. So, we're talking here big numbers for the Venezuelan economy.

However, from the economics point of view, the Banco de Venezuela nationalization is a mere formality. Venezuelan banks already operate under a regime of virtual nationalization. The government dictates interest rates and what amount of credit has to go towards which sectors of the economy. For instance, banks have to comply with minimun lending rates towards the agriculture sector, irrespective of these loans being sound or not. Therefore, the government controls already a big deal of everything the banks do or stop doing. But under these already restrictive parameters, banks operate somewhat freely, being able to select to whom to lend. But under the nationalization of the banks not even that will be possible and all bank activity will come under absolute control of the state.

You might say, But Larry, the government wants to nationalize only one bank, a big bank to be sure, but not all the banking sector. And I would reply that one cannot be so gullible. This is what will happen (You can write it down and come back in a couple of years): The Banco de Venezuela will start a slow and painfull decline, with customers and employees fleeing to the remaining private banks. The only people who will use the banks are those who are forced to use it, as is the case with those collecting alms from the multiple and ever growing government's social programs or "missions". Later on, when the government realizes that Banco de Venezuela cannot compete against its private peers, it will nationalize them one by one. After all, the governmente already has a big bank, the Banco Industrial de Venezuela and the whole rationale to nationalize the Santander's affiliate is that the government needs one bank like this and has been unable to build one itself after 9 years of this administration.

One final negative outcome of this nationalization is the massive infringement of the privacy of Banco de Venezuela costumers. Financial records, previously thought to be safely held by a private entity (constrained by competition) will now be on the hands of government thugs and their friends. The possibilities are infinite for wrongdoing and would probably require a whole post to explore, so I will stop here with the bad of the nationalization.

As always, there are good things that can come out of the nationalization of the Banco de Venezuela. For one thing, this time people can do something about it. In contrast to the nationalization of the cement industries, or the telecom company CANTV, costumers of Banco de Venezuela can express their rejection of the government take-over.

They can simply withdraw their savings from the bank, once the government is the new owner. You see, all banks are bankrupt, always. The amount of money they have on their vaults is not nearly enough to comply with their promises to depositors, who are told their money is available on demand, which is a big lie.

In the case of Banco de Venezuela, the bank has 18.3 billion bolívares fuertes in deposits, but it has only 5.9 billion in liquid assets. So, if only one third of Banco de Venezuela depositors were to dislike the nationalization and were to withdraw their money and deposit it in another private institution, Banco de Venezuela would be broke in a matter of days, or even hours.

No bank can withstand a run.

And for the first time, the victims of Hugo Chávez nationalizations could have him on his knees if they wanted.

Will they?

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3 comments, 2 trackbacks

Comment from: Kire [Visitor]
KireChina is the fastest growing economy in the world, and virtually every bank there is state-owned.
08/06/08 @ 01:29:38 -0430 VET
Comment from: Larry [Member] Email
LarryWhat's that supposed to mean or prove?
08/06/08 @ 05:52:40 -0430 VET
Comment from: René [Visitor]
RenéIt means you are full of it, and that everything you wrote on the issue has no validity. You are just yet anther little rich prick trying to destabilize a lagitimate process that follows the interest of the common citizen , not the elites.
10/22/08 @ 01:51:01 -0430 VET
The Venezuelan LibertarianFMI Favours Bank Nationalization
There is one thing in which Hugo Chaves and FMI can agree: both favour bank nationalization. That bastion of the "free market" and "capitalism" that is the IMF states in a report released today that governments in the world should n...
05/22/09 @ 01:57:51 -0430 VET
Trackback from: shoponate [Visitor]
shoponateshoponate
What the nationalization of Banco de Venezuela means
12/06/15 @ 19:33:28 -0430 VET
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